<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 June 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
28,771,100 Outstanding as of August 7, 2000
<PAGE>
Index
-----
Part I. Item 1. Financial Information (unaudited) Page
A. Consolidated Balance Sheets as of June 30, 2000 and 1
December 31, 1999
B. Consolidated Statements of Income for the Three and Six Months 2
Ended June 30, 2000 and June 30, 1999
C. Consolidated Statements of Cash Flows for the Six Months 3
Ended June 30, 2000 and June 30, 1999
D. Notes to Consolidated Financial Statements 4
Item 2. Management's Discussion and Analysis of Consolidated Financial 9
Condition and Results of Operations
Item 3. Qualitative and Quantitative Disclosures about Market Risk 17
Part II. Other Information
Item 1. Legal Proceedings 19
Item 2. Changes in Securities and Use of Proceeds 19
Item 3. Defaults Upon Senior Securities 19
Item 4. Submission of Matters to a Vote of Security Holders 19
Item 5. Other Information 19
Item 6. Exhibits and Reports on Form 8-K 19
Signatures 20
<PAGE>
American Financial Holdings, Inc.
Consolidated Balance Sheets
(Unaudited)
<TABLE>
<CAPTION>
June 30, 2000 December 31, 1999
------------- -----------------
(In thousands,except share)
Assets
Cash and due from banks:
<S> <C> <C>
Non-interest bearing $ 13,774 $ 23,290
Interest bearing 13 5,014
------------- -----------------
Total cash and due from banks 13,787 28,304
Federal funds sold - 2,300
------------- -----------------
Cash and cash equivalents 13,787 30,604
Investment securities available for sale (amortized cost of
$363,610 at June 30, 2000 and $378,763 at December 31, 1999) 428,590 435,832
Mortgage-backed securities available for sale (amortized cost of
$347,777 at June 30, 2000 and $348,281 at December 31, 1999) 339,407 341,421
Loans, less allowance for loan losses of $9,787 at June 30, 2000 and
$8,820 at December 31, 1999 1,081,671 1,029,531
Real estate owned 21 445
Accrued interest and dividends receivable on investments 9,055 8,833
Accrued interest receivable on loans 5,716 5,697
Federal Home Loan Bank stock 12,194 16,402
Bank premises and equipment, net 13,558 13,373
Other assets 3,932 4,015
------------- -----------------
Total assets $ 1,907,931 $ 1,886,153
============= =================
Liabilities and Stockholders' Equity
Deposits $ 1,120,227 $ 1,100,486
Mortgagors' escrow and other deposits 28,153 18,751
FHLB advances and other borrowings 189,044 214,444
Deferred income tax liability 14,403 11,835
Accrued interest payable on deposits and FHLB advances 1,498 1,556
Other liabilities 10,504 7,629
------------- -----------------
Total liabilities 1,363,829 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 (25,020) (25,020)
Stock-based compensation (196) (160)
Treasury stock at cost, 200,000 shares at June 30, 2000 (3,169) -
Retained earnings 256,013 244,007
Accumulated other comprehensive income 34,037 30,188
------------- -----------------
544,102 531,452
------------- -----------------
Total liabilities and stockholders' equity $ 1,907,931 $ 1,886,153
============= =================
</TABLE>
See accompanying notes to consolidated financial statements.
1
<PAGE>
AMERICAN FINANCIAL HOLDINGS, INC.
Consolidated Statements of Income
(unaudited)
<TABLE>
<CAPTION>
For the Three Months For the Six Months
Ended June 30, Ended June 30,
------------------------------------- --------------------------------------
2000 1999 2000 1999
---------------- ------------------ ---------------- ----------------
(In thousands, except per share data)
Interest and dividend income:
<S> <C> <C> <C> <C>
Real estate mortgage loans $ 13,389 $ 11,722 $ 26,547 $ 23,238
Consumer loans 6,227 5,204 12,054 10,297
Mortgage-backed securities 5,775 3,127 11,519 5,889
Federal funds sold 38 389 208 887
Investment securities:
Interest-taxable 5,222 4,153 10,543 8,274
Interest-tax exempt 291 - 499 -
Dividends 788 474 1,452 1,164
---------------- ------------------ ---------------- ----------------
Total interest and dividend income 31,730 25,069 62,822 49,749
---------------- ------------------ ---------------- ----------------
Interest expense:
Deposits 11,673 11,508 23,158 23,113
Federal Home Loan Bank advances and other
borrowings 2,805 1,920 5,728 3,714
---------------- ------------------ ---------------- ----------------
Total interest expense 14,478 13,428 28,886 26,827
---------------- ------------------ ---------------- ----------------
Net interest income before provision
for loan losses 17,252 11,641 33,936 22,922
Provision for loan losses 570 340 1,120 940
---------------- ------------------ ---------------- ----------------
Net interest income after provision
for loan losses 16,682 11,301 32,816 21,982
---------------- ------------------ ---------------- ----------------
Non-interest income:
Service charges and fees 1,342 1,186 2,643 2,255
Gain on sale of investment securities
available for sale 1,570 2,402 2,986 5,225
Other 134 109 264 261
---------------- ------------------ ---------------- ----------------
Total non-interest income 3,046 3,697 5,893 7,741
---------------- ------------------ ---------------- ----------------
Non-interest expense:
Salaries and employee benefits 4,047 2,888 7,944 6,747
Occupancy expense 582 587 1,230 1,165
Furniture and fixture expense 416 426 857 809
Charitable contributions 9 214 44 451
Outside services 563 324 1,498 1,071
Advertising 411 271 760 675
Other 1,073 833 2,027 1,716
---------------- ------------------ ---------------- ----------------
Total non-interest expense 7,101 5,543 14,360 12,634
---------------- ------------------ ---------------- ----------------
Income before income taxes 12,627 9,455 24,349 17,089
Income taxes 4,240 3,110 8,387 5,631
---------------- ------------------ ---------------- ----------------
Net income $ 8,387 $ 6,345 $ 15,962 $ 11,458
================ ================== ================ ================
Basic earnings per share 0.31 n/a 0.60 n/a
Diluted earnings per share 0.31 n/a 0.60 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 six months ended
June,30,
-------------------------------
2000 1999
----------- ----------
(In thousands)
Operating activities:
<S> <C> <C>
Net income $ 15,962 $ 11,458
Adjustments to reconcile net income to net cash provided by
operating activities:
Provision for loan losses 1,120 940
Depreciation and amortization of bank premises and equipment 966 934
Gain on disposition of fixed assets (4) --
Net accretion of discounts (494) (690)
Increase in accrued interest and dividends receivable receivable (241) (736)
Gain on sale of investment securities available for sale (2,986) (5,225)
Decrease (increase) in other assets 83 (497)
Increase (decrease) in other liabilities 2,817 (815)
Increase in net deferred loan origination costs (36) (1,388)
Gain on sale of loans (3) (55)
Net gain on disposition of real estate owned (141) (193)
Deferred income tax expense 15 1,277
----------- ----------
Net cash provided by operating activities 17,058 5,010
----------- ----------
Investing activities:
Investment securities available for sale:
Purchases (87,757) (174,444)
Proceeds from sales 3,018 7,861
Proceeds from maturities 103,100 213,500
Mortgagebacked securities available for sale
Purchases (14,528) (63,065)
Principal paydowns 15,304 27,236
Proceeds from sale of loans 514 10,875
Redemption (purchases) of Federal Home Loan Bank stock 4,208 (1,037)
Net increase in loans (53,872) (56,721)
Purchases of bank premises and equipment (1,184) (1,448)
Proceeds from the sales of real estate owned 703 1,289
Disposition of fixed assets 37
----------- ----------
Net cash used by investing activities (30,457) (35,954)
----------- ----------
Financing activities:
Increase in demand deposits, regular savings, NOW and money market accounts 19,859 20,598
Decrease in certificates of deposits and retirement accounts (118) (9,731)
Increase (decrease) in mortgagors' escrow and other deposits 9,402 (1,468)
Long term advances from the Federal Home Loan Bank 40,000 9,500
Maturities of long term advances from the Federal Home Loan Bank (81,500) --
Advances from FHLB 219,532 --
Maturities of advances from FHLB (213,432) --
Advances from short and long term repurchase agreements 31,353 --
Maturities of short term repurchase agreements (21,353) --
Dividends paid (3,956) --
Acquisition of of common stock for stockbased compensation (36) --
Purchases of treasury stock (3,169) --
----------- ----------
Net cash (used) provided by financing activities (3,418) 18,899
----------- ----------
Decrease in cash and cash equivalents (16,817) (12,045)
Cash and cash equivalents at beginning of period 30,604 55,822
----------- ----------
Cash and cash equivalents at end of period $ 13,787 $ 43,777
=========== ==========
Supplemental information:
Cash paid during the period ended:
Income taxes $ 8,400 $ 5,325
Interest paid on deposits and borrowings 28,944 25,996
Transfers of loans to real estate owned 138 1,030
</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
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
<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 June 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 June 30, 2000 and
December 31, 1999 are as follows:
<TABLE>
<CAPTION>
June 30, 2000
-------------------------------------------------------------------------
Gross Gross
Unrealized Unrealized
Amortized Cost Gains Losses Fair Value
---------------- --------------- ----------------- ------------
(In thousands)
Investments:
<S> <C> <C> <C> <C>
U.S. Treasury notes $ 5,033 $ 135 $ -- $ 5,168
U.S. Government agencies 34,724 22 (370) 34,376
Corporate bonds and notes 258,583 802 (2,175) 257,210
Municipal bonds
Exempt 25,564 250 (148) 25,666
Taxable 11,087 -- (251) 10,836
Marketable equity securities 28,619 67,519 (804) 95,334
---------------- --------------- ----------------- ------------
363,610 68,728 (3,748) 428,590
---------------- --------------- ----------------- ------------
Mortgage-backed securities:
U.S. Government & agency 210,788 135 (5,907) 205,016
U.S Agency issued collateralized
mortgage obligations 136,989 29 (2,627) 134,391
---------------- --------------- ----------------- ------------
347,777 164 (8,534) 339,407
---------------- --------------- ----------------- ------------
Total available for sale $ 711,387 $ 68,892 $ (12,282) $ 767,997
================ =============== ================= ============
</TABLE>
5
<PAGE>
AMERICAN FINANCIAL HOLDINGS, INC
Notes to Consolidated Financial Statements
(Unaudited)
<TABLE>
<CAPTION>
December 31, 1999
------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fairr
Cost Gains Losses Value
----------- ------------ ------------ ---------
(In thousands)
Investments:
<S> <C> <C> <C> <C>
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
=========== ============ ============ =========
</TABLE>
(3) Comprehensive Income
The following tables represent components and the related tax effects
allocated to other comprehensive income for the three and six-month periods
ended June 30, 2000 and June 30, 1999.
<TABLE>
<CAPTION>
Three months ended
June 30, 2000
-----------------------------------------------------------
Before
Tax Income tax Net-of-tax
Amount effect amount
------------ --------------- -------------
(In thousands)
Unrealized loss on available for sale securities:
<S> <C> <C> <C>
Unrealized holding losses arising during $ (3,298) $ 1,315 $ (1,983)
the period
Less: reclassification adjustment for gains realized
during the period (1,570) 626 (944)
------------- ---------------- --------------
Other comprehensive loss $ (4,868) $ 1,941 $ (2,927)
============= ================ ==============
</TABLE>
6
<PAGE>
AMERICAN FINANCIAL HOLDINGS, INC
Notes to Consolidated Financial Statements
(Unaudited)
<TABLE>
<CAPTION>
Six months ended
June 30, 2000
-----------------------------------------------------------
Before
Tax Income tax Net-of-tax
Amount Effect Amount
------------ --------------- -------------
(In thousands)
Unrealized gain on available for sale securities:
<S> <C> <C> <C>
Unrealized holding gains arising during
the period $ 9,387 $ (3,744) $ 5,643
Less: reclassification adjustment for gains realized
during the period (2,986) 1,192 (1,794)
------------- ---------------- --------------
Other comprehensive income $ 6,401 $ (2,552) $ 3,849
============= ================ ==============
<CAPTION>
Three months ended
June 30, 1999
-----------------------------------------------------------
Before
Tax Income tax Net-of-tax
Amount Effect Amount
------------ --------------- -------------
(In thousands)
Unrealized loss on available for sale securities:
<S> <C> <C> <C>
Unrealized holding losses arising during
the period $ (866) $ 366 $ (500)
Less: reclassification adjustment for gains realized
during the period (2,402) 1,014 (1,388)
------------- ---------------- --------------
Other comprehensive loss $ (3,268) $ 1,380 $ (1,888)
============= ================ ==============
<CAPTION>
Six months ended
June 30, 1999
-----------------------------------------------------------
Before tax Income tax Net-of-tax
Amount effect amount
------------- ---------------- --------------
Unrealized loss on available for sale securities: (In thousands)
<S> <C> <C> <C>
Unrealized holding losses arising during
the period $ (2,787) 1,181 $ (1,606)
Less: reclassification adjustment for gains realized
during the period (5,225) 2,215 (3,010)
------------- ---------------- --------------
Other comprehensive loss $ (8,012) $ 3,396 $ (4,616)
============= ================ ==============
</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.
The weighted-average number of shares used in the computation of basic
earnings per common share and diluted earnings per common share for the six
month period ended June 30, 2000 was 26,636,156 and 26,752,698, respectively.
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 June 30, 2000 was 26,654,282 and 26,886,306, respectively.
At June 30, 2000 stock options issued on June 12, 2000 to employees are not
included in the calculation of weighted average shares because the exercise
price exceeded the average market value and therefore the inclusion of those
dilutive shares would be antidilutive. The number of those stock options not
considered in the calculation of average weighted shares is 2,423,000.
Earnings per share data for the three-month and six-month periods ended June
30, 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 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.
<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 six months ended June 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 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 June 30, 2000 and December 31, 1999.
Total assets at June 30, 2000 were $1.91 billion representing an increase of
$21.8 million or 1.2% over the December 31, 1999 level of $1.89 billion. The
Company's Tier 1 leverage ratio was 21.3% at June 30, 2000 compared to 23.0% at
December 31, 1999. The Company's total risk based capital ratio was 38.3% at
June 30, 2000 compared to 38.0% at December 31, 1999.
The increase in assets was primarily a result of a $52.1 million net increase in
loans, partially offset by a decrease of $9.3 million in net investment
securities and mortgage-backed securities, a $4.2 million in Federal Home Loan
Bank Stock, and $16.8 million 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 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 maturities and prepayments.
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 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 $19.7 million or 1.8% to $1,120 million at June 30, 2000 from
$1,100 million at December 31, 1999. The $19.7 million increase resulted
primarily from a $16.4 million increase in core accounts such as savings, money
market and NOW accounts and a $3.7 million increase in demand deposit accounts.
Mortgagors' escrow and other deposits increased $9.4 million from $18.8 million
at December 31, 1999 to $28.2 million at June 30, 2000 due to timing of payments
made for property taxes in December of 1999 and to an increase in the amount of
bank checks outstanding. Advances from the Federal Home Loan Bank and other
borrowings decreased $25.4 million to $189.0 million at June 30,
9
<PAGE>
2000 from $214.4 million at December 31, 1999. The decrease was due to $102.8
million of maturities in FHLB borrowings offset by new borrowings of $71.4
million coupled with a net increase in FHLB Ideal Way advances of $6.1 million.
The net deferred income tax liability increased $2.6 million to $14.4 million at
June 30, 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 June 30, 2000 compared to $3.0 million at December 31,
1999. Nonperforming assets to total assets were 0.17% and 0.16% at June 30,
2000 and December 31, 1999, respectively. Real estate owned declined from $445
thousand at December 31, 1999 to $21 thousand at June 30, 2000 due to a greater
amount of dispositions of foreclosed properties than the amount of foreclosed
properties transferred to real estate owned. This is the result of current
favorable economic conditions.
Total equity increased $12.7 million to $544.1 million at June 30, 2000 compared
to $531.5 million at December 31, 1999. This increase resulted from net income
of $16.0 million, and an increase of $3.8 million in accumulated other
comprehensive income, offset by dividend payments of $4.0 million, and the
utilization of $3.2 million to fund a portion of the stock awards granted under
American Financial Holdings, Inc. 2000 Stock-Based Incentive Plan (the
"Incentive Plan"). 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 June 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. In addition, management, through the use of an
independent trustee, intends to continue to purchase up to 4.0% of its
outstanding shares on the open market to fund the recently approved stock awards
under the Incentive Plan. The effect of these purchases will be to reduce the
amount of the Company's equity.
Comparison of Operating Results for the Three Months Ended June 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
economic and competitive conditions, notably changes in market interest rates,
and government policies and regulation.
Net Income. Net income increased by $2.0 million, or 32.2%, to $8.4 million for
the quarter ended June 30, 2000 compared to $6.3 million for the same period in
1999. The increase was primarily driven by the increase in interest and
dividend income of $6.7 million generated from earnings on the additional
capital of approximately $261.0 million as a result of the Bank's conversion to
a public company. The higher interest and dividend income was partially offset
by an $885 thousand increase in interest expense on Federal Home Loan Bank
advances and other borrowings, a $832 thousand decrease in gains on the sale of
investment securities, a $1.6 million increase in non-interest expense and a
$1.1 million increase in income tax expense.
10
<PAGE>
Net Interest Income. Net interest income increased $5.6 million, or 48.2%, for
the three months ended June 30, 2000 compared to the three months ended June 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. The
increase in yields on interest earning assets was due to management's investment
strategy of moving to higher yielding investments via the extension of average
maturity, primarily by purchasing collateralized mortgage obligations and
municipal bonds.
Total interest and dividend income was $31.7 million in the second quarter of
2000 as compared to $25.1 million in the second quarter of 1999. The increase in
interest income was primarily due to a $295.9 million increase in average daily
interest-earning assets to $1.79 billion for the three months ended June 30,
2000, compared to $1.49 billion for the three months ended June 30, 1999 and to
an increase in the yield on interest-earning assets to 7.12% from 6.71% for the
three months ended June 30, 2000 and June 30, 1999, respectively. Interest
income on loans increased $2.7 million, or 15.9%, to $19.6 million, primarily
due to a $129.7 million increase in the average daily balance of loans
outstanding for the second 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 $4.4 million, or 59.0% for the quarter
ended June 30, 2000 compared to the second quarter of the prior year. The
increase resulted primarily from a $199.8 million increase in the average daily
balances and an 85 basis point increase in the yield earned on such securities.
The increase in yield in the second quarter of 2000 reflects the gradual
increase in general market interest rates that has taken place since June 1999,
and management's strategy to extend the average maturity of investments and
mortgage-backed securities, which have correspondingly higher yields.
Total interest expense for the three months ended June 30, 2000 was $14.5
million, an increase of $1.1 million, or 7.8%, compared to $13.4 million for the
three months ended June 30, 1999. This increase was primarily due to a $53.8
million increase in the average daily balance of Federal Home Loan Bank advances
and other borrowings to $187.4 million in the second quarter of 2000, as
compared to $133.7 million for the same period in 1999 and to higher interest
rates.
Provision for Loan Losses. The provision for loan losses was $570 thousand for
the three months ended June 30, 2000, a $230 thousand increase from the $340
thousand provision for the three months ended June 30, 1999. This increase
reflects management's assessment of the losses inherent in the loan portfolio
including the impact of continuing growth. At June 30, 2000 and June 30, 1999
the allowance for loan losses was $9.8 million and $8.1 million respectively,
which represented 312.3% of non-performing loans and 0.9% of total loans at June
30, 2000 as compared to 286.3% of non-performing loans and 0.9% of total loans
at June 30, 1999.
Non-interest Income. Non-interest income decreased $651 thousand, or 17.6%, to
$3.0 million for the three months ended June 30, 2000, primarily due to a
decrease of $832 thousand 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. Service charges and fees increased $156 thousand in the second quarter
of 2000 over the same period in 1999, in part due to increased commissions from
the Bank's investment services subsidiary, American Investment Services, Inc.
and increased trust service income.
Non-interest Expense. Non-interest expense for the three months ended June 30,
2000 was $7.1 million, an increase of $1.6 million, or 28.1%, compared to $5.5
million for the three months ended June 30, 1999. The increase was due to an
increase in salaries and benefits of $1.2 million primarily due to costs
associated with the stock based incentive plans. It is expected that salary
expense will rise during the
11
<PAGE>
remaining six months of 2000 due to the implementation of the shareholder
approved American Financial Holdings, Inc. 2000 Stock Based Incentive Plan.
Additionally outside services increased $239 thousand or 73.8% from $324
thousand to $563 thousand due primarily to increased professional services
necessitated by being a public company. Advertising increased $140 thousand or
51.7% from $271 thousand to $411 thousand due to an aggressive campaign to take
advantage of in-market branch consolidations. Other expenses increased $240
thousand or 28.8% from $833 thousand to $1.1 million primarily due to mailing,
annual statement preparation, regulatory filing fees and annual meeting costs
necessitated by being a public company. Charitable contributions decreased $205
thousand, or 95.8%, to $9 thousand for the three months ended June 30, 2000
compared to $214 thousand in the same period in 1999. In the second 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 June 30, 2000.
Income Tax Expense. Income taxes were $4.2 million for the three months ended
June 30, 2000 as compared to $3.1 million for the three months ended June 30,
1999. The effective rates were 33.6 % and 32.9% for the three months ended June
30, 2000 and 1999, respectively. The increase in income taxes was primarily due
to an increase in income before income taxes.
Comparison of Operating Results for the Six Months Ended June 30, 2000 and 1999
Net Income. Net income increased by $4.5 million, or 39.3%, to $16.0 million for
the six months ended June 30, 2000 compared to $11.5 million for the same period
in 1999. The increase was primarily driven by the increase in interest and
dividend income of $13.1 million generated from earnings on the additional
capital of approximately $261.0 million as a result of the Bank's conversion to
a public company. These factors were partially offset by a $2.0 million
increase in interest expense on Federal Home Loan Bank advances and other
borrowings, a $2.2 million decrease in gains on the sale of investment
securities, a $1.7 million increase in non-interest expense and a $2.8 million
increase in income tax expense.
Net Interest Income. Net interest income increased $11.0 million, or 48.1%, for
the six months ended June 30, 2000 compared to the six months ended June 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. 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 by purchasing collateralized mortgage obligations and
municipal bonds.
Total interest and dividend income was $62.8 million in the six months ended
June 30, 2000 as compared to $49.7 million in the corresponding period last
year. The increase in interest income was primarily due to a $307.9 million
increase in average daily interest-earning assets to $1.79 billion for the six
months ended June 30, 2000, compared to $1.48 billion for the six months ended
June 30, 1999 and to an increase in the yield on interest-earning assets to
7.06% from 6.72% for the six months ended June 30, 2000 and June 30, 1999,
respectively. Interest income on loans increased $5.1 million, or 15.1%, to
$38.6 million, primarily due to a $130.4 million increase in the average daily
balance of loans outstanding for the six-month period 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 $8.8 million, or 58.9% for
the six months ended June 30, 2000 compared to the same period of the prior
year. The increase resulted primarily from a $204.7 million increase in the
average daily balances, and a 78 basis point increase in the yield earned on
such securities. The increase in yield in the six month period of 2000 reflects
the gradual increase in general market interest rates that has taken place since
June 1999, and management's strategy to extend the average maturity of
investments and mortgage-backed securities, which have correspondingly higher
yields.
12
<PAGE>
Total interest expense for the six months ended June 30, 2000 was $28.9 million,
an increase of $2.1 million, or 7.7%, compared to $26.8 million for the six
months ended June 30, 1999. This increase was primarily due to a $64.5 million
increase in the average daily balance of Federal Home Loan Bank advances and
other borrowings to $193.1 million in the six month period of 2000, as compared
to $128.6 million for the same period in 1999 and to higher interest rates.
Provision for Loan Losses. The provision for loan losses was $1.1 million for
the six months ended June 30, 2000, a $180 thousand increase from the $940
thousand provision for the six months ended June 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.
Non-interest Income. Non-interest income decreased $1.8 million, or 23.9%, to
$5.9 million for the six months ended June 30, 2000, primarily due to a decrease
of $2.2 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.
Service charges and fees increased $388 thousand or 17.2% in the six month
period of 2000 over the same period in 1999, primarily as a result of increased
commissions from the Bank's investment services subsidiary, American Investment
Services, Inc.
Non-interest Expense. Non-interest expense for the six months ended June 30,
2000 was $14.4 million, an increase of $1.7 million, or 13.7%, compared to $12.6
million for the six months ended June 30, 1999. The increase was due to an
increase in salaries and benefits of $1.2 million primarily due to costs
associated with the employee stock ownership and stock based incentive plans.
It is expected that salary expense will rise during the remaining six months of
2000 due to the continued funding of the stock awards granted under the
Incentive Plan. Additionally, outside services increased $427 thousand or 39.9%
from $1.1 million to $1.5 million due primarily to increased professional
services necessitated by being a public company. Advertising expense increased
$85 thousand or 12.6% from $675 thousand to $760 thousand. Other expenses
increased $311 thousand or 18.1% from $1.7 million to $2.0 million primarily due
to costs necessitated by being a public company. Charitable contributions
decreased $407 thousand, or 90.2%, to $44 thousand for the six months ended June
30, 2000 compared to $451 thousand in the same period in 1999. In the first six
months of 1999, the Bank accrued a contribution of approximately $400 thousand
to the American Savings Bank Foundation, Inc., while no similar accrual was made
during the six months ended June 30, 2000.
Income Tax Expense. Income taxes were $8.4 million for the six months ended
June 30, 2000 as compared to $5.6 million for the six months ended June 30,
1999. The effective rates were 34.4% and 33.0% for the six months ended June 30,
2000 and 1999, respectively. The increase in income taxes was primarily due to
an increase in income before income taxes.
13
<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
June 30, 2000 June 30, 1999
----------------------------------- ----------------------------------
Average Average Average Average
Balance Interest Yield/Rate Balance Interest Yield/Rate
------- -------- ---------- ------- -------- ----------
(Dollars in thousands)
Interest earning assets:
<S> <C> <C> <C> <C> <C> <C>
Loans (1) $1,064,295 $19,616 7.37% $ 934,620 $16,925 7.24%
Federal funds sold 2,555 38 5.95 32,467 389 4.86
Investment securities-taxable 339,684 5,761 6.78 311,248 4,409 5.74
Investment securities- tax exempt (2) 20,913 448 8.57 - - -
Mortgage-backed securities 350,655 5,775 6.59 200,173 3,127 6.25
FHLB stock 12,194 249 8.17 10,434 153 5.95
Interest-earning deposits - - - 5,473 66 4.89
----------- -------- ------- ---------- ------- -------
Total interest-earning assets 1,790,296 $31,887 7.12 1,494,415 25,069 6.71%
Non-interest-earning assets 96,741 112,286
----------- ----------
Total assets $1,887,037 $1,606,701
=========== ==========
Interest-bearing liabilities:
Deposits
Money management accounts $ 64,207 $ 418 2.70% $ 65,552 $ 437 2.70%
NOW accounts 80,333 270 1.35 70,604 239 1.37
Savings and IRA passbook accounts 204,555 1,029 2.02 203,580 1,023 2.04
Certificates of deposit 757,801 9,956 5.28 781,798 9,863 5.12
----------- -------- ------- ---------- ------- -------
Total interest-bearing deposits 1,104,896 11,673 4.25 1,121,534 11,562 4.18
FHLB advances and other borrowings 187,444 2,805 6.02 133,669 1,866 5.66
----------- -------- ------- ---------- ------- -------
Total interest-bearing liabilities 1,292,340 $14,478 4.51% 1,255,203 $13,428 4.34%
Non-interest bearing demand deposits 25,864 24,983
Other non-interest-bearing liabilities 29,321 40,907
----------- ----------
Total liabilities 1,347,525 1,321,093
Stockholders' Equity 539,512 285,608
----------- ----------
Total liabilities and equity $1,887,037 $1,606,701
=========== ==========
Net interest-earning assets $ 497,956 $ 239,212
=========== ==========
Net interest income $17,409 $11,641
======= =======
Interest rate spread 2.62% 2.31%
====== ======
Net interest margin (net interest income
as a percentage of interest-earning 3.89% 3.12%
assets) ====== ======
Ratio of interest-earning assets to
Interest-bearing liabilities 138.53% 119.06%
====== ======
Note 1- Average balances include nonaccrual loans.
Note 2- Tax exempt interest is calculated on a tax
equivalent basis.
</TABLE>
14
<PAGE>
<TABLE>
<CAPTION>
For the Six Months Ended
June 30, 2000 June 30, 1999
----------------------------------- ----------------------------------
Average Average Average Average
Balance Interest Yield/Rate Balance Interest Yield/Rate
------- -------- ---------- ------- -------- ----------
(Dollars in thousands)
Interest earning assets:
<S> <C> <C> <C> <C> <C> <C>
Loans (1) $1,052,367 $38,601 7.34% $ 921,925 $33,535 7.27%
Federal funds sold 7,267 208 5.72 37,252 887 4.76
Investment securities-taxable 342,886 11,424 6.66 320,417 9,029 5.64
Investment securities- tax exempt (2) 18,085 768 8.49 - - -
Mortgage-backed securities 350,868 11,519 6.57 186,719 5,889 6.31
FHLB stock 14,183 509 7.18 9,953 308 6.19
Interest-earning deposits 2,655 62 4.67 4,189 101 4.82
----------- -------- ------- ---------- ------- -------
Total interest-earning assets 1,788,311 $63,091 7.06% 1,480,455 49,749 6.72%
Non-interest-earning assets 94,780 107,350
----------- ----------
Total assets $1,883,091 $1,587,805
=========== ==========
Interest-bearing liabilities:
Deposits
Money management accounts $ 63,212 $ 842 2.68% $ 64,819 $ 870 2.71%
NOW accounts 77,333 523 1.36 68,080 458 1.36
Savings and IRA passbook accounts 201,424 2,025 2.02 199,633 1,995 2.02
Certificates of deposit 761,778 19,768 5.22 780,689 19,876 5.13
----------- -------- ------- ---------- ------- -------
Total interest-bearing deposits 1,103,747 23,158 4.22 1,113,221 23,199 4.20
FHLB advances and other borrowings 193,071 5,728 5.97 128,618 3,627 5.69
----------- -------- ------- ---------- ------- -------
Total interest-bearing liabilities 1,296,818 $28,886 4.48% 1,241,839 $26,826 4.36%
Non-interest bearing demand deposits 24,677 24,457
Other non-interest-bearing liabilities 26,314 38,913
----------- ----------
Total liabilities 1,347,809 1,305,209
Stockholders' Equity 535,282 282,596
----------- ----------
Total liabilities and equity $1,883,091 $1,587,805
=========== ==========
Net interest-earning assets $ 491,493 $ 238,616
=========== ==========
Net interest income $34,205 $22,923
======= =======
Interest rate spread 2.58% 2.36%
====== ======
Net interest margin (net interest income
as a percentage of interest-earning 3.83% 3.10%
assets) ====== ======
Ratio of interest-earning assets to
interest-bearing liabilities 137.90% 119.21%
====== ======
Note 1- Average balances include nonaccrual loans.
Note 2- Tax exempt interest is calculated on a tax
equivalent basis.
</TABLE>
15
<PAGE>
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 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. The Bank's primary sources of funds consist of deposit
inflows, loan repayments, maturities, paydowns, and sales of investments and
mortgage-backed securities and borrowings from the Federal Home Loan Bank. While
maturities and scheduled amortization of loans and securities are predictable
sources of funds, deposit outflows and mortgage prepayments are greatly
influenced by general interest rates, economic conditions and competition.
The primary investing activities of the Bank are: (1) the origination of
residential one- to four-family mortgage loans, single-family construction
loans, home equity loans and lines of credit and consumer loans; and (2) the
investment in mortgage-backed securities, U.S. Government and agency
obligations, corporate equity securities, equity mutual funds 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 June 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
16
<PAGE>
more significant impact on the Company's performance than the general level of
inflation. Over short periods of time, interest rates may not necessarily move
in the same direction or in the same magnitude as inflation.
Part I. Item 3. Qualitative and Quantitative Disclosures about Market Risk
Qualitative Aspects of Market Risk. The Company's most significant form of
market risk is interest rate risk. The principal objectives of the Company's
interest rate risk management are to evaluate the interest rate risk inherent in
certain balance sheet accounts, determine the level of risk appropriate given
the Company's business strategy, operating environment, capital and liquidity
requirements and performance objectives, and manage the risk consistent with the
Board of Directors' approved guidelines. The Company has an Asset/Liability
Committee responsible for reviewing its asset/liability policies and interest
rate risk position, which meets monthly and reports trends and interest rate
risk position to the Finance Committee of the Board of Directors quarterly and
the whole Board of Directors annually. The extent of the movement of interest
rates is an uncertainty that could have a negative impact on the earnings of the
Company.
In recent years, the Company has used the following strategies to manage
interest rate risk:
(1) emphasizing the origination of adjustable-rate loans and generally selling
longer term fixed-rate loans as market interest rate conditions dictate; (2)
emphasizing shorter term consumer loans; (3) maintaining a high quality
securities portfolio that provides adequate liquidity and flexibility to take
advantage of opportunities that may arise from fluctuations in market interest
rates, the overall maturity of which is monitored in relation to the repricing
of its loan portfolio; and (4) using Federal Home Loan Bank advances and
repurchase agreements to better structure maturities of its interest rate
sensitive liabilities. The Company currently does not participate in hedging
programs, interest rate swaps or other activities involving the use of off-
balance sheet derivative financial instruments.
The Company's market risk also includes equity price risk. The marketable equity
securities portfolio had net unrealized gains of $66.7 million at June 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 June 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 12.4% and 12.5% on June
30, 2000 and December 31, 1999, respectively. In a down 200 basis point
environment, the CPR prepayment assumptions on mortgage loans and securities
were 24.7% and 25.5% on June 30, 2000 and December 31, 1999, respectively. On
both June 30, 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.
17
<PAGE>
Estimated Changes in Annual Net Interest Income
-----------------------------------------------
Increase June 30, 2000 December 31, 1999
(Decrease) ------------- -----------------
in market (Dollars in thousands)
interest rates
in basis points $ % $ %
(Rate Shock) Change Change Change Change
---------------------------------------------------------------------------
200 $(860) (1.27)% $ (279) (0.43)%
Static - - - -
(200) (1,151) (1.71) (1,907) (2.92)
Comparing the changes in net interest income on June 30, 2000 and December 31,
1999, the estimated change in net interest income improved by $756 thousand from
($1,907 thousand) to ($ 1,151 thousand) under a down 200 basis point
environment. Correspondingly, under an up 200 basis point environment, the
estimated change in net interest income worsened by $581 thousand from ($279
thousand) to ($860 thousand). The change in the basic interest rate risk profile
on June 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.
18
<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
The Company held its first annual meeting on June 5, 2000. At that meeting
shareholders voted on and approved the election of Fred M. Hollfelder, with
24,090,894 votes for and 281,187 votes withheld, Harry N. Mazadoorian, with
24,090,937 votes for and 281,144 votes withheld, and Jeffrey T. Witherwax with
24,003,392 votes for and 368,689 votes withheld, as directors for a three year
term to expire in 2003. Other directors continuing service on the board are:
Adolf G. Carlson, Marie S. Gustin, Mark E. Karp, Robert T. Kenney and Steven T.
Martin. Two other matters were voted on by shareholders. The first matter was
ratification of the appointment of KPMG LLP as independent auditors for the
Company for the fiscal year ending December 31, 2000, which passed with
24,138,837 shares or 99.04% of shareholders present or voting by proxy casting
votes affirmatively, 111,240 votes against and 122,004 abstentions. The other
item brought to a vote was the adoption of the American Financial Holdings, Inc.
2000 Stock-Based Incentive Plan which also passed with 16,459,521 votes or
67.53% of all shareholders voting affirmatively, 2,965,090 or 12.17% voting
against, 208,039 or 0.85% abstaining and 4,739,431 or 19.45% broker non-votes.
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.*
10.1 American Financial Holdings, Inc. 2000 Stock-Based Incentive
Plan **
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
** Incorporated by reference into this document from the Proxy
Statement for the Company's 2000 Annual Meeting, filed on April
24, 2000.
b) Reports on Form 8-K
None.
19
<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: August 10, 2000 /s/ Robert T. Kenney
--------------------
Robert T. Kenney
Chairman, President and Chief Executive
Officer
Date: August 10, 2000 /s/Charles J. Boulier, III
--------------------------
Charles J. Boulier, III
Executive Vice President, Chief Financial
Officer and Treasurer
20
