8-K/A 1 asb54772-8ka.txt 8K UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 8-K/A CURRENT REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 DATE OF REPORT (DATE OF EARLIEST EVENT REPORTED) JANUARY 18, 2002 Commission File Number 0-27399 AMERICAN FINANCIAL HOLDINGS, INC. (Exact name of registrant as specified in its charter)

Registrant's telephone number, including area code: (860) 612-3366 Not Applicable (Former name, former address and former fiscal year, if changed since last report) The Registrant hereby amends the items, financial statements, exhibits or other portions of its Current Report on Form 8-K dated January 18, 2002 and filed on January 29, 2002 as set forth herein. TABLE OF CONTENTS ITEM. 7 FINANCIAL STATEMENTS, PRO FORMA INFORMATION AND EXHIBITS (a) Financial Statements of Businesses Acquired Audited Consolidated Balance Sheets of American Bank of Connecticut as of December 31, 2001 and 2000, and the Related Consolidated Statements of Earnings, Stockholders' Equity, Comprehensive Income (Loss) and Cash Flows for the Years Ended December 31, 2001, 2000, and 1999.....................3 (b) Pro Forma Financial Information American Financial Holdings, Inc. Unaudited Pro Forma Consolidated Condensed Balance Sheet as of December 31, 2001..........................30 American Financial Holdings, Inc. Unaudited Pro Forma Consolidated Condensed Statement of Income for the Year Ended December 31, 2001.......31 American Financial Holdings, Inc. Notes to Unaudited Pro Forma Consolidated Condensed Financial Statements..............................31 (c) Exhibits Exhibit No. Description ---------- ----------- 23 Consent of KPMG LLP 2 INDEPENDENT AUDITORS' REPORT The Board of Directors American Financial Holdings, Inc.: We have audited the accompanying consolidated balance sheets of American Bank of Connecticut and subsidiaries (the "Bank") as of December 31, 2001 and 2000, and the related consolidated statements of earnings, comprehensive income (loss), stockholders' equity, and cash flows for each of the years in the three-year period ended December 31, 2001. These consolidated financial statements are the responsibility of the Bank's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of American Bank of Connecticut and subsidiaries as of December 31, 2001 and 2000, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2001, in conformity with accounting principles generally accepted in the United States of America. As described in note 1 to the consolidated financial statements, the Bank was acquired by American Financial Holdings, Inc. on January 18, 2002. /s/ KPMG LLP ---------------- KPMG LLP Hartford, Connecticut January 18, 2002 3 AMERICAN BANK OF CONNECTICUT AND SUBSIDIARIES Consolidated Balance Sheets December 31, 2001 and 2000 (Dollars in thousands)

See accompanying notes to consolidated financial statements. 4 AMERICAN BANK OF CONNECTICUT AND SUBSIDIARIES Consolidated Statements of Earnings Years ended December 31, 2001, 2000 and 1999 (Dollars in thousands, except per share data)

See accompanying notes to consolidated financial statements. 5 AMERICAN BANK OF CONNECTICUT AND SUBSIDIARIES Consolidated Statements of Comprehensive Income (Loss) Years ended December 31, 2001, 2000 and 1999 (Dollars in thousands)

See accompanying notes to consolidated financial statements. 6 AMERICAN BANK OF CONNECTICUT AND SUBSIDIARIES Consolidated Statements of Stockholders' Equity Years ended December 31, 2001, 2000 and 1999 (Dollars in thousands)

See accompanying notes to consolidated financial statements. 7 AMERICAN BANK OF CONNECTICUT AND SUBSIDIARIES Consolidated Statements of Cash Flows Years ended December 31, 2001, 2000 and 1999 (Dollars in thousands)

See accompanying notes to consolidated financial statements. 8 AMERICAN BANK OF CONNECTICUT AND SUBSIDIARIES Notes to Consolidated Financial Statements December 31, 2001, 2000 and 1999 (1) ACQUISITION OF THE BANK On July 19, 2001, American Bank of Connecticut (the "Bank") announced that it had entered into an Agreement and Plan of Merger ("Agreement") by and among American Financial Holdings, Inc., ("AFH"), a Delaware corporation and American Savings Bank of New Britain ("ASB") a Connecticut state-chartered stock savings bank and wholly-owned subsidiary of AFH, providing for the acquisition of the Bank by AFH and related merger of the Bank into ASB. During the fourth quarter of 2001, the merger was approved by the regulatory agencies and the shareholders of the Bank. Under the terms of the Agreement, AFH paid or tendered $30 in cash, or a combination of AFH common stock and cash, for each share of Bank common stock. The acquisition was completed on January 18, 2002. (2) SUMMARY OF ACCOUNTING POLICIES The Bank is a Connecticut state-chartered stock savings bank headquartered in Waterbury, Connecticut. The Bank's market area is comprised of the cities of Waterbury, Torrington and contiguous towns. In addition to retail banking, the Bank also engages in residential, commercial and commercial real estate lending and business banking. The Bank originates loans primarily for retention in its own portfolio. The Bank operates and reports results as a single business without segments. BASIS OF FINANCIAL STATEMENT PRESENTATION The consolidated financial statements include the accounts of the Bank and its wholly-owned subsidiaries, BKC Passive Investment Corporation, a Connecticut passive investment company, and BKC Financial Services, Inc., a subsidiary established to sell non-deposit investment products (hereinafter referred to collectively as the "Bank"). All inter-company accounts are eliminated in the consolidation. The consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America. In preparing the consolidated financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the balance sheet and revenues and expenses for the period. Actual results could differ from those estimates. A material estimate that is particularly susceptible to change in the near term is the allowance for loan losses, which is discussed below. For purposes of the consolidated statements of cash flows, cash and cash equivalents include cash amounts due from depository institutions and Federal funds sold. Generally, Federal funds are sold for a one-day period. Certain prior year amounts have been reclassified to conform with the 2001 presentation. CASH AND DUE FROM BANKS The Bank is subject to requirements of the Federal Reserve Bank of Boston to maintain certain average cash reserve balances. At December 31, 2001 and 2000, these reserves were $386,000 and $337,000, respectively. 9 (Continued) AMERICAN BANK OF CONNECTICUT AND SUBSIDIARIES Notes to Consolidated Financial Statements December 31, 2001, 2000 and 1999 SECURITIES AND OTHER INVESTMENTS Securities classified as available for sale are intended to be held for indefinite periods of time, but not necessarily to maturity. Available-for-sale securities are reported at fair value with unrealized gains or losses reported in stockholders' equity (accumulated other comprehensive income or loss), net of income tax effect. Federal Home Loan Bank stock is a non-marketable equity security reported at cost. Debt securities for which there exists the ability and intent to hold to maturity are classified as held to maturity and are reported at amortized cost. The amortization of premiums and accretion of discounts are recorded over the life of the security. Trading account assets are held in anticipation of short-term market movements and are carried at fair value. Any resulting gain or loss is reflected in the Bank's statement of earnings. The Bank periodically writes call options, which are obligations to sell a fixed quantity of securities at the option holder's request at a stated price within a specified term. The Bank owns or has entered into commitments to purchase underlying securities for all call options sold. Premium income from the sale of call options is recorded as a liability and, together with the call option, is marked to market with the resulting unrealized gains or losses recognized in earnings currently. Upon either the expiration or exercise of the option, the remaining premium is recognized in income in the statement of earnings. Gains and losses on sales of securities are determined on the specific identification method and are recognized upon realization. The Bank's Investment Committee reviews the debt and equity security portfolio on a quarterly basis to determine if any "other-than-temporary" impairment conditions exist. If such a condition exists, the debt or equity security is written down to the fair market value and the loss is recognized in the Bank's statement of earnings. The Bank owns other assets that are not marketable securities, including limited partnerships and investment funds. Management reflects the related unrealized gains and losses (net of taxes) in accumulated other comprehensive income. At December 31, 2001, other assets include an investment in limited partnership carried at a fair value of $4,429,000, and accumulated other comprehensive income includes an unrealized gain of $1,509,000 (after taxes of $962,000) with respect to this investment. Income of $1,716,000 was recognized on this partnership investment in 2001, primarily representing the Bank's share of the gain from the partnership's sale of an appreciated equity security. LOAN INCOME RECOGNITION Interest on loans is credited to income as earned based on the rate applied to principal amounts outstanding. The Bank discontinues the accrual of interest on loans over 90 days delinquent, and any interest previously accrued is reversed. Interest ultimately collected is credited to income in the period of recovery. Loan origination fees and certain direct origination costs are deferred and recognized over the life of the loan as an adjustment of yield, utilizing the interest method. 10 (Continued) AMERICAN BANK OF CONNECTICUT AND SUBSIDIARIES Notes to Consolidated Financial Statements December 31, 2001, 2000 and 1999 ALLOWANCE FOR LOAN LOSSES AND IMPAIRED LOANS The allowance for losses on loans is established through provisions charged against income and is maintained at a level considered adequate to provide for probable loan losses based on management's evaluation of known and inherent risks in the loan portfolio. When a loan or a portion of a loan is considered uncollectible, it is charged against the allowance. Recoveries of loans previously charged-off are credited to the allowance when received. Management's evaluation of the allowance for loan losses is based on a continuing review of the loan portfolio, which includes many factors, including identification and review of individual problem situations that may affect the borrower's ability to repay; review of current charge-offs, delinquencies, and nonperforming loan data; review of regulatory examinations and related evaluations of loans; an assessment of current economic conditions; and changes in the size and character of the loan portfolio. The Bank considers a loan impaired when it is probable it will be unable to collect all amounts due, both principal and interest, according to the contractual terms of the loan agreement. When a loan is impaired, impairment is measured based on the present value of expected future cash flows of the impaired loan discounted at the loan's original effective interest rate, or as a practical expedient, the fair value of the collateral of a collateral-dependent loan. When a loan has been deemed to be impaired, a valuation allowance is established for the amount of such impairment, as part of the total allowance for loan losses. The Bank excludes large groups of smaller-balance homogeneous loans, including residential mortgages and consumer loans, which are collectively evaluated for impairment. In general, interest income is recognized on impaired loans on a cash basis. Management believes that the allowance for loan losses, including losses on impaired loans, is adequate. While management uses the best available information to recognize losses on loans, future additions to the allowance for loan losses may be necessary based on changes in economic conditions, particularly in the Bank's market area. In addition, various regulatory agencies, as an integral part of their examination process, periodically review the Bank's allowance for loan losses. Such agencies may require the Bank to recognize additions to the allowance based on their judgments about information available to them at the time of their examination. PREMISES AND EQUIPMENT Premises and equipment are carried at cost less accumulated depreciation, except for land, which is carried at cost. Depreciation of office premises and equipment is recognized on the straight-line basis over the estimated useful lives of related assets, and amortization of leasehold improvements is recognized on the straight-line basis over the terms of the related leases. Maintenance and repairs are charged to expense as incurred, while improvements are capitalized. REAL ESTATE OWNED Real estate acquired through foreclosure is recorded at the lower of the loan balance or fair market value of the property, determined by an appraisal, less estimated costs of disposal at the date of acquisition. Subsequent adjustments are made to the carrying value for declines in market value. Holding costs, net of rental income, are charged to income in the period incurred. 11 (Continued) AMERICAN BANK OF CONNECTICUT AND SUBSIDIARIES Notes to Consolidated Financial Statements December 31, 2001, 2000 and 1999 INTANGIBLE ASSETS Intangible assets consist of goodwill arising from the purchase of branch offices and the associated deposit accounts. Goodwill is being amortized on a straight-line basis over periods ranging from 7 to 15 years. On a periodic basis, the Bank reviews the intangible assets for events or changes in circumstances that may indicate that the carrying amount of goodwill may not be recoverable. No impairment losses were recognized through December 31, 2001. BANK-OWNED LIFE INSURANCE The investment in bank-owned life insurance represents the cash surrender value of the life insurance policies on officers of the Bank. Increases in the cash surrender value are recorded as non-interest income. INCOME TAXES Deferred tax assets and liabilities are recognized for future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets are also recognized for tax net operating loss carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in future years. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. COMPREHENSIVE INCOME Comprehensive income represents the sum of net income and any changes in equity from non-owner sources that bypass the statement of earnings, such as net unrealized gains and losses on securities and other investments. The purpose of reporting comprehensive income is to report a measure of all changes in equity of an enterprise that result from recognized transactions and other economic events, other than transactions with owners. EARNINGS PER SHARE Basic earnings per share ("EPS") excludes all dilution and is computed by dividing income available to common shareholders (net income less dividends on preferred stock, if any) by the weighted average number of common shares outstanding during the period. Diluted EPS reflects the potential dilution that could occur if securities or other contracts to issue common stock (such as stock options) were exercised or converted into common stock that then shares in the earnings of the Bank. STOCK-BASED COMPENSATION The Bank accounts for stock-based compensation in accordance with Accounting Principles Board ("APB") Opinion No. 25, and related interpretations. Compensation expense is not recognized for fixed stock options if the exercise price of the option equals the fair value of the underlying stock at the grant date. In the case of variable stock options, such as options that become exercisable only if certain events occur, compensation expense is determined on the measurement date in an amount equal to the intrinsic value (excess of market price over exercise price), and recognized in the statement of earnings on the vesting date or over the vesting period (if applicable). The fair value of restricted stock awards, measured at the grant date, is amortized to compensation expense on a straight-line basis over the vesting period. 12 (Continued) AMERICAN BANK OF CONNECTICUT AND SUBSIDIARIES Notes to Consolidated Financial Statements December 31, 2001, 2000 and 1999 Statement of Financial Accounting Standards ("SFAS") No. 123, Accounting for Stock-Based Compensation, allows an entity to continue to use APB Opinion No. 25 and make the required disclosure of pro-forma net income and EPS as if stock-based compensation had been accounted for using the fair-value-based method of SFAS No. 123. (3) INVESTMENT AND MORTGAGE-BACKED SECURITIES AVAILABLE FOR SALE The following is a comparative summary of the amortized cost, gross unrealized gains and losses, and fair value of available for sale securities. There were no held to maturity securities in 2001, 2000 or 1999.

Gross realized gains from sales or calls of securities during 2001, 2000 and 1999 were approximately $3,751,000, $5,572,000 and $4,804,000, respectively. Gross realized losses from sales or calls during 2001, 2000 and 1999 were approximately $5,519,000, $3,679,000 and $2,679,000, respectively. Gross realized losses on sales of trading securities during 2000 and 1999 were approximately $308,000 and $537,000, respectively. Gross realized gains from sales of trading securities in 1999 were approximately $78,000. In addition, the Bank recognized $2,289,000, $2,528,000 and $1,803,000 of income from option trading activities for 2001, 2000 and 1999, respectively. (Continued) 13 AMERICAN BANK OF CONNECTICUT AND SUBSIDIARIES Notes to Consolidated Financial Statements December 31, 2001, 2000 and 1999 At December 31, 2001, mortgage-backed securities of $601,000 were pledged as collateral for public deposits and treasury, tax and loan deposits. The amortized cost and fair value of mortgage-backed and other debt securities at December 31, 2001 are shown below by remaining period to contractual maturity. The expected maturities of mortgage-backed securities can differ from contractual maturities because borrowers on the underlying mortgage loans have the ability to make prepayments. The expected maturities of other debt securities may differ from contractual maturities because issuers may have the ability to call the obligations prior to maturity.

14 (Continued) AMERICAN BANK OF CONNECTICUT AND SUBSIDIARIES Notes to Consolidated Financial Statements December 31, 2001, 2000 and 1999 (4) LOANS Loans receivable at December 31 consisted of the following:

NON-ACCRUAL LOANS Non-accrual loans as of December 31, 2001, 2000 and 1999 were $1,273,000, $1,623,000 and $731,000, respectively. The gross amount of interest that would have accrued at the original contract rate on non-accrual loans is $84,000, $89,000 and $62,000 for 2001, 2000 and 1999, respectively. The Bank had a recorded investment in impaired loans and related allowance, which is component of the total allowance for the loan losses, of $7,027,000 and $2,271,000, respectively, at December 31, 2001, compared to $4,435,000 and $1,304,000, respectively, at December 31, 2000. The average recorded investment in impaired loans during 2001, 2000 and 1999 was $5,731,000, $4,399,000 and $5,052,000, respectively. Interest income recognized on impaired loans, which also approximated cash received, was $528,000, $345,000 and $337,000 during 2001, 2000 and 1999, respectively. 15 (Continued) AMERICAN BANK OF CONNECTICUT AND SUBSIDIARIES Notes to Consolidated Financial Statements December 31, 2001, 2000 and 1999 RELATED PARTY TRANSACTIONS Loans to officers, directors, principal security holders, and their associates considered to be related parties, aggregated $9,070,000 at December 31, 2001. At December 31, 2000, loans to such persons totaled approximately $9,375,000. Unused loan commitments made to such persons totaled approximately $300,000 and $400,000 at December 31, 2001 and 2000, respectively. Related party loans were made in the ordinary course of business on substantially the same terms, including interest rate and collateral, as those prevailing at the time for comparable transactions with other persons. All loans to related parties were current as to principal and interest payments at December 31, 2001 and 2000. SIGNIFICANT GROUP CONCENTRATIONS OF CREDIT RISK AND OFF-BALANCE SHEET RISK The Bank's lending activities are limited principally to borrowers within the State of Connecticut, with a large emphasis on the greater Waterbury and Torrington area. Primarily a lender on residential real estate properties, the Bank also makes loans secured by commercial real estate, commercial loans, and consumer loans for a variety of purposes. The strength of the state and local economy is a primary factor in determining the ability of borrowers to meet their repayment obligations. The Bank is subject to off-balance sheet risk involving primarily commitments to extend credit on home equity loans secured by residential property and, to a lesser extent, unsecured lines of credit. These commitments involve, to varying degrees, elements of credit risk in excess of the amounts recognized in the consolidated balance sheets. The Bank's exposure to credit loss in the event of non-performance by the other party to the commitment to extend credit is represented by the contractual amount of the commitment. The Bank uses the same credit policies in making commitments as it does for on-balance sheet instruments. In extending commitments, the Bank evaluates each customer's credit worthiness on a case-by-case basis. The amount of collateral obtained upon extension of credit is based on management's credit evaluation. Since certain of the commitments may expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. Outstanding mortgage loan commitments (generally of a two-month duration) totaled $2,852,000 at December 31, 2001 and $4,815,000 at December 31, 2000. Other unused commitments, primarily on commercial loans, totaled $44,395,000 at December 31, 2001 and $42,896,000 at December 31, 2000. In addition, unused home equity lines of credit totaling $23,494,000 and $21,926,000 were outstanding at December 31, 2001 and 2000, respectively. At December 31, 2001 and 2000, the Bank had approximately $3,660,000 and $4,356,000, respectively, in contingent liabilities on outstanding letters of credit. 16 (Continued) AMERICAN BANK OF CONNECTICUT AND SUBSIDIARIES Notes to Consolidated Financial Statements December 31, 2001, 2000 and 1999 ALLOWANCE FOR LOAN LOSSES A summary of changes in the allowance for loan losses for the years ended December 31 follows:

(5) PREMISES AND EQUIPMENT Premises and equipment consisted of the following at December 31:

17 (Continued) AMERICAN BANK OF CONNECTICUT AND SUBSIDIARIES Notes to Consolidated Financial Statements December 31, 2001, 2000 and 1999 Total depreciation and amortization expense was approximately $1,052,000 for 2001, $839,000 for 2000 and $697,000 for 1999. (6) EMPLOYEE BENEFITS The Bank maintains a non-contributory, defined benefit pension plan covering substantially all its employees. The benefits are based on years of service and employees' compensation. Benefits for post-1986 plan members are integrated with social security benefits. The following table sets forth the plan's funded status and amounts recognized in the consolidated balance sheets at December 31:

The following tables set forth changes in the plan's benefit obligation and assets for the years ended December 31:

18 (Continued) AMERICAN BANK OF CONNECTICUT AND SUBSIDIARIES Notes to Consolidated Financial Statements December 31, 2001, 2000 and 1999 Net periodic pension expense for the years ended December 31 included the following components:

The weighted average discount rates and rates of increase in future compensation levels used in determining the actuarial present values of the projected benefit obligation for 2001, 2000 and 1999 were 7.25% and 4%, respectively. The expected long-term rate of return on plan assets was 9.0% for 2001, and 9.25% for 2000 and 1999. The pension plan held in its asset portfolio 50,680 shares of common stock of the Bank at December 31, 2001 and 53,680 shares as of December 31, 2000. Other assets of the plan include equity funds, bond funds and a guarantee deposit account. The Bank also maintains a supplemental retirement plan for the purpose of providing additional unfunded, non-qualified benefits for a select group of Bank employees. In 2001, 2000 and 1999, expense of $711,000, $250,000 and $85,000 was recognized under this supplemental plan. The Bank sponsors a leveraged employee stock ownership plan ("ESOP") that covers substantially all employees. The Bank makes annual contributions to the ESOP equal to the ESOP's debt service less dividends received by the ESOP. All dividends on unallocated shares are used to pay debt service. As the debt is repaid, shares are allocated to active employees, based on the proportion of debt service paid in the year. The shares pledged as collateral are reported as unearned ESOP shares in the balance sheets. ESOP compensation expense was $110,000 in 2001, $303,000 in 2000 and $314,000 in 1999. The ESOP shares as of December 31 were as follows:

19 (Continued) AMERICAN BANK OF CONNECTICUT AND SUBSIDIARIES Notes to Consolidated Financial Statements December 31, 2001, 2000 and 1999 (7) Deposits Deposit balances and weighted average interest rates at December 31 are summarized as follows:

Included in time deposits were approximately $43,391,000 and $53,741,000 of individual deposits of $100,000 or more as of December 31, 2001 and 2000, respectively. Interest expense on time deposits of $100,000 or more was $2,145,000, $2,094,000 and $1,328,000 for 2001, 2000 and 1999, respectively. 20 (Continued) AMERICAN BANK OF CONNECTICUT AND SUBSIDIARIES Notes to Consolidated Financial Statements December 31, 2001, 2000 and 1999 A summary of individual time deposits of $100,000 or more at December 31 follows, by remaining period to maturity:

(8) BORROWINGS FROM THE FEDERAL HOME LOAN BANK Federal Home Loan Bank ("FHLB") advances at December 31 are as follows:

Advances are shown above by final maturity date. Advances callable between the years 2002 and 2004 total $42,000,000 at December 31, 2001. The Bank is required to maintain sufficient collateral (primarily unpaid balances of first mortgage loans on residential property) to meet the collateral maintenance level required by the FHLB. In addition, all stock in the FHLB is pledged as collateral to secure advances. The Bank's available Ideal Way Line of Credit approximates 1.00% of the Bank's total assets, with a rate determined and reset by the FHLB on a daily basis. There were no Ideal Way advances outstanding at December 31, 2001 and 2000. 21 (Continued) AMERICAN BANK OF CONNECTICUT AND SUBSIDIARIES Notes to Consolidated Financial Statements December 31, 2001, 2000 and 1999 (9) INCOME TAXES Components of the income tax expense reported in the consolidated statements of earnings are as follows for the years ended December 31:

Components of the deferred tax assets and deferred tax liabilities at December 31 are presented below:

22 (Continued) AMERICAN BANK OF CONNECTICUT AND SUBSIDIARIES Notes to Consolidated Financial Statements December 31, 2001, 2000 and 1999 The Bank has established a valuation allowance for its entire state deferred tax asset following the creation of a Connecticut Passive Investment Company subsidiary. Income of the passive investment company subsidiary and dividends paid to its parent are exempt from the Connecticut Corporation Business Tax and, accordingly, the Bank no longer expects to realize its state deferred tax asset. During 2001, the Bank increased its valuation allowance by $938,000 to offset the increase in the state deferred tax asset. State tax net operating loss carryforwards for 1999, 2000 and 2001 are approximately $6,800,000, $9,100,000 and $12,400,000, respectively, and expire in 2004, 2020 and 2021, respectively. The actual income tax expense differs from the "expected" income tax expense (computed by applying the statutory U.S. federal corporate tax rate of 34% to earnings before income taxes) for the years ended December 31 as follows:

Tax law changes enacted in 1996 eliminated the percentage of taxable income method and imposed a requirement to recapture into taxable income (over a six-year period) all bad debt reserves accumulated after 1987. The Bank previously recognized a deferred tax liability with respect to these post-1987 reserves. The tax law changes also provided that taxes associated with the recapture of pre-1998 bad debt reserves would become payable under more limited circumstances than under prior law. Under the tax laws, as amended, events that would result in recapture of the Bank's pre-1998 bad debt reserves of $2,020,000 include repurchases and other redemptions of the Bank's stock and distributions to shareholders' in excess of specified amounts. The Bank does not anticipate having such reserves recaptured into taxable income. The potential recapture liability for which no deferred taxes have been provided was approximately $687,000 at December 31, 2001. 23 (Continued) AMERICAN BANK OF CONNECTICUT AND SUBSIDIARIES Notes to Consolidated Financial Statements December 31, 2001, 2000 and 1999 (10) EARNINGS PER SHARE The following is a reconciliation of the numerators and denominators of the basic and diluted EPS computations for the years ended December 31:

(11) COMMITMENTS At December 31, 2001, the Bank was obligated through 2006 under various non-cancelable operating leases for properties used for branch purposes. The leases generally contain renewal options and escalation clauses that provide for increased rental payments in future periods and, in one lease, a purchase option. Minimum operating lease payments due in each of the five years subsequent to December 31, 2001 are as follows: 2002 $ 296,000 2003 191,000 2004 146,000 2005 86,000 2006 28,000 Rent expense for operating leases was $370,000, $287,000 and $266,000 in 2001, 2000 and 1999, respectively. 24 (Continued) AMERICAN BANK OF CONNECTICUT AND SUBSIDIARIES Notes to Consolidated Financial Statements December 31, 2001, 2000 and 1999 (12) FAIR VALUE OF FINANCIAL INSTRUMENTS The Bank is required to disclose the estimated fair value of its financial instruments in accordance with SFAS No. 107. Financial instruments defined in SFAS No. 107 include cash and cash equivalents, securities, loans, deposits, borrowings and certain off-balance sheet items. Fair value estimates are made at a specific point in time based on relevant market information, where available, or other more subjective information if a market for the financial instrument does not exist. These estimates incorporate assumptions and other matters of judgment, and may not reflect the true financial impact that would result from selling the entire portfolio of a financial instrument on one date, including any income tax consequences. The following is a summary of the carrying amount and estimated fair value of the Bank's financial instruments at December 31:

For cash and cash equivalents, the carrying amount equals the estimated fair value. For securities, fair value is estimated using quoted market prices or dealer quotes, if available. If a quoted market price is not available, fair value is estimated using quoted market prices for similar securities. 25 (Continued) AMERICAN BANK OF CONNECTICUT AND SUBSIDIARIES Notes to Consolidated Financial Statements December 31, 2001, 2000 and 1999 In developing the estimated fair values of loans, the Bank's portfolio was segregated by type of loan, performing status, and interest rate (fixed or variable). In general, fair values were estimated by discounting contractual cash flows adjusted for prepayment estimates, using discount rates developed by reference to secondary market data. All non-performing loans were valued using the discounted cash flow method and a discount rate commensurate with the anticipated risks and repayment period. The fair values of deposits with no stated maturity, including non-interest bearing, NOW and savings accounts, are equal to the amounts payable on demand. The fair values of time deposits are based on the discounted value of contractual cash flows, using rates offered at December 31 for deposits with similar remaining maturities. The fair values of FHLB borrowings were estimated using rates available at December 31 for debt of similar terms and remaining maturities. The fair values of accrued interest receivable, accrued interest payable and loan commitments approximate the carrying amounts at December 31, 2001 and 2000. (13) STOCK-BASED COMPENSATION The Bank's stock incentive plan includes the 1984, 1993 and 1998 Incentive Stock Option Plans. The 1984 and the 1993 plans allow for grants of stock options to key employees allowing them to purchase a total of 720,000 shares of the Bank's common stock. The 1998 plan allows for grants of stock options to both the staff and key employees. A total of 480,000 shares may be granted under the 1998 plan. Under these plans, the option price shall at least equal the fair market value of such shares on the date the options are granted, and all options expire not later than ten years from the date of grant. All options became fully vested in January 2002 upon completion of the acquisition of the Bank which is described in note 1. As provided by SFAS No. 123, which became effective for the Bank on January 1, 1997, the Bank continues to apply APB Opinion No. 25 and related interpretations in accounting for its stock-based compensation plans. Accordingly, no compensation expense has been recognized for its fixed stock options, which constitute the majority of the grants made under the plans. Compensation expense has been recognized for the Bank's variable stock options which were granted in 1998 and subsequent years, and which become exercisable if the market price of the Bank's common stock reaches a specified level and remains at that level for a specified period. The compensation expense is measured when the market price reaches the specified level, or when it is deemed probable that the price will reach that level. The expense equals the excess of the market price over the exercise price on the measurement date, and is recognized on the vesting date or over the vesting period (if applicable). 26 (Continued) AMERICAN BANK OF CONNECTICUT AND SUBSIDIARIES Notes to Consolidated Financial Statements December 31, 2001, 2000 and 1999 In contrast, SFAS No. 123 requires recognition of expense for the fair value of all stock option awards (both fixed and variable), measured on the grant date. Under SFAS No. 123, the expense equals the grant-date fair value of the awards, estimated using an option pricing model, which is recognized over the vesting period (if any). Accordingly, the amount of expense recognized in any given period using the fair-value-based method of SFAS No. 123 may be greater or less than the expense recognized using the intrinsic-value-based method of APB Opinion No. 25. Had compensation expense for the Bank's stock-based compensation plans been determined consistent with SFAS No. 123, the Bank's net earnings and earnings per share for the years ended December 31 would have changed to the pro forma amounts indicated below:

For purposes of the preceding disclosure, under SFAS No. 123, fair value has been estimated on the date of each grant using the binomial option-pricing model with the following weighted average assumptions: dividend yield of 5.0%; expected volatility of 26% in 2001, 24% in 2000 and 22% in 1999; risk-free interest rates averaging 4.8% in 2001, 5.7% in 2000 and 5.21% in 1999; and expected lives of five years. A summary of the status of the Bank's stock option plans as of December 31, 2001, 2000 and 1999, and changes during the years then ended, is presented below.

27 (Continued) AMERICAN BANK OF CONNECTICUT AND SUBSIDIARIES Notes to Consolidated Financial Statements December 31, 2001, 2000 and 1999 The following table summarizes information about the Bank's stock options at December 31, 2001:

At December 31, 2001, there were 12,000 shares of restricted stock outstanding with associated unearned compensation included as a reduction of retained earnings of $138,000. Compensation expense recorded with respect to restricted stock totaled $69,000 in 2001, $69,000 in 2000 and $169,000 in 1999. (14) REGULATORY CAPITAL REQUIREMENTS The Bank is subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory, and possibly additional discretionary, actions by regulators that, if undertaken, could have a direct material effect on the Bank's consolidated financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank must meet specific capital guidelines that involve quantitative measures of the Bank's assets, liabilities and certain off-balance sheet items as calculated under regulatory accounting practices. The Bank's capital amounts and classifications are also subject to qualitative judgments by the regulators about capital components, risk weightings and other factors. Quantitative measures established by regulation to ensure capital adequacy require the Bank to maintain minimum amounts and ratios (set forth in the table below) of total capital to risk-weighted assets, of total Tier 1 Capital to risk-weighted assets, and of Tier 1 Capital to average assets. Management believes, as of December 31, 2001 and 2000, that the Bank met all capital adequacy requirements to which it was subject. As of December 31, 2001, the most recent notification from the FDIC categorized the Bank as well capitalized under the regulatory framework from prompt corrective action. To be categorized as well capitalized, the Bank must maintain minimum total risk-based, Tier 1 risk-based, and Tier 1 leverage ratios as set forth in the table. There have been no conditions or events since that notification that management believes have changed the Bank's category. 28 (Continued) AMERICAN BANK OF CONNECTICUT AND SUBSIDIARIES Notes to Consolidated Financial Statements December 31, 2001, 2000 and 1999 The Bank's actual capital amounts and ratios are summarized below in comparison to the required regulatory amounts:

The Bank's ability to pay dividends is subject to Connecticut banking law. The Bank may not declare a dividend in excess of its retained net profits from the current and prior two years. Also, the Bank may not pay a dividend if the effect of the dividend would be to reduce its capital below regulatory requirements. 29 On January 18, 2002, American Financial Holdings, Inc. ("American Financial") through its subsidiary, American Savings Bank, (the "Bank") acquired American Bank of Connecticut ("ABC"). American Financial acquired all of the outstanding common stock of ABC. The unaudited pro forma consolidated condensed financial statements reflect the effects of the ABC acquisition, assuming that the acquisition occurred January 1, 2001 for the statement of income and at December 31, 2001 for the balance sheet. American Financial Holdings, Inc. and American Bank of Connecticut Unaudited Pro Forma Consolidated Condensed Balance Sheet as of December 31, 2001.

30 American Financial Holdings, Inc. and American Bank of Connecticut, Inc., Unaudited Pro Forma Consolidated Condensed Balance Sheet as of December 31, 2001.

The accompanying notes are an integral part of the unaudited pro forma consolidated condensed financial statements. 1. ACQUISITION On January 18, 2002, American Financial Holdings, Inc. through its subsidiary, American Savings Bank, (the "Bank"), acquired American Bank of Connecticut. American Financial acquired all of the outstanding common stock of ABC for $73.9 million of cash, excluding transaction costs, and issued 3,208,715 shares of American Financial common stock. 31 The acquisition was accounted for as a purchase and the purchase price was allocated based on the estimated fair market values of the assets and liabilities acquired. The preliminary allocation of the purchase price is as follows:

The merger has been accounted for by American Financial under the purchase method of accounting in accordance with Statement of Financial Accounting Standards ("SFAS") No. 141, "Business Combinations, and SFAS No. 142, "Goodwill and Other Intangible Assets." In accordance with Statement of Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets," intangible assets other than goodwill (such as core deposit intangibles) must be amortized over their estimated useful lives. Goodwill will not be amortized to expense, but instead will be reviewed for impairment at least annually and to the extent goodwill is impaired, its carrying value will be written down to its implied fair value and a charge to earnings will be made. The pro forma information presented is theoretical in nature and not necessarily indicative of future consolidated results of operations of the Company or the consolidated results of operations which would have resulted had the Company acquired the stock of ABC during the periods presented. The unaudited pro forma consolidated condensed financial statements reflect the effects of the ABC acquisition, assuming that the acquisition occurred January 1, 2001 for the statement of income and at December 31, 2001 for the balance sheet. 32 2. PRO FORMA ADJUSTMENTS (A) Represents the cash portion consideration of the purchase price. (B) Represents the cost basis amount of an adjustment of American Bank stock (89,700 shares) held by American Financial. (C) Represents adjustments to record the acquired loans at fair value based on interest rates at December 31, 2001, resulting in a net premium of $383,000. (D) Represents the fair market value adjustment relating to premises and equipment. (E) The net adjustment of $68.0 million represents (i) an increase of $80.0 million to record the estimated goodwill related to the merger and (ii) a decrease of $12.5 million to eliminate the pre-existing goodwill related to prior branch acquisitions by American Bank. (F) Represents an adjustment to record American Bank's core deposit intangible ("CDI") at 2.16% of core deposits. The CDI will be amortized using an accelerated method over a 10-year period. (G) Represents the (i) adjustment to record the difference in the projected benefit obligation and fair value of plan assets in American Banks pension plan of $1.2 million and (ii) an increase in net deferred tax assets for the estimated tax effects of fair value adjustments and merger related costs of $6.8 million and (iii) adjustment of $1.1 million to record the estimated tax refund from the Internal Revenue Service for the 2001 tax year. (H) Represents the fair market value adjustment relating to time deposit liabilities resulting in a net premium of $4.1 million. (I) Represents an adjustment to record American Bank's Federal Home Loan Bank borrowings at fair value based on interest rates as of January 15, 2002 resulting in a net premium of $3.7 million. (J) Represents a deferred tax liability of $5.5 million recognized with respect to the non-deductible portion of the core deposit intangible, a deferred tax asset associated with the American Bank goodwill of $4.4 million resulting in a net deferred tax liability of $1.1 million, and the accrual of the following estimated merger-related costs totaling $5.8 million: payments of $2.0 million to officers and employees of American Bank pursuant to changes in control provisions of certain agreements and severance arrangements; and merger-related costs of $3.8 million. (K) Represents (i) the elimination of American Bank's historical stockholders' equity balances, (ii) the issuance by American Financial of 3,208,715 common shares as the stock portion of the merger consideration, at a total market value of $73.8 million ($66.5 million from treasury stock and $7.3 million from additional paid-in capital) based on the agreed upon price of $23.01 at July 18, 2001 with an exchange ratio of 1.304 shares and (iii) an adjustment of $12.0 million to record the fair value of American Bank vested options that were exchanged for vested options of American Financial. 33 (L) Represents (i) a $93,000 reduction in dividend income for the 89,700 shares of American Bank common stock held by American Financial, (ii) a $2.9 million reduction in interest income based on an annual average yield of approximately 3.8% for the $73.9 million cash portion of the purchase - see adjustment (A) above, and (iii) a $70,000 adjustment to amortize loan premium as a result of recording acquired loans at fair value. See adjustment (C) above. Premiums are being amortized over 5.5 years. (M) Represents the annual amortization of the time deposit fair value adjustment using a straight line method over five years. See adjustment (H) above. (N) Represents the following:

(O) Represents the tax effect at a federal rate of 35.0% of the pro forma adjustments (L), (M) and (N) above, reflected in the Consolidated Condensed Statement of Income. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. American Financial Holdings, Inc. Date: April 2, 2002 /s/ Charles J. Boulier, III ----------------------------------- Charles J. Boulier, III Senior Executive Vice President, Chief Financial Officer and Treasurer 34

AMERICAN FINANCIAL HOLDINGS INC 8-K/A