10-Q 1 asb56787-10q.txt 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 quarterly period ended June 30, 2002 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 registrant 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 21,360,615 Outstanding as of July 26, 2002

See accompanying notes to unaudited interim consolidated financial statements. 2 AMERICAN FINANCIAL HOLDINGS, INC. Consolidated Statements of Cash Flows (Unaudited)

See accompanying notes to unaudited interim consolidated financial statements. 3 AMERICAN FINANCIAL HOLDINGS, INC. Notes to Interim Consolidated Financial Statements (Unaudited) (1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES BUSINESS AND ACQUISITION 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 and businesses located primarily in Connecticut and to a lesser extent in Massachusetts and Rhode Island. The Company is subject to the regulation of certain state and federal agencies and undergoes periodic examination by those regulatory authorities. On January 18, 2002, the Company through the Bank, completed its acquisition of American Bank of Connecticut ("American Bank") by acquiring all of the outstanding common stock of American Bank for approximately $162.0 million in stock and cash (see Note 5). BASIS OF FINANCIAL STATEMENT PRESENTATION The accompanying unaudited interim consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America and with the instructions to Form 10-Q. Accordingly, certain information and disclosures required by accounting principles generally accepted in the United States of America 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 2001 annual report filed on Form 10-K. The unaudited interim 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 unaudited interim consolidated financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the balance sheet and revenues and expenses for the period. Actual results could differ from those estimates. Material estimates that are particularly susceptible to changes in the near-term include 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 the fair presentation of financial position, results of operations and cash flows, have been made. The results of operations for interim periods are not necessarily indicative of the results that may be expected for another interim period or a full year. 4 AMERICAN FINANCIAL HOLDINGS, INC. Notes to Interim Consolidated Financial Statements (Unaudited) RECLASSIFICATIONS Certain prior year amounts have been reclassified to conform to the current year presentation. (2) INVESTMENT AND MORTGAGE-BACKED SECURITIES The Company classified all investment and mortgage-backed securities as available for sale as of June 30, 2002 and December 31, 2001. The amortized cost, gross unrealized gains, gross unrealized losses, and estimated fair values of investment and mortgage-backed securities at June 30, 2002 and December 31, 2001 are as follows:

At June 30, 2002, the net unrealized gain on securities available for sale of $62.6 million, offset by income taxes of $25.6 million, is included in accumulated other comprehensive income in stockholders' equity. 5 AMERICAN FINANCIAL HOLDINGS, INC. Notes to Interim Consolidated Financial Statements (Unaudited)

At December 31, 2001, the net unrealized gain on securities available for sale of $69.5 million, net of income taxes of $27.7 million, is shown as accumulated other comprehensive income of $41.8 million in stockholders' equity. 6 AMERICAN FINANCIAL HOLDINGS, INC. Notes to Interim Consolidated Financial Statements (Unaudited) (3) LOANS RECEIVABLE The composition of the Company's loan portfolio was as follows:

7 AMERICAN FINANCIAL HOLDINGS, INC. Notes to Interim Consolidated Financial Statements (Unaudited)

8 AMERICAN FINANCIAL HOLDINGS, INC. Notes to Interim Consolidated Financial Statements (Unaudited)

(5) EARNINGS PER SHARE Basic net income per common 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 net income per common share is computed in a manner similar to that of basic net income per common share except that the weighted-average number of common shares outstanding is increased to include the number of incremental common shares (computed using the treasury stock method) 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. 9 AMERICAN FINANCIAL HOLDINGS, INC. Notes to Interim Consolidated Financial Statements (Unaudited) The weighted-average shares and earnings per share for the three and six month periods ended June 30 are detailed in the table below (in thousands, except per share data).

There were 30,000 and 35,500 anti-dilutive stock options in the three and six month period ended June 30, 2002 not included in the computation of diluted shares because the options' exercise prices exceeded the average market price of the Company's common stock for the period. There were no anti-dilutive stock options in the three or six-month periods ended June 30, 2001. (6) RECENT ACQUISITION Following the close of business on January 18, 2002, the Parent Company completed the acquisition of 100% of the voting stock of American Bank of Connecticut, a state chartered savings bank, with American Bank of Connecticut merging into American Savings Bank. American Bank of Connecticut was headquartered in Waterbury, Connecticut and operated 17 branches in the cities of Waterbury, Torrington and contiguous towns. The Company issued 3,208,715 shares from treasury and acquired all of the outstanding common stock of American Bank of Connecticut for approximately $162.0 million ($73.8 million in cash and $88.2 million in common stock and options), excluding transaction costs. As defined in the Agreement and Plan of Merger, dated July 18, 2001, between the Company and American Bank of Connecticut, the shareholders of American Bank received either (a) $30.00 in cash per share, (b) 1.304 shares of American Financial Holding stock for every share of American Bank stock which was based on a purchase price of $30.00 per share and an American Financial share price of $23.01 at the date of the announcement or (c) a combination thereof. American Bank of Connecticut's results of operations are included in the Company's consolidated statement of income from the date of acquisition forward. 10 AMERICAN FINANCIAL HOLDINGS, INC. Notes to Interim Consolidated Financial Statements (Unaudited) The transaction was accounted for using the purchase method of accounting in accordance with Statement of Financial Accounting Standards ("SFAS") No. 141, "Business Combinations." Accordingly, the purchase price was allocated based on the estimated fair market values of the assets and liabilities acquired. The allocation of the purchase price is as follows (in thousands): Cash and cash equivalents $ 128,543 Investment securities 309,927 Loans, less allowance for loan losses 413,094 Federal Home Loan Bank stock 9,700 Cash surrender value of life insurance 18,014 Goodwill 85,947 Core deposit intangible 15,597 Other assets 19,024 Deposits (726,193) Federal Home Loan Bank advances and other borrowings (110,697) Other liabilities (1,395) ------------- Total purchase price $ 161,561 =============

The goodwill associated with the acquisition of American Bank of Connecticut is not tax deductible. The core deposit intangible is being amortized on an accelerated basis over its estimated life of ten years. Amortization expense of the core deposit intangible was $709,000 and $1.3 million respectively for the three and six-month periods ended June 30, 2002, and accumulated amortization was $1.3 million at June 30, 2002. Estimated annual amortization expense of the core deposit intangible asset, absent any impairment charge is summarized as follows for the remainder of this year and for each of the next five years: For the years ending December 31, 2002 (remaining six months) $ 1,418 2003 2,566 2004 2,282 2005 1,999 2006 1,715 2007 1,432 -------------- Total $ 11,412 ==============

11 AMERICAN FINANCIAL HOLDINGS, INC. Notes to Interim Consolidated Financial Statements (Unaudited) The following supplemental pro forma information is presented for the three and six months ended June 30, 2001, assuming American Bank of Connecticut had been acquired as of January 1, 2001. Because the acquisition of American Bank of Connecticut was completed near the beginning of the six-month period ended June 30, 2002, no supplemental pro forma information for 2002 is presented.

(7) ACCOUNTING STANDARDS In July 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards ("SFAS") No. 141, "Business Combinations," and SFAS No. 142, "Goodwill and Other Intangible Assets." Among other things, SFAS No. 141 requires the use of the purchase method to account for all business combinations initiated after June 30, 2001. SFAS No. 142 requires that goodwill no longer be amortized to expense, but instead be reviewed annually for impairment. Amortization of goodwill ceases upon adoption of SFAS No. 142, which for calendar year-end entities, such as the Company, was January 1, 2002. Intangible assets other than goodwill (such as core deposit intangibles) are amortized to expense over their estimated useful lives. SFAS No. 142 applies to goodwill and other intangible assets acquired after June 30, 2001 and accordingly, was applied by the Company upon its acquisition of American Bank of Connecticut as described in note 5. Prior to the adoption of SFAS No. 142, the Company had no goodwill. SFAS No. 143, "Accounting for Asset Retirement Obligations," addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. This statement requires that the fair value of a liability for an asset retirement obligation be recognized in the period in which it is incurred if a reasonable estimate of fair value can be made. The associated asset retirement costs are capitalized as part of the carrying amount of the long-lived asset. Under this statement, the liability is discounted and the accretion expense is recognized using the credit-adjusted risk free interest rate in effect when the liability was initially 12 AMERICAN FINANCIAL HOLDINGS, INC. Notes to Interim Consolidated Financial Statements (Unaudited) recognized. SFAS No. 143 is effective for financial statements issued for fiscal years beginning after June 15, 2002. Earlier adoption is permitted. The Company does not expect that the adoption of this statement will have a material impact on its consolidated financial statements. SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets," supersedes SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of." SFAS No. 144 requires that one accounting model be used for long-lived assets to be disposed of, and is effective for financial statements issued for fiscal years beginning after December 15, 2001 and interim periods within those fiscal years. The provisions of this statement are to be applied prospectively. The adoption of SFAS No. 144 did not have a material impact on the Company's consolidated financial statements. In April 2002, the Financial Accounting Standards Board issued SFAS No. 145, "Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections." This statement rescinds FASB Statement No. 4, "Reporting Gains and Losses from Extinguishment of Debt," and an amendment of that Statement, FASB Statement No. 64, "Extinguishments of Debt made to Satisfy Sinking-Fund Requirements." This statement also rescinds FASB Statement No. 44, "Accounting for Intangible Assets of Motor Carriers" and amends SFAS No. 13, "Accounting for Leases." SFAS No. 145 is effective for financial statements issued for fiscal years beginning after May 15, 2002 for provisions related to the recission of Statement No. 4. Certain provisions related to Statement No. 13 shall be effective for transactions occurring after May 15, 2002, with early adoption permitted. All other provisions of this Statement shall be effective for financial statements issued on or after May 15, 2002, with early adoption permitted. The Company does not expect that the adoption of this statement will have a material impact on its consolidated financial statements. 13 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, 2002 and 2001, and should be read in conjunction with American Financial Holdings, Inc.'s (the "Company") Unaudited Interim Consolidated Financial Statements and the notes thereto, appearing in Part I, Item 1 of this document. FORWARD-LOOKING STATEMENTS This quarterly report contains forward-looking statements that are based on assumptions and may contain descriptions of 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 are affected by many factors which 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, real estate values 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. Except as required by applicable law or regulation, 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. ACQUISITION OF AMERICAN BANK OF CONNECTICUT On January 18, 2002, the Company completed its acquisition of American Bank of Connecticut in a transaction accounted for under the purchase method of accounting by acquiring all of the outstanding common stock of American Bank of Connecticut for approximately $162.0 million in stock and cash. Accordingly, the assets and liabilities of American Bank of Connecticut are reflected in the Company's unaudited interim consolidated balance sheet at June 30, 2002. The results of operations of American Bank of Connecticut for the three and six months ended June 30, 2001 are not included in the unaudited interim consolidated statement of income for those periods. American Bank of Connecticut's results of operations are included in the unaudited interim consolidated statement of income for the three and six months ended June 30, 2002 from the acquisition date forward and are included in the accompanying discussion of the comparison of operating results for the three and six months ended June 30, 2002 and 2001. COMPARISON OF FINANCIAL CONDITION AT JUNE 30, 2002 AND DECEMBER 31, 2001 Total assets at June 30, 2002 were $2.89 billion representing an increase of $994.2 million, or 52.3%, over the December 31, 2001 level of $1.90 billion. The increase in assets was primarily due to the acquisition of American Bank of Connecticut, which added approximately $920.0 million in assets. American Savings Bank's (the "Bank") Tier 1 leverage capital ratio was 8.57% at June 30, 2002 compared to 17.7% at December 31, 2001. The Bank's total risk based capital ratio was 16.01% at June 30, 2002 compared to 31.3% at December 31, 2001, and the Company's capital to assets ratio was 15.3% and 20.8% at June 30, 2002 and December 31, 2001, respectively. The reduction in these capital ratios from December 31, 2001 to June 30, 2002 was due primarily to the acquisition of American Bank of Connecticut, stock repurchases and dividend payments. 14 Cash and cash equivalents decreased $4.3 million from $39.2 million at December 31, 2001 to $34.9 million at June 30, 2002, due primarily to a decrease in federal funds as the Company used all of the $17.1 million of federal funds at December 31, 2001 to fund loan growth and purchase mortgage-backed securities. The decrease was partially offset by a net increase of $12.8 million in cash and deposits held at the Federal Reserve Bank. Deposits at the Federal Reserve Bank increased to accommodate increased wire transfer activity by commercial customers. The Company acquired $128.5 million in cash and cash equivalents from the acquisition of American Bank of Connecticut which was offset by $73.8 million in cash paid to the American Bank of Connecticut shareholders. The cash acquired was primarily used to fund loan growth, purchase mortgage-backed securities and to fund the Company's seventh share repurchase program. Investment securities available for sale decreased $13.3 million from $311.3 million at December 31, 2001 to $298.0 million at June 30, 2002. The Company acquired $67.6 million in securities from the acquisition of American Bank of Connecticut. The Company sold $33.8 million of these securities to reposition its portfolio. Additionally, $33.0 million of corporate bonds matured and $9.4 million in securities were sold or called and were reinvested primarily in U.S. Agency mortgage-backed securities. Mortgage-backed securities increased $403.5 million to $628.6 million at June 30, 2002 from $225.1 million at December 31, 2001 due primarily to $244.2 million in mortgage-backed securities acquired from the acquisition and $240.2 million in additional purchases, partially offset by $82.9 million of principal payments and amortization. The purchases were made to utilize some of the cash acquired from American Bank of Connecticut and to take advantage of a steep yield curve by investing part of this cash and overnight federal funds in U. S. Agency mortgage-backed securities with average lives of two to four years and a yield advantage of 200 to 300 basis points over investments maturing within one year. The increase of $445.2 million in net loans from $1.21 billion at December 31, 2001 to $1.66 billion at June 30, 2002 was driven primarily by the acquisition and loan originations partially offset by refinance activity. Approximately $413.1 million in loans (net of the allowance for loan losses and a premium of $383,000 established in marking to market the American Bank of Connecticut loans) were acquired from the acquisition of American Bank of Connecticut. These loans were comprised of $245.1 million in mortgage loans, $134.7 million in commercial loans and $32.9 million in consumer loans. Additionally, the Company originated approximately $415.0 million in loans during the period primarily due to a high level of refinance activity and an advertising campaign promoting home equity loans. Heavy refinance activity on mortgage loans during the first two months of 2002, limited net loan growth for the period. Nonperforming assets, consisting of nonperforming loans and real estate owned, totaled $4.6 million at June 30, 2002 compared to $4.3 million at December 31, 2001. Nonperforming assets to total assets were 0.16% at June 30, 2002 and 0.23% at December 31, 2001. Of the total non-performing assets at June 30, 2002, $1.8 million was attributable to assets acquired from the acquisition of American Bank of Connecticut. Real estate owned increased by $18,000 to $95,000 at June 30, 2002 from $77,000 at December 31, 2001. The modest levels of nonperforming assets reflect the Company's strict underwriting guidelines and collection practices. Future increases in nonperforming loans and other real estate owned could occur if economic conditions decline. 15 The following table sets forth information regarding nonperforming loans and other real estate owned: JUNE 30, DECEMBER 31, 2002 2001 ----------------- ----------------- (Dollars in thousands) Non-accruing loans: One-to four-family real estate $ 3,764 $ 3,851 Commercial 400 - Consumer 370 353 ----------------- ----------------- Total 4,534 4,204 Real estate owned 95 77 ----------------- ----------------- $ 4,629 $ 4,281 ================= ================= Total non-performing loans as a percentage of total loans 0.27% 0.34% Total non-performing assets as a percentage of total assets 0.16% 0.23% The allowance for loan losses at June 30, 2002 and December 31, 2001 was $17.2 million and $10.9 million respectively, which represented 380.4% of nonperforming loans and 1.03% of total loans at June 30, 2002 as compared to 258.9% of nonperforming loans and 0.89% of total loans at December 31, 2001. The increase in the allowance for loan losses of $6.4 million was primarily due to the acquisition of American Bank of Connecticut. The Company recorded loan loss reserves of $8.5 million in the acquisition of American Bank of Connecticut and subsequently sold eight loans acquired from American Bank and charged off $2.1 million in specific reserves related to those loans. The allowance for loan losses is maintained at a level to absorb probable losses inherent in the current loan portfolio. Probable losses are estimated quarterly based on a review of the loan portfolio, loss experience, specific problem loans, economic conditions and other factors that cannot be associated with specific credit or loan categories, but in management's judgement deserve current recognition in estimating loan losses. These factors include management's subjective evaluation of local and national economic and business conditions, portfolio concentration and changes in the character and size of the loan portfolio. The Company's methodology for assessing the appropriateness of the allowance consists of several key elements. The methodology includes comparison to actual losses, peer group comparisons, industry data and economic conditions. In assessing the allowance for loan losses, loss factors are applied to various homogeneous pools of outstanding loans and certain unused commitments. The Company segregates the loan portfolio according to risk characteristics (i.e. mortgage loans, commercial and consumer). Loss factors are derived using the Company's historical loss experience and may be adjusted for significant factors that, in management's judgement, affect the collectibility of the portfolio as of the evaluation date. In addition, problem loans are identified and analyzed individually on a periodic basis to detect specific probable losses. Changes in risk ratings, and other risk factors, from period to period for both performing and nonperforming loans affect the calculation of the loan loss allowance. 16 Management believes that at this time, based on information currently available, the allowance for loan losses is sufficient to cover probable losses inherent in the Company's loan portfolio. However, no assurances can be given that the Company's allowance for loan losses will be sufficient to cover loan losses incurred by the Company or that future adjustments to the allowance for loan losses will not be necessary if economic and other conditions differ substantially from the economic and other assumptions used by management to determine the current level of the allowance for loan losses. The increase in Federal Home Loan Bank ("FHLB") stock of $10.4 million from $17.3 million at December 31, 2001 to $27.6 million at June 30, 2002 was due to the Company recording $9.7 million of FHLB stock from the acquisition and to increases in FHLB advances. As a result of the increase in FHLB borrowings, the Bank is required to increase its FHLB stock holdings. Net bank premises and equipment increased $3.9 million due primarily to the bank premises and equipment of $4.0 million recorded from the acquisition and $1.3 million in new purchases, partly offset by depreciation of $1.4 million. Bank Owned Life Insurance ("BOLI") increased by $19.8 million due to the recording of $18.0 million through the acquisition. The remaining increase of $1.8 million represents the increase in the cash surrender value, which was recognized in non-interest income. The investment in BOLI reflects management's strategy to invest in a single premium contract providing a return in excess of other earning assets with comparable risk due to the favorable tax treatment. Goodwill amounted to $85.9 million at June 30, 2002. The increase was due solely to the acquisition of American Bank of Connecticut and is not subject to amortization. The goodwill will be evaluated for impairment annually in accordance with SFAS No. 142, "Goodwill and Other Intangible Assets" and written down if deemed impaired. Core deposit intangible ("CDI") amounted to $14.3 million at June 30, 2002. CDI was recorded in the acquisition of American Bank of Connecticut during the first quarter and is being amortized using an accelerated method over ten years. The Company recorded approximately $15.6 million of CDI upon the acquisition and has amortized $1.3 million during the six months ended June 30, 2002. Other assets increased $24.3 million from $5.1 million at December 31, 2002 to $29.4 million at June 30. 2002. The increase was due primarily to $3.5 million in assets acquired from American Bank of Connecticut, $8.8 million in security sales at period end that settled in July 2002, $7.5 million for federal income tax (due primarily to $5.4 million of tax benefits on items related to the acquisition of American Bank of Connecticut and $2.1 million of tax benefits associated with the release of restricted stock and exercise of options) and $3.3 million in items to be processed. Deposits increased $793.8 million, or 70.6%, from $1.12 billion at December 31, 2001 to $1.92 billion at June 30, 2002. The increase was due primarily to $726.5 million of deposits acquired from the acquisition (including a $4.1 million premium established in marking to market the American Bank of Connecticut certificates of deposit) and net deposit growth of $67.7 million. The net deposit growth was largely the result of a certificate of deposit acquisition campaign initiated in the first quarter of 2002 and a demand deposit campaign in the second quarter of 2002, offset by $365,000 in amortization of the premium on the fair value adjustment. Savings, money market, NOW, and customer demand deposit accounts increased $525.3 million to $971.9 million at June 30, 2002 from $446.6 million at December 31, 2001. Time deposits increased $268.6 million to $946.2 million at June 30, 2002 from $677.6 million at December 31, 2001. Mortgagors' escrow and other deposits increased $5.8 million, or 21.1%, from $27.5 million at December 31, 2001 to $33.3 million at June 30, 2002. The increase was due primarily to increases in borrowers' tax escrow accounts, which will be paid to municipalities in the third quarter. FHLB advances and other borrowings increased $157.0 million from $311.4 million at December 31, 2001 to $468.4 million at June 30, 2002. The increase represents an increase in FHLB advances of $110.7 million recorded in the American Bank of Connecticut acquisition, including a $3.7 million premium established in marking to market the American Bank of Connecticut FHLB advances and new FHLB advances of $10.0 million, partly offset by $18.0 million of advances that matured and amortization of $786,000 of the fair value adjustment. 17 Additionally, the Company entered into repurchase agreements for $54.5 million to fund the purchase of mortgage-backed securities. Deferred income tax liability decreased $4.4 million from $19.3 million at December 31, 2001 to $14.9 million at June 30, 2002 due to adjustments in the deferred taxes related to the acquisition and a decrease in the deferred tax liability due to a decrease in the net unrealized gains on securities available for sale. Other liabilities decreased $6.8 million, or 29.2%, from $23.1 million at December 31, 2001 to $16.4 million at June 30, 2002. The decrease was due primarily to the net settlement of a security purchase of $10.1 million pending at December 31, 2001, partly offset by increases of $1.0 million in accrued interest payable, $1.0 million in funds due to investors for loans serviced by the Bank and $1.4 million in reserves for income taxes. Total stockholder's equity increased $48.7 million, or 12.3%, to $443.6 million at June 30, 2002 from $394.9 million at December 31, 2001. This increase resulted primarily from (1) the issuance of 3,208,715 shares of Company stock with a fair value of $73.8 million and the issuance of stock options with a fair value of $12.0 million, both in conjunction with the American Bank of Connecticut acquisition (2) the net addition to capital of $12.3 million for the exercise of options on the Company's stock, release of restricted stock and the tax benefits related to the exercise of stock options and release of restricted stock and (3) net income of $16.0 million. These increases were partially offset by the purchase by the Company of 1,945,552 shares of common stock totaling $54.6 million, the payment of dividends totaling $8.4 million and a decrease of $3.3 million in accumulated other comprehensive income. The decrease in other accumulated comprehensive income resulted from a decrease in the after-tax net unrealized gain on investments, primarily in the mortgage-backed securities and equity portfolios. In keeping with its capital management strategy, management announced on February 26, 2002 that the Board of Directors had authorized a seventh share repurchase program of 3,208,715 common shares, an amount equal to the shares issued in the Company's acquisition of American Bank of Connecticut. As of June 30, 2002, 1,706,240 shares were still available for repurchase. COMPARISON OF OPERATING RESULTS FOR THE THREE MONTHS ENDED JUNE 30, 2002 AND 2001 GENERAL. The Company's 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 Bank's wholly owned subsidiary, American Investment Services, Inc. ("AIS") and from the sale of investment and mortgage-backed securities. The Company's non-interest expenses primarily consist of employee compensation and benefits, occupancy expense, amortization of core deposit intangible, 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, government policies and regulation. NET INCOME. Net income increased $2.5 million, or 34.1%, to $9.7 million for the quarter ended June 30, 2002 compared to $7.3 million for the same period in 2001. The increase was primarily driven by increases in interest and dividend income of $8.6 million. The increase was partially offset by increases of $2.2 million in interest expense, $1.8 million in non-interest expense, $1.3 million in income taxes and a $915,000 decrease in non-interest income. Net interest margin declined to 3.39% at June 30, 2002 from 3.51% at June 30, 2001 due primarily to: (1) the effect of the Company's stock buy-back programs which shifted funding from capital which is a non-interest bearing source of funds to borrowings which are interest bearing and (2) the acquisition of American Bank of Connecticut which had a lower net interest margin than the Company. NET INTEREST INCOME. Net interest income increased $6.3 million, or 43.2%, for the three months ended June 30, 2002 compared to the three months ended June 30, 2001. The increase was primarily the result of higher interest income resulting from an increase in interest-earning assets partially offset by an increase in interest expense resulting from the increase of interest-bearing liabilities obtained through the acquisition of American Bank of Connecticut. 18 Total interest and dividend income increased $8.6 million to $39.0 million in the second quarter of 2002 as compared to $30.4 million in the second quarter of 2001. The increase was due to a $836.3 million increase in average interest-earning assets to $2.53 billion for the quarter ended June 30, 2002 compared to $1.70 billion for the quarter ended June 30, 2001, partially offset by a 102 basis point decrease in average yield to 6.22% (on a tax equivalent basis) for the quarter ended June 30, 2002, due to the lower interest rate environment and the amortization of the premiums established in marking to market the American Bank of Connecticut loans and investments. The rise in interest-earning assets was primarily the result of the acquisition of American Bank of Connecticut. Interest income on loans increased $4.8 million, or 23.1%, to $25.8 million, primarily due to a $473.7 million increase in the average daily balance of loans outstanding for the quarter ended June 30, 2002 as compared to the same period in 2001, partially offset by a 91 basis point decrease in the yield on loans. Interest and dividend income on investment and mortgage-backed securities increased $3.8 million, or 41.7%, for the quarter ended June 30, 2002 compared to the same period of the prior year. The increase resulted primarily from a $337.7 million increase in the average daily balances partially offset by a 113 basis point decrease in the yield earned on such securities. Total interest expense for the three months ended June 30, 2002 was $17.9 million, an increase of $2.2 million, or 14.3%, compared to $15.7 million for the three months ended June 30, 2001. This increase was primarily due to a $905.9 million increase in the average daily balance of interest-bearing liabilities to $2.27 billion at June 30, 2002 compared to $1.36 billion at June 30, 2001, partially offset by a 145 basis point decrease in the average cost of funds to 3.16%. The increase in average balances reflects the infusion of deposits and FHLB advances from the acquisition. The decrease in average cost of funds reflects the lower interest rate environment that existed during that period, the higher concentration of less expensive core deposits and the amortization of the premium established in marking to market the American Bank of Connecticut certificates of deposit and borrowings. PROVISION FOR LOAN LOSSES. The Company did not record a provision for loan losses for the three months ended June 30, 2002. This was a reduction from the $100,000 provision for the three months ended June 30, 2001. This decrease reflects the favorable current ratio of the allowance for loan losses to non-performing loans and management's assessment of the exposure to losses that may be inherent in the loan portfolio. At June 30, 2002, the allowance for loan losses was $17.2 million, which represented 380.4% of nonperforming loans, and 1.03% of total loans. This compared to the allowance for loan losses of $10.9 million at June 30, 2001 representing 330.9% of nonperforming loans and 0.90% of total loans. The $6.3 million increase in the allowance for loan losses was primarily the result of the $8.5 million allowance recorded as a result of the American Bank acquisition less $2.0 million in charge-offs on acquired loans that were sold. The allowance for loan losses is maintained at a level believed by management to be adequate to absorb losses inherent in the current loan portfolio. The adequacy of the allowance for loan losses is regularly evaluated by management. Factors considered in evaluating the adequacy of the allowance include previous loss experience, current economic conditions and their effect on borrowers, the performance of individual loans in relation to contract terms, and other pertinent factors. While management uses the best available information to estimate the allowance for loan losses, future additions to the allowance for loan losses may be necessary based on changes in economic conditions. In addition, various regulatory agencies, as an integral part of their examination process, periodically review the Company's allowance for loan losses. Such agencies may require the Company to recognize additions to the allowance based on their judgments about information available to them at the time of their examinations. The methodology for assessing the appropriateness of the allowance for loan losses is considered a critical accounting policy by management due to the judgement involved, the subjectivity of the assumptions utilized and the potential changes in the economic environment. NON-INTEREST INCOME. Non-interest income decreased $915,000, or 13.9%, to $5.7 million for the three months ended June 30, 2002 from $6.6 million for the three months ended June 30, 2001, primarily due to a decrease of $2.0 million in net gains on sale of investment securities, partially offset by increases of $544,000 in service charges and fees, $150,000 in investment commissions and advisory fees, $151,000 in the cash surrender value of BOLI and $285,000 in other income. The increase in service charges and fees was primarily due to the increased deposit fee income resulting from the expansion of the branch network through the acquisition. The increase in investment commissions and advisory fees was 19 due to the expansion of our complement of investment advisory professionals, and the emphasis on growing fee based revenues versus one-time commissions. The increase in the cash surrender value of BOLI was mainly due to the assumption of $18.0 million in BOLI contracts from American Bank. The increase in other income was primarily from gains on loan sales. The decrease in net gains on sale of investment securities was due to equity market conditions offset by gains realized on fixed income securities. NON-INTEREST EXPENSE. Non-interest expense for the three months ended June 30, 2002 was $12.3 million, an increase of $1.8 million, or 16.9%, compared to $10.5 million for the three months ended June 30, 2001. The increase was primarily due to increases in occupancy, furniture and fixtures, outside services, amortization of core deposit intangible, and other expenses. Occupancy expense increased $345,000, or 52.6%, furniture and fixtures expense increased $252,000, or 56.9%, outside services increased $168,000, or 23.6%, and other expenses increased $346,000, or 28.0%, primarily attributable to costs associated with the doubling of the Company's retail branch facilities from 17 to 34 branches through the acquisition of American Bank of Connecticut. Due to the acquisition of American Bank of Connecticut, the Company recorded a core deposit intangible. This core deposit intangible totaled $14.3 million at June 30, 2002 and is being amortized on an accelerated basis over its estimated life of ten years. Amortization expense on this intangible was $709,000 during the quarter ended June 30, 2002. Salaries and employee benefits increased $1.7 million or 33.1%, to $6.9 million for the three months ended June 30, 2002 from $5.2 million, excluding $1.7 million related to the cost of accelerating the vesting of stock-based benefits for certain retired directors for the three months ended June 30, 2001, primarily due to costs associated with the staffing of seventeen additional branches. INCOME TAX EXPENSE. Income taxes were $4.7 million for the three months ended June 30, 2002 as compared to $3.4 million for the three months ended June 30, 2001. The increase in income taxes was primarily due to an increase in income before income taxes. Dividends paid by the American Savings Mortgage Servicing Company to the Bank are exempt from state taxes, which eliminates state tax liability. Management considers accounting for income taxes as a critical accounting policy due to the subjective nature of certain estimates that are involved in the calculation. COMPARISON OF OPERATING RESULTS FOR THE SIX MONTHS ENDED JUNE 30, 2002 AND 2001 Net Income. Net income increased $1.3 million, or 8.8%, to $16.0 million for the six months ended June 30, 2002 compared to $14.7 million for the same period in 2001. The increase was primarily driven by an increase in interest and dividend income of $13.7 million, partially offset by a $4.0 million increase in interest expense, an $8.1 million increase in non-interest expense, which included one-time merger related expenses of $2.9 million ($1.9 million net of tax), a $1.3 million increase in the amortization of the core deposit intangible, and a $752,000 increase in income taxes. Net income exclusive of one-time expenses related to the acquisition of American Bank of Connecticut was $17.9 million. Net interest margin declined to 3.38% at June 30, 2002 from 3.64% at June 30, 2001 due primarily to: (1) the effect of the Company's stock buy-back programs which shifted funding from capital which is a non-interest bearing source of funds to borrowings which are interest bearing and (2) the acquisition of American Bank of Connecticut which had a lower net interest margin than the Company. NET INTEREST INCOME. Net interest income increased $9.7 million, or 31.9%, for the six months ended June 30, 2002 compared to the six months ended June 30, 2001. The increase was primarily the result of higher interest income resulting from an increase in interest-earning assets partially offset by an increase in interest expense resulting from the increase of interest-bearing liabilities obtained through the acquisition of American Bank of Connecticut. 20 Total interest and dividend income increased $13.7 million to $75.5 million in the six months ended June 30, 2002 compared to $61.8 million in the same period of 2001. The increase was due to a $732.1 million increase in average interest-earning assets to $2.43 billion for the period ended June 30, 2002 compared to $1.70 billion for the period ended June 30, 2001, partially offset by a 107 basis point decrease in average yield to 6.28% (on a tax equivalent basis) for the period ended June 30, 2002, due to the lower interest rate environment and the amortization of the premiums established in marking to market the American Bank of Connecticut loans and investments. The rise in interest-earning assets was primarily the result of the acquisition of American Bank of Connecticut. Interest income on loans increased $8.2 million, or 19.2%, to $50.7 million, primarily due to a $430.3 million increase in the average daily balance of loans outstanding for the first six months of 2002 as compared to the same period in 2001, partially offset by a 97 basis point decrease in the yield on loans. Interest and dividend income on investment and mortgage-backed securities increased $5.6 million, or 29.8%, for the six months ended June 30, 2002 compared to the same period of the prior year. The increase resulted primarily from a $255.7 million increase in the average daily balances partially offset by a 98 basis point decrease in the yield earned on such securities. Total interest expense for the six months ended June 30, 2002 was $35.2 million, an increase of $4.0 million, or 12.7%, compared to $31.3 million for the six months ended June 30, 2001. This increase was primarily due to an $815.1 million increase in the average daily balance of interest-bearing liabilities to $2.16 billion at June 30, 2002 compared to $1.34 billion at June 30, 2001, partially offset by a 139 basis point decrease in the average cost of funds to 3.26%. The increase in average balances reflects the infusion of deposits and FHLB advances from the acquisition of American Bank and an increase of $54.5 million in reverse repurchase agreements. The decrease in the average cost of funds reflects the lower interest rate environment that existed during that period, the higher concentration of less expensive core deposits and the amortization of the premium established in marking to market the American Bank of Connecticut certificates of deposit and borrowings. PROVISION FOR LOAN LOSSES. The Company did not record a provision for loan losses for the six months ended June 30, 2002. This was a reduction from the $400,000 provision for the six months ended June 30, 2001. This decrease reflects the favorable current ratio of allowance to non-performing loans and management's assessment of the exposure to losses that may be inherent in the loan portfolio. NON-INTEREST INCOME. Non-interest income remained constant at $10.3 million for the six months ended June 30, 2002 and 2001. Service charges and fees increased $1.2 million, investment commissions and advisory fees increased $277,000, cash surrender value of BOLI increased $220,000, and other income increased $297,000. The increase in service charges and fees was primarily due to the increased deposit fee income resulting from the expansion of the branch network through the acquisition. The increase in investment commissions and advisory fees was due to the expansion of our complement of investment advisory professionals, and the emphasis on growing fee based revenues versus one-time commissions. The increase in the cash surrender value of BOLI was mainly due to the assumption of $18.0 million in BOLI contracts from American Bank. The increase in other income was primarily from the gain on sale of commercial loans in the second quarter of 2002. These increases were offset by a $1.9 million decrease in gains on sale of investment securities due to equity market conditions offset by gains realized on fixed income securities. NON-INTEREST EXPENSE. Non-interest expense for the six months ended June 30, 2002 was $26.8 million, an increase of $8.1 million, or 43.1%, compared to $18.8 million for the six months ended June 30, 2001. The increase was primarily due to increases in salaries and employee benefits, occupancy, furniture and fixtures, outside services, amortization of core deposit intangible, other expenses and one-time merger expenses relating to the acquisition of American Bank of Connecticut. During the first six months of 2002, the Company recorded non-interest expenses totaling $2.9 million ($1.9 million, net of tax) that are nonrecurring in nature and are related to the acquisition of American Bank of Connecticut. Salaries and employee benefits increased $3.4 million or 34.1%, to $13.5 million for the six months ended June 30, 2002 from $10.0 million, excluding the $1.7 million related to the cost of accelerating the vesting of stock-based benefits for certain retired directors for the six months ended June 30, 2001, primarily due to costs associated with the staffing of 17 additional 21 branches, costs associated with stock-based incentive plans, and general salary and benefit increases. Occupancy expense increased $608,000, or 45.1%, furniture and fixtures expense increased $434,000, or 50.1%, outside services increased $420,000, or 28.9%, and other expenses increased $628,000, or 26.1%, which was primarily attributable to costs associated with the doubling of the Company's retail branch facilities from 17 to 34 branches through the acquisition of American Bank of Connecticut. Due to the acquisition of American Bank of Connecticut, the Company recorded a core deposit intangible. This core deposit intangible totaled $14.3 million at June 30, 2002 and is being amortized on an accelerated basis over its estimated life of ten years. Amortization expense on this intangible was $1.3 million during the six months ended June 30, 2002. INCOME TAX EXPENSE. Income taxes were $7.7 million for the six months ended June 30, 2002 as compared to $6.9 million for the six months ended June 30, 2001. The increase in income taxes was primarily due to an increase in income before income taxes. Dividends paid by the American Savings Mortgage Servicing Company to the Bank are exempt from state taxes, which eliminates state tax liability. Management considers accounting for income taxes as a critical accounting policy due to the subjective nature of certain estimates that are involved in the calculation. AVERAGE BALANCES, INTEREST AND AVERAGE YIELDS/COSTS 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. 22

24 LIQUIDITY AND CAPITAL RESOURCES Liquidity is the ability to meet current and future short-term financial obligations. The Company and the Bank further define 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 source of liquidity is dividends from the Bank, while the main outflows are the payments of dividends, purchase of treasury stock and operating expenses. The Bank cannot pay dividends to the Company without prior approval of the State of Connecticut Department of Banking because the Bank has paid dividends in excess of the sum of the Bank's net profits for the current year combined with its retained net profits from the preceding two calendar years. Regulations also prohibit the payment of dividends by the Bank if doing so would cause it to be "undercapitalized." Further restrictions prohibit the payment of dividends if such dividends would reduce stockholders' equity below the amount of the liquidation account required by the Connecticut conversion regulations. Management does not expect the Bank to be unable to pay dividends to the Company in the future since the Bank exceeds all capital ratios required by statute and the liquidation account value is less than the amount of capital required to maintain minimum capital ratios. 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, consumer loans and commercial loans and mortgages; and (2) the investment in mortgage-backed securities, U.S. Government and agency obligations, corporate equity securities and debt obligations. Additionally, the Bank has outstanding loan commitments that consist of unused lines of credit available through ready reserve lines of credit, equity lines of credit and commitments for mortgage loans. 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 closely monitors its liquidity position on a daily basis. If the Bank should require funds beyond its ability to generate them at a reasonable rate internally, additional sources of funds are available through Federal Home Loan Bank advances and through repurchase agreement borrowing facilities with broker/dealers. Time deposits that are scheduled to mature in one-year or less from June 30, 2002 total $667.1 million. 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 is subject to various regulatory capital requirements administered by the state and federal banking agencies including a risk-based capital measure. The risk-based capital guidelines include both a definition of capital and a framework for calculating risk-weighted assets by assigning balance sheet assets and off-balance sheet items to broad risk categories. At June 30, 2002, the Bank exceeded all regulatory capital requirements and was considered "well capitalized" under regulatory guidelines. IMPACT OF INFLATION AND CHANGING PRICES The unaudited interim consolidated financial statements and related data presented in this report have been prepared in conformity with accounting principles generally accepted in the United States of America, which require the measurement of financial position and operating results in terms of historical dollars, without considering changes in the relative purchasing power of money over time due to inflation. Unlike many industrial companies, substantially all of the assets and liabilities of the Company are monetary in nature. As a result, interest rates have a more significant impact on the Company's performance than the general level of inflation. Over short periods of time, interest rates may not necessarily move in the same direction or in the same magnitude as inflation. 25 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 periodically 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 $42.7 million at June 30, 2002 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. These assumptions may be effected by many factors outside of the Company's control and thus undue reliance should not be placed on these computations. Further, these computations do not reflect any actions that management may undertake in responses to changes in interest rates. The table below sets forth, as of June 30, 2002 and December 31, 2001, 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 100 basis points down. In an up 200 basis point environment, the average constant prepayment rate (the "CPR") assumptions on mortgage loans and securities, including Collateralized Mortgage Obligations and Mortgage-backed Securities, were 11.87% and 13.66% on June 30, 2002 and December 31, 2001, respectively. In a down 100 basis point environment, the CPR prepayment assumptions were 27.26% and 24.78% on June 30, 2002 and December 31, 2001, respectively. At December 31, 2001, the rates paid on non-maturity deposits were assumed to change as follows: savings, NOW, and non-premium rate money market accounts were assumed not to change under a rising or falling interest rate environment; premium rate money market accounts were assumed to increase 50 basis points if interest rates increased 200 basis points and decrease 50 basis points if interest rates decreased 100 basis points. At June 30, 2002, the assumptions are the same except for premium rate money market accounts, which were assumed to increase 100 basis points if interest rates increased 200 basis points. The banking industry has experienced a significant increase in money market balances, which to some extent has been the result of customers investing funds in money market accounts rather than equity securities, due to the poor performance in the equity markets. As the market for equity investments improves and/or returns on competing investments rise, money 26 market balances could be subject to greater interest rate sensitivity. Consequently management decided to reflect this possibility by making the assumption that the rates paid on premium money market accounts would change by 100 basis points (as opposed to 50 basis points) if there is a 200 basis point change in market interest rates.

Comparing the changes in net interest income on June 30, 2002 and December 31, 2001, the estimated percentage change in net interest income decreased by 2.02% from (4.80%) to (2.78%) under a down 100 basis point environment. Under an up 200 basis point environment, the estimated percentage change in net interest income worsened by 3.45% from 4.28% to 0.83%. The change in both the up 200 and down 100 basis point environments was due to the reduction in the ratio of rate sensitive assets to rate sensitive liabilities because of the investment in longer term assets. The investment in longer-term assets, primarily investment securities, was executed by investing overnight Federal Funds and cash flows from the securities and loan portfolios into assets with a 2-4 year average life. Without a material impact on risk, management elected to take advantage of the steep yield curve, adding approximately 200 to 300 basis points in yield over investment due within one year. In addition, the decrease in the percentage change in net interest income in an up 200 basis point environment was impacted further by the change in the assumption for premium rate money market accounts from an increase of 50 basis points to 100 basis points if interest rates increased 200 basis points. 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 and 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 annual meeting on April 29, 2002. At that meeting shareholders voted on and approved the election of Marie S. Gustin, with 19,105,432 votes for and 647,403 votes withheld, Mark E. Karp, with 19,109,211 votes for and 643,624 votes withheld, and Gregory B. Howey, with 19,106,932 votes for and 645,903 votes withheld, as directors for a three year term to expire in 2005. Shareholders also ratified the appointment of KPMG LLP as independent auditors for the Company for the fiscal year ending December 31, 2002, which passed with 18,748,623 shares of shareholders present or voting by proxy casting votes for, 523,111 votes against and 481,094 abstentions. 27 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: 3.1 Certificate of Incorporation of American Financial Holdings, Inc.* 3.2 Bylaws of American Financial Holdings, Inc.** 4.0 Draft Stock Certificate of American Financial Holdings, Inc.* 99.1 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 99.2 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 * 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 exhibits filed with the Form 10-K on March 27, 2002, (Commission File No. 0-27399) b) Reports on Form 8-K On April 3, 2002, the Company filed a Form 8-K/A in which it disclosed under Item 7 the required Financial Statements relating to the acquisition of American Bank of Connecticut, a Connecticut-chartered stock savings bank. The merger was completed on January 18, 2002 pursuant to an Agreement and Plan of Merger, dated July 18, 2001, by and between American Financial, American Savings and American Bank of Connecticut. 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 13, 2002 /s/ Robert T. Kenney --------------------- Robert T. Kenney Chairman, President and Chief Executive Officer Date: August 13, 2002 /s/ Charles J. Boulier, III --------------------------- Charles J. Boulier, III Senior Executive Vice President, Treasurer and Chief Financial Officer 28

AMERICAN FINANCIAL HOLDINGS INC 10-Q