UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                                    FORM 10-K

[X] ANNUAL REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
    ACT OF 1934

    For the Fiscal Year Ended December 31, 2001

[ ] TRANSITION REPORT UNDER 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 incorporation                I.R.S. Employer
             or organization)                               Identification No.)

102 WEST MAIN STREET, NEW BRITAIN, CONNECTICUT                     06051
  (Address of principal executive officers)                      (Zip Code)

       Registrant's telephone number, including area code: (860) 612-3366
        Securities registered pursuant to Section 12(b) of the Act: None
               Securities registered pursuant to Section 12(g) of
                                    the Act:

                     COMMON STOCK, PAR VALUE $0.01 PER SHARE
                                (Title of Class)

      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
                                             ---   ---

      Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of the Form 10-K or any
amendment to this Form 10-K. X
                            ---

      The aggregate market value of the voting and non-voting common equity held
by non-affiliates was $601,522,911 based upon the closing price of $27.15 as
quoted on the Nasdaq National Market for March 7, 2002. Solely for purposes of
this calculation, the shares held by the directors and officers of the
registrant are deemed to be held by affiliates.

      The number of shares outstanding of the registrant's Common Stock as of
March 7, 2002 was 23,314,529.

                       DOCUMENTS INCORPORATED BY REFERENCE

      Portions of Proxy Statement for the Annual Meeting of Stockholders
("Proxy Statement").  (Part III)



<PAGE>


                                TABLE OF CONTENTS

Part I                                                                      Page
------                                                                      ----

Item 1.   Business.............................................................3
Item 2.   Properties..........................................................32
Item 3.   Legal Proceedings...................................................33
Item 4.   Submission of Matters to a Vote of Security Holders.................33

Part II
-------

Item 5.   Market for Registrant's Common Stock and Related Stockholder
          Matters.............................................................33
Item 6.   Selected Financial Data.............................................34
Item 7.   Management's Discussion and Analysis of Financial Condition and
          Results of Operations...............................................35
Item 7A.  Quantitative and Qualitative Disclosures About Market Risk..........47
Item 8.   Financial Statements and Supplementary Data.........................48
Item 9.   Changes in and Disagreements with Accountants on Accounting and
          Financial Disclosure................................................48

Part III
--------

Item 10.  Directors and Executive Officers of the Registrant..................48
Item 11.  Executive Compensation..............................................49
Item 12.  Security Ownership of Certain Beneficial Owners and Management......49
Item 13.  Certain Relationships and Related Transactions......................49

Part IV
-------

Item 14.  Exhibits, Financial Statement Schedules and Reports on Form 8-K.....49

SIGNATURES


<PAGE>


PART I

ITEM 1.      DESCRIPTION OF BUSINESS
------

FORWARD LOOKING STATEMENTS

References to the Company generally refer to the consolidated operations of
American Financial Holdings, Inc. (the "Parent Company") and American Savings
Bank (the "Bank"). This report contains forward-looking statements that are
based on assumptions and describe future plans, strategies, and expectations of
the Company. These forward-looking statements are generally identified by use of
the words "believe," "expect," "intend," "anticipate," "estimate," "project," or
similar expressions. The Company's ability to predict results accurately or the
actual effect of future plans or strategies is inherently uncertain. Factors
which could have a material adverse effect on the operations of the Company
include, but are not limited to, changes in interest rates, general economic
conditions, legislative/regulatory changes, monetary and fiscal policies of the
U.S. Government, including policies of the U.S. Treasury and the Federal Reserve
Board, the quality and composition of the loan and investment portfolios, demand
for loan products, deposit flows, competition, demand for financial services in
the Company's market area and accounting principles. These risks and
uncertainties should be considered in evaluating forward-looking statements and
undue reliance should not be placed on these statements. The Company does not
undertake - and specifically disclaims any obligation - to publicly release the
result of any revisions which may be made to any forward-looking statements to
reflect events or circumstances after the date of the statements or to reflect
the occurrence of anticipated or unanticipated events.

GENERAL

The Parent Company was organized as a Delaware business corporation at the
direction of the Bank in July 1999 to become the holding company for the Bank
upon completion of its conversion from a mutual savings bank to a stock savings
bank (the "Conversion"). The Conversion was completed on November 30, 1999. At
December 31, 2001, the Company had consolidated total assets of $1.90 billion
and total stockholders' equity of $394.9 million. The Parent Company is subject
to regulation by the Office of Thrift Supervision, the Federal Deposit Insurance
Corporation, and the Securities and Exchange Commission.

The Bank was founded in 1862 as a Connecticut-chartered mutual savings bank
under the name "Savings Bank of New Britain." In 1976, the Bank changed its name
to "American Savings Bank." The Bank is regulated by the State of Connecticut
Department of Banking and the Federal Deposit Insurance Corporation. The Bank's
deposits are insured to the maximum allowable amount by the Bank Insurance Fund
of the Federal Deposit Insurance Corporation. The Bank has been a member of the
Federal Home Loan Bank System since 1978.

On January 18, 2002, the Company completed its acquisition of American Bank of
Connecticut ("ABC"). The acquisition doubled the number of branch locations from
17 to 34. The majority of the new branches are located in Waterbury, Connecticut
in New Haven County and some are located in Litchfield County. The acquisition
extended the Bank's traditional loan and deposit products to a larger
population, and brought the established ABC commercial banking products and
expertise to the Bank's market area.

The Company operates 34 banking offices in Hartford, Middlesex, Tolland, New
Haven and Litchfield counties, and offers a full range of banking services to
individuals and corporate customers primarily located in Central Connecticut.
The Company specializes in acceptance of retail deposits from the general public
and using those funds, together with funds generated from operations and
borrowings, to originate commercial loans and commercial real estate loans,
residential mortgage loans and consumer loans, primarily home equity loans and
lines of credit. The Company originates loans primarily for investment. However,
the Company also sells loans, primarily fixed-rate mortgage loans, in the
secondary market, while generally retaining the servicing rights. The Company
also invests in mortgage-backed securities, debt and equity securities and other
permissible investments. The Company's revenues are derived principally from the
generation of interest and fees on loans originated and, to a lesser extent,
interest and dividends on investment and mortgage-backed securities. The
Company's primary sources of funds are deposits, principal and interest payments
on loans and investments and mortgage-backed


                                       3
<PAGE>


securities, advances from the Federal Home Loan Bank of Boston and to a lesser
extent, borrowings under repurchase agreements.

MARKET AREA

The Company is headquartered in New Britain, Connecticut in Hartford County. The
Company's primary deposit gathering area is concentrated in the communities
surrounding its 34 banking offices located in Hartford, Middlesex, Tolland, New
Haven and Litchfield counties. The Company's primary lending area is
significantly broader than its deposit gathering area and, includes all of the
State of Connecticut as well as parts of Rhode Island and Massachusetts.

Hartford County is located approximately two hours from both Boston and New York
City and contains the city of Hartford. The region serves as the governmental
and financial center of Connecticut. Hartford County has a diversified mix of
industry groups, including insurance and financial services, manufacturing,
service, government and retail. The major employers in the area include several
prominent international and national insurance and manufacturing companies, such
as Aetna, Inc., The Hartford Financial Services, Inc., Travelers Property
Casualty Corp., United Technologies Corp., Stanley Works, as well as many
regional banks and the State of Connecticut.

Connecticut's economy declined along with the nation's in 2001 and like the
national economy the downturn was not as deep as it was in the recession of the
early 1990s. When final labor figures are published, Connecticut is expected to
lose a total of 35,000-40,000 jobs in this downturn, about a quarter of the
number lost in the state's last recession. The state's economy, along with the
nation's, is expected to recover in 2002, supported by a diverse industrial base
and service industry, a growing biotech industry, increases in federal spending
on defense and a 3.6% unemployment rate that is still well below the national
unemployment rate of 5.8%. However, the state's rate of recovery is expected to
lag the nation's--just as it did before the recession--because of a
long-standing labor shortage, and, to a lesser extent, the state's dependency on
the weakening financial services industry and particularly Connecticut's ties to
Wall Street, largely in Fairfield county.

Connecticut leads the nation in terms of disposable personal income, which was
$32,820 in 2000 as compared to $23,279 in 1990. Additionally, during the fourth
quarter of 2001, the drop in labor market activity has slowed in most of the
State's regions and this has showed up in the recent positive reading from the
State's consumer confidence index and in a rebound in retail sales. The State's
manufacturing sector, which represents nearly 20% of economic activity,
continued to weaken as hours worked in the fourth quarter of 2001 dropped
significantly, supporting a slower economic recovery.

COMPETITION

The Company faces intense competition for the attraction of deposits and
origination of loans in its primary market area. Its most direct competition for
deposits has historically come from the several commercial and savings banks
operating in the Company's primary market area and, to a lesser extent, from
other financial institutions, such as brokerage firms, credit unions and
insurance companies. While those entities still provide a source of competition
for deposits, the Company faces significant competition for deposits from the
mutual fund industry as customers seek alternative sources of investment for
their funds. The Company also faces significant competition for investors' funds
from their direct purchase of short-term money market securities and other
corporate and government securities. While the Company faces competition for
loans from the significant number of financial institutions, primarily savings
banks and commercial banks in its market area, its most significant competition
comes from other financial service providers, such as the mortgage companies and
mortgage brokers operating in its primary market area. The increase of Internet
accessible financial institutions, which solicit deposits and originate loans on
a nationwide basis will continue to increase competition for the Company's
customers and may have an adverse impact on its future operations. Additionally,
competition is likely to continue to increase as a result of recent regulatory
actions and legislative changes, most notably the enactment of the
Gramm-Leach-Bliley Act of 1999. These changes have eased and likely will
continue to ease restrictions on the interstate operations of financial
institutions due to the increasing trend for non-depository financial service
companies entering the


                                       4
<PAGE>


financial services market, such as insurance companies, securities companies and
specialty financial companies. Competition for deposits and the origination of
loans may limit the Company's growth in the future.

LENDING ACTIVITIES

GENERAL. The types of loans that the Company may originate are subject to
federal and state laws and regulations. The Company concentrates primarily upon
its traditional residential mortgage, home equity and other consumer loan
products, in addition to commercial and commercial real estate loans that meet
the needs of small - to medium - sized businesses. Interest rates charged by the
Company on loans are affected principally by the Company's current
asset/liability strategy, the demand for such loans and the supply of money
available for lending purposes. These factors are, in turn, affected by general
and economic conditions, monetary policies of the federal government, including
the Federal Reserve Board, legislative tax policies and governmental budgetary
matters.

The following table shows the composition of the Company's loan portfolio at the
dates indicated. At December 31, 2001, the Company did not have any loan
concentrations in excess of 10% of total loans except as disclosed in the
following table:

<TABLE>
<CAPTION>

------------------------------------------------------------------------------------------------------------------------------
LOAN PORTFOLIO
------------------------------------------------------------------------------------------------------------------------------

                                                                 AT DECEMBER 31,
                    ----------------------------------------------------------------------------------------------------------
                          2001                 2000                  1999                  1998                 1997
                    ------------------   -----------------     ------------------    ------------------   --------------------
                               PERCENT             Percent                Percent              Percent              Percent
                                 OF                   of                    of                    of                   of
                    AMOUNT      TOTAL     Amount    Total      Amount      Total     Amount     Total     Amount     Total
                    ------      -----     ------    -----      ------      -----     ------     -----     ------     -----
                                                             (Dollars in thousands)
<S>                 <C>         <C>      <C>        <C>        <C>         <C>       <C>         <C>       <C>        <C>
Real estate loans:
  One- to four-
    family          $ 832,177   68.2%    $ 818,272   70.6%     $ 719,089   69.5%     $ 624,819   68.4%     $588,050   69.8%
  Residential
    construction        9,437    0.8        11,963    1.0         19,587    1.9         17,177    1.9        11,755    1.4
  Other                   394    0.0           924    0.1          1,106    0.1          1,223    0.1         2,063    0.2
                    ---------   ----     ---------   ----      ---------   ----      ---------   ----      --------   ----
    Total real
    estate loans      842,008   69.0       831,159   71.7        739,782   71.5        643,219   70.4       601,868   71.4
                    ---------   ----     ---------   ----      ---------   ----      ---------   ----      --------   ----

Commercial loans
  Commercial
  business loans        3,296    0.3           132     -              -      -              -      -             -      -
                        -----                  ---
    Total
      commercial
      business loans    3,296    0.3           132
                        -----    ---           ---
                                                       -              -      -              -      -             -      -

Consumer loans:
  Home equity
    loans and
    lines of
    credit            360,166   29.5       307,106   26.6        276,049   26.7        243,102   26.6       216,814   25.7
  Automobiles          12,881    1.0        17,027    1.5         15,539    1.5         20,085    2.2        20,793    2.5
  Other                 2,197    0.2         2,701    0.2          3,162    0.3          6,940    0.8         3,557    0.4
                    ---------   ----     ---------   ----      ---------   ----      ---------  ----      --------   ----

    Total
      consumer
      loans           375,244   30.7       326,834   28.3        294,750   28.5        270,127   29.6       241,164   28.6
                    ---------   ----     ---------   ----      ---------   ----      ---------   ----      --------   ----


    Total loans     1,220,548  100.0%    1,158,125  100.0%     1,034,532  100.0%       913,346  100.0%      843,032  100.0%
                               =====                =====                 =====                 =====                =====

Net deferred
  loan
  origination
  costs (fees)          5,186                3,547                 3,819                 1,534                  928
Allowance for
  loan losses         (10,887)             (10,624)               (8,820)               (7,626)              (6,277)
                    ---------            ---------             ---------             ---------             --------

    Total loans,
      net          $1,214,847           $1,151,048            $1,029,531              $907,254             $837,683
                    =========            =========             =========               =======              =======

------------------------------------------------------------------------------------------------------------------------------
</TABLE>


                                       5
<PAGE>


ONE- TO FOUR-FAMILY REAL ESTATE LOANS. The Company's primary lending activity is
the origination of loans secured by owner occupied one- to four-family
residences located in its primary lending area.

The Company originates fixed-rate fully amortizing loans with maturities ranging
between 10 and 30 years and rates based on market conditions. The Company offers
mortgage loans that conform to Fannie Mae and Freddie Mac underwriting
guidelines, as well as jumbo loans, which were loans in amounts over $275,000
through October 2001 and $300,700 beginning in November 2001. Fixed-rate
conforming loans are generally originated for portfolio; however, such loans may
be sold periodically in response to changes in prevailing market interest rates.
Loans that are sold are generally sold to Freddie Mac, with the servicing rights
retained. The Company will underwrite one- to four-family residential mortgage
loans up to a loan-to-value ratio of 95%, provided that a borrower obtains
private mortgage insurance on loans that exceed 80% of the appraised value or
sales price, whichever is less, of the secured property.

The Company also offers adjustable-rate mortgage loans, with an interest rate
based on market conditions. Interest rate adjustments are limited to no more
than 2% during any adjustment period and 6% over the life of the loan.
Additionally, the Company offers an adjustable-rate loan with a conversion
option where the borrower has the option to convert the loan to a fixed interest
rate after a predetermined period of time, generally within the first 60 months
of the loan term. Adjustable-rate mortgage loans help reduce the Company's
exposure to changes in interest rates. There are, however, unquantifiable credit
risks resulting from the potential of increased costs due to changed rates to be
paid by the borrower. During periods of rising interest rates the risk of
default on adjustable-rate mortgage loans may increase as a result of repricing
and the increased payments required by the borrower. Although adjustable-rate
mortgage loans allow the Company to increase the sensitivity of its asset base
to changes in interest rates, the extent of this interest sensitivity is limited
by the annual and lifetime interest rate adjustment limits, and the degree to
which borrowers prepay their loans. Because of these considerations, the Company
has no assurance that yields on adjustable-rate mortgage loans will be
sufficient to offset increases in the Company's cost of funds during periods of
rising interest rates. The Company believes these risks, which have not had a
material adverse effect to date, generally are less than the risks associated
with holding fixed-rate loans in its portfolio in a rising interest rate
environment.

The Company also requires that fire, casualty, title, hazard insurance and, if
appropriate, flood insurance be maintained on all properties securing real
estate loans. An independent licensed appraiser generally appraises all
properties.

RESIDENTIAL CONSTRUCTION LOANS. The Company originates construction loans to
individuals for the construction and acquisition of personal residences. At
December 31, 2001, the advanced portion of residential construction loans
amounted to $9.4 million, or 0.8% of total loans. At December 31, 2001, the
unadvanced portion of construction loans totaled $7.8 million.

The Company's construction loans generally provide for the payment of interest
only during the construction phase, which is usually twelve months. At the end
of the construction phase, the loan converts to a permanent mortgage loan. Loans
can be made with a maximum loan-to-value ratio of 90%, provided that the
borrower obtains private mortgage insurance on the loan if the loan exceeds 80%
of the appraised value or sales price of the secured property, whichever is
less. At December 31, 2001, the largest outstanding construction loan commitment
was for $900,000, $630,000 of which was outstanding. This loan was performing
according to its terms at December 31, 2001. Construction loans to individuals
are made on the same terms as the Company's one- to four-family mortgage loans.
Before making a commitment to fund a construction loan, the Company requires an
appraisal of the property by an independent licensed appraiser. The Company also
reviews and inspects each property before disbursement of funds during the term
of the construction loan. Loan proceeds are disbursed after inspection based on
the percentage of completion method.


                                       6
<PAGE>


Construction lending generally involves a higher degree of risk than
single-family permanent mortgage lending because of the greater potential for
disagreements between borrowers and builders and the failure of builders to pay
subcontractors. Additional risk often exists because of the inherent difficulty
in estimating both a property's value and the estimated cost of the property. If
the estimate of value upon completion proves to be inaccurate, the Company may
be confronted with a property whose value is insufficient to assure full
repayment. The Company has attempted to minimize the foregoing risks by, among
other things, limiting its construction lending to residential properties, and
by having all construction loans convert to permanent mortgage loans at the end
of the construction phase.

HOME EQUITY LOANS AND LINES OF CREDIT. The Company offers home equity lines of
credit and fully amortizing home equity loans, both of which are secured by
owner-occupied one- to four-family residences. At December 31, 2001, home equity
loans and lines of credit totaled $360.2 million, or 29.5% of the Company's
total loans and 96.0% of consumer loans. Additionally, at December 31, 2001, the
unadvanced amounts of home equity lines of credit totaled $265.9 million. The
underwriting standards employed by the Company for home equity loans and lines
of credit include a determination of the applicant's credit history, an
assessment of the applicant's ability to meet existing obligations and payments
on the proposed loan and the value of the collateral securing the loan. Home
equity lines of credit have adjustable rates of interest, which are indexed to
the prime rate as reported in The Wall Street Journal. Interest rate adjustments
on home equity lines of credit are limited to no more than 6% over the life of
the loan. Generally, the maximum loan-to-value ratio on home equity lines of
credit (combined with any existing first mortgage balance) is 75% for a one- to
four-family residence and 70% for a condominium. A home equity line of credit
may be drawn down by the borrower for a period of ten years from the date of the
loan agreement. During this period, the borrower has the option of paying, on a
monthly basis, either principal and interest or only the interest. The borrower
has to pay back the amount outstanding under the line of credit at the end of
the ten-year period.

The Company also offers fixed- and adjustable-rate home equity loans with terms
up to 15 and 20 years, respectively. The loan-to-value ratios of both fixed-rate
and adjustable-rate home equity loans are generally limited to 80% for loans of
five years or less, 75% for loans over five years and 70% for loans secured by
condominiums.

AUTOMOBILE AND OTHER CONSUMER LENDING. The Company offers fixed-rate automobile
loans with terms of up to 60 months and loan-to-value ratios of 80% for new
cars. For used cars, the maximum loan-to-value ratio is 80% of the retail value
shown in the NADA Used Car Guide or the purchase price, whichever is lower, and
with terms of 48 months for automobiles up to three years old and 36 months for
older vehicles. At December 31, 2001, automobile loans totaled $12.9 million, or
1.0% of the Company's total loans and 3.4% of consumer loans.

Other consumer loans at December 31, 2001 amounted to $2.2 million, or 0.2% of
the Company's total loans and 0.6% of consumer loans. These loans include
unsecured personal loans and unsecured reserve checking, collateral loans and
reserve checking. Unsecured personal loans have a fixed-rate, a maximum
borrowing limitation of $5,000 and a maximum term of three years. Collateral
loans are generally secured by a passbook account, a certificate of deposit or
marketable securities.

Consumer loans entail greater risk than do residential mortgage loans,
particularly in the case of loans that are unsecured or secured by rapidly
depreciating assets such as automobiles. In these cases, any repossessed
collateral may not provide an adequate source of repayment of the outstanding
loan balance. The remaining deficiency often does not warrant further
substantial collection efforts against the borrower beyond obtaining a
deficiency judgment. In addition, consumer loan collections are dependent on the
borrower's continuing financial stability, and thus are more likely to be
adversely affected by job loss, divorce, illness or personal bankruptcy.


                                       7
<PAGE>


COMMERCIAL BUSINESS LOANS. During the fourth quarter of 2000, the Company began
to originate commercial business loans to small and medium size businesses
located in its primary market area. At December 31, 2001, approximately $3.3
million of the Company's gross loan portfolio consisted of commercial business
loans. At that date, the Company had outstanding unadvanced commitments on
commercial lines of credit of approximately $955,000. Commercial business loans
are generally secured by business assets such as business equipment, inventory
and accounts receivable. The Community Lending Department will originate
business Lines of Credit and Term Loans. Lines of Credit are for short-term
business needs and are reviewed annually while Term Loans are for business needs
of a longer term and will typically have a maturity of up to seven years. Rates
for business loans will be established based on the strength of the financial
information submitted to the Company and will be variable rate tied to prime, or
fixed rate based on prevailing long-term rates. Commercial business loans
generally involve higher credit risks than residential loans. Unlike mortgage
loans, which generally are made on the basis of the borrower's ability to make
repayment from his or her employment or other income, and which are secured by
real property whose value tends to be more easily ascertainable, commercial
loans are of higher risk and typically are made on the basis of the borrower's
ability to make repayment from the cash flow of the borrower's business. As a
result, the availability of funds for the repayment of commercial loans may be
substantially dependent on the success of the business itself. Further, any
collateral securing such loans may depreciate over time, may be difficult to
appraise and may fluctuate in value based on the success of the business.

Commercial business loans diversify the Company's portfolio and reduce the
Company's interest rate risk by originating loans that adjust with changes in
the prime rate. These loans typically will generate fee income and often have
compensating deposit balances. Upon the acquisition of American Bank of
Connecticut, commercial loans are expected to initially increase to
approximately 11.0% of the loan portfolio from 0.3% at December 31, 2001.

LOANS TO ONE BORROWER. The maximum amount that the Company may lend to one
borrower is limited by regulation. At December 31, 2001, the Company's
regulatory limit on loans to one borrower was $49.3 million, which equaled 15%
of the Bank's Tier 1 capital. At that date, the Company's largest amount of
loans to one borrower, including the borrower's related interests, was a line of
credit totaling $2.0 million of which approximately $2.0 million was
outstanding. This loan was performing according to the original terms at
December 31, 2001.

MATURITY OF RESIDENTIAL CONSTRUCTION, COMMERCIAL REAL ESTATE AND COMMERCIAL LOAN
PORTFOLIO. At December 31, 2001, the advanced portion of residential
construction loans due in one year or less totaled $8.8 million. The remainder
of the portfolio which totaled $628,200 was due in two years all of which were
fixed rate loans. Upon completion of the construction phase, construction loans
automatically convert to residential real estate loans at either a fixed or
variable rate. At December 31, 2001, there were no commercial real estate loans.
At December 31, 2001, $602,000 of commercial loans were due to mature in one
year or less, $1.2 million were due to mature beyond one year but before five
years, of which $373,000 were variable loans, and $1.5 million were due to
mature beyond five years all of which were fixed rate loans.

LOAN APPROVAL PROCEDURES AND AUTHORITY. The Company follows written,
non-discriminatory, underwriting standards and loan origination procedures
established by the Bank's Board of Directors and management.

The Company's policies and loan approval limits are established by the Chief
Executive Officer, Chief Banking Officer, Chief Lending Officer and the Chief
Commercial Banking Officer with the approval of the Board of Directors.

Any two members of the Mortgage Loan Committee, which currently consists of the
Chief Executive Officer, the Chief Lending Officer, two members of senior
management and officers of the Bank, may approve a mortgage loan up to $300,000.
Larger loans must be approved by two members of the Mortgage Loan Committee, one
of whom must be the Senior Vice President of Mortgage Loans for loans up to
$500,000, Chief Lending Officer for loans up to $900,000 and the Chief Executive
Officer for loans up to $1.0 million. All loans over $1.0 million require the
prior approval of the Board of Directors.


                                       8
<PAGE>


Three individuals have been delegated significant approval authority with
respect to consumer loans. The Chief Executive Officer may approve any consumer
loan up to $1.0 million. The Chief Lending Officer may individually approve any
consumer loan up to $250,000. The additional approval of any member of the
Consumer Loan Committee, which currently consists of the Chief Executive
Officer, the Chief Lending Officer and two other members of the Company's senior
management and officers, is required on loans between $250,000 and $900,000. A
senior vice president in the lending department also has authority to
individually approve consumer loans up to $250,000; however, loans between
$250,000 and $900,000 require the additional signature of the Chief Executive
Officer or the Chief Lending Officer. Lastly, an officer of the Company has
authority to approve automobile loans up to $35,000 and home equity loans up to
$150,000. Loans greater than those limits require the approval of another member
of the Consumer Loan Committee and home equity loans between $250,000 and
$900,000 require the additional signature of either the Chief Executive Officer
or the Chief Lending Officer. All consumer loans greater than $1.0 million
require the prior approval of the Board of Directors.

Additionally, various Bank personnel have been delegated various levels of
authority to approve new and used automobile loans and unsecured loans. These
individuals' authority ranges from $15,000 to $25,000 for automobile loans and
between $2,500 and $5,000 for unsecured loans.

Any two of the following members of the Community Lending Loan Committee
("CLLC"), or any one member and the Chief Executive Officer, may approve loans.
The CLLC members are the Executive Vice President and Chief Lending Officer,
Executive Vice President of Retail Banking, Vice President and Community Lending
Department Head, and the Vice President Community Lending Department Lending
Loan Officer. Loans of up to $150,000 may be approved within the Community
Lending Department and larger loans up to $250,000 must be approved by one of
the Vice Presidents of the CLLC. Over $250,000 to $1 million must be approved by
the Chief Executive Officer. All loans over $1 million require the prior
approval of the Board of Directors.

LOAN ORIGINATIONS, PURCHASES AND SALES. The Company's lending activities are
conducted by its salaried and commissioned loan personnel and through the use of
13 loan correspondents who solicit and originate adjustable-rate mortgage loans
on behalf of the Company. These loan correspondents accounted for approximately
58.5% of the adjustable-rate mortgage loans originated by the Company in 2001.
All loans originated by loan correspondents are underwritten to conform to the
Company's loan underwriting policies and procedures. Additionally, the Company
uses a third party to solicit and originate automobile loans on behalf of the
Company. This arrangement accounted for approximately 63.3% of the automobile
loans originated in 2001. All of the loans originated by the third party are
underwritten by the Company according to its underwriting policies and
procedures. The Company is not an active purchaser of loans. At December 31,
2001, the Company serviced $135.8 million of loans for others.

The Company generally originates fixed-rate mortgage loans for portfolio but
from time to time will sell such loans in the secondary market based on
prevailing market conditions. Sales are generally to Freddie Mac, with servicing
rights retained. Loan sale decisions are made by the Mortgage Pipeline Committee
of the Company. The Company occasionally obtains forward or standby commitments
from the prospective loan purchaser.


                                       9
<PAGE>


The following table presents total loans originated, sold and repaid during the
periods indicated. The Company did not purchase any loans during the periods
indicated.

<TABLE>
<CAPTION>

--------------------------------------------------------------------------------------------------------------------------------
LOANS ORIGINATED, SOLD AND REPAID
--------------------------------------------------------------------------------------------------------------------------------

                                                                                FOR THE YEAR ENDED DECEMBER 31,
                                                                ----------------------------------------------------------------
                                                                         2001                  2000                  1999
                                                                   ------------------    -----------------     -----------------
                                                                                      (Dollars in thousands)

<S>                                                             <C>                   <C>                   <C>
Loans at beginning of year                                      $          1,158,125  $         1,034,532   $           913,346
Originations:
          Real estate:
          One-to four-family                                                 309,123              159,460               214,994
          Residential constructions                                           17,493               21,477                41,922
                                                                   ------------------    -----------------     -----------------
               Total real estate loans                                       326,616              180,937               256,916
                                                                   ------------------    -----------------     -----------------

Consumer:
          Home equity loans and lines of credit                              219,135              121,060               165,214
          All other                                                           34,638               47,565                38,427
                                                                   ------------------    -----------------     -----------------
               Total consumer loans                                          253,773              168,625               203,641
                                                                   ------------------    -----------------     -----------------

Commercial:
          Business loans                                                       3,931                  275                     -
                                                                   ------------------    -----------------     -----------------
               Total loans originated                                        584,320              349,837               460,557
                                                                   ------------------    -----------------     -----------------

Deduct:
          Principal loan repayments,
            prepayments and other net                                        510,453              224,915               325,858
          Loan sales                                                          10,700                  768                11,191
          Net loan charge-offs                                                   187                   91                   836
          Transfer to REO                                                        557                  470                 1,486
                                                                   ------------------    -----------------     -----------------
               Total deductions                                              521,897              226,244               339,371
                                                                   ------------------    -----------------     -----------------

Net increase in loans                                                         62,423              123,593               121,186
                                                                   ------------------    -----------------     -----------------
Loans at end of year                                              $        1,220,548    $       1,158,125     $       1,034,532
                                                                   ==================    =================     =================

--------------------------------------------------------------------------------------------------------------------------------
</TABLE>


LOAN COMMITMENTS. The Company issues loan commitments to its prospective
borrowers conditioned on the occurrence of certain events. Commitments are made
in writing on specified terms and conditions and are honored for up to 120 days
from application. At December 31, 2001, the Company had loan commitments and
unadvanced loans and lines of credit totaling $366.5 million. See Note 12 of the
Notes to Consolidated Financial Statements included in this report.

LOAN FEES. In addition to interest earned on loans, the Company receives income
from fees in connection with loan originations, loan modifications, late
payments and for miscellaneous services related to its loans. Income from these
activities varies from period to period depending upon the volume and type of
loans made. On loans originated by correspondents, where the borrower pays no
points, but pays a higher rate on the loan, the Company will pay a premium to
compensate the correspondent.


                                       10
<PAGE>


The Company charges loan origination fees for fixed-rate loans which are
calculated as a percentage of the amount borrowed. As required by applicable
accounting principles, loan origination fees, discount points and certain loan
origination costs are deferred and recognized over the contractual remaining
lives of the related loans on a level yield basis. At December 31, 2001, 2000
and 1999, the Company had $5.2 million, $3.5 million and $3.8 million,
respectively, of net deferred loan origination costs. The Company amortized
approximately $722,000, $751,000 and $502,000 of net deferred loan origination
costs during the years ended December 31, 2001, 2000 and 1999, respectively.

NONPERFORMING ASSETS AND DELINQUENCIES. All loan payments are due on the first
day of each month. When a borrower fails to make a required loan payment, the
Company attempts to cure the deficiency by contacting the borrower to seek
payment. A late notice is mailed on the 16th day of the month. In most cases,
deficiencies are cured promptly. If a delinquency continues beyond the 16th day
of the month, the account is referred to an in-house collector. While the
Company generally prefers to work with borrowers to resolve problems, the
Company will institute foreclosure or other proceedings after the 90th day of a
delinquency, as necessary, to minimize any potential loss.

Management informs the Board of Directors quarterly of the amount of loans
delinquent more than 30 days, loans in foreclosure, and foreclosed and
repossessed property that the Company owns.

The Company ceases accruing interest on mortgage loans when principal or
interest payments are delinquent 90 days or more. The following table presents
information with respect to the Company's nonperforming assets at the dates
indicated.

<TABLE>
<CAPTION>

------------------------------------------------------------------------------------------------------------------
NONPERFORMING ASSETS
------------------------------------------------------------------------------------------------------------------

                                                                      AT DECEMBER 31,
                                           -----------------------------------------------------------------------
                                             2001            2000           1999           1998           1997
                                           ----------     -----------    -----------    -----------    -----------
                                                                   (Dollars in thousands)
<S>                                    <C>            <C>             <C>            <C>            <C>
Non-accruing loans:
One-to four-family real estate         $       3,851  $        2,709  $       2,158  $       3,683  $       6,480
Consumer                                         353             304            365            303            394
                                           ----------     -----------    -----------    -----------    -----------
   Total nonperforming loans                   4,204           3,013          2,523          3,986          6,874
Real estate owned                                 77             211            445            720            739
                                           ----------     -----------    -----------    -----------    -----------
   Total nonperforming assets          $       4,281  $        3,224  $       2,968  $       4,706  $       7,613
                                           ==========     ===========    ===========    ===========    ===========

Total nonperforming loans as a
  percentage of total loans                    0.34%           0.26%          0.24%          0.44%          0.81%

Total nonperforming assets as
  a percentage of total assets                 0.23%           0.17%          0.16%          0.30%          0.52%

</TABLE>





Interest income that would have been recorded for the year ended December 31,
2001, had nonaccruing loans been current according to their original terms
amounted to approximately $385,000. Income on nonaccruing loans included in
interest income for the year ended December 31, 2001 amounted to approximately
$190,000. There were no loans past due 90 days or more and accruing interest
during the five year period ended December 31, 2001. See note 1 of the "Notes to
Consolidated Financial Statements" within this report for information concerning
the Company's nonaccrual loan policy.


                                       11
<PAGE>


REAL ESTATE OWNED. Real estate acquired by the Company as a result of
foreclosure or by deed-in-lieu of foreclosure is classified as real estate owned
until sold. When property is acquired it is recorded at fair market value at the
date of foreclosure less estimated cost to sell, establishing a new cost basis.
Holding costs and declines in fair market value are expensed. At December 31,
2001, the Company had approximately $77,000 of real estate owned, consisting
primarily of one- to four-family residences.

ASSET CLASSIFICATION. Regulators have adopted various regulations and practices
regarding problem assets of savings institutions. These regulations give federal
and state examiners the authority to identify problem assets during examinations
and, if appropriate, require them to be classified.

There are three classifications for problem assets: substandard, doubtful and
loss. Substandard assets have one or more defined weaknesses and are
characterized by the distinct possibility that the insured institution will
sustain some loss if the deficiencies are not corrected. Doubtful assets have
the weaknesses of substandard assets with the additional characteristic that the
weaknesses make collection or liquidation in full on the basis of currently
existing facts, conditions and values questionable, and there is a high
possibility of loss. An asset classified as loss is considered uncollectible and
of such little value that continuance as an asset of the institution is not
warranted. If an asset or portion thereof is classified as loss, the institution
establishes specific allowances for loan losses for the full amount of the
portion of the asset classified as loss. All or a portion of general loan loss
allowances established to cover probable losses related to assets classified
substandard or doubtful can be included in determining an institution's
regulatory capital, while specific valuation allowances for loan losses
generally do not qualify as regulatory capital. Assets that do not currently
expose the institution to sufficient risk to warrant classification in one of
the aforementioned categories, but possess weaknesses, are designated "special
mention." Because substantially all of the Company's lending activities involve
loans secured by residential real estate, the Company only performs an internal
analysis of its loan portfolio and assets to classify such loans and assets
similar to the manner in which such loans and assets are classified by the
federal banking regulators on its commercial portfolio. The Company does, also,
regularly analyze the losses inherent in its non-commercial loan portfolio and
its non-performing loans in determining the appropriate level of the allowance
for loan losses.

ALLOWANCE FOR LOAN LOSSES. In originating loans, the Company recognizes that
losses will be experienced on loans and that the risk of loss will vary with,
among other things, the type of loan being made, the creditworthiness of the
borrower over the term of the loan, general economic conditions and, in the case
of a secured loan, the quality of the security for the loan. The Company
maintains an allowance for loan losses to absorb losses inherent in the loan
portfolio. The allowance for loan losses represents management's estimate of
probable losses based on information available as of the date of the
consolidated financial statements. The allowance for loan losses is based on
management's evaluation of the collectibility of the loan portfolio, including
past loan loss experience, known and inherent risks in the nature and volume of
the portfolio, information about specific borrower situations, estimated
collateral values, and economic conditions.

The loan portfolio and other credit exposures are regularly reviewed by
management to evaluate the adequacy of the allowance for loan losses. The
methodology for assessing the appropriateness of the allowance includes
comparison to actual losses, peer group comparisons, industry data and economic
conditions. In addition, the regulatory agencies, as an integral part of their
examination process, periodically review the Company's allowance for loan losses
and may require the Company to make additional provisions for estimated losses.

In assessing the allowance for loan losses, loss factors are applied to various
pools of outstanding loans and certain unused commitments. The Company
segregates the loan portfolio according to risk characteristics (i.e., mortgage
loans, home equity, consumer). Loss factors are derived using the Company's
historical loss experience and may be adjusted for significant factors that, in
management's judgment, affect the collectibility of the portfolio as of the
evaluation date.

In addition, management assesses the allowance for loan losses using factors
that cannot be associated with specific credit or loan categories. 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


                                       12
<PAGE>


allowance methodology reflects management's objective that the overall allowance
appropriately reflects a margin for the imprecision necessarily inherent in
estimates of probable credit losses.

Although management believes that it uses the best information available to
establish the allowance for loan losses, future adjustments to the allowance for
loan losses may be necessary and results of operations could be adversely
affected if circumstances differ substantially from the assumptions used in
making the determinations. Furthermore, while the Company believes it has
established its existing allowance for loan losses in conformity with accounting
principles generally accepted in the United States of America, there can be no
assurance that regulators, in reviewing the Company's loan portfolio, will not
request the Company to increase its allowance for loan losses. In addition,
because future events affecting borrowers and collateral cannot be predicted
with certainty, there can be no assurance that the existing allowance for loan
losses is adequate or that increases will not be necessary should the quality of
any loans deteriorate as a result of the factors discussed above. Any material
increase in the allowance for loan losses may adversely affect the Company's
financial condition and results of operations.

The following table presents an analysis of the Company's allowance for loan
losses.

<TABLE>
<CAPTION>

------------------------------------------------------------------------------------------------------------------------------
ALLOWANCE FOR LOAN LOSSES
------------------------------------------------------------------------------------------------------------------------------
                                                                AT OR FOR THE YEARS ENDED DECEMBER 31,
                                         -------------------------------------------------------------------------------------
                                                2001            2000            1999             1998               1997
                                         ---------------- ---------------- ---------------- ---------------- -----------------
                                                                       (Dollars in  thousands)

<S>                                      <C>              <C>              <C>               <C>             <C>
Allowance for loan losses,
    beginning of year                    $       10,624   $        8,820   $       7,626     $        6,277  $        5,588
Charged-off loans:
    One-to four-family real estate                  187              225             900              1,145           1,481
    Other real estate                                 -                -               -                  -              39
    Consumer                                         21               27              42                  9              20
                                         ---------------- ---------------- ---------------- ---------------- -----------------
       Total charged-off loans                      208              252             942              1,154           1,540
Recoveries:
    One-to four-family real estate                    -              158             104                103              75
    Consumer                                         21                3               2                  -               -
                                         ---------------- ---------------- ---------------- ---------------- -----------------
           Total recoveries                          21              161             106                103              75
                                         ---------------- ---------------- ---------------- ---------------- -----------------

Net loans charged-off                               187               91             836              1,051           1,465
                                         ---------------- ---------------- ---------------- ---------------- -----------------


Provision for loan losses                           450            1,895           2,030              2,400           2,154
Allowance for loan losses,
                                         ---------------- ---------------- ---------------- ---------------- -----------------
  end of year                            $       10,887   $       10,624   $       8,820    $         7,626      $    6,277
                                         ================ ================ ================ ================ =================

Ratios:
Net loans charged-off to
  average loans                                  0.02%            0.01%           0.09%              0.12%           0.18%
Allowance for loan losses to
  total loans                                    0.89%            0.92%           0.85%              0.83%           0.74%
Allowance for loan losses to
  nonperforming loans                          258.97%          352.58%         349.58%            191.32%          91.32%
Net loans charged-off to
  allowance for loan losses                      1.72%            0.86%           9.48%             13.78%          23.34%

Recoveries to charge-offs                       10.10%           63.90%          11.25%              8.93%           4.87%

------------------------------------------------------------------------------------------------------------------------------
</TABLE>


                                       13


<PAGE>


The following table presents the approximate allocation of the allowance for
loan losses by loan category at the dates indicated. Management believes that
the allowance can be allocated by category only on an approximate basis. The
allocation of the allowance to each category is not indicative of future losses
and does not restrict the use of any of the allowance to absorb losses in any
category.


<TABLE>
<CAPTION>

---------------------------------------------------------------------------------------------------------------------------
ALLOWANCE FOR LOAN LOSSES BY LOAN CATEGORY
---------------------------------------------------------------------------------------------------------------------------

                                                                      AT DECEMBER 31,
                                -------------------------------------------------------------------------------------------
                                                    2001                                           2000
                                --------------------------------------------   --------------------------------------------
                                                   % OF                                           % of
                                               ALLOWANCE IN     PERCENT OF                    Allowance in     Percent of
                                               EACH CATEGORY   LOAN IN EACH                   Each Category   Loan in Each
                                                  TO TOTAL      CATEGORY TO                      To Total      Category to
                                     AMOUNT      ALLOWANCE     TOTAL LOANS         Amount       Allowance     Total Loans
                                -------------- -------------- --------------   -------------- -------------- --------------
                                                                  (Dollars in  thousands)

<S>                             <C>                    <C>            <C>      <C>                    <C>            <C>
Real estate loans               $        8,472         77.80%         69.00%   $        9,006         84.80%         71.90%
Consumer loans                           2,402         22.10          30.70             1,618         15.20          28.10
Commercial loans                            13           .10            .30                 -              -              -
                                -------------- -------------- --------------   -------------- -------------- --------------

      Total Allowance
      for loan losses           $       10,887        100.00%        100.00%   $       10,624        100.00%        100.00%
                                ============== ============== ==============   ============== ============== ==============

                                                                      At December 31,
                                -------------------------------------------------------------------------------------------
                                                    1999                                           1998
                                --------------------------------------------   --------------------------------------------
                                                   % of                                           % of
                                               Allowance in     Percent of                    Allowance in     Percent of
                                               Each Category   Loan in Each                   Each Category   Loan in Each
                                                 to Total      Category to                      to Total      Category to
                                     Amount      Allowance     Total Loans         Amount       Allowance     Total Loans
                                -------------- -------------- --------------   -------------- -------------- --------------
                                                                       (Dollars in  thousands)

Real estate loans               $        7,749         87.90%         71.50%   $        6,874         90.10%         70.40%
Consumer loans                           1,071         12.10          28.50               752          9.90          29.60
                                -------------- -------------- --------------   -------------- -------------- --------------

      Total Allowance
      for loan losses           $        8,820        100.00%        100.00%   $        7,626        100.00%        100.00%
                                ============== ============== ==============   ============== ============== ==============

                                                At December 31,
                                --------------------------------------------
                                                    1997
                                --------------------------------------------
                                                   % Of
                                               Allowance in     Percent of
                                               Each Category   Loan in Each
                                                 to Total      Category to
                                     Amount      Allowance     Total Loans
                                -------------- -------------- --------------
                                           (Dollars in  thousands)

Real estate loans               $        6,101         97.20%         71.40%
Consumer loans                             176          2.80          28.60
                                -------------- -------------- --------------

      Total Allowance
      for loan losses           $        6,277        100.00%        100.00%
                                ============== ============== ==============
---------------------------------------------------------------------------------------------------------------------------
</TABLE>


                                       14
<PAGE>


INVESTMENT ACTIVITIES

GENERAL. Under Connecticut law, the Bank has authority to purchase a wide range
of investment securities. Under federal banking laws, however, financial
institutions such as the Bank may not engage as principals in any activities
that are not permissible for a national bank, unless the Federal Deposit
Insurance Corporation has determined that the investments would not pose a
significant risk to the Bank Insurance Fund and the Bank is in compliance with
applicable capital standards. In 1993, the Regional Director of the Federal
Deposit Insurance Corporation approved a request by the Bank to invest in
certain listed stocks and/or registered stocks subject to certain conditions.

The Investment Subcommittee of the Asset/Liability Committee is responsible for
developing and reviewing the Company's investment policy, which serves to guide
diversification of the Company's assets, improve liquidity, and provide
interest, dividend and capital gain income, while optimizing the Company's tax
position. The Investment Subcommittee meets weekly to evaluate potential
investments. Investment decisions are made in accordance with the Company's
investment policy and are based upon the quality of a particular investment, its
inherent risks, the composition of the balance sheet, market expectations, the
Company's liquidity, income and collateral needs and how the investment fits
within the Company's interest rate risk management strategy. In 2001, the
Company primarily used the proceeds of securities that were sold, prepaid as to
principal or matured to fund the purchase of its common stock, fund loan growth
and purchase the remaining balance of a $60.0 million single premium bank owned
life insurance contract (BOLI). $15.0 million of the BOLI contract was executed
in early January 2001 and $45.0 million was paid in late December 2000. The
increase in the value of the BOLI is recorded as non-interest income and is not
taxable, which reduces the Company's federal and state taxable income.

Currently, the Company's investment policy does permit limited investment in
derivative products, such as investment grade tranches of collateralized
mortgage obligations. At December 31, 2001, the Company was not invested in any
hedging programs or other activities involving the use of derivative financial
instruments, but may do so in the future if permitted by the investment policy.
Derivatives may not be used for speculative purposes.

The Company's investment policy divides investments into two categories, fixed
income and equity portfolios. The fixed income portfolio is limited to debt
issues, including mortgage-backed securities. The Company generally invests in
securities which have an investment grade rating from one or more of the rating
agencies (e.g., Moody's, Standard & Poor's and Fitch). All of the Company's
mortgage-backed securities are issued or guaranteed by agencies of the U.S.
Government. Accordingly, they carry lower credit risk than mortgage-backed
securities of a private issuer.

The objective of the marketable equity securities portfolio is to produce
capital gains through price appreciation and to lower taxable income through
deductions permitted for a portion of dividends received. The total market value
of the marketable equity securities portfolio, excluding Federal Home Loan Bank
stock and auction market preferred stock, is limited by the investment policy to
the lesser of 50% of total capital or 100% of Tier 1 capital. At December 31,
2001, the marketable equity securities portfolio totaled $58.0 million or 29.4%
of its authorized limit. At December 31, 2001, the net unrealized gains
associated with the marketable equity securities portfolio was $50.8 million.
The marketable equity securities portfolio is heavily weighted toward the
financial sector. In order to diversify its risk, the Company intends to
periodically sell a portion of this portfolio, realize the gains, and reinvest
the proceeds of the sales primarily into loans and fixed income securities.

In addition to marketable equity securities, the Company, from time to time,
invests in short-term auction market preferred stocks that pay income treated as
a dividend for tax purposes, reducing the Company's federal and state taxable
income through the allowable deductions for such income. Although the Company
had none of these investments at December 31, 2001, the Company's investment
policy allows for investments in auction market preferred stock of up to 50% of
its Tier 1 capital. In 1997, the Federal Deposit Insurance Corporation approved
the request of the Bank to invest up to 50% of Tier 1 capital in auction market
preferred stock, which exceeds the regulatory limit of 15% of Tier 1 capital.
Also, the Company periodically invests in trust preferred securities that have
maturities of up to thirty years and are callable in ten years at par or at a
premium if called earlier than 10 years.


                                       15
<PAGE>


Statement of Financial Accounting Standards No.115, "Accounting for Certain
Investments in Debt and Equity Securities," requires that investments be
categorized as "held to maturity," "trading securities" or "available for sale,"
based on management's intent as to the ultimate disposition of each security.
Statement of Financial Accounting Standards No. 115 allows debt securities to be
classified as "held to maturity" and reported in financial statements at
amortized cost only if the reporting entity has the positive intent and ability
to hold those securities to maturity. Securities that might be sold in response
to changes in market interest rates, changes in the security's prepayment risk,
increases in loan demand, or other similar factors cannot be classified as "held
to maturity." Debt and equity securities held for current resale are classified
as "trading securities." These securities are reported at fair value, and
unrealized gains and losses on the securities would be included in earnings. The
Company does not currently use or maintain a trading account. Debt and equity
securities not classified as either "held to maturity" or "trading securities"
are classified as "available for sale." These securities are reported at fair
value, and unrealized gains and losses on the securities are excluded from
earnings and reported, net of deferred taxes, as a separate component of
stockholders' equity (accumulated other comprehensive income). Currently all of
the Company's debt and equity securities are classified as available for sale.

All of the Company's debt and mortgage-backed securities carry market risk
insofar as increases in market rates of interest may cause a decrease in their
market value. They also carry prepayment risk insofar as they may be called or
repaid before maturity in times of low market interest rates, resulting in lower
yields on the reinvested proceeds, and in times of higher market interest rates
prepayment rates could slow, reducing the amount of prepaid principal available
for reinvestment at higher yields. The marketable equity securities portfolio
also carries equity price risk in that, if equity prices decline due to
unfavorable market conditions or other factors, the Company's capital would
decrease. In addition to increases in market rates, deteriorating credit quality
can affect the value of the Company's corporate bond portfolio.







                                       16
<PAGE>


At December 31, 2001, all of the Company's investment securities and
mortgage-backed securities were classified as "available for sale." The
following table presents the amortized cost and fair value of the Company's
securities, by type of security, at the dates indicated.

<TABLE>
<CAPTION>

-----------------------------------------------------------------------------------------------------------------------------
SECURITIES BY TYPE
-----------------------------------------------------------------------------------------------------------------------------
                                                                           AT DECEMBER 31,
                                         ------------------------------------------------------------------------------------
                                                    2001                        2000                         1999
                                         --------------------------- --------------------------- ----------------------------
                                           AMORTIZED       FAIR        Amortized       Fair        Amortized       Fair
                                             COST          VALUE         Cost          Value          Cost         Value
                                         ------------- ------------- ------------- ------------- ------------- --------------
                                                                       (Dollars in thousands)


<S>                                      <C>           <C>           <C>           <C>           <C>           <C>
INVESTMENT SECURITIES:
      U.S. Treasury notes and U.S.
        Government agencies              $     24,799  $     26,604  $     29,771  $     30,811  $     50,539  $     50,288

     Corporate bonds                          146,026       151,796       187,800        190,232      267,341       264,161

     Municipal bonds                           45,054        47,138        38,002         40,037       22,738        22,260

     Trust preferred stock                     26,346        27,744        13,293         13,041            -             -


     Marketable equity securities               7,128        58,011         6,811         77,090       13,145         74,123

     Auction preferred stock                        -             -             -              -       25,000         25,000
                                         ------------- ------------- ------------- ------------- ------------- --------------

        Total investment securities           249,353       311,293       275,677        351,211      378,763        435,832
                                         ------------- ------------- ------------- ------------- ------------- --------------


MORTGAGE-BACKED SECURITIES:

     U.S. Government and agency               101,314       104,238       139,377        140,868       224,916       219,861
     U.S. Agency issued collateralized
       mortgage obligations                   116,223       120,863       111,530        114,402       123,365       121,560
                                         ------------- ------------- ------------- ------------- ------------- --------------

       Total mortgage-backed securities       217,537       225,101       250,907        255,270       348,281        341,421
                                         ------------- ------------- ------------- ------------- ------------- --------------

       Total securities                  $    466,890  $    536,394  $    526,584  $     606,481 $     727,044 $      777,253
                                         ============= ============= ============= ============= ============= ==============

-----------------------------------------------------------------------------------------------------------------------------
</TABLE>


At December 31, 2001, the Company did not own any investment or mortgage-backed
securities of a single issuer, other than U.S. government and agency securities,
which had an aggregate book value in excess of 10% of the Company's equity at
that date.


                                       17
<PAGE>


The following table presents certain information regarding the carrying value,
weighted average yields and maturities or periods to repricing, of the Company's
debt securities at December 31, 2001, all of which are classified as "available
for sale". Mortgage-backed securities are included by final contractual
maturity. Actual maturities will differ from contractual maturities because
certain issuers may have the right to call or prepay obligations with or without
call or prepayment penalties.

<TABLE>
<CAPTION>

------------------------------------------------------------------------------------------------------------------------------------
DEBT SECURITIES: CARRYING VALUE, WEIGHTED AVERAGE YIELDS, AND MATURITIES
------------------------------------------------------------------------------------------------------------------------------------
                                                                   AT DECEMBER 31, 2001
                       -------------------------------------------------------------------------------------------------------------

                                              MORE THAN ONE YEAR   MORE THAN FIVE YEARS
                         ONE YEAR OR LESS        TO FIVE YEARS        TO TEN YEARS        MORE THAN TEN YEARS          TOTAL
                       --------------------- --------------------- --------------------- --------------------- ---------------------
                                   WEIGHTED              WEIGHTED             WEIGHTED               WEIGHTED              WEIGHTED
                          FAIR     AVERAGE      FAIR     AVERAGE      FAIR    AVERAGE      FAIR      AVERAGE     FAIR      AVERAGE
                          VALUE     YIELD       VALUE     YIELD       VALUE    YIELD       VALUE      YIELD      VALUE      YIELD
                       ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
                                                                  (Dollars in thousands)

<S>                     <C>            <C>   <C>             <C>   <C>            <C>        <C>         <C>       <C>         <C>
INVESTMENT SECURITIES:

U.S. Treasury notes
  and  U.S. Government
  agencies             $        -         -% $   21,357      7.86% $    5,247      6.49% $        -         -% $   26,604      7.59%

Corporate bonds            62,728      6.93      85,507      6.66       3,561      9.55           -         -     151,796      6.84

Municipal bonds                 -         -       4,670      6.54       7,219      6.92      35,249      7.78      47,138      7.52

Trust preferred stock           -         -           -         -           -         -      27,744      7.96      27,744      7.96

MORTGAGE-BACKED
SECURITIES:

U.S. Government and
  agency issued
  mortgage-backed
  securities                2,015      7.17       4,039      6.53       2,041      6.87      96,143      6.56     104,238      6.58
U.S.  Agency issued
  collateralized
  mortgage
  obligations              11,340      6.02     104,343      6.20       5,180      6.19           -         -     120,863      6.18
                       ---------- ---------  ---------- ---------  ---------- ---------  ---------- ---------  ---------- ---------

     Total securities  $   76,083      6.80% $  219,916      6.55%   $ 23,248      7.06% $  159,136      7.07% $  478,383      6.79%
                       ========== =========  ========== =========  ========== =========  ========== =========  ========== =========

------------------------------------------------------------------------------------------------------------------------------------
</TABLE>

                                       18


<PAGE>


DEPOSIT ACTIVITIES AND OTHER SOURCES OF FUNDS

GENERAL. Deposits are the major external source of funds for the Company's
lending and investment activities. In addition, the Company generates funds
internally from loan principal repayments and prepayments, and maturing
investment securities. Scheduled loan repayments and the maturation of
securities are a relatively stable source of funds, while deposit inflows and
outflows and loan prepayments are influenced significantly by general interest
rates and money market conditions. The Company supplements its funding needs
with borrowings from the Federal Home Loan Bank of Boston and through repurchase
agreements with broker-dealers.

DEPOSIT ACCOUNTS. Nearly all of the Company's depositors reside in Connecticut.
The Company offers a wide variety of deposit accounts with a range of interest
rates and terms. The Company's deposit accounts consist of interest-bearing
checking, non-interest-bearing checking, regular savings, money market accounts,
certificates of deposit and commercial business products. The maturities of the
Company's certificate of deposit accounts range from one month to five years. In
addition, the Company offers retirement accounts, including Traditional IRAs,
Roth IRAs, Simple IRAs, Money Purchase and Profit Sharing Plans and Simplified
Employee Pension Plan Accounts. Deposit account terms vary with the principal
differences being the minimum balance requirements, early withdrawal penalties,
limits on the number of transactions and the interest rate. The Company reviews
its deposit mix and pricing weekly.

The Company believes it is competitive in the interest rates it offers on its
deposit products. The Company determines the rates paid based on a number of
factors, including rates paid by competitors, the Company's need for funds, and
cost of funds, alternative borrowing costs and movements in market interest
rates. The Company has not utilized brokers to obtain deposits and at December
31, 2001 had no brokered deposits.

The following table indicates the amount of the Company's jumbo certificates of
deposit at December 31, 2001 by time remaining until maturity. Jumbo
certificates of deposit have principal balances of $100,000 or more.

--------------------------------------------------------------------------------
                JUMBO CERTIFICATES OF DEPOSIT BY MATURITY PERIOD
--------------------------------------------------------------------------------
                                                                    WEIGHTED
                                                                     AVERAGE
          MATURITY PERIOD                   AMOUNT                    RATE
 ----------------------------------     --------------            --------------
                                                 (Dollars in thousands)

 Three months or less                  $       17,197                   4.18%
 Over 3 through 6 months                       20,785                   4.58
 Over 6 through 12 months                      22,244                   4.78
 Over 12 months                                21,590                   4.78
                                        --------------

      Total                            $       81,816                   4.71%
                                        ==============





                                       19
<PAGE>


BORROWINGS. The Federal Home Loan Bank of Boston functions as a central reserve
bank providing credit for savings banks and certain other member financial
institutions. As a member of the Federal Home Loan Bank of Boston, the Bank is
required to own capital stock in the Federal Home Loan Bank of Boston and is
authorized to apply for advances on the security of the capital stock and
certain of its mortgage loans and other assets, principally securities that are
obligations of, or guaranteed by, the U.S. Government or its agencies, provided
certain creditworthiness standards have been met. Advances are made under
several different credit programs. Each credit program has its own interest rate
and range of maturities. Depending on the program, limitations on the amount of
advances are based on the financial condition of the member institution and the
adequacy of collateral pledged to secure the advance. At December 31, 2001, the
Company had the ability to borrow a total of approximately $618.0 million from
the Federal Home Loan Bank of Boston. At that date, the Company had outstanding
advances of $301.4 million. The weighted average balance during 2001 of FHLB
Borrowings was $281.3 million with the maximum balance outstanding of any
month-end of $341.9 million. In addition to the borrowing facility with the
Federal Home Loan Bank of Boston, the Company has repurchase agreement lines
with major broker-dealers. There were $10.0 million in outstanding repurchase
agreements at December 31, 2001. The repurchase agreements at December 31, 2001
are callable on various dates during 2003. Repurchase agreements have weighted
average remaining terms to the initial call dates and contractual maturity dates
of approximately 1.37 years and 5.87 years, respectively.

TRUST SERVICES

In 1996, the Bank established American Savings Trust Services as a department
within the Bank that provides trust and investment services to individuals,
partnerships, corporations and institutions. Consistent with the Company's
operating strategy, the Company will continue to emphasize the growth of its
trust service operations to grow assets and increase fee-based income. The
Company has implemented several policies governing the practices and procedures
of the trust department, including policies relating to maintaining
confidentiality of trust records, investment of trust property, handling
conflicts of interest, and maintaining impartiality. At December 31, 2001, the
Trust department managed 135 accounts with aggregate assets of $187.3 million,
of which two accounts belonging to one relationship totaled $39.8 million, or
21.3%, of the Trust department's total assets.

SUBSIDIARY ACTIVITIES

The following are descriptions of the Bank's wholly owned subsidiaries, which
are indirectly owned by the Company.

AMERICAN INVESTMENT SERVICES, INC. American Investment Services, Inc., was
incorporated in Connecticut in December 1997 and through an arrangement with a
third party registered broker-dealer, offers to the customers of the Bank a
complete range of investment products, including mutual funds, debt, equity and
government securities and fixed and variable annuities. American Investment
Services, Inc. receives from the broker-dealer a substantial portion of the
commissions generated from the sale of the products. American Investment
Services, Inc. is also licensed as an insurance producer by the State of
Connecticut. In this capacity, American Investment Services, Inc. engages
directly in certain insurance sales activities, offering a wide variety of
insurance products as well as the sale of fixed annuities. For 2001, 2000 and
1999, American Investment Services, Inc. generated total revenues of
approximately $1.7 million, $1.5 million and $1.4 million, respectively.

ASB MORTGAGE SERVICING COMPANY. ASB Mortgage Servicing Company was incorporated
in Connecticut in February 1999 to service and hold loans secured by real
property. ASB Mortgage Servicing Company was established to qualify as a
"passive investment company" for Connecticut income tax purposes. Income earned
by a qualifying passive investment company is exempt from Connecticut income
tax. See Item 1 - Description of Business "Connecticut Taxation."


                                       20
<PAGE>


CHARITABLE FOUNDATION

In connection with the Conversion in 1999, the Company established American
Savings Charitable Foundation, which made grants and donations to non-profit and
community groups within the communities where the Company operated. The Company
believed that this foundation would enable the Company and the Bank to assist in
areas beyond community development and lending within the communities in which
they operate and enhanced its current activities under the Community
Reinvestment Act. The American Savings Charitable Foundation was funded with
2,138,600 shares of common stock of the Company. There were no contributions
made by the Company to the Foundation in 2000.

In 1995, the Bank established a private charitable foundation, American Savings
Bank Foundation, Inc. Since its inception, this Foundation provided grants to
charitable organizations that focus primarily on children and education and
scholarships to qualified students in the communities in which the Company
operates. American Savings Bank Foundation, Inc. was funded initially by a
$500,000 donation from the Bank. In 1999, the Bank contributed to American
Savings Bank Foundation, Inc. marketable equity securities with a fair value of
approximately $212,000.

On December 31, 2000, the two Foundations merged to form the American Savings
Foundation. At December 31, 2001, the American Savings Foundation had assets
with a fair value of approximately $65.4 million, including Company common stock
of $52.6 million. The Foundation's current Board of Directors consists of
retired and current directors and current officers of the Company. There were no
contributions made by the Company to the Foundation in 2001.

REGULATION AND SUPERVISION

As a savings bank chartered by the State of Connecticut, the Bank is extensively
regulated under state law by the Connecticut Banking Commissioner with respect
to many aspects of its banking activities. In addition, as a bank whose deposits
are insured by the Federal Deposit Insurance Corporation under the Bank
Insurance Fund, the Bank must pay deposit insurance assessments and is examined
and supervised by the Federal Deposit Insurance Corporation. These laws and
regulations have been established primarily for the protection of depositors,
customers and borrowers of the Bank, not its shareholders.

The Company is required to file reports with, and otherwise comply with the
rules and regulations of the Office of Thrift Supervision, the Connecticut
Banking Commissioner and the Securities and Exchange Commission under the
federal securities laws. The following discussion of the laws and regulations
material to the operations of the Company and the Bank is a summary and is
qualified in its entirety by reference to such laws and regulations.

The Bank and the Company are extensively regulated and supervised. Regulations,
which affect the Company on a daily basis, may be changed at any time, and the
interpretation of the relevant law and regulations may also change because of
new interpretations by the authorities who interpret those laws and regulations.
Any change in the regulatory structure or the applicable statutes or
regulations, whether by the Connecticut Banking Commissioner, the State of
Connecticut, the Office of Thrift Supervision, the Federal Deposit Insurance
Corporation or the Congress, could have a material impact on the Company.


                                     21
<PAGE>


CONNECTICUT BANKING LAWS AND SUPERVISION

The Connecticut Banking Commissioner regulates the Bank's internal organization
as well as its deposit, lending and investment activities. The approval of the
Connecticut Banking Commissioner is required, among other things, for the
establishment of branch offices and business combination transactions. The
Connecticut Banking Commissioner conducts periodic examinations of the Bank. The
Federal Deposit Insurance Corporation also regulates many of the areas regulated
by the Connecticut Banking Commissioner and federal law may limit some of the
authority provided to the Bank by Connecticut law.

LENDING ACTIVITIES. Connecticut banking laws grant banks broad lending
authority. Subject to certain limited exceptions, however, total secured and
unsecured loans made to any one obligor pursuant to this statutory authority may
not exceed 10% and 15%, respectively, of the Bank's equity and reserves for loan
and lease losses.

DIVIDEND RESTRICTIONS. A savings bank may pay cash dividends out of its net
profits. For purposes of this restriction, "net profits" means the remainder of
all earnings from current operations. Further, the total of all dividends
declared by a savings bank in any calendar year may not exceed the sum of the
Bank's net profits for the year in question combined with its retained net
profits from the preceding two calendar years. Additionally, earnings
appropriated to reserves for loan losses and deducted for federal income tax
purposes are not available for cash dividends without the payment of taxes at
the then current income tax rates on the amount used. Federal law also prevents
an institution from paying dividends or making other capital distributions if
doing so would cause it to become "undercapitalized." The Federal Deposit
Insurance Corporation may limit a savings bank's ability to pay dividends. No
dividends may be paid to the Bank's stockholder if such dividends would reduce
stockholder's equity below the amount of the liquidation account required by the
Connecticut conversion regulations.

BRANCHING ACTIVITIES. Any Connecticut-chartered bank meeting certain statutory
requirements may, with the Connecticut Banking Commissioner's approval,
establish and operate branches in any town or towns within the state. In 1996,
legislation was enacted which permits banks to establish mobile branches with
the Connecticut Banking Commissioner's approval.

INVESTMENT ACTIVITIES. Connecticut law requires the board of directors of each
Connecticut bank to adopt annually an investment policy to govern the types of
investments the bank makes, and to periodically review the bank's adherence to
its investment policy. The investment policy must establish standards for the
making of prudent investments and procedures for divesting investments no longer
deemed consistent with the bank's investment policy. In recent years,
Connecticut law has expanded bank investment activities.

Connecticut banks may invest in debt securities and debt mutual funds without
regard to any other liability to the Connecticut bank of the maker or issuer of
the debt securities and debt mutual fund, if the debt securities and debt mutual
funds are rated in the three highest rating categories or otherwise deemed to be
a prudent investment, and so long as the total amount of debt securities and
debt mutual funds of any one issuer will not exceed 25% of the Bank's total
equity capital and reserves for loan and lease losses and the total amount of
all its investments in debt securities and debt mutual funds will not exceed 25%
of its assets. In addition, a Connecticut bank may invest in certain government
and agency obligations according to the same standards as debt securities and
debt mutual funds, except without any percentage limitation.

Similarly, Connecticut banks may invest in equity securities and equity mutual
funds without regard to any other liability to the Connecticut bank of the
issuer of equity securities and equity mutual funds, so long as the total amount
of equity securities and equity mutual funds of any one issuer will not exceed
25% of the bank's total equity capital and reserves for loan and lease losses
and the total amount of the bank's investment in all equity securities and
equity mutual funds will not exceed 25% of its assets.

POWERS. In recent years, Connecticut law has expanded bank powers. Connecticut
law permits Connecticut banks to sell insurance and fixed and variable rate
annuities if licensed to do so by the Connecticut Insurance Commissioner.
Connecticut law authorizes a new form of Connecticut bank known as an uninsured
bank. An uninsured bank has the same powers as banks, except that it does not
accept retail deposits and is not required to


                                       22
<PAGE>


insure deposits with the FDIC. With the prior approval of the Commissioner,
Connecticut banks are also authorized to engage in a broad range of activities
related to the business of banking, or that are financial in nature or that are
permitted under the Bank Holding company Act ("BHCA") or the Home Owners' Loan
Act ("HOLA"), both federal statutes, or the regulations promulgated as a result
of these statutes. Connecticut banks are also authorized to engage in any
activity permitted for a national bank or a federal savings association upon
filing notice with the Commissioner unless the Commissioner disapproves the
activity.

ASSESSMENTS. Connecticut banks are required to pay annual assessments to the
Connecticut Department of Banking to fund the department's operations. The
general assessments are paid pro rata based upon a bank's asset size. The
assessments paid by the Bank for the fiscal year ended December 31, 2001 totaled
approximately $20,000.

RECENT LEGISLATION. Connecticut legislation enacted in 1999 authorizes
Connecticut banks with the prior approval of the Connecticut Banking
Commissioner to engage in a broad range of activities related to the business of
banking, or that are financial in nature or that are permitted under the Federal
Bank Holding Company Act or the Home Owners' Loan Act or the regulations
promulgated thereunder. The legislation also authorizes a Connecticut bank to
engage in any activity permitted for a national bank or a federal savings
association upon filing notice with the Connecticut Banking Commissioner unless
the Connecticut Banking Commissioner disapproves the activity.

ENFORCEMENT. Under Connecticut law, the Connecticut Banking Commissioner has
extensive enforcement authority over Connecticut banks and, under certain
circumstances, affiliated parties, insiders, and agents. The Connecticut Banking
Commissioner's enforcement authority includes: cease and desist orders,
receivership, conservatorship, removal of officers and directors, emergency
closures, dissolution, and liquidation. Fines for violations range up to $7,500.

FEDERAL REGULATIONS

CAPITAL REQUIREMENTS. Under Federal Deposit Insurance Corporation regulations,
federally insured state-chartered banks that are not members of the Federal
Reserve System ("state non-member banks"), such as the Bank, are required to
comply with minimum leverage capital requirements. For an institution determined
by the Federal Deposit Insurance Corporation to not be anticipating or
experiencing significant growth and to be in general a strong banking
organization, rated composite 1 under the Uniform Financial Institutions Ranking
System (the rating system) established by the Federal Financial Institutions
Examination Council, the minimum capital leverage requirement is a ratio of Tier
1 capital to total assets of 3%. For all other institutions, the minimum
leverage capital ratio is not less than 4%. Tier 1 capital is the sum of common
stockholders' equity, noncumulative perpetual preferred stock (including any
related surplus) and minority investments in certain subsidiaries, less
intangible assets (except for certain servicing rights and credit card
relationships) and certain other deductions. Recent regulatory amendments also
require the deduction from Tier 1 capital of a percentage of the carrying value
of certain nonfinancial equity investments acquired after March 13, 2000.

The Federal Deposit Insurance Corporation has also adopted risk-based capital
guidelines to which the Bank is subject. The Federal Deposit Insurance
Corporation guidelines require state non-member banks to maintain certain levels
of regulatory capital in relation to regulatory risk-weighted assets. The ratio
of regulatory capital to regulatory risk-weighted assets is referred to as the
Bank's "risk-based capital ratio." Risk-based capital ratios are determined by
allocating assets and specified off-balance sheet items to four risk-weighted
categories ranging from 0% to 100%, with higher levels of capital being required
for the categories perceived as representing greater risk. For example, under
the Federal Deposit Insurance Corporation's risk-weighting system, cash and
securities backed by the full faith and credit of the U.S. Government are given
a 0% risk weight, loans secured by one- to four-family residential properties
generally have a 50% risk weight and commercial loans have a risk weight of
100%.


                                       23
<PAGE>


State non-member banks must maintain a minimum ratio of total capital to
risk-weighted assets of at least 8%, of which at least one-half must be Tier 1
capital. Total capital consists of Tier 1 capital plus Tier 2 or supplementary
capital items, which include allowances for loan losses in an amount of up to
1.25% of risk-weighted assets, cumulative preferred stock, a portion of the net
unrealized gain on equity securities and other capital instruments. The
includable amount of Tier 2 capital cannot exceed the amount of the
institution's Tier 1 capital.

The Federal Deposit Insurance Corporation Improvement Act required each federal
banking agency to revise its risk-based capital standards for insured
institutions to ensure that those standards take adequate account of
interest-rate risk, concentration of credit risk, and the risk of nontraditional
activities, as well as to reflect the actual performance and expected risk of
loss on multi-family residential loans. The Federal Deposit Insurance
Corporation, along with the other federal banking agencies, has adopted a
regulation providing that the agencies will take into account the exposure of a
bank's capital and economic value to changes in interest rate risk in assessing
a bank's capital adequacy.

As a savings and loan holding company regulated by the Office of Thrift
Supervision, the Parent Company is not subject to any separate regulatory
capital requirements.

STANDARDS FOR SAFETY AND SOUNDNESS. As required by statute, the federal banking
agencies adopted final regulations and Interagency Guidelines Establishing
Standards for Safety and Soundness to implement safety and soundness standards.
The guidelines set forth the safety and soundness standards that the federal
banking agencies use to identify and address problems at insured depository
institutions before capital becomes impaired. The guidelines address internal
controls and information systems, internal audit system, credit underwriting,
loan documentation, interest rate risk exposure, asset growth, asset quality,
earnings and compensation, and fees and benefits. If the appropriate federal
banking agency determines that an institution fails to meet any standard
prescribed by the guidelines, the agency may require the institution to submit
to the agency an acceptable plan to achieve compliance with the standard.

INVESTMENT ACTIVITIES

Since the enactment of the Federal Deposit Insurance Corporation Improvement
Act, all state-chartered Federal Deposit Insurance Corporation insured banks,
including savings banks, have generally been limited to activities as principal
and equity investments of the type and in the amount authorized for national
banks, notwithstanding state law. The Federal Deposit Insurance Corporation
Improvement Act and the Federal Deposit Insurance Corporation regulations
thereunder permit exceptions to these limitations. Also state chartered banks,
such as the Bank, may, with Federal Deposit Insurance Corporation approval,
continue to exercise state authority to invest in common or preferred stocks
listed on a national securities exchange or the NASDAQ National Market and in
the shares of an investment company registered under the Investment Company Act
of 1940, as amended. For example, the Federal Deposit Insurance Corporation is
authorized to permit such institutions to engage in state authorized activities
or investments that do not meet the national bank standard (other than
non-subsidiary equity investments) for institutions that meet all applicable
capital requirements if it is determined that such activities or investments do
not pose a significant risk to the Bank Insurance Fund. All non-subsidiary
equity investments, unless otherwise authorized or approved by the Federal
Deposit Insurance Corporation, must have been divested by December 19, 1996,
under a Federal Deposit Insurance Corporation-approved divestiture plan, unless
such investments were grandfathered by the Federal Deposit Insurance
Corporation. The Bank received grandfathering authority from the Federal Deposit
Insurance Corporation in March 1993 to invest in listed stocks and/or registered
shares. However, the maximum permissible investment is 100% of Tier 1 capital,
as specified by the Federal Deposit Insurance Corporation's regulations, or the
maximum amount permitted by Connecticut law, whichever is less. Such
grandfathering authority may be terminated upon the Federal Deposit Insurance
Corporation's determination that such investments pose a safety and soundness
risk to the Bank, or if the Bank converts its charter, other than a mutual to
stock conversion, or undergoes a change in control. As of December 31, 2001, the
Company had $81.8 million of securities which were held under such
grandfathering authority.


                                       24
<PAGE>


INTERSTATE BRANCHING

Until recently, branching across state lines was not generally available to a
state bank. Out-of-state branches of banking institutions are authorized under
the Connecticut Banking Law, but similar authority does not exist generally
under the laws of most other states. The Interstate Banking Act permitted,
beginning June 1, 1997, the responsible federal banking agencies to approve
merger transactions between banks located in different states, regardless of
whether the merger would be prohibited under the law of the two states. The
Interstate Banking Act also permitted a state to "opt in" to the provisions of
the Interstate Banking Act before June 1, 1997, and permitted a state to "opt
out" of the provisions of the Interstate Banking Act by adopting appropriate
legislation before that date. In 1995, Connecticut affirmatively "opted-in" to
the provisions of the Interstate Banking Act. Accordingly, the Interstate
Banking Act, beginning June 1, 1997, permitted a bank to acquire branches in a
state other than Connecticut unless the other state had opted out of the
Interstate Banking Act. The Interstate Banking Act also authorizes de novo
branching into another state if the host state enacts a law expressly permitting
out of state banks to establish such branches within its borders.

PROMPT CORRECTIVE REGULATORY ACTION

Federal law requires, among other things, that federal bank regulatory
authorities take "prompt corrective action" with respect to banks that do not
meet minimum capital requirements. For these purposes, the law establishes five
capital categories: well capitalized, adequately capitalized, undercapitalized,
significantly undercapitalized, and critically undercapitalized.

The Federal Deposit Insurance Corporation has adopted regulations to implement
the prompt corrective action legislation. An institution is considered to be
"well capitalized" if it has a total risk-based capital ratio of 10% or greater,
a Tier 1 risk-based capital ratio of 6% or greater and an advantage ratio of 5%
or greater. An institution is "adequately capitalized" if it has a total
risk-based capital ratio of 8% or greater, a Tier 1 risk-based capital ratio of
4% or greater, and generally a leverage ratio of 4% or greater. An institution
is "undercapitalized" if it has a total risk-based capital ratio of less than
8%, a Tier 1 risk-based capital ratio of less than 4%, or generally a leverage
ratio of less than 4%. An institution is considered to be "significantly
undercapitalized" if it has a total risk-based capital ratio of less than 6%, a
Tier 1 risk-based capital ratio of less than 3%, or a leverage ratio of less
than 3%. An institution is considered to be "critically undercapitalized" if it
has a ratio of tangible equity (as defined in the regulations) to total assets
that are equal to or less than 2%. As of December 31, 2001, the Bank was a "well
capitalized" institution.

"Undercapitalized" banks must adhere to growth, capital distribution (including
dividend) and other limitations and are required to submit a capital restoration
plan. No institutions may have a capital distribution, including payment of a
dividend, if it would be "undercapitalized" after the payment. A bank's
compliance with such plan is required to be guaranteed by any company that
controls the undercapitalized institution in an amount equal to the lesser of 5%
of the institution's total assets when deemed undercapitalized or the amount
necessary to achieve the status of adequately capitalized. If an
"undercapitalized" bank fails to submit an acceptable plan, it is treated as if
it is "significantly undercapitalized." "Significantly undercapitalized" banks
must comply with one or more of a number of additional restrictions, including
but not limited to an order by the Federal Deposit Insurance Corporation to sell
sufficient voting stock to become adequately capitalized, requirements to reduce
total assets and cease receipt of deposits from correspondent banks or dismiss
directors or officers, and restrictions on interest rates paid on deposits,
compensation of executive officers and capital distributions by the parent
holding company. "Critically undercapitalized" institutions must comply with
additional sanctions including, subject to a narrow exception, the appointment
of a receiver or conservator within 270 days after it obtains such status.


                                       25
<PAGE>


TRANSACTIONS WITH AFFILIATES

Under current federal law, transactions between depository institutions and
their affiliates are governed by Sections 23A and 23B of the Federal Reserve
Act. In a holding company context, at a minimum, the parent holding company of a
savings institution and any companies, which are controlled, by such parent
holding company are affiliates of the savings institution. Generally, Section
23A limits the extent to which the savings institution or its subsidiaries may
engage in "covered transactions" with any one affiliate to 10% of such savings
institution's capital stock and surplus, and contains an aggregate limit on all
such transactions with all affiliates to 20% of capital stock and surplus. The
term "covered transaction" includes, among other things, the making of loans or
other extensions of credit to an affiliate and the purchase of assets from an
affiliate. Section 23A also establishes specific collateral requirements for
loans or extensions of credit to, or guarantees, acceptances on letters of
credit issued on behalf of an affiliate. Section 23B requires that covered
transactions and a broad list of other specified transactions be on terms
substantially the same, or no less favorable, to the savings institution or its
subsidiary as similar transactions with nonaffiliates.

Further, Section 22(h) of the Federal Reserve Act restricts an institution with
respect to loans to directors, executive officers, and principal stockholders
("insiders"). Under Section 22(h), loans to insiders and their related interests
may not exceed, together with all other outstanding loans to such persons and
affiliated entities, the institution's total capital and surplus. Loans to
insiders above specified amounts must receive the prior approval of the board of
directors. Further, under Section 22(h), loans to directors, executive officers
and principal shareholders must be made on terms substantially the same as
offered in comparable transactions to other persons, except that such insiders
may receive preferential loans made under a benefit or compensation program that
is widely available to Bank's employees and does not give preference to the
insider over the employees. Section 22(g) of the Federal Reserve Act places
additional limitations on loans to executive officers.

ENFORCEMENT

The Federal Deposit Insurance Corporation has extensive enforcement authority
over insured savings banks, including the Bank. This enforcement authority
includes, among other things, the ability to assess civil money penalties, to
issue cease and desist orders and to remove directors and officers. In general,
these enforcement actions may be initiated in response to violations of laws and
regulations and unsafe or unsound practices.

The Federal Deposit Insurance Corporation has authority under Federal law to
appoint a conservator or receiver for an insured bank under limited
circumstances. The Federal Deposit Insurance Corporation is required, with
certain exceptions, to appoint a receiver or conservator for an insured state
non-member bank if that bank was "critically undercapitalized" on average during
the calendar quarter beginning 270 days after the date on which the institution
became "critically undercapitalized." See "Prompt Corrective Regulatory Action."
The Federal Deposit Insurance Corporation may also appoint itself as conservator
or receiver for an insured state non-member institution under specific
circumstances on the basis of the institution's financial condition or upon the
occurrence of other events, including: (1) insolvency; (2) substantial
dissipation of assets or earnings through violations of law or unsafe or unsound
practices; (3) existence of an unsafe or unsound condition to transact business;
and (4) insufficient capital, or the incurring of losses that will deplete
substantially all of the institution's capital with no reasonable prospect of
replenishment without federal assistance.


                                       26
<PAGE>


INSURANCE OF DEPOSIT ACCOUNTS

The Federal Deposit Insurance Corporation has adopted a risk-based insurance
assessment system. The Federal Deposit Insurance Corporation assigns an
institution to one of three capital categories based on the institution's
financial information consisting of (1) well capitalized, (2) adequately
capitalized or (3) undercapitalized, and one of three supervisory subcategories
within each capital group. The supervisory subgroup to which an institution is
assigned is based on a supervisory evaluation provided to the Federal Deposit
Insurance Corporation by the institution's primary federal regulator and
information which the Federal Deposit Insurance Corporation determines to be
relevant to the institution's financial condition and the risk posed to the
deposit insurance funds. An institution's assessment rate depends on the capital
category and supervisory category to which it is assigned. Assessment rates for
insurance fund deposits currently range from 0 basis points for the strongest
institution to 27 basis points of assessed deposits for the weakest. Bank
Insurance Fund members are also required to assist in the repayment of bonds
issued by the Financing Corporation in the late 1980s to recapitalize the
Federal Savings and Loan Insurance Corporation. Bank Insurance Fund members paid
approximately 1.9 basis points of assessable deposits towards the Financing
Corporation assessment in 2001. The Federal Deposit Insurance Corporation is
authorized to raise the assessment rates. The Federal Deposit Insurance
Corporation has exercised this authority several times in the past and may raise
insurance premiums in the future. If such action is taken by the Federal Deposit
Insurance Corporation, it could have an adverse effect on the earnings of the
Bank.

Insurance of deposits may be terminated by the Federal Deposit Insurance
Corporation upon a finding that the institution is in an unsafe or unsound
condition to continue operations, has engaged in unsafe or unsound practices, or
has violated any applicable law, regulation, rule, order or condition imposed by
the Federal Deposit Insurance Corporation. The management of the Company does
not know of any practice, condition or violation that might lead to termination
of deposit insurance.

FEDERAL RESERVE SYSTEM

The Federal Reserve Board regulations require depository institutions to
maintain non-interest-earning reserves against their transaction accounts
(primarily NOW and regular checking accounts). The Federal Reserve Board
regulations generally require that reserves be maintained against aggregate
transaction accounts as follows: for that portion of transaction accounts
aggregating $41.3 million or less (which may be adjusted by the Federal Reserve
Board) the reserve requirement is 3%; and for transaction accounts aggregating
greater than $41.3 million, the reserve requirement is $1.1 million plus 10%
(which may be adjusted by the Federal Reserve Board between 8% and 14%) against
that portion of total transaction accounts in excess of $41.3 million. The first
$5.7 million of otherwise reservable balances (which may be adjusted by the
Federal Reserve Board) are exempted from the reserve requirements. The Bank is
in compliance with the foregoing requirements.

COMMUNITY REINVESTMENT ACT

Under the Community Reinvestment Act, as implemented by Federal Deposit
Insurance Corporation regulations, a state bank has a continuing and affirmative
obligation consistent with its safe and sound operation to help meet the credit
needs of its entire community, including low and moderate income neighborhoods.
The Community Reinvestment Act does not establish specific lending requirements
or programs for financial institutions nor does it limit an institution's
discretion to develop the types of products and services that it believes are
best suited to its particular community, consistent with the Community
Reinvestment Act. The Community Reinvestment Act requires the Federal Deposit
Insurance Corporation, in connection with its examination of an institution, to
assess the institution's record of meeting the credit needs of its community and
to take such record into account in its evaluation of applications by such
institution. The Community Reinvestment Act requires public disclosure of an
institution's Community Reinvestment Act rating. The Bank's latest Community
Reinvestment Act rating, received from the Federal Deposit Insurance
Corporation, was "Outstanding."


                                       27
<PAGE>


FEDERAL HOME LOAN BANK SYSTEM

The Bank is a member of the Federal Home Loan Bank System, which consists of 12
regional Federal Home Loan Banks. The Federal Home Loan Bank provides a central
credit facility primarily for member institutions. The Bank, as a member of the
Federal Home Loan Bank of Boston, is required to acquire and hold shares of
capital stock in the Federal Home Loan Bank of Boston in an amount at least
equal to 1% of the aggregate principal amount of its unpaid residential mortgage
loans and similar obligations at the beginning of each year, or 1/20 of its
advances (borrowings) from the Federal Home Loan Bank of Boston, whichever is
greater. The Bank was in compliance with this requirement with an investment in
Federal Home Loan Bank of Boston stock at December 31, 2001 of $17.3 million. At
December 31, 2001, the Bank had $301.4 million in Federal Home Loan Bank of
Boston advances.

The Federal Home Loan Banks are required to provide funds for the resolution of
insolvent thrifts and to contribute funds for affordable housing programs. These
requirements could reduce the amount of dividends that the Federal Home Loan
Banks pay to their members and result in the Federal Home Loan Banks imposing a
higher rate of interest on advances to their members. For the years ended
December 31, 2001, 2000 and 1999, cash dividends from the Federal Home Loan Bank
of Boston to the Bank amounted to approximately $840,000, $999,000, and
$762,000, respectively. Further, there can be no assurance that the impact of
recent or future legislation on the Federal Home Loan Banks will not also cause
a decrease in the value of the Federal Home Loan Bank stock held by the Bank.

HOLDING COMPANY REGULATION

The Parent Company is regulated as a non-diversified unitary savings and loan
holding company within the meaning of the Home Owners' Loan Act. As such, the
Parent Company is required to register with the Office of Thrift Supervision and
to adhere to the Office of Thrift Supervision's regulations and reporting
requirements. In addition, the Office of Thrift Supervision may examine and
supervise the Parent Company and the Office of Thrift Supervision has
enforcement authority over the Parent Company and its non-savings institution
subsidiaries. Among other things, this authority permits the Office of Thrift
Supervision to restrict or prohibit activities that are determined to be a
serious risk to the subsidiary savings institution. Additionally, the Bank is
required to notify the Office of Thrift Supervision at least 30 days before
declaring any dividend to the Parent Company. Under current law, as a unitary
savings and loan holding company, the Parent Company generally would not be
restricted under existing laws as to the types of business activities in which
it may engage. The Gramm-Leach-Bliley Act of 1999 provides that no company may
acquire control of a savings association after May 4, 1999 unless it engages
only in the financial activities permitted for financial holding companies under
the law or for multiple savings and loan holding companies as described below.
Further, the Gramm-Leach-Bliley Act specifies that existing savings and loan
holding companies may only engage in such activities. The Gramm-Leach-Bliley
Act, however, grandfathered the unrestricted authority for activities with
respect to unitary savings and loan holding companies existing prior to May 4,
1999, such as the Company, so long as the Bank continues to comply with the
qualified thrift lender test, described below. Upon any non-supervisory
acquisition by the Parent Company of another savings association as a separate
subsidiary, the Parent Company would become a multiple savings and loan holding
company and would have limitations on the types of business activities in which
it could engage. The Home Owners' Loan Act limits the activities of a multiple
savings and loan holding company and its non-insured institution subsidiaries
primarily to activities permissible for financial holding corporates and
activities permissible for bank holding companies under Section 4(c)(8) of the
Bank Holding Company Act, provided the prior approval of the Office of Thrift
Supervision is obtained, and to other activities authorized by Office of Thrift
Supervision regulation. Multiple savings and loan holding companies are
generally prohibited from acquiring or retaining more than 5% of a
non-subsidiary company engaged in activities other than those permitted by the
Home Owners' Loan Act.

The Home Owners' Loan Act prohibits a savings and loan holding company from,
directly or indirectly, acquiring more than 5% of the voting stock of another
savings association or savings and loan holding company or from acquiring such
an institution or company by merger, consolidation or purchase of its assets,
without prior written approval of the Office of Thrift Supervision. In
evaluating applications by holding companies to acquire savings associations,
the Office of Thrift Supervision considers the financial and managerial
resources and future prospects


                                       28
<PAGE>


of the Company and the institution involved, the effect of the acquisition on
the risk to the insurance funds, the convenience and needs of the community and
competitive factors.

The Office of Thrift Supervision is prohibited from approving any acquisition
that would result in a multiple savings and loan holding company controlling
savings institutions in more than one state, except: (1) interstate supervisory
acquisitions by savings and loan holding companies; and (2) the acquisition of a
savings institution in another state if the laws of the state of the target
savings institution specifically permit such acquisitions.

To be regulated as a savings and loan holding company by the Office of Thrift
Supervision (rather than as a bank holding company by the Federal Reserve
Board), the Bank must qualify as a Qualified Thrift Lender. To qualify as a
Qualified Thrift Lender, the Bank must maintain compliance with the test for a
"domestic building and loan association," as defined in the Internal Revenue
Code, or with a Qualified Thrift Lender Test. Under the Qualified Thrift Lender
Test, a savings institution is required to maintain at least 65% of its
"portfolio assets" (total assets less: (1) specified liquid assets up to 20% of
total assets; (2) intangibles, including goodwill; and (3) the value of property
used to conduct business) in certain "qualified thrift investments" (primarily
residential mortgages and related investments, including certain mortgage-backed
and related securities) in at least 9 months out of each 12 month period. As of
December 31, 2001, the Bank maintained in excess of 65% of its portfolio assets
in qualified thrift investments.

Under the Federal Change in Bank Control Act ("CIBCA"), a notice must be
submitted to the Office of Thrift Supervision if any person (including a
company), or group acting in concert, seeks to acquire 10% or more of the
Company's outstanding voting stock, unless the Office of Thrift Supervision has
found that the acquisition will not result in a change of control of the
Company. Under the CIBCA, the Office of Thrift Supervision has 60 days from the
filing of a complete notice to act, taking into consideration certain factors,
including the financial and managerial resources of the acquirer and the
anti-trust effects of the acquisition. Any company that so acquires control
would then be subject to regulation as a savings and loan holding company.

CONNECTICUT HOLDING COMPANY REGULATIONS. Under Connecticut banking law, no
person may acquire beneficial ownership of more than 10% of any class of voting
securities of a Connecticut-chartered bank, or any bank holding company of such
a bank, without prior notification of, and lack of disapproval by, the
Connecticut Banking Commissioner. The Connecticut Banking Commissioner will
disapprove the acquisition if the bank or holding company to be acquired has
been in existence for less than five years, unless the Connecticut Banking
Commissioner waives this requirement, or if the acquisition would result in the
acquirer controlling 30% or more of the total amount of deposits in insured
depository institutions in Connecticut. Similar restrictions apply to any person
who holds in excess of 10% of any such class and desires to increase its
holdings to 25% or more of such class.

FEDERAL INCOME TAXATION

GENERAL. The Company, the Bank and its subsidiaries report their income on a
calendar year basis using the accrual method of accounting. The federal income
tax laws apply to the Company and the Bank in the same manner as to other
corporations with some exceptions, including particularly the Banks' reserve for
bad debts discussed below. The following discussion of tax matters is intended
only as a summary and does not purport to be a comprehensive description of the
tax rules applicable to the Bank, the Company or other group corporations. The
Bank's federal income tax returns have been either audited or closed under the
statute of limitations through tax year 1997.

BAD DEBT RESERVES. For fiscal years beginning before December 31, 1995, thrift
institutions which qualified under certain definitional tests and other
conditions of the Internal Revenue Code of 1986, as amended, were permitted to
use certain favorable provisions to calculate their deductions from taxable
income for annual additions to their bad debt reserve. A reserve could be
established for bad debts on qualifying real property loans, generally secured
by interests in real property improved or to be improved, under the percentage
of taxable income method or the experience method. The reserve for nonqualifying
loans was computed using the experience method.


                                     29
<PAGE>


Federal legislation enacted in 1996 repealed the reserve method of accounting
for bad debts and the percentage of taxable income method for tax years
beginning after 1995 and require savings institutions to recapture or take into
income certain portions of their accumulated bad debt reserves. Approximately
$24.6 million of the Bank's accumulated bad debt reserves would not be
recaptured into taxable income unless certain events were to occur, such as a
"non-dividend distribution" by the bank to the Parent Company.

CONNECTICUT TAXATION

The Company is subject to the Connecticut Corporate Business tax. The Company
files a combined Connecticut income tax return.

 Connecticut income tax is based on the federal taxable income before net
operating loss and special deductions with certain modifications made to federal
taxable income to arrive at Connecticut taxable income. Connecticut taxable
income is multiplied by the state tax rate (8.5% for 1999 and 7.5% for 2000 and
thereafter) to arrive at Connecticut income tax.

In May 1998, the State of Connecticut enacted legislation permitting the
formation of a passive investment company ("PIC") as subsidiaries of financial
institutions. This legislation exempts qualifying passive investment companies
from the state income taxation in Connecticut and excludes dividends paid from a
PIC to a related financial institution. American Savings Bank qualifies as a
financial institution under the statue and has established a PIC that began
operations in the first quarter of 1999. The Bank expects the PIC will eliminate
substantially all state income taxes of the Bank going forward.

ADDITIONAL ITEM.   EXECUTIVE OFFICERS OF THE REGISTRANT
---------------

Certain executive officers of the Bank also serve as executive officers of the
Company. The day-to-day management duties of the executive officers of the
Company and the Bank relate primarily to their duties as to the Bank. The
executive officers of the Company are as follows:

<TABLE>
<CAPTION>

             NAME                 AGE (1)                                        POSITION
             ----                 -------                                        --------
<S>                                 <C>      <C>
Robert T. Kenney                    59       Chairman of the Board, President and  Chief Executive Officer
William E. Solberg                  52       Senior Executive Vice President
Charles J. Boulier, III             45       Senior Executive Vice President, Treasurer and Chief Financial Officer
Charles P. Ahern                    50       Executive Vice President
Richard J. Moore                    60       Executive Vice President and Corporate Secretary
Sheri C. Pasqualoni                 43       Executive Vice President
Peter N. Perugini                   57       Executive Vice President
Earl T. Young                       40       Executive Vice President

(1) As of December 31, 2001
</TABLE>

The executive officers are elected annually and hold office until their
successors have been elected and qualified or until they are removed or
replaced.

Robert T. Kenney joined American Savings in August 1991 as President, Treasurer
and Chief Operating Officer. In August 1992, he was appointed Chief Executive
Officer while maintaining his positions of President and Treasurer. Mr. Kenney
was named Chairman of the Board of Directors in July 1995. Mr. Kenney also
serves as a director of Mutual Investment Fund of Connecticut, Inc. located in
Hartford, Connecticut, a director and past Chairman of Savings Bank Life
Insurance Company in Connecticut.

William E. Solberg serves as Senior Executive Vice President. He was President
and Chief Executive Officer of American Bank of Connecticut from 1997 until its
acquisition by the Company in January 2002.


                                       30
<PAGE>


Charles J. Boulier, III joined American Savings in 1993 as Senior Vice President
and Chief Financial Officer. In 1994, Mr. Boulier was also named Treasurer. In
1997, he was appointed Executive Vice President while maintaining his positions
of Treasurer and Chief Financial Officer. In June 1999 he was named Executive
Vice President, Treasurer and Chief Financial Officer of the Company. In April
2001, he was named Senior Executive Vice President of the Company while
maintaining his positions of Treasurer and Chief Financial Officer.

Charles P. Ahern joined American Savings in April 1996 as Senior Vice
President-Retail Banking of the Bank. In June 1999 he was named Senior Vice
President of the Company. He was named Executive Vice President of the Company
in April 2001.

Richard J. Moore joined American Savings in May 1998 and serves as Senior Vice
President of Human Resources and Corporate Secretary. In June 1999 he was named
Senior Vice President and Corporate Secretary of the Company. He was named
Executive Vice President and Corporate Secretary of the Company in April 2001.
From 1997 until joining American Savings, Mr. Moore worked at Howell & Moore, a
human resources consulting firm.

Sheri C. Pasqualoni joined American Savings in January 1995 as Vice President of
Sales and Marketing. In January 1997, Ms. Pasqualoni was appointed Senior Vice
President of Marketing, Trust and Investment Management. In June of 1999 she was
named Senior Vice President of the Company. In April 2001 she was named
Executive Vice President of the Company.

Peter N. Perugini joined American Savings in 1986 as Vice President of Mortgage
Loans. He was named Senior Vice President and Chief Lending Officer in 1997. In
June 1999 he was named Senior Vice President of the Company. In April 2001 he
was named Executive Vice President of the Company.

Earl T. Young serves as Executive Vice President of the Company. He was
Executive Vice President and Senior Lending Officer of American Bank of
Connecticut, Inc. prior to its acquisition by the Company in January 2002.


                                       31
<PAGE>


ITEM 2.       DESCRIPTION OF PROPERTIES
------

At December 31, 2001, the Company conducted its business through its two
administrative offices, its main office located in New Britain, Connecticut and
16 other full-service banking offices. The Company believes that its facilities
are adequate to meet its present and immediately foreseeable needs.

<TABLE>
<CAPTION>

----------------------------------------------------------------------------------------------------------------------------
       PROPERTIES
----------------------------------------------------------------------------------------------------------------------------

                                                                                                       NET BOOK VALUE OF
                                               LEASED          ORIGINAL YEAR            DATE          PROPERTY OR LEASEHOLD
                                                 OR                LEASED             OF LEASE             IMPROVEMENTS
                 LOCATION                       OWNED           OR ACQUIRED          EXPIRATION       AT DECEMBER 31, 2001
--------------------------------------------  --------- ----------------------- ------------------- -------------------------
                                                                                                         (In thousands)
Administrative Offices:
-----------------------

<S>                                            <C>                 <C>                 <C>                   <C>
102 West Main Street
New Britain, Connecticut 06051                 Owned               1995                 --                   $2,423

185 Main Street
New Britain, Connecticut 06051                 Leased              2001                2006(2)                   86

Banking Offices:
----------------

178 Main Street
New Britain, Connecticut 06051                 Owned               1901                 --                    3,095

655 West Main Street
New Britain, Connecticut 06053                 Owned               1961                 --                      189

1133 Main Street
Newington, Connecticut 06111                   Owned               1965                 --                      520

123 East Main Street
Plainville, Connecticut 06062                  Owned               1966                 --                      124

Route 195
Mansfield, Connecticut 06250                   Leased              1975                2005                      34

25 New London Turnpike
Glastonbury, Connecticut 06033                 Owned               1976                 --                      138

184 Route 81
Killingworth, Connecticut 06419                Leased              1977                2002(1)                   19

143 South Main Street
West Hartford, Connecticut 06107               Leased              1980                2005(1)                   53

587 Hartford Road
New Britain, Connecticut 06053                 Leased              1980                2005(1)                   60

25 Wells Road
Wethersfield, Connecticut 06109                Leased              1986                2006                      56

252 Allen Street
New Britain, Connecticut 06053                 Leased              1988                2003(1)                   45

714 Hopmeadow Street
Simsbury, Connecticut 06070                    Leased              1988                2008(3)                   51

29 South Main Street
West Hartford, Connecticut 06107               Leased              1996                2006(1)                   13

315 West Main Street
Avon, Connecticut 06001                        Leased              1997                2005                     190

1127 Farmington Avenue
Berlin, Connecticut 06037                      Leased              1998                2018(4)                  436

747 Farmington Avenue
New Britain, Connecticut 06053                 Leased              1998                2003(3)                  105

632 Cromwell Avenue
Rocky Hill, Connecticut 06067
        Total                                  Leased              1998                2003(2)                  228
                                                                                                          ---------
                                                                                                          $   7,865
                                                                                                          =========


(1) The Company has an option to renew this lease for an additional five-year period.
(2) The Company has an option to renew this lease for two additional five-year periods.
(3) The Company has an option to renew this lease for three additional five-year periods.
(4) The Company has an option to renew this lease for four additional five-year periods.

----------------------------------------------------------------------------------------------------------------------------
</TABLE>

With the acquisition of American Bank of Connecticut on January 18, 2002, the
Company added 17 full-service banking offices of which 6 were owned and 11 were
leased and are located in New Haven and Litchfield counties. The net book value
of property and leasehold improvements as of January 18, 2002 was $11.4 million.


                                       32
<PAGE>


ITEM 3.     LEGAL PROCEEDINGS
------

Periodically there have been various claims and lawsuits involving the Company,
such as claims to enforce liens, condemnation proceedings on properties in which
the Company holds security interests, claims involving the making and servicing
of real property loans and other issues incident to the Company's business. Such
routine legal proceedings, in the aggregate, are believed by management to be
immaterial to the financial condition and results of operations of the Company.

ITEM 4.     SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
------

None

                                     PART II

ITEM 5.     MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
------

The Company's common stock is quoted on the NASDAQ National Stock Market under
the symbol "AMFH."

The Parent Company is subject to the laws of the state of Delaware which
generally limit dividends to an amount equal to the excess of the net assets of
the Company (the amount by which total assets exceed total liabilities) over its
statutory capital, or if there is no such excess, to its net profits for the
current and/or the immediately preceding fiscal year.

The payment of dividends by the Parent Company could be dependent, in a large
part, upon the receipt of dividends from the Bank. The Bank is subject to
certain restrictions which may limit its ability to pay dividends to the Parent
Company. See Note 8 of Notes to the Consolidated Financial Statements in Item 8,
"Financial Statements and Supplementary Data" for an explanation of the
liquidation account and regulatory capital requirements on the Bank's ability to
pay dividends.

The table below provides the reported high and low bid information of the common
stock and the dividends paid for each of the quarters of 2001 and 2000.

<TABLE>
<CAPTION>

             -------------------------------------------------------------------------------------------------
                                            COMMON STOCK PRICES AND DIVIDENDS
             -------------------------------------------------------------------------------------------------

                                                          HIGH               LOW            DIVIDENDS PAID
                                                     --------------     ------------    ----------------------
                   2000

<S>                                                 <C>                <C>             <C>
             First quarter                          $       12.688     $     10.813    $          -
             Second quarter                                 16.688           11.625             0.150
             Third quarter                                  19.688           15.750             0.150
             Fourth quarter                                 22.125           17.375             0.150

                   2001

             FIRST QUARTER                          $       22.438     $     19.250    $        0.165
             SECOND QUARTER                                 23.600           20.210             0.165
             THIRD QUARTER                                  27.330           22.000             0.165
             FOURTH QUARTER                                 26.500           22.900             0.165
</TABLE>


                                       33
<PAGE>


ITEM 6.     SELECTED FINANCIAL DATA
-----

Set forth below are selected consolidated financial and other data of the
Company. This financial data is derived in part from, and should be read in
conjunction with, the Company's audited consolidated financial statements and
related notes.

<TABLE>
<CAPTION>

----------------------------------------------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------------------------------------
SELECTED FINANCIAL DATA
----------------------------------------------------------------------------------------------------------------------------
                                                                                     AT DECEMBER 31,
                                                        --------------------------------------------------------------------
                                                             2001         2000          1999          1998          1997
                                                        ------------  ------------  ------------  ------------  ------------
                                                                                  (Dollars in thousands)

<S>                                                     <C>           <C>           <C>           <C>           <C>
Selected Financial Data:
    Total assets                                        $ 1,900,596   $ 1,873,458   $ 1,886,153   $ 1,590,451   $ 1,475,262
    Loans, net                                            1,214,847     1,151,048     1,029,531       907,254       837,683
    Securities available for sale
      Mortgage-backed securities                            225,101       255,270       341,421       172,855       132,817
      Investment securities                                 311,293       351,211       435,832       417,673       432,032
    Deposits                                              1,124,249     1,126,336     1,100,502     1,130,711     1,089,593
    FHLB advances and other borrowings                      311,444       177,944       214,444       120,244        80,244
    Total stockholders' equity                              394,947       513,967       531,452       280,984       258,141
    Real estate owned                                            77           211           445           720           739
    Nonperforming loans                                       4,204         3,013         2,523         3,986         6,874

Selected Operating Data:
    Total interest and dividend income                  $  121,028    $   127,623   $   106,033   $    98,989   $    95,255
    Total interest expense                                  61,240         59,931        56,444        54,067        52,507
                                                         ----------    -----------   -----------   -----------   -----------
      Net interest income before provision
        for loan losses                                     59,788         67,692        49,589        44,922        42,748
    Provision for loan losses                                  450          1,895         2,030         2,400         2,154
                                                         ----------    -----------   -----------   -----------   -----------
      Net interest income after
        provision for loan losses                           59,338         65,797        47,559        42,522        40,594
    Non-interest income:
      Service charges and fees                               5,190          3,977         3,351         3,149         2,346
      Investment commission and
        advisory fees                                        1,695          1,545         1,399         1,052           152
      Net gain on sales/contribution
        of securities                                        8,212          6,068         2,850         6,696         4,655
      Increase in cash surrender value                       3,122             21             -             -             -
      Other                                                    435            483           363           367           552
                                                         ----------    -----------   -----------   -----------   -----------
    Total non-interest income                               18,654         12,094         7,963        11,264         7,705
    Total non-interest expenses                             36,046         31,046        50,928        26,705        21,946
                                                         ----------    -----------   -----------   -----------   -----------
    Income before income taxes                              41,946         46,845         4,594        27,081        26,353
    Income taxes                                            13,316         15,719         1,811         9,066         8,093
                                                         ----------    -----------   -----------   -----------   -----------
    Net income                                          $   28,630    $    31,126   $     2,783    $   18,015  $     18,260
                                                         ==========    ===========   ===========   ===========   ===========
    Net income per common share
      Basic                                             $     1.40    $      1.19         nm           n/a            n/a
      Diluted                                                 1.33           1.18         nm           n/a            n/a
    Cash dividends declared per share                         0.66           0.45         nm           n/a            n/a

----------------------------------------------------------------------------------------------------------------------------
</TABLE>

nm - not meaningful

The decline in net income in 2001 is a result of the Company's strategic
initiative to utilize borrowings to fund the repurchase of the Company's common
stock. The decline in net income in 1999 primarily resulted from a $21.4 million
common stock contribution to the newly formed American Savings Charitable
Foundation at the time of the Conversion.


                                       34
<PAGE>


<TABLE>
<CAPTION>

-------------------------------------------------------------------------------------------------------------------------------
SELECTED FINANCIAL DATA
-------------------------------------------------------------------------------------------------------------------------------
                                                                            AT OR FOR THE YEAR ENDED DECEMBER 31,
                                                                  ----------------------------------------------------------
                                                                     2001       2000        1999        1998        1997
                                                                  ----------  ----------  ----------  ----------  ----------

<S>                                                                 <C>         <C>         <C>          <C>         <C>
SELECTED OPERATING RATIOS AND OTHER DATA
PERFORMANCE RATIOS:
  Interest rate spread                                                 2.68%       2.57%       2.36%       2.45%       2.47%
  Net interest margin                                                  3.54        3.81        3.16        3.20        3.20
  Net interest income after provision for loan
    losses to non-interest expense                                   164.62      211.94       93.38      159.23      184.70
  Non-interest expense as a percent of
    average assets (excluding Foundation contribution)                 1.89        1.65        1.77        1.52        1.38
  Efficiency ratio (excluding Foundation contribution)*               48.91       42.11       54.05       46.62       42.89
  Return on average assets                                             1.51        1.66        0.17        1.20        1.29
  Return on average equity                                             6.59        5.91        0.91        6.76        7.56
  Ratio of average equity to average assets                           22.86       28.03       18.36       17.78       17.01
  Dividend payout ratio                                               47.14       37.82       -           -           -
  Book value per share                                              $ 19.16     $ 19.19     $ 18.41       -           -

BANK REGULATORY CAPITAL RATIOS
  Leverage capital ratio                                              17.74%      19.25%      23.00%      16.35%      15.95%
  Risk-based capital ratio                                            31.30       35.60       38.00       29.19       30.30

ASSET QUALITY RATIOS
  Nonperforming assets as a percent of total assets                    0.23%       0.17%       0.16%       0.30%       0.52%
  Allowance for loan losses as a percent
    of total loans                                                     0.89        0.92        0.85        0.83        0.74
  Allowance for loan losses as a percent of
    nonperforming loans                                              258.97      352.58      349.58      191.32       91.32

-------------------------------------------------------------------------------------------------------------------------------
*Efficiency ratio is net interest income plus non-interest income exclusive of securities gains, divided into non-interest
expense exclusive of Foundation contributions and a one-time employee  benefit charge in 2001 of $1.7 million
-------------------------------------------------------------------------------------------------------------------------------
</TABLE>


ITEM 7.     MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
------      RESULTS OF OPERATIONS

GENERAL

The Company's results of operations depend primarily on net interest income,
which is the difference between interest income earned on the Company's
interest-earning assets, primarily loans and securities, and the interest
expense on the Company's interest-bearing liabilities, consisting of deposits
and borrowings. The Company also generates non-interest income from service
charges on deposits and loans, gains on the sale of securities 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. The Company's non-interest expenses consist of
employee compensation and benefits, occupancy expense, furniture and fixture
expense, advertising, outside services and other operating expenses. Results of
operations are also affected by general economic and competitive conditions,
notably changes in market interest rates, and government policies and
regulations.


                                       35
<PAGE>


OPERATING STRATEGY

The Bank is an independent, community-oriented savings bank that delivers
quality customer service and offers a wide range of deposit, loan and investment
products to its customers. In recent years, the Company's strategy has been to
enhance profitability by increasing sources of non-interest income and by
improving operating efficiencies while managing its capital position and
limiting its credit and interest rate risk exposure. To accomplish these
objectives, the Company has sought to:

    o    Provide superior customer service by expanding and upgrading the branch
         network, maintaining a customer call center, introducing Internet
         banking and broadening its market by offering community based
         commercial deposit and loan products.

    o    Increase fee income by broadening non-depository product offerings and
         services, including expansion of its trust services; changing American
         Investment Services, Inc. broker/dealer affiliation to enhance future
         revenue; transitioning from transaction-based brokerage business to
         fee-based investment advisory business; and providing property,
         casualty and comprehensive business insurance coverage through an
         affiliation with a local insurance broker.

    o    Increase loan production through an expanded out-of-state correspondent
         network.

    o    Manage credit risk by focusing primarily on the origination of
         single-family, owner-occupied residential mortgage loans and consumer
         loans, consisting primarily of home equity loans and lines of credit.

    o    Repurchase Company stock and pay dividends to enhance shareholder
         value.

    o    Pursue acquisitions that enhance shareholder value.

    o    Continue to invest in technology to increase productivity and
         efficiency.

COMPARISON OF FINANCIAL CONDITION AT DECEMBER 31, 2001 AND 2000

Total assets at December 31, 2001 were $1.90 billion representing an increase of
$27.1, million, or 1.4%, over the December 31, 2000 level of $1.87 billion. The
increase in assets was primarily a result of increases of $63.8 million, or
5.5%, in net loans, a $18.1 million increase in a bank owned life insurance
(BOLI), a $5.1 million increase in Federal Home Loan Bank stock and a $10.1
million increase in the Company's cash position. These increases were partially
offset by decreases of $39.9 million, or 11.4%, in investment securities, $30.2
million, or 11.8%, in mortgage-backed securities and $1.9 million, or 14.5%, in
accrued interest and dividends receivable.

The increase in loans was primarily in equity lines of credit secured by second
mortgages and one to four-family first mortgages. The increase was due primarily
to the lower level of interest rates prevailing during the year and due to the
expansion of the Bank's equity line of credit product into Massachusetts and
Fairfield County, Connecticut and continued expansion of the Bank's first
mortgage products in the same areas. The increase in BOLI was primary due to the
Company paying $15.0 million for a single premium bank-owned life insurance
contract. The remaining increase of $3.1 million in the BOLI is related to 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. The loan originations
and BOLI purchase were funded in part with maturities and sales of investment
and mortgage-backed securities. As a result of the increase in Federal Home Loan
Bank ("FHLB") borrowings, the Bank was required to increase its FHLB stock
holdings. The $10.1 million increase in cash and cash equivalents was due
primarily to an increase in the Bank's overnight federal funds investments.

The decrease of $39.9 million in investment securities was due to the Company's
decision to take advantage of market conditions and realize gains on investment
sales to purchase the BOLI and to fund loan growth. The decrease in
mortgage-backed securities of $30.2 million was due to maturing and prepayment
of these securities


                                       36
<PAGE>


which the Company chose to re-invest in higher yielding loans and to repurchase
the Company's stock. The decrease in accrued interest and dividends receivable
of $1.9 million was due in part to a lower level of investment and
mortgage-backed securities in 2001 compared to 2000 and the decline in the prime
lending rate. The Bank uses the prime rate as the base rate on its home equity
lines of credit. The prime rate declined from 9.50% at December 31, 2000 to
4.75% at December 31, 2001.

Nonperforming assets, consisting of nonperforming loans and real estate owned,
totaled $4.3 million at December 31, 2001 compared to $3.2 million at December
31, 2000. This increase was a result of growth in the loan portfolio and
increases in the number of delinquent mortgage loans. Real estate owned
decreased by $134,000 to $77,000 at December 31, 2001 from $211,000 at December
31, 2000, due to a greater amount of dispositions of foreclosed properties than
the amount of foreclosed properties transferred to real estate owned. The modest
levels of nonperforming assets reflect the current stable economic conditions in
the Company's market area and the Company's strict underwriting guidelines and
collection practices. Future increases in nonperforming loans and other real
estate owned could occur if general economic conditions deteriorate.

Deposits decreased $2.1 million, or 0.2%, to $1.12 billion at December 31, 2001
from $1.13 billion at December 31, 2000. The decrease resulted primarily from a
$74.5 million decrease in time and retirement accounts, offset by a $72.4
million increase in core accounts which consist of savings, money market, NOW
and customer demand deposit accounts. Time deposits decreased as higher rate
CD's matured and were replaced by lower cost core deposits. The core deposit
increase was due to lower market interest rates, new product offerings and
increased sales efforts. Mortgagors' escrow and other deposits increased $8.0
million, or 40.7%, due primarily to the timing of payments made for property
taxes during the fourth quarters of 2001 and 2000. Federal Home Loan Bank
advances and other borrowings increased $133.5 million to $311.4 million at
December 31, 2001 from $177.9 million at December 31, 2000. The increase in FHLB
advances and other borrowings were used primarily to fund treasury stock
purchases and loan growth. Other liabilities increased $11.5 million due
primarily to the purchase of a $10.1 million investment security at the end of
the quarter which did not settle until January 2, 2002. The net deferred income
tax liability decreased $5.0 million to $19.3 million at December 21, 2001
compared to $24.3 million at December 31, 2000. The decrease was principally due
to the decrease in the net deferred tax liability for the unrealized gains on
total securities available for sale.

Total equity decreased $119.0 million, or 23.2%, from $514.0 million at December
31, 2000 to $394.9 million at December 31, 2001. The decrease was primarily due
to the repurchase of 6,285,334 shares of common stock at a total cost of $138.3
million, the payment of dividends totaling $13.8 million and a decrease of $6.3
million in accumulated other comprehensive income resulting from a decrease in
the after-tax net unrealized gain on total securities. These decreases were
partially offset by net income after tax of $28.6 million, and an increase of
$9.4 million from the exercise of options and the release of restricted stock.
In addition, the Bank has an Employee Stock Ownership Plan. This plan purchased
2.3 million shares of the Company's common stock at the time the Bank converted
to a stock based company, which is held in a trust account until the shares are
allocated to the participants. The shares held in the trust account were
initially reflected as a $25.7 million reduction to equity. As shares are
allocated to participants over the remaining 17 years of the original 20-year
plan, this reduction to equity will decline. The decline in the reduction to
equity for the year 2001 was $1.3 million due to the current year release of
118,526 shares to participants in the plan.


                                       37
<PAGE>


COMMITMENTS

The following tables present information indicating various obligations and
commitments made by the Company as of December 31, 2001 and the respective
maturity dates.

<TABLE>
<CAPTION>

--------------------------------------------------------------------------------------------------------------------------------
CONTRACTUAL OBLIGATIONS:
--------------------------------------------------------------------------------------------------------------------------------
                                                          LESS THAN           TWO TO             FOUR TO         OVER FIVE
                                           TOTAL           ONE YEAR         THREE YEARS         FIVE YEARS         YEARS
                                         ----------    ---------------    ---------------     -------------    -------------

<S>                                     <C>           <C>                <C>                 <C>              <C>
Federal Home Loan Bank                  $  301,444    $        78,500    $       158,500     $      56,700    $       7,744
  advances (1)

Repurchase agreements (2)                   10,000                  -                  -                 -           10,000

Operating leases (3)                         2,995                548                976               633              838
                                         ----------    ---------------    ---------------     -------------    -------------

   TOTAL CONTRACTUAL OBLIGATIONS        $  314,439    $        79,048    $       159,476     $      57,333    $      18,582
                                         ==========    ===============    ===============     =============    =============


(1)  Is secured by balance security agreement on qualifying assets mainly Mortgage loans and investments. No advances are callable.
(2)  Callable in May 2003.
(3)  Represents non-cancelable operating leases for offices.



--------------------------------------------------------------------------------------------------------------------------------
OTHER COMMITMENTS
--------------------------------------------------------------------------------------------------------------------------------
                                                           LESS THAN           TWO TO             FOUR TO         OVER FIVE
                                           TOTAL           ONE YEAR         THREE YEARS         FIVE YEARS         YEARS
                                         ----------    ---------------    ---------------     -------------    -------------

Real estate loan commitments (1)        $  79,407     $        79,407    $             -     $           -    $           -

Consumer loan commitments (1)              11,713              11,713                  -                 -                -

Commercial loan commitments (1)               955                 955                  -                 -                -

Unused portion of home equity             265,856             265,856                  -                 -                -
  loans (2)

Unused portion of construction              7,809               7,809                  -                 -                -
  loans (3)

Unused  checking overdraft lines of
  credit (4)                                  809                 809                  -                 -                -
                                         ---------     ---------------    ---------------     -------------    -------------

    TOTAL OTHER COMMERCIAL

        COMMITMENTS                     $ 366,549     $       366,549    $             -     $           -    $           -
                                         =========     ===============    ===============     =============    =============



GENERAL:  Commitments to extend credit are agreements to lend to a customer as long as there is no violation of
condition established in the contract and generally have fixed expiration dates or other termination clauses

(1) Commitments for loans are extended to customers for up to 180 days after which they expire.
(2) Unused portions of home equity loans are available to the borrower for up to 10 years.
(3) Unused portions of construction loans are available to the borrower for up to 1 year.
(4) Unused portion of checking overdraft lines of credit are available to customers in "good standing" indefinitely.
</TABLE>


                                       38
<PAGE>


COMPARISON OF OPERATING RESULTS FOR THE YEAR ENDED DECEMBER 31, 2001 AND 2000

GENERAL

NET INCOME. Net income decreased by $2.5 million, or 8.0%, to $28.6 million in
2001 compared to $31.1 million in 2000. The decrease in 2001 was attributable to
a decrease in net interest income of $7.9 million and an increase in
non-interest expense of $5.0 million partially offset by an increase in
non-interest income of $6.6 million and a decrease in income taxes of $2.4
million.

NET INTEREST INCOME. Net interest income decreased $7.9 million, or 11.7%, to
$59.8 million for 2001 compared to $67.7 million in 2000. Total interest and
dividend income decreased $6.6 million to $121.0 million in 2001 as compared to
$127.6 million in 2000. The decrease in interest income was primarily due to a
$62.3 million decrease in the average daily interest earning assets to $1.71
billion in 2001 from $1.78 billion in 2000 and a decrease of 8 basis points in
the weighted average yield on earning assets in 2001. The decrease in the daily
average balance was due to the selling of approximately $60 million of
investment and mortgage-backed securities to fund the purchase of BOLI, the
purchase of which occurred in late December of 2000 and in January 2001. BOLI is
recorded on the balance sheet as Other Assets and the income generated is
recorded as Non-Interest Income. The decrease in the daily average weighted
yield on earning assets was due to a decrease in mortgage lending rates,
including the prime rate, throughout 2001 as compared to 2000, partially offset
through the purchase of corporate bonds and mortgage-backed securities. Although
these securities were purchased throughout 2000, the full impact on interest
income did not occur until 2001. Additionally, the yields on these securities
were not impacted by the decline in market interest rates to the same degree as
were the yields on the Banks' residential mortgage loans and Home Equity Lines
of Credit. The average yield on Bank's residential mortgage loans in 2001 was
reduced by significant refinancing activity, while the rate on Home Equity Lines
of Credit is indexed to the prime rate, which declined from 9.50% at December
31, 2000 to 4.75% at December 31, 2001. Interest income on loans increased $3.2
million, or 4.0% to $84.3 million in 2001 compared to $81.1 million in 2000. The
increase was due to a $105.6 million increase in the average daily balance of
loans outstanding offset by a 39 basis point decrease in the average yield.
Interest income on investments and mortgage-backed securities decreased $9.4
million, or 20.6%, from $45.6 million in 2000 to $36.2 million in 2001. The
decrease was due to a $165.6 million decrease in the average balance offset by a
35 basis point increase in the weighted average yield.

Total interest expense for 2001 was $61.2 million, an increase of $1.3 million,
or 2.2%, compared to $59.9 million for 2000. Interest on Federal Home Loan Bank
advances and other borrowings increased by $4.8 million primarily due to a $97.8
million increase in the average daily borrowings to $293.9 million in 2001 from
$196.1 million in 2000 offset by a decrease of 38 basis points in the weighted
average rate paid on these borrowings. The increase in the average daily
balances was due to the Company funding purchases of treasury stock and loan
originations with increased borrowings. The decrease in the weighted average
rate paid on these deposits was due to market conditions. Interest on deposits
decreased $3.5 million to $44.5 million in 2001 compared to $48.0 million in
2000. Interest on certificates of deposits and retirement accounts decreased
$3.8 million primarily due to a decrease of 15 basis points on the weighted
average rate paid on these deposits and a decrease in the average daily balance
of $50.4 million. Interest on deposits, other than certificates of deposit and
retirement accounts, increased $274,000 primarily due to increases in the
average daily balances of these accounts in 2001 as compared to 2000 partially
offset by a decrease of the weighted average rate paid on these deposits. The
decrease in time deposits was due to higher rate CDs maturing and the Company
focusing on increasing other deposits or core deposit, such as savings, money
markets, Now accounts and demand accounts through new product offerings and
increased sales effort.

PROVISION FOR LOAN LOSSES. The provision for loan losses was $450,000 for 2001,
a decrease of $1.4 million or 76.3%, from $1.9 million in 2000. The lower
provision reflects a decrease in charge-offs and management's assessment of
exposure to losses that maybe inherent in the loan portfolio, as well as current
economic conditions. At December 31, 2001, the allowance for loan losses was
$10.9 million which represented 259.0% of nonperforming loans and 0.89% of total
loans. This compared to the allowance for loan losses of $10.6 million at
December 31, 2000 representing 352.6% of nonperforming loans and 0.92% of total
loans. The methodology for assessing the appropriateness of the allowance for
loan losses is considered a critical accounting policy by management due to the
judgment involved, the subjectivity of the assumptions utilized and the
potential changes in


                                       39
<PAGE>


the economic environment. See Item 1 - "Descriptions of Business - Lending
Activities - Allowance for Loan Losses" for a further discussion of the
Company's loan loss allowance.

NON-INTEREST INCOME. Non-interest income increased $6.6 million, or 54.2%, to
$18.7 million in 2001 from $12.1 million in 2000. This was primarily due to a
$3.1 million increase in the cash surrender value of BOLI in 2001 compared to
$21,000 in 2000, a $2.1 million increase in net gains on the sale of investment
securities to $8.2 million in 2001 compared to $6.1 million in 2000, and a $1.2
million increase in service charges and fees to $5.2 million in 2001 compared to
$4.0 million in 2000. The $3.1 million increase in BOLI was due to the BOLI
contract being in effect during all of 2001 as compared to 3 days in 2000. The
$2.1 million increase in gains on the sale of securities was taken to provide a
portion of funds required for treasury stock purchases, the BOLI contract
purchase, and to fund loan originations. The net gain on sale of equity
securities was $8.5 million in 2001 as compared to $10.3 million in 2000. There
were no sales of equity mutual funds in 2001 whereas a $28,000 gain was recorded
in 2000. The increase was offset by net losses of $265,000 on the sale of
mortgage-backed securities and corporate bonds in 2001 as compared to a net loss
of $4.0 million on the sale of mortgage-backed securities and corporate and U.S.
Agency bonds in 2000. Service charges and fees increased $1.2 million, or 30.5%,
to $5.2 million in 2001 compared to $4.0 million in 2000. The increase was
primarily due to implementing charges for foreign ATM transactions, increased
collection rate in overdraft fees, implementation of revised deposit fees,
increased customer activity for NOW accounts and increased sales of fixed
annuity products which was driven by market conditions. Additionally, investment
commissions and advisory fees from American Investment Services, Inc. (a
financial services subsidiary of the Bank) increased $150,000, or 9.7%, to $1.7
million for 2001 compared to $1.5 million in 2000. This increase was attributed
to additional commissions earned from advisory fees.

NON-INTEREST EXPENSE. Non-interest expense increased $5.0 million, or 16.1% to
$36.0 million in 2001, compared to $31.0 million for 2000. The increase was
primarily due to increases in salaries and employee benefits, occupancy expense
and other expenses. Salaries and benefits increased $4.1 million, or 22.1%, to
$22.5 million for 2001 from $18.4 million for 2000. The increase was
attributable to a $1.7 million expense related to the cost of accelerating the
vesting of options for certain retired directors, $1.3 million for the increased
cost of the restricted stock plan for the full twelve months of 2001 versus 110
days in 2000 and approximately $820,000 for the increased cost for the Employee
Stock Ownership Plan resulting from the higher share price of the Company's
stock. Other expenses increased $654,000, or 15.3%, to $4.9 million for 2001
from $4.3 million for 2000. The increase was primarily due to increased costs
related to increased loan volume and additional software maintenance to support
enhanced Internet capabilities and other productivity enhancing software and
forms. Occupancy expense increased $196,000, or 8.2%, to $2.6 million for 2001
from $2.4 million for 2000. The increase was primarily due to increases in rent,
real estate taxes and utilities.

INCOME TAX EXPENSE. Income taxes were $13.3 million for 2001 as compared to
$15.7 million for 2000. The effective tax rate decreased to 31.7% in 2001, from
33.6% in 2000. The decrease in income taxes was primarily due to a decrease in
income before income taxes and the effect of a greater percentage of tax exempt
income to total taxable income. 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. Management uses the asset
liability method of accounting for income taxes in which deferred tax assets and
liabilities are established for the temporary differences between the financial
reporting basis and the tax basis of the Company's assets and liabilities.
Management must assess the reliability of the deferred tax asset and to the
extent that management believes that recovery is not likely, a valuation
allowance is established. Adjustments to increase or decrease the valuation
allowance are charged or credited, respectively, to income tax expense.

COMPARISON OF OPERATING RESULTS FOR THE YEARS ENDED DECEMBER 31, 2000 AND 1999

NET INCOME. Net income increased by $28.3 million to $31.1 million for 2000,
compared to $2.8 million for 1999. The increase in 2000 was attributable to an
increase in net interest income of $18.1 million, an increase in non-interest
income of $4.1 million and a decrease in non-interest expense of $19.9 million
partially offset by an increase in income taxes of $13.9 million.


                                       40
<PAGE>


NET INTEREST INCOME. Net interest income increased $18.1 million or 36.5% to
$67.7 million in 2000 compared to $49.6 million in 1999. Total interest and
dividend income increased $21.6 million to $127.6 million in 2000, as compared
to $106.0 million in 1999. The increase in interest income was primarily due to
a $204.0 million increase in the average daily interest earning assets to $1.78
billion in 2000 from $1.57 billion in 1999 and an increase of 44 basis points in
the weighted average yield on earning assets in 2000. The increase in the
average daily balances was due to the reinvestment of additional capital from
the conversion to a public company, less the capital used to fund purchases of
treasury stock and stock to fund the granting of stock awards. The increase in
yields on interest earning assets was due: (1) in part to management's
investment strategy of moving to higher yielding investments at the end of 1999,
primarily by purchasing a combination of corporate bonds and mortgage-backed
securities with a modest extension in duration in the portfolio and selling
lower yielding investments and mortgage-backed securities and (2) to an increase
in overall rates within the economy. Interest income on loans increased $11.4
million, or 16.3%, to $81.1 million in 2000 compared to $69.7 million in 1999.
This increase was due to a $120.9 million increase in the average daily balance
of loans outstanding, and a 24 basis point increase in the average yield.
Interest income on investments and mortgage-backed securities increased $10.8
million, or 31.0%, over 1999 to $45.6 million. The increase was due to an
increase of $96.8 million in the average balance and a 73 basis point increase
in the weighted average yield. The increase in interest income on loans,
investments and mortgage-backed securities was partially offset by a decrease in
income of $565,000 on federal funds sold to $987,000 compared to $1.6 million in
1999.

Total interest expense for 2000 amounted to $59.9 million, an increase of $3.5
million, or 6.2%, compared to $56.4 million in 1999. Interest on certificates of
deposits and retirement accounts increased by $2.2 million primarily due to an
increase of 39 basis points on the weighted average rate paid on these deposits,
partially offset by a decrease in the average daily balance $15.9 million. The
decrease in average daily balance was primarily in retirement accounts whose
average daily balance decreased by $12.1 million. Interest on deposits, other
than certificates of deposit and retirement accounts, increased $109,000,
primarily due to increases in the average daily balances in 2000 as compared to
1999 offset by a slight decrease in the weighted average rate paid on these
deposits. Interest expense on FHLB advances and other borrowings increased $1.2
million or 11.0% to $11.9 million in 2000 compared to $10.7 million in 1999
primarily due to a $17.0 million increase in the average daily borrowings in
2000 and an 8 basis point increase in the weighted average rate paid.

PROVISION FOR LOAN LOSSES. The provision for loan losses was $1.9 million for
2000, a $135,000 decrease from $2.0 million in 1999. This decrease reflects
management's assessment of the losses inherent in the loan portfolio, as well as
current economic conditions. At December 31, 2000, the allowance for loan losses
was $10.6 million which represented 352.6% of nonperforming loans and 0.92% of
total loans. This compared to the allowance for loan losses of $8.8 million at
December 31, 1999 representing 349.6% of nonperforming loans and 0.85% of total
loans. See Item 1 - "Description of Business - Lending Activities - Allowance
for Loan Losses" for a discussion of the Company's loan loss allowance.

NON-INTEREST INCOME. Non-interest income increased $4.1 million or 51.9% to
$12.1 million for 2000 compared to $8.0 million for 1999. The primary reason for
the increase was a $3.4 million increase on net gains on the sale of securities
to $6.1 million in 2000 compared to $2.6 million in 1999. The sale of securities
was to provide a portion of funds required for the acquisition of treasury stock
and stock in connection with granting of restricted stock, the purchase of BOLI
and to fund loan originations. The net gain on sale of equity securities and
equity mutual funds was $10.1 million in 2000 as compared to $5.7 million in
1999. The increase was offset by net losses of $4.0 million on sale of
mortgage-backed securities and corporate and U. S. Agency bonds. Service charges
and fees increased $626,000 or 18.7% to $4.0 million in 2000 compared to $3.4
million in 1999. The increase was primarily due to increased customer activity
for NOW account services, increased fees resulting from debit card usage,
increased trust fees and increased sale of insurance protection plans covering
certain consumer loans. Investment commissions and advisory fees from the Bank's
financial services subsidiary, American Investment Services, Inc (AIS) increased
by $146,000 or 10.4%, to $1.5 million for 2000 compared to $1.4 million in 1999.
During 2000 AIS began a transition to investment advisory services which will
enable it to grow through recurring investment advisory revenue as opposed to
one-time commissions. It is expected that during the transition, net income from
this activity will be reduced over the next several quarters, but is expected to
generate an ongoing enhanced stream of advisory fee revenue after this period.


                                       41
<PAGE>


NON-INTEREST EXPENSE. Non-interest expense decreased $19.9 million, or 39.0%, to
$31.0 million in 2000 compared to $50.9 million in 1999. The decrease in
non-interest expense was primarily attributable to a decrease of $21.4 million
in charitable contributions. The decrease in charitable contributions is due to
the $21.4 million contribution of Company common stock to the then newly formed
American Savings Charitable Foundation (Charitable Foundation) on November 30,
1999 upon the conversion from a mutual savings bank to a stock savings bank.
There were no contributions made to the American Savings Charitable Foundation
in 2000. Excluding this contribution, non-interest expense increased $2.0
million, or 6.9% from $29.0 million for 1999 to $31.0 million for 2000. This
increase was due to an increase of $856,000 in salaries and employee benefits,
$214,000 in outside services and $644,000 in other expenses. Salaries and
employee benefits expense increased to $18.4 million in 2000 from $17.6 million
in 1999 due primarily to $2.3 million expenses related to stock awards granted
in June 2000, a full year of expense for the Employee Stock Ownership Plan of
$1.8 million and, to a lesser extent, general salary increases. The increase in
salaries and employee benefits were offset by a decrease in the charges related
to the 1999 restructuring of the Company's compensation plans to align them with
other publicly traded financial institutions and holding companies. Other
expenses increased primarily due to expenses related to being a public company
and an increase in insurance premiums paid to the FDIC. Outside services
increased primarily due to additional legal and accounting fees related to the
additional responsibilities of being a public company.

INCOME TAX EXPENSE. Income taxes were $15.7 million for the year ended December
31, 2000 compared to $1.8 million for the year ended December 31, 1999. The
effective tax rate decreased to 33.6% in 2000, from 39.4% in 1999 primarily
because total expenses in 1999 included a relatively high percentage of
non-deductible expenses.


                                       42
<PAGE>


AVERAGE BALANCES, INTEREST AND AVERAGE YIELDS/COST

The following table presents certain information for the periods indicated
regarding average balances of assets and liabilities, as well as the total
dollar amount of interest income on a tax-equivalent basis from average
interest-earning assets and interest expense from interest-bearing liabilities
and the resulting average yields and costs. The yields and costs for the periods
indicated are derived by dividing income or expense by the average balances of
assets or liabilities, respectively, for the periods presented. Average balances
were derived from daily balances and include nonaccrual loans.

<TABLE>
<CAPTION>

------------------------------------------------------------------------------------------------------------------------------------
AVERAGE BALANCE SHEET AND YIELD/RATE ANALYSIS
------------------------------------------------------------------------------------------------------------------------------------
                                                                 FOR THE FISCAL YEARS ENDED DECEMBER 31,
                                               2001                              2000                              1999
                               -------------------------------- ----------------------------------  --------------------------------

                                                        AVERAGE                            AVERAGE                           AVERAGE
                                   AVERAGE               YIELD/     AVERAGE                 YIELD/     AVERAGE               YIELD/
                                   BALANCE    INTEREST    RATE      BALANCE     INTEREST    RATE       BALANCE    INTEREST    RATE
                               -------------------------------- ----------------------------------  --------------------------------
                                                                         (Dollars in thousands)

<S>                             <C>           <C>       <C>      <C>           <C>         <C>      <C>          <C>           <C>
INTEREST-EARNING ASSETS:
 Loans (1)                      $1,192,331    $ 84,319    7.07%  $1,086,721    $  81,075     7.46%  $  965,808   $  69,694     7.22%
 Federal funds sold                 13,084         550    4.20       15,348          987     6.43       30,680       1,552     5.06
 Investment securities-
  taxable (2)                      234,151      17,790    7.60      313,808       21,691     6.91      330,657      19,370     5.86
 Investment securities-
  tax exempt (2)(3)                 28,624       2,437    8.51       22,440        1,289     5.74        2,028         187     9.22
 Mortgage-backed securities (2)    231,020      15,945    6.90      324,600       21,625     6.66      231,411      14,533     6.28
 FHLB stock                         14,602         840    5.75       13,183          999     7.58       11,471         762     6.64
                               ------------  ---------- ------  ------------  -----------  ------  ------------ -----------  ------
   Total interest-
     earning assets              1,713,812    $121,881    7.11%   1,776,100    $ 127,666     7.19%   1,572,055   $ 106,098     6.75%
 Non-interest-earning assets       188,029   ---------- ------      103,102   -----------  ------      100,326  -----------  ------
                               ------------                     ------------                       ------------
 Total assets                   $1,901,841                       $1,879,202                         $1,672,381
                               ============                     ============                       ============

INTEREST-BEARING LIABILITIES:
 Deposits
  Money market accounts         $   84,848    $  2,370    2.79%  $   62,295    $   1,709     2.74%  $   63,240   $   1,766     2.79%
  NOW accounts                      86,205         654    0.76       79,624        1,082     1.36       69,846         946     1.35
  Savings and IRA passbook
   accounts                        213,642       4,142    1.94      202,725        4,101     2.02      201,973       4,071     2.02
  Time deposits                    705,219      37,339    5.29      755,668       41,132     5.44      771,547      38,935     5.05
                               ------------  ---------- ------  ------------  -----------  ------  ------------ -----------  ------
  Total interest-bearing
   deposits                      1,089,914      44,505    4.08    1,100,312       48,024     4.36    1,106,606      45,718     4.13
 FHLB advances and other
   borrowings (4)                  293,894      16,735    5.69      196,141       11,907     6.07      179,134      10,726     5.99
                               ------------  ---------- ------  ------------  -----------  ------  ------------ -----------  ------
  Total interest-bearing
   liabilities                   1,383,808    $ 61,240    4.43%   1,296,453    $  59,931     4.62%  $1,285,740   $  56,444     4.39%
                                             ---------- ------                -----------  ------               -----------  ------
 Non-interest bearing demand
   deposits                         36,107                           25,181                             26,768
 Non-interest-bearing
   liabilities                      47,257                           30,839                             52,612
                               ------------                     ------------                       ------------
  Total liabilities              1,467,172                        1,352,473                          1,365,120
Stockholders' equity               434,669                          526,729                            307,261
                               ------------                     ------------                       ------------
    Total liabilities and
     equity                     $1,901,841                       $1,879,202                         $1,672,381
                               ============                     ============                       ============
 Net interest-earning assets    $  330,004                       $  479,647                         $  286,315
                               ============                     ============                       ============
 Net interest income                          $ 60,641                         $ 67,735                          $  49,654
                                             ==========                       ==========                        ============
 Interest rate spread                                     2.68%                              2.57%                             2.36%
 Net interest margin
  (net interest income
  as a percentage of
    interest-earning assets)                              3.54%                              3.81%                             3.16%
 Ratio of interest-earning
  assets to interest-bearing
  liabilities                                           123.85%                            137.00%                           122.27%
------------------------------------------------------------------------------------------------------------------------------------



(1)  Interest on Loans includes amortization of net deferred cost of $721,845, $751,000 and $502,000 in 2001, 2000 and 1999,
     respectively.
(2)  Average balances and yields are based on amortized costs.
(3)  Tax-exempt interest is calculated on a tax equivalent basis based on a marginal tax rate of 35%.
(4)  Includes mortgagors escrow accounts.
------------------------------------------------------------------------------------------------------------------------------------
</TABLE>


                                       43
<PAGE>


RATE/VOLUME ANALYSIS

The following table presents the effects of changing rates and volumes on the
interest income and interest expense of the Company. The rate column shows the
effects attributable to changes in rate (changes in rate multiplied by prior
volume). The volume column shows the effects attributable to changes in volume
(changes in volume multiplied by prior rate). The net column represents the sum
of the prior columns. For purposes of this table, changes attributable to
changes in both rate and volume have been allocated proportionately based on the
absolute value of the change due to rate and the change due to volume.

<TABLE>
<CAPTION>

------------------------------------------------------------------------------------------------------------------------------------
 RATE/VOLUME ANALYSIS
------------------------------------------------------------------------------------------------------------------------------------
                                                              YEAR ENDED DECEMBER 31, 2001           Year ended December 31, 2000
                                                                 COMPARED TO YEAR ENDED                 compared to year ended
                                                                   DECEMBER 31, 2000                        DECEMBER 31, 1999
                                                      -------------------------------------    -------------------------------------
                                                         INCREASE (DECREASE)                      Increase (Decrease)
                                                               DUE TO                                    Due to
                                                      -----------------------                  ------------------------
                                                         RATE        VOLUME         NET           Rate         Volume         Net
                                                      -----------  -----------    ----------    -----------  -----------  ----------
                                                                                 (Dollars in thousands)
<S>                                                       <C>      <C>            <C>           <C>          <C>           <C>
 INTEREST-EARNING ASSETS:
   Loans                                               $  (4,381)  $    7,625     $   3,244     $    2,423   $    8,958    $11,381
   Federal funds sold                                       (306)        (131)         (437)            74         (639)      (565)
   Investment securities-taxable                           1,985       (5,886)       (3,901)         3,317         (996)     2,321
   Investment securities-tax exempt (1)                      730          418         1,148            (96)       1,198      1,102
   Mortgage-backed securities                                750       (6,430)       (5,680)           930        6,162      7,092
   FHLB stock                                               (259)         100          (159)           115          122        237
                                                      -----------  -----------    ----------    -----------  -----------  ----------
   Total interest-earning assets                          (1,481)      (4,304)       (5,785)         6,763       14,805     21,568
                                                      -----------  -----------    ----------    -----------  -----------  ----------


 INTEREST-BEARING LIABILITIES:
   Money market accounts                                      30          631           661            (30)         (27)       (57)
   NOW accounts                                             (511)          83          (428)             3          133        136
   Savings and IRA
     passbook accounts                                      (173)         214            41             15           15         30
   Time deposits                                          (1,125)      (2,668)       (3,793)         3,011         (814)      2,197
   FHLB advances and other
     borrowings                                             (787)       5,615         4,828            150        1,031       1,181
                                                      -----------  -----------    ----------    -----------  -----------  ----------
       Total interest-bearing liabilities                 (2,566)       3,875         1,309          3,149          338       3,487
                                                      -----------  -----------    ----------    -----------  -----------  ----------
   Increase (decrease) in net interest
     income                                            $   1,085    $  (8,179)     $ (7,094)     $   3,614    $  14,467    $ 18,081
                                                      ===========  ===========    ==========    ===========  ===========  ==========

------------------------------------------------------------------------------------------------------------------------------------

(1) Tax exempt interest is calculated on a tax equivalent basis.
------------------------------------------------------------------------------------------------------------------------------------
</TABLE>


                                       44
<PAGE>


LIQUIDITY AND CAPITAL RESOURCES

Liquidity is the ability to meet current and future short-term financial
obligations. The Company further defines liquidity as the ability to respond to
the needs of depositors and borrowers as well as maintaining the flexibility to
take advantage of investment opportunities. The Company's primary sources of
funds consist of deposit inflows, loan repayments, maturities, paydowns, and
sales of investment and mortgage-backed securities, borrowings from the Federal
Home Loan Bank, and repurchase agreements. While maturities and scheduled
amortization of loans and securities are predictable sources of funds, deposit
outflows and mortgage prepayments are greatly influenced by general interest
rates, economic conditions and competition.

The primary investing activities of the Company are (1) the origination of
residential one-to four-family mortgage loans and, to a lesser extent,
multi-family loans, single-family construction loans, and home equity loans and
lines of credit and consumer loans and (2) the investment in mortgage-backed
securities, U.S. Government and agency obligations and corporate equity
securities and debt obligations. These activities are funded primarily by
principal and interest payments on loans, maturities and sales of securities,
deposit growth and Federal Home Loan Bank advances. At December 31, 2001 and
2000, the Company's loans totaled $1.21 billion, and $1.15 billion,
respectively. At December 31, 2001 and 2000, the Company's investments in
mortgage-backed securities, U.S. Government and agency obligations and corporate
equity securities and debt obligations totaled $536.4 million and $606.5
million, respectively. During 2001, proceeds from the sale of investment
securities and mortgage-backed securities were used to fund growth in the loan
portfolio. The Company experienced a net decrease in total deposits of $2.1
million for the year ended December 31, 2001. Deposit flows are affected by the
overall level of interest rates, the interest rates and products offered by the
Company and its local competitors and other factors. The Company increased its
advances from the Federal Home Loan Bank in 2001 by approximately $133 million,
the proceeds of which were used to fund repurchases of the Company's stock. The
Company closely monitors its liquidity position on a daily basis. If the Company
should require funds beyond its ability to generate them internally, additional
sources of funds are available through Federal Home Loan Bank advances and
through repurchase agreement borrowing facilities with U. S. Government and
Agency security broker dealers.

Outstanding commitments for all loans and unadvanced construction loans and
lines of credit totaled $366.6 million at December 31, 2001. Management of the
Company anticipates that it will have sufficient funds available to meet its
current loan commitments. Certificates of deposit that are scheduled to mature
in one year or less from December 31, 2001 totaled $515.8 million. The Company
relies primarily on competitive rates, customer service, and long-standing
relationships with customers to retain deposits. From time to time, the Company
will also offer special competitive promotions to its customers to increase
retention and promote deposit growth. Based upon the Company'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 Company. During 2001 the Company
repurchased 6,285,334 shares of common stock at a cost of $138.4 million. The
effect of the repurchase of common stock is to reduce the level of capital which
also decreases the capital ratio's which are discussed in the following
paragraph.

The Company purchased 6.2 million shares in 2001 for a total cost of $136.5
million. This reduction in capital was replaced primarily with FHLB borrowing.
Prior to the company implementing a buyback program, management considers not
only the impact on earnings per share but also liquidity, or the company's
ability to meet its loan obligations and deposit withdrawals. The analysis of
the impact on earnings per share fully incorporates a rise in the company's
interest expense resulting from the replacement of capital with borrowings. The
impact on liquidity is measured by determining the amount of the Company's
liquid assets and the amount of short-term obligations that could result under a
worst-case scenario. The Company defines liquid assets as cash and due from
banks (net of float and reserves), overnight investments (e.g. federal funds),
anticipated prepayments and maturity of investment securities and
mortgage-backed obligations maturing in the next 30 days and the amount of U.S.
agency notes and mortgage-backed securities that can be used to execute
repurchase agreements. At December 31, 2001, the company had $257.6 million in
liquid assets. The company defines short-term liabilities as federal funds
purchased, FHLB borrowings and repurchase agreements maturing within the next 30
days, an amount representing 28% of CDs maturing within the next 30 days and an
amount representing 10% of non-maturity deposits. Management believes that the
non-renewal of 28% of the company's CDs and a 10% reduction in core deposits are


                                       45
<PAGE>


conservative assumptions based on historical deposit flow patterns. At December
31, 2001, the company had $56.2 million in short-term obligations, resulting in
a ratio of liquid assets to short-term obligations of 4.6 times.

The Company has broker/dealer repurchase agreement lines of $400 million of
which $10 million is currently outstanding. Additionally, the Company has a $631
million borrowing facility with the FHLB of Boston of which $301 million was
outstanding at December 31, 2001. The amount of this borrowing facility is
determined by the amount of eligible collateral, which primarily includes the
Company's one-to four-family residential mortgage loans.

The Bank is subject to various regulatory capital requirements administered by
the federal banking agencies including a risk-based capital measure. The
risk-based capital guidelines include both a definition of capital and a
framework for calculating risk-weighted assets by assigning balance sheet assets
and off-balance sheet items to broad risk categories. At December 31, 2001, the
Bank exceeded all of its regulatory capital requirements with (1) a leverage
capital level of $328.5 million, or 17.7% of average assets, which is above the
required level of $76.8 million, or 4.0%, and (2) total risk-based capital of
$361.7 million, or 31.3% of risk weighted assets, which is above the required
level of $92.4 million, or 8.0%. The Bank is considered "well capitalized" under
regulatory guidelines. On a consolidated basis at December 31, 2001, the Company
had total stockholders' equity of $394.9 million, or 20.7% of total assets.

IMPACT OF INFLATION AND CHANGING PRICES

The consolidated financial statements and related data presented in this filing
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.

IMPACT OF NEW ACCOUNTING STANDARDS

Statement of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities," addresses the accounting for derivative
instruments, including certain derivative instruments embedded in other
contracts and hedging activities. As amended, the statement is effective for all
fiscal quarters of all fiscal years beginning after June 15, 2000. On that date,
hedging relationships shall be designed in accordance with the statement. This
statement did not affect the Company because it does not currently purchase
derivative instruments or enter into hedging activities.

In July 2001, the Financial Accounting Standards Board ("FASB") issued 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, will be 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, will be applied by the Company's
acquisition of American Bank of Connecticut, effective January 2002 (See note
17). The Company does not have any material intangible assets on its balance
sheet at December 31, 2001. Therefore, the adoption of SFAS No. 142 will not
have any material impact on consolidated financial statements.

In August 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement
Obligations". This statement 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


                                       46
<PAGE>

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 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.

In October 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets." This statement supersedes SFAS No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed Of." This statement requires that one accounting model be used for
long-lived assets to be disposed of. SFAS No. 144 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 Company does not expect that the adoption of this
statement will have a material impact on its consolidated financial statements.

ITEM 7A.    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
-------

MANAGEMENT OF INTEREST RATE RISK AND MARKET RISK ANALYSIS

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 Director's approved guidelines. The Company has an Asset/Liability
Committee, responsible for reviewing its asset/liability policies and interest
rate risk position, which meets monthly and reports trends and interest rate
risk position to the Finance Committee of the Board of Directors quarterly and
the whole Board of Directors annually. The extent of the movement of interest
rates is an uncertainty that could have a negative impact on the earnings of the
Company.

In recent years, the Company has used the following strategies to manage
interest rate risk: (1) emphasizing the origination of adjustable-rate loans and
generally selling longer term fixed-rate loans as market interest rate
conditions dictate; (2) emphasizing shorter term consumer loans; (3) maintaining
a high quality securities portfolio that provides adequate liquidity and
flexibility to take advantage of opportunities that may arise from fluctuations
in market interest rates, the overall maturity of which is monitored in relation
to the repricing of its loan portfolio; and (4) using Federal Home Loan Bank
advances and repurchase agreement borrowings 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 Company's
marketable equity securities portfolio had gross unrealized gains of $51.2
million at December 31, 2001 which is included, net of taxes, in accumulated
other comprehensive income, a separate component of the Company's stockholders'
equity. If equity security prices decline due to unfavorable market conditions
or other factors, the Company's stockholders' equity would decrease.

QUANTITATIVE ASPECTS OF MARKET RISK. The Company uses a simulation model to
measure the potential change in net interest income, incorporating various
assumptions regarding the shape of the yield curve, the pricing characteristics
of loans, deposits and borrowings, prepayments on loans and securities and
changes in balance sheet mix. The assumptions that have the greatest impact on
the estimated changes in annual net interest income are prepayment assumptions
on mortgage loans and securities. The table below sets forth, as of December 31,
2001 and 2000 estimated changes in the Company's net interest income for the
next twelve month period which may result given instantaneous increases in
market interest rates of 200 basis points and instantaneous decreases in market
rates of 100 basis points. A rate shock decrease of 100 basis points is used due
to the current low level of interest rates. A rate shock decrease of 200 basis
points would result in a negative rate.


                                       47
<PAGE>


If interest rates instantaneously increased 200 basis points, the average
constant prepayment rate (the "CPR") assumptions on mortgage loans and
securities, including Collateralized Mortgage Obligations ("CMO") and
Mortgage-backed Securities ("MBS"), were 13.66% and 13.51% on December 31, 2001
and 2000, respectively. If interest rates instantaneously decreased 100 basis
points, the CPR prepayment assumptions were 24.78% and 21.40% on December 30,
2001 and 2000, 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, instantaneously increased
200 basis points and decreased 50 basis points if interest rate instantaneously
decreased 100 basis points. At December 31, 2000, the rates paid on non-maturity
deposits (savings, money management and NOW accounts) were assumed not to change
under either interest rate environment.

<TABLE>
<CAPTION>

-------------------------------------------------------------------------------------------------------------------
                           ESTIMATED INCREASE/(DECREASE) IN ANNUAL NET INTEREST INCOME
-------------------------------------------------------------------------------------------------------------------


                  Increase/                      Estimated Changes in Annual Net Interest Income
                                                 -----------------------------------------------
                  (Decrease)                            December 31, 2001                    December 31, 2000
                                                        -----------------                    -----------------
                                                                  (Dollars in thousands)
<S>               <C>                              <C>                   <C>             <C>                 <C>
                  in market
                  interest rates
                  in basis points                     $                   %                $                   %
                  (rate shock)                      CHANGE              CHANGE           Change             Change
                  ------------------------------------------------------------------------------------------------

                  200                              $ 2,953               4.28%           $  178              0.27%

                  (100)                            $(2,906)             (4.80)%          $ (960)            (1.45)%
-------------------------------------------------------------------------------------------------------------------
</TABLE>


Comparing the changes in net interest income on December 31, 2001 and 2000,
under a down 100 basis point environment the estimated decrease in net interest
income rose by $1.9 million from ($1.0 million) to ($2.9 million).
Correspondingly, under an up 200 basis point environment, the estimated increase
in net interest income rose by $2.8 million from $178,000 to $3.0 million. These
changes are attributable to an increase in asset rate sensitivity, which
resulted from the growth of short-term assets and increased prepayment speeds
for mortgage loans and mortgage-backed securities.

ITEM 8.      FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
------

For the Company's Consolidated Financial Statements, see index on page 52.

ITEM 9.     CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
------      FINANCIAL DISCLOSURE

None.

                                    PART III

ITEM 10.   DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
-------

For information concerning the directors of American Financial Holdings, Inc.,
the information contained under the sections captioned "Proposal I - Election of
Directors" in American Financial Holdings, Inc.'s Proxy Statement dated March
27, 2002 is incorporated by reference. For information concerning officers of
the Company, reference is made to Part I, Item 1, "Business--Executive Officers
of the Registrant" in this report. Reference is made to the cover page of this
report and to the section captioned "Section 16 (a) Beneficial Ownership
Reporting Compliance" in this Proxy Statement for information regarding
compliance with Section 16(a) of the Exchange Act.


                                       48
<PAGE>


ITEM 11.   EXECUTIVE COMPENSATION
-------

The information contained under the heading "Executive Compensation" and
"Directors Compensation" in American Financial Holdings, Inc.'s Proxy Statement
dated March 27, 2002, with respect to executive compensation, is incorporated
herein by reference in response to this item.

ITEM 12.   SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
-------

The information contained under the heading "Stock Ownership" in American
Financial Holdings, Inc.'s Proxy Statement dated March 27, 2002, with respect to
security ownership of certain beneficial owners and management is incorporated
herein by reference in response to this item.

ITEM 13.   CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
-------

The information contained under the heading "Transactions with Management" in
American Financial Holdings, Inc.'s Proxy Statement dated March 27, 2002, with
respect certain relationships and related transactions is incorporated herein by
reference in response to this item.

                                     PART IV

ITEM 14.     EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
-------

(A)   (1) FINANCIAL STATEMENTS

      The following consolidated financial statements of the Bank and its
      subsidiaries are filed as part of this document under Item 8:

      -  Independent Auditors' Report
      -  Consolidated Balance Sheets at December 31, 2001 and 2000
      -  Consolidated Statements of Income for the Years Ended December 31,
         2001, 2000 and 1999
      -  Consolidated Statements of Stockholders' Equity for the Years Ended
         December 31, 2001, 2000 and 1999
      -  Consolidated Statements of Cash Flows for Years Ended December 31,
         2001, 2000 and 1999
      -  Notes to Consolidated Financial Statements

(2)      FINANCIAL STATEMENT SCHEDULES

         Financial Statement Schedules have been omitted because they are not
         applicable or the required information is shown in the Consolidated
         Financial Statements or notes thereto.

(B)      REPORTS ON FORM 8-K FILED DURING THE LAST QUARTER OF 2001

         On December 6, 2001, the Company filed a Form 8-K in which it disclosed
         that it had reached an agreement with William E. Solberg, the former
         President, Chief Executive Officer of American Bank of Connecticut, on
         the terms of his employment with the Company and American Savings Bank
         following the merger. A summary of the proposed items of Mr. Solberg's
         employment was included in the filing.


                                       49
<PAGE>



(C)      EXHIBITS REQUIRED BY SECURITIES AND EXCHANGE COMMISSION REGULATION S-K

         Exhibit
         Number
         -------

         2.1   Agreement and Plan of Merger, dated as of July 18, 2001 by and
               among American Financial Holdings, Inc., American Savings Bank
               and American Bank of Connecticut (1)
         3.1   Certificate of Incorporation of American Financial Holdings,
               Inc. (2)
         3.2   Bylaws of American Financial Holdings, Inc.
         4.0   Draft Stock Certificate of American Financial Holdings, Inc. (2)
         10.1  Employment Agreement between American Savings Bank and Robert T.
               Kenney (3)
         10.2  Employment Agreement between American Savings Bank and Charles J.
               Boulier III (3)
         10.3  Employment Agreement between American Savings Bank and Peter N.
               Perugini (3)
         10.4  Employment Agreement between American Savings Bank and Sheri C.
               Pasqualoni (3)
         10.5  Employment Agreement between American Savings Bank and Richard J.
               Moore (3)
         10.6  Employment Agreement between American Financial Holdings, Inc.
               and Robert T. Kenney (3)
         10.7  Employment Agreement between American Financial Holdings, Inc.
               and Charles J. Boulier III (3)
         10.8  Employment Agreement between American Financial Holdings, Inc.
               and Peter N. Perugini (3)
         10.9  Employment Agreement between American Financial Holdings, Inc.
               and Sheri C. Pasqualoni (3)
         10.10 Employment Agreement between American Financial Holdings, Inc.
               and Richard J. Moore (3)
         10.11 Form of American Savings Bank Employee Severance Compensation
               Plan (2)
         10.12 Form of American Savings Bank Supplemental Executive Retirement
               Plan (2)
         10.13 Form of American Savings Bank Directors' Retirement Plan (2)
         10.14 Form of Deferred Compensation Plans (2)
         10.15 American Savings Bank 401(k) Plan (2)
         10.16 Form of American Savings Bank Supplemental Retirement Plan for
               Chief Executive Officer (2)
         10.17 American Financial Holdings, Inc. 2000 Stock-Based Incentive
               Plan (4)
         11.0  Statement Re: Computation of Per Share Earnings
               Incorporated-Herein By Deference to Footnote 11 of the
               Consolidated Financial Statements
         21.0  Subsidiaries Information Incorporated-Herein By Reference to
               Part I - Subsidiaries
         23.1  Consent of KPMG LLP
----------------------------

         (1)   Incorporated by reference into this document from the Exhibits to
               the Form 8-K filed on July 24, 2001 (Commission File No. 0-27399)
         (2)   Incorporated by reference into this document from the Exhibits
               filed with the Registration Statement on
               Form S-1, and any amendments thereto, Registration No. 333-84463.
         (3)   Incorporated by reference into this document from the Exhibits
               filed with the Form 10-K on March 29, 2000, (Commission File No.
               0-27399).
         (4)   Incorporated by reference into this document from Appendix A to
               the Proxy Statement filed on April 24, 2000 (Commission File No.
               0-27399).


                                       50
<PAGE>


SIGNATURES
----------

Pursuant to the requirements of Section 13 or 15 (d) 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.
---------------------------------

   /s/ Robert T. Kenney                                     Date: March 19, 2002
   --------------------
     Robert T. Kenney
     Chairman, President and Chief Executive Officer

Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated:

    /s/ Robert T. Kenney                                    Date: March 19, 2002
    --------------------
     Robert T. Kenney
     Chairman, President and Chief Executive Officer
     (principal executive officer)

    /s/ Charles J. Boulier III                              Date: March 19, 2002
    --------------------------
     Charles J. Boulier III
     Senior Executive Vice President, Treasurer
     and Chief Financial Officer
     (principal accounting officer)

    /s/ Marie S. Gustin                                     Date: March 19, 2002
    -------------------
     Marie S. Gustin
     Director

    /s/ Fred M. Hollfelder                                  Date: March 19, 2002
    ----------------------
     Fred M. Hollfelder
     Director

    /s/ Gregory B. Howey                                    Date: March 19, 2002
    --------------------
     Gregory B. Howey
     Director

    /s/ Mark E. Karp                                        Date: March 19, 2002
    ----------------
     Mark E. Karp
     Director

    /s/ Steven T. Martin                                    Date: March 19, 2002
    --------------------
     Steven T. Martin
     Director

    /s/ Harry N. Mazadoorian                                Date: March 19, 2002
    ------------------------
     Harry N. Mazadoorian
     Director

    /s/ Laurence A. Tanner                                  Date: March 19, 2002
    ----------------------
     Laurence A. Tanner
     Director

    /s/ Jeffrey T. Witherwax                                Date: March 19, 2002
    ------------------------
     Jeffrey T. Witherwax
     Director


                                       51
<PAGE>


                      CONSOLIDATED FINANCIAL STATEMENTS OF
                        AMERICAN FINANCIAL HOLDINGS, INC.


                                      INDEX

                                                                           Page

Independent Auditors' Report                                                53
Consolidated Balance Sheets as of December 31, 2001, 2000 and 1999          54
Consolidated Statements of Income for the Years Ended
    December 31, 2001, 2000, and 1999                                       55
Consolidated Statements of Stockholders' Equity for the Years Ended
    December 31, 2001, 2000 and 1999                                        56
Consolidated Statements of Cash Flows for the Years Ended
    December 31, 2001, 2000, and 1999                                       57
Notes to Consolidated Financial Statements                                  58
















                                       52
<PAGE>




[logo] KPMG
                    One Financial Plaza                   Telephone 860 522 3200
                    Hartford, CT 06103-2608               Fax 860 297 5555



                          INDEPENDENT AUDITORS' REPORT

The Board of Directors
American Financial Holdings, Inc.:


We have audited the accompanying consolidated balance sheets of American
Financial Holdings, Inc. and Subsidiaries as of December 31, 2001 and 2000, and
the related consolidated statements of income, 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 Company'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 Financial
Holdings, Inc. 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.

/s/KPMG LLP
-------------------
   KPMG LLP

Hartford, Connecticut
January 29, 2002

                                       53
<PAGE>

                           AMERICAN FINANCIAL HOLDINGS, INC.

                              Consolidated Balance Sheets

                              December 31, 2001 and 2000

<TABLE>
<CAPTION>


ASSETS                                                                                       2001                        2000
                                                                                        --------------             ---------------
                                                                                           (In thousands, except per share data)
<S>                                                                                        <C>                          <C>

Cash and due from banks (note 2):
    Non-interest bearing                                                                    $ 20,903                    $ 17,293
    Interest bearing                                                                           1,230                          21
                                                                                        --------------             ---------------
                                                                                              22,133                      17,314
Federal funds sold                                                                            17,050                      11,740
                                                                                        --------------             ---------------
    Cash and cash equivalents                                                                 39,183                      29,054

Investment securities available for sale, at fair value (note 3)                             311,293                     351,211
Mortgage-backed securities available for sale, at fair value (note 3)                        225,101                     255,270
Loans receivable, net (note 4)                                                             1,214,847                   1,151,048
Accrued interest and dividends receivable                                                     11,120                      13,012
Federal Home Loan Bank stock (note 7)                                                         17,279                      12,194
Bank premises and equipment, net (note 5)                                                     13,490                      13,348
Cash surrender value of life insurance                                                        63,144                      45,022
Real estate owned                                                                                 77                         211
Other assets                                                                                   5,062                       3,088
                                                                                        --------------             ---------------

    TOTAL ASSETS                                                                         $ 1,900,596                 $ 1,873,458
                                                                                        ==============             ===============


LIABILITIES AND STOCKHOLDERS' EQUITY


Deposits (note 6)                                                                        $ 1,124,249                 $ 1,126,336
Mortgagors' escrow and other deposits                                                         27,505                      19,554
Federal Home Loan Bank advances and other borrowings (note 7)                                311,444                     177,944
Deferred income tax liability (note 10)                                                       19,321                      24,280
Accrued interest payable on deposits and borrowings                                            1,855                       1,622
Other liabilities                                                                             21,275                       9,755
                                                                                        --------------             ---------------

    TOTAL LIABILITIES                                                                      1,505,649                   1,359,491
                                                                                        --------------             ---------------

Commitments and contingencies (notes 5 and 12)

Stockholders' Equity (note 8):
    Preferred stock, $.01 par value; authorized 10,000,000 shares,
    none issued                                                                                   -                           -
    Common stock, $.01 par value; authorized 120,000,000 shares;
    issued 28,871,100 shares at December 31, 2001 and 2000                                       289                         289
    Additional paid-in capital                                                               285,953                     282,676
    Unallocated common stock held by ESOP (2,014,958 shares at
    December 31, 2001 and 2,133,484 shares at December 31, 2000) (note 9)                    (22,386)                    (23,703)
    Stock-based compensation (note 9)                                                           (266)                        (78)
    Treasury stock, at cost including issues acquired and awarded as
    restricted stock at cost (9,120,791 shares at December 31, 2001
    and 3,198,395 shares at December 31, 2000)                                              (188,746)                    (56,707)
    Retained earnings                                                                        278,315                     263,452
    Accumulated other comprehensive income (note 13)                                          41,788                      48,038
                                                                                        --------------             ---------------

    TOTAL STOCKHOLDERS' EQUITY                                                               394,947                     513,967
                                                                                        --------------             ---------------

    TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY                                           $ 1,900,596                 $ 1,873,458
                                                                                        ==============              ==============
See accompanying notes to consolidated financial statements.
</TABLE>



                                       54
<PAGE>

                        AMERICAN FINANCIAL HOLDINGS, INC.

                       CONSOLIDATED STATEMENTS OF INCOME

                  YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999

<TABLE>
<CAPTION>

                                                                                 2001                 2000              1999
                                                                              ----------           ----------         ---------
                                                                                       (In thousands, except per share data)
<S>                                                                           <C>                  <C>                <C>
INTEREST AND DIVIDEND INCOME:
   Real estate mortgage loans                                                 $   60,025           $  55,370          $  48,366
   Commercial loans                                                                  117                   1                -
   Consumer loans                                                                 24,177              25,704             21,328
   Mortgage-backed securities                                                     15,945              21,625             14,533
   Federal funds sold                                                                550                 987              1,552
   Investment securities:
      Interest-taxable                                                            14,732              19,404             17,770
      Interest-tax exempt                                                          1,584               1,246                122
      Dividends                                                                    3,898               3,286              2,362
                                                                              -----------          ----------         ----------
        Total interest and dividend income                                       121,028             127,623            106,033
                                                                              -----------          ----------         ----------

INTEREST EXPENSE:
   Deposits (note 6)                                                              44,505              48,024             45,718
   Federal Home Loan Bank advances                                                15,800              11,189             10,215
   Other borrowings                                                                  935                 718                511
                                                                              -----------          ----------         ----------
      Total interest expense                                                      61,240              59,931             56,444
                                                                              -----------          ----------         ----------


      Net interest income before provision for loan losses                        59,788              67,692             49,589
   Provision for loan losses (note 4)                                                450               1,895              2,030
                                                                              -----------          ----------         ----------
      Net interest income after provision for loan losses                         59,338              65,797             47,559
                                                                              -----------          ----------         ----------

NON-INTEREST INCOME:
   Service charges and fees                                                        5,190               3,977              3,351
   Investment commissions and advisory fees                                        1,695               1,545              1,399
   Net gain on sale of securities (note 3)                                         8,212               6,068              2,641
   Gain on contribution of investment securities (note 3)                              -                  -                 209
   Increase in cash surrender value of life insurance                              3,122                  21                 -
   Other                                                                             435                 483                363
                                                                              -----------          ----------         ----------
      Total non-interest income                                                   18,654              12,094              7,963
                                                                              -----------          ----------         ----------

NON-INTEREST EXPENSE:
   Salaries and employee benefits (note 9)                                        22,508              18,441             17,585
   Occupancy expense                                                               2,576               2,380              2,475
   Furniture and fixture expense                                                   1,750               1,706              1,814
   Charitable contributions (note 14)                                                 65                  46             21,458
   Advertising                                                                     1,422               1,371              1,352
   Outside services                                                                2,785               2,816              2,602
   Other                                                                           4,940               4,286              3,642
                                                                              -----------          ----------         ----------
      Total non-interest expense                                                  36,046              31,046             50,928
                                                                              -----------          ----------         ----------

   Income before income taxes                                                     41,946              46,845              4,594

   Income taxes (note 10)                                                         13,316              15,719              1,811
                                                                              -----------          ----------         ----------

      NET INCOME                                                              $   28,630           $  31,126          $   2,783
                                                                              ===========          ==========         ==========

NET INCOME PER COMMON SHARE (NOTE 11)
   Basic                                                                      $     1.40           $    1.19               nm
   Diluted                                                                          1.33                1.18               nm
</TABLE>


See accompanying notes to consolidated financial statements.

                                       55
<PAGE>

                        AMERICAN FINANCIAL HOLDINGS, INC.

                 Consolidated Statements of Stockholders' Equity

                  Years ended December 31, 2001, 2000 and 1999


<TABLE>
<CAPTION>
                                                                                     UNALLOCATED
                                                                     ADDITIONAL         COMMON
                                                      COMMON          PAID-IN         STOCK HELD             STOCK-BASED
                                                       STOCK          CAPITAL          BY ESOP               COMPENSATION
                                                     ----------      -------------    -------------          --------------
<S>                                                  <C>            <C>               <C>                    <C>


BALANCE, DECEMBER 31, 1998                          $       --      $         --     $         --           $          --
                                                     ----------      ------------     ------------           --------------
Issuance of common stock pursuant to
 initial stock offering (note 1)                           268          260,718                --                      --
Issuance of common stock to Charitable
 Foundation (note 14)                                       21           21,365                --                      --
Unallocated ESOP shares (note 9)                            --               --           (25,661)                     --
Allocation of ESOP shares (note 9)                          --               65               641                      --
Shares acquired for stock-based
 compensation plans (note 9)                                --               --                --                  (1,755)
Stock-based deferred compensation
 obligation (note 9)                                        --               --                --                   1,595

Comprehensive income (loss):
   Net income                                               --               --                --                      --
   Other comprehensive income (loss), net of tax:
     Net unrealized loss on available for
     sale securities net of reclassification
      adjustment (note 13)                                  --               --                --                      --
    Total comprehensive income (loss)
                                                     ----------      ------------     ------------           --------------

BALANCE, DECEMBER 31, 1999                                 289          282,148           (25,020)                    (160)
                                                     ----------      ------------     ------------           --------------
Treasury shares acquired (note 8)                           --               --                --                       --
Treasury shares acquired under stock
    repurchase programs and awarded as
    restricted stock (note 9)                               --               --                --                       --
Dividends declared ($0.45 per share)                        --               --                --                       --
Allocation of ESOP shares (note 9)                          --              528             1,317                       --
Stock-based deferred compensation obligation
    (note 9)                                                --               --                --                       82

Comprehensive income:
   Net income                                               --               --                --                       --
   Other comprehensive income, net of tax:
      Net unrealized gain on available for
       sale securities net of reclassification
       adjustment (note 13)                                 --               --                --                       --
   Total comprehensive income
                                                     ----------      ------------     ------------           --------------

BALANCE, DECEMBER 31, 2000                                 289           282,676          (23,703)                     (78)
                                                     ----------      ------------     ------------           --------------
Treasury shares acquired (note 8)                           --               --                --                       --
Net shares issued for exercise of options and
   release of restricted stock                              --              154                --                       --
Payout of stock deferred compensation                       --               (3)               --                       --
Immediate vesting of options                                --            1,698                --                       --
Dividends declared ($0.66 per share)                        --               --                --                       --
Allocation of ESOP shares (note 9)                          --            1,428             1,317                       --
Stock-based deferred compensation obligation
 (note 9)                                                   --               --                --                     (188)

Comprehensive income:
   Net income                                               --               --                --                       --
   Other comprehensive income, net of tax:
      Net unrealized loss on available for
       sale securities loss of reclassification
       adjustment (note 13)                                 --               --                --                       --
   Total comprehensive income

                                                     ----------      ------------     ------------           --------------
BALANCE, DECEMBER 31, 2001                          $      289      $    285,953     $    (22,386)          $         (266)
                                                     ==========      ============     ============           ==============

See accompanying notes to consolidated financial statements.


<CAPTION>


                                                                                       ACCUMULATED
                                                                                           OTHER                 TOTAL
                                                     TREASURY         RETAINED         COMPREHENSIVE          STOCKHOLDERS'
                                                       STOCK          EARNINGS            INCOME                EQUITY
                                                     ----------      -------------    -------------          --------------

             (In thousands, except per share data)
<S>                                                  <C>            <C>               <C>                    <C>




BALANCE, DECEMBER 31, 1998                          $       --       $   241,224     $     39,760            $     280,984
                                                     ----------      -------------    -------------          --------------

Issuance of common stock pursuant to
 initial stock offering (note 1)                            --                --               --                  260,986
Issuance of common stock  to Charitable
 Foundation (note 14)                                       --                --               --                   21,386
Unallocated ESOP shares (note 9)                            --                --               --                  (25,661)
Allocation of ESOP shares (note 9)                          --                --               --                      706
Shares acquired for stock-based
 compensation plans (note 9)                                --                --               --                   (1,755)
Stock-based deferred compensation
 obligation (note 9)                                        --                --               --                    1,595

Comprehensive income (loss):
   Net income                                               --             2,783               --                   2,783
   Other comprehensive income (loss), net of tax:
    Net unrealized loss on available for
     sale securities
    net of reclassification adjustment
    (note 13)                                               --                --           (9,572)                  (9,572)
                                                                                                             --------------
   Total comprehensive income (loss)                                                                                (6,789)
                                                     ----------      -------------    -------------          --------------
BALANCE, DECEMBER 31, 1999                                  --           244,007           30,188                   531,452
                                                     ----------      -------------    -------------          --------------

Treasury shares acquired (note 8)                      (38,675)               --               --                  (38,675)
Treasury shares acquired under stock
   repurchase programs and awarded as
    restricted stock (note 9)                          (18,032)               --               --                  (18,032)
Dividends declared ($0.45 per share)                        --           (11,681)              --                  (11,681)
Allocation of ESOP shares (note 9)                                            --               --                    1,845
Stock-based deferred compensation obligation
    (note 9)                                                --                --               --                       82

Comprehensive income:
   Net income                                               --            31,126               --                   31,126
   Other comprehensive income, net of tax:
    Net unrealized gain on available for
      sale securities net of reclassification
      adjustment (note 13)                                  --                --           17,850                   17,850
                                                                                                             --------------
   Total comprehensive income                                                                                       48,976
                                                     ----------      -------------    -------------          --------------

BALANCE, DECEMBER 31, 2000                             (56,707)          263,452           48,038                  513,967
                                                     ----------      -------------    -------------          --------------
Treasury shares acquired (note 8)                     (138,373)               --              --                  (138,373)
Net shares issued for exercise of options and
   release of restricted stock                           6,334                --              --                     6,488
Payout of stock deferred compensation                       --                --              --                        (3)
Immediate vesting of options                                --                --              --                     1,698
Dividends declared ($0.66 per share)                        --           (13,767)             --                   (13,767)
Allocation of ESOP shares (note 9)                          --                --              --                     2,745
Stock-based deferred compensation obligation
    (note 9)                                                --                --              --                      (188)

Comprehensive income:
   Net income                                               --            28,630              --                    28,630
   Other comprehensive income, net of tax:
      Net unrealized loss on available for
       sale securities loss of reclassification
       adjustment (note 13)                                 --                --           (6,250)                  (6,250)
                                                                                                             --------------
   Total comprehensive income                                                                                       22,380
                                                     ----------      -------------    -------------          --------------
BALANCE, DECEMBER 31, 2001                          $ (188,746)     $    278,315     $     41,788           $      394,947
                                                     ==========      =============    =============          ==============
</TABLE>
                                       56
<PAGE>

                        AMERICAN FINANCIAL HOLDINGS, INC.

                      Consolidated Statements of Cash Flows

                  Years ended December 31, 2001, 2000 and 1999

<TABLE>
<CAPTION>

                                                                                         2001              2000            1999
                                                                                   ------------        ------------     ----------
                                                                                                      (In thousands)
<S>                                                                               <C>                 <C>             <C>
OPERATING ACTIVITIES:
    Net income                                                                    $     28,630        $     31,126     $    2,783
    Adjustments to reconcile net income to net cash provided by
      operating activities:
          Provision for loan losses                                                        450               1,895          2,030
          ESOP expense                                                                   2,745               1,845            706
          Depreciation and amortization of bank premises and equipment                   2,003               1,957          2,073
          Accretion of discounts                                                        (1,688)             (1,342)          (622)
          Decrease (increase) in accrued interest and dividends receivable               1,892               1,453         (3,270)
          Gain on sale/contribution of investment securities                            (8,212)             (6,068)        (2,850)
          (Increase) decrease deferred income taxes                                       (816)                607         (5,630)
          Increase in cash surrender value of life insurance                            (3,122)                (22)             -
          (Increase) decrease in other assets                                           (1,974)                988         (1,429)
          Increase in other liabilities                                                 11,755               2,208          1,198
          (Increase) decrease in net deferred loan origination costs                    (1,639)                272         (2,282)
          Net gain on sale of loans                                                        (25)                 (5)           (59)
          Issuance of common stock to Charitable Foundation                                  -                   -         21,365
          Loss on disposal of fixed assets                                                  26                   -              -
          Net gain on sale of real estate owned                                           (188)               (234)          (384)
                                                                                   ------------        ------------     ----------
            Net cash provided by operating activities                                   29,837              34,680         13,629
                                                                                   ------------        ------------     ----------

INVESTING ACTIVITIES:
    Investment securities available for sale:
      Purchases                                                                        (28,733)            (92,205)      (357,884)
      Proceeds from sales                                                               26,886              83,379         64,695
      Proceeds from maturities                                                          37,000             120,600        270,500
    Mortgage-backed securities available for sale:
      Purchases                                                                        (10,100)            (14,527)      (276,383)
      Proceeds from sales                                                                2,532              76,267         46,231
      Principal paydowns                                                                42,007              34,356         50,649
    (Purchases) redemptions of Federal Home Loan Bank stock                             (5,085)              4,208         (7,005)
    Proceeds from sales of loans                                                        10,725                 773         11,250
    Net increase in loans (originations less repayments)                               (73,867)           (124,922)      (134,699)
    Net purchases of bank premises and equipment                                        (2,171)             (1,932)        (2,562)
    Proceeds from the sales of real estate owned                                           879                 938          2,145
    Purchase of single premium bank owned life insurance                               (15,000)            (45,000)             -
                                                                                   ------------        ------------     ----------
          Net cash (used) provided by investing activities                             (14,927)             41,935       (333,063)
                                                                                   ------------        ------------     ----------

FINANCING ACTIVITIES:
    Net (decrease) increase in deposits                                                 (2,087)             25,834        (24,873)
    Increase (decrease) in mortgagors' escrow and other deposits                         7,951                 803        (10,297)
    Advances from the Federal Home Loan Bank                                           188,500             228,000         99,500
    Repayments of advances from the Federal Home Loan Bank                             (55,000)           (274,500)        (5,300)
    Borrowings under repurchase agreements                                                   -              36,666         52,451
    Repayments of repurchase agreements                                                      -             (26,666)       (52,451)
    Net proceeds from common stock offering                                                  -                   -        260,986
    Proceeds from issuance of common stock to Charitable Foundation                          -                   -             21
    Acquisition of common stock by ESOP                                                      -                   -        (25,661)
    (Acquisition) release of common stock for stock-based compensation plans              (188)                 82         (1,755)
    Obligation to stock-based deferred compensation plans                                    -                   -          1,595
    Net shares issued for stock option plan and payout of stock
      deferred compensation                                                              8,183                   -              -
    Purchases of treasury stock                                                       (138,373)           (56,707)              -
    Cash dividends paid                                                                (13,767)           (11,681)              -
                                                                                   ------------        ------------     ----------
          Net cash (used) provided by financing activities                              (4,781)           (78,169)        294,216
                                                                                   ------------        ------------     ----------

INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS                                        10,129              (1,554)       (25,218)

CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR                                          29,054              30,608         55,826
                                                                                   ------------        ------------     ----------

CASH AND CASH EQUIVALENTS AT END OF YEAR                                          $     39,183       $      29,054     $   30,608
                                                                                   ============        ============     ==========

SUPPLEMENTAL INFORMATION:
    Cash paid during the year:
      Interest on deposits and borrowings                                         $     61,007       $      59,865     $   55,549
      Income taxes                                                                      12,245              13,885          9,670
    Transfers of loans to real estate owned                                                557                 470          1,486
    Contribution of investment securities to charitable foundation                           -                   -            212

See accompanying notes to consolidated financial statements.
</TABLE>


                                       57
<PAGE>


                        AMERICAN FINANCIAL HOLDINGS, INC.

                   Notes to Consolidated Financial Statements

                        December 31, 2001, 2000 and 1999



(1)    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

       The accounting and reporting policies of American Financial Holdings,
       Inc. (the "Parent Company") and its subsidiary (referred together as the
       "Company") conform to accounting principles generally accepted in the
       United States of America and reporting practices followed by the banking
       industry. Significant policies are described below.

       (a)    BUSINESS AND STOCK OFFERING

              The Parent Company is a savings and loan holding company. The
              Parent Company's subsidiary, American Savings Bank (the "Bank"),
              provides business and consumer banking, mortgage lending, trust
              and investment services and insurance services through 17 banking
              offices and one office for American Investment Services, Inc. and
              the Internet (www.americanfinancialholdings.com). The Company is
              subject to the regulation of certain state and federal agencies
              and undergoes periodic examination by those regulatory
              authorities.

              The Bank completed its conversion from a mutual savings bank to a
              stock savings bank (the "Conversion") on November 30, 1999.
              Concurrent with the Bank's conversion, the Parent Company was
              formed, acquired all of the Bank's common stock and issued its
              common stock in a subscription and direct community offering to
              the public. Prior to the subscription and direct community
              offering, the Parent Company had no results of operations;
              therefore, financial information prior to November 30, 1999
              reflects the operations of the Bank.

              As provided for in the Conversion, the Bank issued all of its
              1,000 outstanding shares of common stock to the Company for 50% of
              the net proceeds from the Company's sale of common stock in the
              subscription and direct community offering. As a result of the
              subscription and direct community offering, the Company sold
              25,395,875 shares of its common stock at a price of $10 per share
              to persons having subscription rights, and 1,336,625 shares to the
              Bank's Employee Stock Ownership Plan (the "ESOP"). The Company
              also contributed 2,138,600 shares to American Savings Charitable
              Foundation. The Conversion resulted in net proceeds of $261.0
              million after offering costs of $6.3 million.

       (b)    BASIS OF FINANCIAL STATEMENT PRESENTATION

              The consolidated financial statements have been prepared in
              conformity with accounting principles generally accepted in the
              United States of America, and 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.


                                       58                            (Continued)
<PAGE>


                        AMERICAN FINANCIAL HOLDINGS, INC.

                   Notes to Consolidated Financial Statements

                        December 31, 2001, 2000 and 1999

              In preparing the consolidated financial statements, management is
              required to make estimates and assumptions that affect the
              reported amounts of assets and liabilities as of the date of the
              balance sheet and revenues and expenses for the period. Actual
              results could differ from those estimates. Material estimates that
              are particularly susceptible to changes in the near-term relate to
              the determination of the allowance for loan losses and the
              valuation allowance for the deferred tax assets, which are
              discussed below.

       (c)    INVESTMENT AND MORTGAGE-BACKED SECURITIES

              The Company may classify its debt securities in one of three
              categories: trading, available for sale, or held to maturity.
              Marketable equity securities are classified as either trading or
              available for sale. Management determines the appropriate
              classifications of securities at the time of purchase. Trading
              securities are bought and held principally for the purpose of
              selling them in the near term. Held to maturity securities are
              debt securities for which the Company has the ability and intent
              to hold until maturity. All other securities not included in
              trading or held to maturity are classified as available for sale.
              At December 31, 2001 and 2000, all of the Company's debt and
              equity securities were classified as available for sale.

              Held to maturity securities are recorded at amortized cost,
              adjusted for the amortization or accretion of premiums or
              discounts. Trading and available for sale securities are recorded
              at fair value. Unrealized gains and losses on trading securities
              are included in earnings. Unrealized gains and losses, net of the
              related tax effect, on available for sale securities are excluded
              from earnings and are reported in accumulated other comprehensive
              income (loss), a separate component of stockholders' equity, until
              realized.

              Premiums and discounts on debt securities are amortized or
              accreted into interest income over the term of the securities in a
              manner that approximates the level yield method. A decline in
              market value of a security below amortized cost that is deemed
              other than temporary is charged to earnings, resulting in the
              establishment of a new cost basis for the security. Gains and
              losses on sales of securities are recognized at the time of sale
              on a specific identification basis.

       (d)    LOANS RECEIVABLE, NET

              Loans are reported at the principal amount outstanding, net of
              deferred loan fees and costs and the allowance for loan losses. A
              significant portion of the Company's mortgage loan receivables and
              commitments are secured by residential real estate located in the
              Greater Hartford area and surrounding communities in Connecticut.
              Accordingly, a substantial portion of the Company's loan portfolio
              is susceptible to changes in economic and market conditions in
              Connecticut. The Company's policy for collateral requires that the
              amount of the loan generally may not exceed 80% of the appraised
              value of the property at the time that the loan is granted. In
              cases where the loan exceeds this percentage, the Company's policy
              is to require private mortgage insurance of between 20% to 30% of
              the appraised value based on the actual loan to value ratio.


                                       59                            (Continued)
<PAGE>


                        AMERICAN FINANCIAL HOLDINGS, INC.

                   Notes to Consolidated Financial Statements

                        December 31, 2001, 2000 and 1999

              Interest on loans is credited to income as earned based on the
              rate applied to principal amounts outstanding. Loans are placed on
              nonaccrual status when timely collection of principal and interest
              in accordance with contractual terms is doubtful. Loans are
              generally transferred to a nonaccrual basis when principal or
              interest payments become 90 days delinquent or sooner if
              management concludes circumstances indicate that borrowers may be
              unable to meet contractual principal or interest payments. The
              Company's policy is to discontinue the accrual of interest when
              principal or interest payments are delinquent 90 days or more. If
              ultimately collected, such interest is credited to income when
              received. Loans are removed from nonaccrual status when they
              become current as to the principal and interest and when, in the
              opinion of management, concern no longer exists as to the
              collectibility of principal and interest.

              Certain direct loan origination fees and costs, and premiums and
              discounts on loans purchased, are deferred and recognized in
              interest income over the lives of the related loan as an
              adjustment of interest using a method approximating the yield
              method.

              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. The provision for loan losses charged to
              expense is based upon management's judgment of the amount
              necessary to maintain the allowance at a level adequate to absorb
              probable losses inherent in the loan portfolio. Loan losses are
              charged against the allowance when management believes the
              collectibility of the principal balance outstanding is unlikely.

              In determining the adequacy of the allowance for loan losses,
              management obtains independent appraisals on assets securing
              significant relationships. 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. 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.

              Impaired loans are those for which it is probable that the Company
              will be unable to collect all amounts due according to the
              original contractual terms of the loan agreement. Impairment is
              measured based on the present value of expected future cash flows
              discounted at the loan's effective interest rate or, as a
              practical expedient, at the loan's observable market price or the
              fair value of the collateral if the loan is collateral dependent.
              The Company considers loans impaired if payments are greater than
              90 days past due and the value of the collateral securing the loan
              is less than the principal amount outstanding. The Company follows
              the same policy for recognition of income on impaired loans as it
              does for all other loans.


                                       60                            (Continued)
<PAGE>

                        AMERICAN FINANCIAL HOLDINGS, INC.

                   Notes to Consolidated Financial Statements

                        December 31, 2001, 2000 and 1999


       (e)    MORTGAGE SERVICING RIGHTS

              When the Company sells mortgage loans with servicing rights
              retained, it allocates the total cost of the loans to the mortgage
              servicing rights and to the loans (without the servicing rights)
              based on their relative fair values. Fair values are estimated
              considering loan prepayment predictions, historical prepayment
              rates, interest-rates, servicing costs, and other economic
              factors. Capitalized mortgage servicing rights are amortized into
              non-interest income as a reduction of servicing fee income in
              proportion to, and over the period of, estimated net servicing
              income by use of a method that approximates the level-yield
              method. Capitalized mortgage servicing rights are periodically
              evaluated and, if impairment is identified, the amount is charged
              to earnings with the establishment of a valuation allowance
              against the capitalized mortgage servicing rights.

       (f)    REAL ESTATE OWNED

              Real estate owned primarily consists of properties acquired
              through foreclosure or deeded to the Company in lieu of
              foreclosure. Each real estate owned property is carried at the
              lower of cost or fair value, less estimated selling costs. Holding
              costs are charged to current period earnings. Gains and losses on
              sales of properties are reflected in the consolidated statements
              of income when realized.

       (g)    FEDERAL HOME LOAN BANK STOCK

              As a member of the Federal Home Loan Bank of Boston ("FHLB"), the
              Bank is required to hold a certain amount of FHLB stock. This
              stock is considered to be a non-marketable equity security and,
              accordingly, is carried at cost.

       (h)    BANK PREMISES AND EQUIPMENT

              Premises and equipment are carried at cost less accumulated
              depreciation and amortization. Depreciation and amortization are
              computed on the straight-line method using the estimated lives of
              the assets. Estimated lives are 15 to 40 years for buildings and
              improvements and 3 to 20 years for furniture, fixtures and
              equipment. Amortization of leasehold improvements is calculated on
              a straight-line basis over the terms of the related leases,
              including renewal periods, or the life of the asset, whichever is
              shorter. The cost of maintenance and repairs is charged to expense
              as incurred, whereas significant renovations are capitalized.

       (i)    INCOME TAXES

              The Company files consolidated federal and state tax returns. In
              accordance with Statement of Financial Accounting Standards
              ("SFAS") No. 109, "Accounting for Income Taxes," the Company uses
              the asset and liability method of accounting for income taxes.
              Under this method, deferred tax assets and liabilities are
              established for the temporary differences between the financial
              reporting basis and the tax basis of the Company's assets and
              liabilities. Deferred tax assets are also recognized for available
              tax carryforwards, such as for charitable contributions.


                                       61                            (Continued)
<PAGE>


                        AMERICAN FINANCIAL HOLDINGS, INC.

                   Notes to Consolidated Financial Statements

                        December 31, 2001, 2000 and 1999


              Deferred tax assets and liabilities are measured using enacted tax
              rates expected to be in effect when temporary differences and
              carryforwards are realized or settled.

              The deferred tax asset is subject to reduction by a valuation
              allowance in certain circumstances. This valuation allowance is
              recognized if, based on an analysis of available evidence,
              management determines that it is more likely than not that some
              portion or all of the deferred tax asset will not be realized. The
              valuation allowance is subject to ongoing adjustment based on
              changes in circumstances that affect management's judgment about
              the realization of the deferred tax asset. Adjustments to increase
              or decrease the valuation allowance are charged or credited,
              respectively, to income tax expense.

              Income tax expense includes the amount of taxes payable for the
              current year, and the deferred tax benefit or expense for the
              period. The effect on deferred tax assets and liabilities of a
              change in tax rates is recognized in income tax expense in the
              period that includes the enactment date.

       (j)    PENSION AND OTHER POST-RETIREMENT BENEFIT PLANS

              The Bank has a noncontributory pension plan covering substantially
              all employees. Pension costs related to this plan are based upon
              actuarial computations of current and future benefits for
              employees, are charged to noninterest expense and are funded in
              accordance with requirements of the Employee Retirement Income
              Security Act. The Bank also accrues costs related to
              post-retirement health care and life insurance benefits.

       (k)    EMPLOYEE STOCK OWNERSHIP PLAN

              Compensation expense is recognized for the Employee Stock
              Ownership Plan ("ESOP") equal to the average fair value of shares
              committed to be released for allocation to participant accounts.
              Any difference between the average fair value of shares committed
              to be released for allocation and the ESOP's original acquisition
              cost is charged or credited to stockholders' equity (additional
              paid-in capital). The cost of unallocated ESOP shares (shares not
              yet released for allocation) is reflected as a reduction of
              stockholders' equity.

       (l)    FAIR VALUES OF FINANCIAL INSTRUMENTS

              Fair values of financial instruments are disclosed in accordance
              with SFAS No. 107, "Disclosure about Fair Value of Financial
              Instruments," which requires entities to disclose the fair value
              of financial instruments, including both assets and liabilities
              recognized on the balance sheet as well as off-balance sheet
              instruments, for which it is practicable to estimate fair value.

              Financial instruments include cash and cash equivalents,
              investment securities, mortgage-backed securities, loans,
              deposits, borrowings and certain off-balance-sheet items. Fair
              value estimates are made at a specific point in time based on
              market information, where available, or other more subjective
              information if an active market for the financial instrument does
              not exist. These estimates incorporate assumptions and other
              matters of judgment and may not reflect the true


                                       62                            (Continued)

<PAGE>

                        AMERICAN FINANCIAL HOLDINGS, INC.

                   Notes to Consolidated Financial Statements

                        December 31, 2001, 2000 and 1999


              financial impact that could result from selling the entire
              portfolio of a financial instrument on one date, including any
              income tax consequences.

              Fair value estimates are based on existing on-and
              off-balance-sheet financial instruments without attempting to
              estimate the value of anticipated future business and the value of
              assets and liabilities that are not considered financial
              instruments. Other assets that are not considered financial
              instruments and are excluded from fair value disclosures include
              real estate owned and premises and equipment.

       (m)    CASH EQUIVALENTS

              For purposes of the consolidated statements of cash flows, the
              Company defines cash equivalents to include federal funds sold.

       (n)    TRUST ASSETS

              Approximately $187.3 million and $165.0 million of assets were
              held by the Company at December 31, 2001 and 2000, respectively,
              in a fiduciary or agency capacity for customers. These assets are
              not included in the accompanying consolidated financial
              statements, since the Company does not own them.

       (o)    COMPREHENSIVE INCOME

              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 of the period
              other than transactions with owners in their capacity as owners.
              Comprehensive income includes net income and certain changes in
              equity that are not recognized in the statement of income (such as
              changes in net unrealized gains and losses on securities available
              for sale). The Company has reported comprehensive income and its
              components for 2001, 2000 and 1999 in the consolidated statements
              of stockholders' equity.

       (p)    SEGMENT INFORMATION

              SFAS No. 131, "Disclosures about Segments of an Enterprise and
              Related Information," requires public companies to report certain
              financial information about significant revenue-producing segments
              of the business for which such information is available and
              utilized by the chief operating decision-maker. Specific
              information to be reported for individual operating segments
              includes a measure of profit and loss, certain revenue and expense
              items and total assets. As a community-oriented financial
              institution, substantially all of the Company's operations involve
              the delivery of loan and deposit products to customers. Management
              makes operating decisions and assesses performance based on an
              ongoing review of the community-banking operation, which
              constitutes the Company's only operating segment for financial
              reporting purposes under SFAS No. 131.


                                       63                            (Continued)
<PAGE>


                        AMERICAN FINANCIAL HOLDINGS, INC.

                   Notes to Consolidated Financial Statements

                        December 31, 2001, 2000 and 1999


       (q)    NET INCOME PER COMMON 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 and
              unvested restricted stock are not included in the weighted-average
              number of common shares outstanding for either basic or diluted
              earnings per share calculations.

       (r)    STOCK-BASED COMPENSATION

              SFAS No. 123, "Accounting for Stock-Based Compensation,"
              encourages all companies to adopt a new fair value based method of
              accounting for stock-based employee compensation plans. Under the
              provisions of this statement, the Company has elected to continue
              to measure compensation for its stock option plans using the
              accounting method prescribed by Accounting Principles Board
              Opinion No. 25 ("APB No. 25") "Accounting for Stock Issued to
              Employees." Entities electing to continue to follow APB No. 25
              must make pro forma disclosures for net income and earnings per
              share as if the fair value based method of accounting had been
              applied.

              The restricted stock awards under the Stock-Based Incentive Plan
              is also accounted for in accordance with APB No. 25. The fair
              value of the shares awarded, measured at the grant date, is
              recognized as a deduction from stockholders' equity and amortized
              to compensation expense as the shares vest.

       (s)    CASH SURRENDER VALUE OF LIFE INSURANCE

              The investment in life insurance represents the cash surrender
              value of life insurance policies purchased by the Bank with
              respect to certain officers and employees of the Bank. Increases
              in the cash surrender value are recorded as other non-interest
              income. Decreases are the result of collection on the policies due
              to the death of an insured.


                                       64                            (Continued)
<PAGE>


                        AMERICAN FINANCIAL HOLDINGS, INC.

                   Notes to Consolidated Financial Statements

                        December 31, 2001, 2000 and 1999


       (t)    SECURITIES REPURCHASE AGREEMENTS

              In securities repurchase agreements, the Company transfers
              securities to a counterparty under an agreement to repurchase the
              identical securities at a fixed price on a future date. These
              agreements are accounted for as secured financing transactions
              since the Company maintains effective control over the transferred
              securities and the transfer meets other specified criteria.
              Accordingly, the transaction proceeds are recorded as borrowings
              and the underlying securities continue to be carried in the
              Company's securities portfolio.

       (u)    RECLASSIFICATIONS

              Certain financial statement amounts as previously reported have
              been reclassified to conform to the current year presentation.

(2)    CASH AND DUE FROM BANKS

       The Bank is required to maintain reserves with respect to its transaction
       accounts and non-personal time deposits. As of December 31, 2001, the
       Bank maintained cash and liquid assets of approximately $3.1 million in
       satisfaction of these regulatory requirements.


                                       65                            (Continued)
<PAGE>


                        AMERICAN FINANCIAL HOLDINGS, INC.

                   Notes to Consolidated Financial Statements

                        December 31, 2001, 2000 and 1999


(3)    INVESTMENT AND MORTGAGE-BACKED SECURITIES

       The Company classified all investment and mortgage-backed securities as
       available for sale as of December 31, 2001, and 2000. The amortized cost,
       gross unrealized gains, gross unrealized losses, and estimated fair
       values of investment and mortgage-backed securities at December 31, 2001
       and 2000 are as follows:

<TABLE>
<CAPTION>

                                                                                   DECEMBER 31, 2001
                                                            ----------------------------------------------------------------
                                                                                 GROSS              GROSS
                                                              AMORTIZED        UNREALIZED        UNREALIZED          FAIR
                                                                COST             GAINS             LOSSES           VALUE
                                                            --------------   --------------    --------------    -----------
                                                                                       (In thousands)
<S>                                                        <C>                <C>              <C>               <C>
       Investment securities:
           U.S. Treasury notes                             $      5,020      $        438     $          -      $    5,458
           U.S. Government agencies                              19,779             1,367                -          21,146
           Corporate bonds                                      146,026             5,771               (1)        151,796
           Municipal bonds                                       45,054             2,242             (158)         47,138
           Trust preferred stock                                 26,346             1,398                -          27,744
           Marketable equity securities                           7,128            51,185             (302)         58,011
                                                            -------------    --------------    --------------    -----------
                Total investment securities                     249,353            62,401             (461)        311,293
                                                            --------------    -------------    --------------    -----------
       Mortgage-backed securities:
           U.S. Government and agency                           101,314             2,924                -         104,238
           U.S. Agency issued collateralized
              mortgage obligations                              116,223             4,640                -         120,863
                                                            --------------    -------------    --------------    -----------
                 Total mortgage-backed securities               217,537             7,564                -         225,101
                                                            --------------    -------------    --------------    -----------

              Total available for sale                     $    466,890      $     69,965     $       (461)     $  536,394
                                                            ==============    =============    ==============    ===========
</TABLE>


       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 stockholder's
       equity.


                                       66                            (Continued)
<PAGE>


                        AMERICAN FINANCIAL HOLDINGS, INC.

                   Notes to Consolidated Financial Statements

                        December 31, 2001, 2000 and 1999

<TABLE>
<CAPTION>

                                                                                  December 31, 2000
                                                            ----------------------------------------------------------------
                                                                                 Gross             Gross
                                                              Amortized        unrealized        unrealized         Fair
                                                                 cost            gains             losses          value
                                                            -------------     -------------    --------------    -----------
                                                                                     (In thousands)
<S>                                                        <C>               <C>              <C>               <C>
      Investment securities:
           U.S. Treasury notes                             $      5,029      $       318      $          -      $   5,347
           U.S. Government agencies                              24,742              734               (12)        25,464
           Corporate bonds                                      187,800            2,500               (68)       190,232
           Municipal bonds                                       38,002            2,036                (1)        40,037
           Trust preferred stock                                 13,293               97              (349)        13,041
           Marketable equity securities                           6,811           70,463              (184)        77,090
                                                            -------------     -------------    --------------    -----------
                Total investment securities                     275,677           76,148              (614)       351,211
                                                            -------------     -------------    --------------    -----------
      Mortgage-backed securities:
           U.S. Government and agency                           139,377            1,581               (90)       140,868
           U.S. Agency issued collateralized
              mortgage obligations                              111,530            2,872                 -        114,402
                                                            -------------     -------------    --------------    -----------
                Total mortgage-backed securities                250,907            4,453               (90)       255,270
                                                            -------------     -------------    --------------    -----------

              Total available for sale                     $    526,584      $    80,601      $       (704)     $ 606,481
                                                            =============     =============    ==============    ===========
</TABLE>


       At December 31, 2000, the net unrealized gain on securities available for
       sale of $79.9 million, net of income taxes of $31.9 million, is shown as
       accumulated other comprehensive income of $48.0 million in stockholders'
       equity.

       The amortized cost and fair value of debt securities at December 31, 2001
       by contractual maturity, excluding mortgage-backed securities, are shown
       below. Expected maturities will differ from contractual maturities
       because issuers may have the right to call or prepay obligations with or
       without call or prepayment penalties.

<TABLE>
<CAPTION>

                                                                                                 DECEMBER 31, 2001
                                                                                          ---------------------------------
                                                                                             AMORTIZED            FAIR
                                                                                               COST              VALUE
                                                                                          ----------------    -------------
                                                                                                   (In thousands)
<S>                                                                                       <C>                <C>
        Due in one year or less                                                           $      61,490      $      62,728
        Due after one year through five years                                                   105,560            111,534
        Due after five years through ten years                                                   14,927             16,027
        Due after ten years                                                                      60,248             62,993
                                                                                           -------------      -------------
                                                                                                242,225            253,282
        Mortgage-backed securities                                                              217,537            225,101
                                                                                           -------------      -------------

                                                                                          $     459,762      $     478,383
                                                                                           =============      =============
</TABLE>


                                       67                            (Continued)

<PAGE>


                        AMERICAN FINANCIAL HOLDINGS, INC.

                   Notes to Consolidated Financial Statements

                        December 31, 2001, 2000 and 1999


       A security with an amortized cost of $1.9 million and a fair value of
$2.0 million at December 31, 2001 was pledged to secure public deposits.

       The following is a summary of realized gains and losses on sales of
securities available for sale during the years ended December 31:

<TABLE>
<CAPTION>

                                 2001                          2000                        1999
                      --------------------------- --------------------------- -----------------------------

<S>                    <C>      <C>        <C>     <C>      <C>        <C>     <C>      <C>        <C>
                       GAINS    LOSSES     NET     Gains    Losses     Net     Gains    Losses     Net
                       -----    ------     ---     -----    ------     ---     -----    ------     ---
                                                           (In thousands)
AVAILABLE FOR SALE:

MORTGAGE-BACKED
  SECURITIES          $   61     $   -  $   61   $    30    ($2,037) ($2,007) $    -    ($1,785)  ($1,785)

INVESTMENT
  SECURITIES           8,788     (637)   8,151    10,364     (2,289)   8,075   5,694     (1,268)    4,426
                       -----     -----   -----    ------     -------   -----   -----     -------    -----
    TOTAL             $8,849    ($637)  $8,212   $10,394    ($4,326)  $6,068  $5,694    ($3,053)   $2,641
                     =======   =======  ======   =======    =======   ======  ======   =========  =======
</TABLE>


       During the year ended December 31, 1999, investment securities with an
       amortized cost of $3,000 and a fair value of $212,000 were contributed to
       the American Savings Bank Foundation, resulting in recognition of a gain
       of $209,000.


                                       68                            (Continued)

<PAGE>


                        AMERICAN FINANCIAL HOLDINGS, INC.

                   Notes to Consolidated Financial Statements

                        December 31, 2001, 2000 and 1999



(4)    LOANS RECEIVABLE, NET

       The composition of the Company's loan portfolio was as follows:

<TABLE>
<CAPTION>

                                                                                                    DECEMBER 31,
                                                                                          ---------------------------------
                                                                                               2001              2000
                                                                                          ---------------   ---------------
                                                                                                   (In thousands)
<S>                                                                                       <C>             <C>
       Real estate mortgage loans:
           One to four family                                                             $     832,177   $       818,272
           Residential construction                                                               9,437            11,963
           Other                                                                                    394               924
                                                                                          ----------------  ----------------
                    Total real estate mortgage loans                                            842,008           831,159
                                                                                          ----------------  ----------------

       Commercial loans:
            Commercial business                                                                   3,296               132

       Consumer loans:
           Home equity loans and lines of credit                                                360,166           307,106
           Automobile                                                                            12,881            17,027
           Other                                                                                  2,197             2,701
                                                                                          ----------------  ----------------
                    Total consumer loans                                                        375,244           326,834
                                                                                          ----------------  ----------------

                    Total loans                                                               1,220,548         1,158,125

       Premiums on loans purchased, deferred loan fees and costs, net                             5,186             3,547
       Allowance for loan losses                                                                (10,887)          (10,624)
                                                                                          ----------------  ----------------

       Loans receivable, net                                                              $    1,214,847  $     1,151,048
                                                                                          ================  ================
</TABLE>

       Loans on nonaccrual status amounted to $4.2 million and $3.0 million as
       of December 31, 2001 and 2000, respectively. If interest on nonaccrual
       loans had been recognized in accordance with their original terms, such
       income would have approximated $385,000, $306,000 and $200,000 for the
       years ended December 31, 2001, 2000 and 1999, respectively. Interest
       income recognized on nonaccrual loans for the years ended December 31,
       2001, 2000 and 1999 was approximately $190,000, $199,000 and $112,000,
       respectively.

       The Company's investment in impaired loans was $119,000 and $130,000 at
       December 31, 2001 and 2000, respectively. The allowance for loan losses
       on these impaired loans was approximately $22,000 and $45,000 at December
       31, 2001 and 2000, respectively. There were no impaired loans without a
       related allowance for losses. The average balance of impaired loans was
       $125,000, $220,000 and


                                       69                            (Continued)
<PAGE>


                        AMERICAN FINANCIAL HOLDINGS, INC.

                   Notes to Consolidated Financial Statements

                        December 31, 2001, 2000 and 1999


       $805,000 for the years ended December 31, 2001, 2000 and 1999. The
       interest income recognized on impaired loans was not significant.

       Changes in the allowance for loan losses are summarized as follows:

<TABLE>
<CAPTION>

                                                                                             YEARS ENDED DECEMBER 31,
                                                                                     -------------------------------------
                                                                                        2001         2000         1999
                                                                                     -----------   ----------   ----------
                                                                                                 (In thousands)

<S>                                                                               <C>           <C>          <C>
        Balance at beginning of year                                              $    10,624   $     8,820  $     7,626
        Provision for loan losses charged to income                                       450         1,895        2,030
        Loans charged-off                                                                (208)         (252)        (942)
        Recoveries                                                                         21           161          106
                                                                                     ----------    ----------    ----------

        Balance at end of year                                                    $    10,887   $    10,624  $     8,820
                                                                                     ==========    ==========    ==========
</TABLE>

       The Company serviced loans for others totaling approximately $135.8
       million, $146.1 million and $157.1 million at December 31, 2001, 2000 and
       1999, respectively. Income from servicing loans for others was $396,000,
       $431,000 and $455,000 for the years ended December 31, 2001, 2000 and
       1999, respectively.

(5)    BANK PREMISES AND EQUIPMENT, NET

       Bank premises and equipment consisted of the following:

<TABLE>
<CAPTION>

                                                                                          DECEMBER 31,
                                                                                   -------------------------
                                                                                      2001           2000
                                                                                   -----------    ----------
                                                                                          (In thousands)

<S>                                                                                <C>           <C>
            Premises                                                               $   10,820    $   10,672
            Construction in progress                                                      471           276
            Furniture, equipment and software                                          11,300         9,575
            Leasehold improvements                                                      2,921         2,845
                                                                                   -----------    ----------
                 Total                                                                 25,512        23,368

            Less accumulated depreciation and amortization                            (12,022)      (10,020)
                                                                                   -----------    ----------

                 Premises and equipment, net                                       $   13,490    $   13,348
                                                                                   ===========    ==========
</TABLE>

       Total depreciation and amortization expense amounted to $2.0 million,
       $2.0 million and $2.1 million for the years ended December 31, 2001, 2000
       and 1999, respectively.


                                       70                            (Continued)
<PAGE>


                        AMERICAN FINANCIAL HOLDINGS, INC.

                   Notes to Consolidated Financial Statements

                        December 31, 2001, 2000 and 1999


       At December 31, 2001, the Company was obligated under various
       non-cancelable operating leases for properties used as branch facilities.
       The leases contain renewal options for periods ranging from 5 to 20 years
       and escalation clauses as defined which provide for increased rental
       expense over a base year. Rental expense under leases was $532,000,
       $487,000 and $557,000 for the years ended December 31, 2001, 2000 and
       1999, respectively.

       Future minimum payments, by year and in the aggregate, under
       non-cancelable operating leases for branch office premises with initial
       or remaining terms of one year or more consisted of the following:

                                                   December 31,
                                                      2001
                                                   ------------
                                                  (in thousands)

                      2002                         $        548
                      2003                                  513
                      2004                                  463
                      2005                                  385
                      2006                                  248
                      Thereafter                            838
                                                      -----------

                      Total                        $      2,995
                                                      ===========


(6)    DEPOSITS

       A summary of deposit balances, by type, is as follows:

                                                         DECEMBER 31,

                                                 -------------------------------
                                                      2001             2000
                                                 --------------   --------------
                                                        (In thousands)

       Savings                                  $     225,659    $    202,564
       NOW accounts                                    94,702          90,118
       Money market accounts                           95,562          65,130
       Demand deposit accounts                         30,687          16,378
       Time deposits and retirement accounts          677,639         752,146
                                                 --------------   --------------
                 Total                          $   1,124,249    $   1,126,336
                                                 ==============   ==============


                                       71                            (Continued)
<PAGE>


                        AMERICAN FINANCIAL HOLDINGS, INC.

                   Notes to Consolidated Financial Statements

                        December 31, 2001, 2000 and 1999


       Interest expense on deposits, by account type, is summarized as follows:

<TABLE>
<CAPTION>

                                                                    YEARS ENDED DECEMBER 31,
                                                           -------------------------------------------
                                                               2001           2000           1999
                                                           ------------   ------------   -------------
                                                                         (In thousands)

<S>                                                       <C>            <C>             <C>
       Savings                                            $      4,142   $      4,101    $      4,071
       NOW accounts                                                654          1,082             946
       Money market accounts                                     2,370          1,709           1,766
       Time deposits                                            37,339         41,132          38,935
                                                           ------------   ------------   -------------

       Total                                            $       44,505 $       48,024  $       45,718
                                                           ============   ============   =============
</TABLE>

       A summary of time deposits by remaining period to maturity is as follows:

<TABLE>
<CAPTION>

                                                                               DECEMBER 31,
                                                                    ------------------------------
                                                                         2001            2000
                                                                    -------------    -------------
                                                                            (In thousands)

<S>    <C>                                                         <C>              <C>
       1 - 12 months                                               $    515,753     $    568,012
       13 - 24 months                                                   103,972          143,274
       25 - 36 months                                                     8,895           24,168
       37 - 48 months                                                    26,551            1,524
       48 months and thereafter                                          22,468           15,168
                                                                    -------------    -------------

           Total                                                   $    677,639     $    752,146
                                                                    =============    =============
</TABLE>

       Time deposits of $100,000 or more amounted to $81.8 million at December
       31, 2001. Interest paid on time of deposits of $100,000 or more amounted
       to approximately $4.2 million for the year ended December 31, 2001.


                                       72                            (Continued)
<PAGE>


                        AMERICAN FINANCIAL HOLDINGS, INC.

                   Notes to Consolidated Financial Statements

                        December 31, 2001, 2000 and 1999


(7)    BORROWINGS

       Advances payable to the Federal Home Loan Bank of Boston are as follows:

    MATURITY                     INTEREST                DECEMBER 31,
                                                -------------------------------
     DATES                         RATES                2001          2000
-----------------            ------------------    ------------    ------------
                                                           (In thousands)

2001                           5.10 - 6.28%      $          -    $     55,000
2002                           3.73 - 6.70%            78,500          59,500
2003                           4.19 - 6.91%           127,500          35,000
2004                           4.87 - 6.51%            31,000          11,000
2005                           5.13 - 7.27%             9,200           7,200
2006                           4.32 - 5.35%            47,500               -
After 2006                     4.00 - 5.39%             7,744             244
                                                   ------------    ------------

Total                                            $    301,444    $    167,944
                                                   ============    ============


       At December 31, 2001, 2000 and 1999, the Bank was in compliance with FHLB
       collateral requirements. At December 31, 2001, the Bank can borrow an
       additional capacity of $330.0 million from the FHLB, inclusive of a line
       of credit of approximately $14.8 million. Advances are secured by the
       Bank's investment in FHLB stock and a blanket security agreement. This
       agreement requires the Bank to maintain as collateral certain qualifying
       assets, principally mortgage loans.

       During the years ended December 31, 2001, 2000 and 1999, the Company also
       borrowed under securities repurchase agreements. Certain information as
       to the Bank's repurchase agreements is summarized as follows:

<TABLE>
<CAPTION>

                                                                                    YEARS ENDED DECEMBER 31,
                                                                                    ------------------------
                                                                                2001          2000          1999
                                                                                ----          ----          ----
                                                                                     (Dollars in thousands)

<S>                                                                          <C>           <C>           <C>
                 Average amount outstanding during the period                $ 10,000      $  7,300      $  6,100
                 Maximum amount outstanding during the period                  10,000        15,300        25,800
                 Amount outstanding at end of period                           10,000        10,000           -
                 Weighted average interest rate during the period               6.99%         6.92%           -
                 Weighted average interest rate at end of period                6.99%         6.89%         5.47%
</TABLE>

       Securities underlying the repurchase agreements held as collateral are
       U.S. Government agency securities with a fair value of $11.6 million at
       December 31, 2001. The securities underlying the agreements were under
       the Company's control. The repurchase agreements at December 31, 2001 are
       callable on various dates during 2003. These borrowings have weighted
       average remaining terms to the initial call dates and contractual
       maturity dates of approximately 1.37 years and 5.87 years, respectively.


                                       73                            (Continued)
<PAGE>


                        AMERICAN FINANCIAL HOLDINGS, INC.

                   Notes to Consolidated Financial Statements

                        December 31, 2001, 2000 and 1999


(8)    STOCKHOLDERS' EQUITY

       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 Company'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
       classification are also subject to qualitative judgments by the
       regulators about 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 and Tier 1 Capital to
       risk-weighted assets, and of Tier 1 Capital to average assets. Management
       believes that, as of December 31, 2001 and 2000, 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
       for 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 following table. There have been no
       conditions or events since that notification that management believes
       have changed the Bank's capital category.


                                       74                            (Continued)
<PAGE>


                        AMERICAN FINANCIAL HOLDINGS, INC.

                   Notes to Consolidated Financial Statements

                        December 31, 2001, 2000 and 1999


       The following is a summary of the Bank's actual capital amounts and
       ratios as of December 31, 2001 and 2000, compared to the required amounts
       and ratios for minimum capital adequacy and for classification as a
       well-capitalized institution:

<TABLE>
<CAPTION>

                                                                                                         TO BE WELL
                                                                              FOR CAPITAL             CAPITALIZED UNDER
                                                                               ADEQUACY               PROMPT CORRECTIVE
                                                     ACTUAL                    PURPOSES               ACTION PROVISIONS
                                            --------------------------  ------------------------  --------------------------
                                               AMOUNT         RATIO        AMOUNT        RATIO       AMOUNT          RATIO
                                            ------------   -----------  -------------  ---------  ------------     ---------
                                                                        (Dollars in thousands)
<S>        <C>                             <C>                <C>      <C>               <C>     <C>                <C>
       AS OF DECEMBER 31, 2001:
           Total Capital (to Risk
             Weighted Assets)              $  361,716         31.3%    $   92,399        8.0%    $  115,499         10.0%
           Tier 1 Capital (to Risk
             Weighted Assets)                 328,510         28.4         46,200        4.0         69,299          6.0
           Tier 1 Capital (to
             Average Assets)                  328,510         17.7         76,779        4.0         95,974          5.0

       As of December 31, 2000:
           Total Capital (to Risk
             Weighted Assets)              $  403,738        35.6%     $   90,721        8.0%    $  113,401         10.0%
           Tier 1 Capital (to Risk
             Weighted Assets)                 361,713         31.9         45,360        4.0         68,041          6.0
           Tier 1 Capital (to
             Average Assets)                  361,713         19.3         75,083        4.0         93,854          5.0
</TABLE>


       The Parent Company and the Bank are subject to dividend restrictions
       imposed by various regulators. Connecticut banking laws limit the amount
       of annual dividends that the Bank may pay to the Parent Company, to an
       amount that approximates the Bank's net income retained for the current
       year plus the Bank's net income retained for the two previous years. In
       addition, the Bank may not declare or pay dividends on, and the Parent
       Company may not repurchase, any of its shares of common stock if the
       effect thereof would cause stockholders' equity to be reduced below
       applicable regulatory capital maintenance requirements or if such
       declaration, payment or repurchase would otherwise violate regulatory
       requirements.


                                       75                            (Continued)
<PAGE>


                        AMERICAN FINANCIAL HOLDINGS, INC.

                   Notes to Consolidated Financial Statements

                        December 31, 2001, 2000 and 1999


       As part of the Conversion, the Bank established a liquidation account for
       the benefit of account holders in an amount equal to the Bank's capital
       of $286.0 million as of May 31,1999. The liquidation account will be
       maintained for a period of ten years after the Conversion for the benefit
       of those deposit account holders who qualified as eligible account
       holders at the time of the Conversion and who have continued to maintain
       their eligible deposit balances with the Bank following the Conversion.
       The liquidation account, which totaled $116.7 million and $143.7 million
       at December 31, 2001 and 2000, respectively, is reduced annually by an
       amount equal to the decreases in eligible deposit balances,
       notwithstanding any subsequent increases in the account. In the event of
       the complete liquidation of the Bank, each eligible deposit account
       holder will be entitled to receive his/her proportionate interest in the
       liquidation account, after the payment of all creditors' claims, but
       before any distributions to the Parent Company as the sole stockholder of
       the Bank. The Bank may not declare or pay a dividend on its capital stock
       if its effect would be to reduce the regulatory capital of the Bank below
       the amount required for the liquidation account.

       In 2000, the Board of Directors authorized two stock repurchase programs
       for an aggregate of 2.8 million shares. During 2000, the Company
       repurchased 2.1 million shares at a total cost of $38.7 million. In 2001,
       the remaining 700,000 shares, at a cost of $14.6 million, were purchased.
       During 2001, the Board of Directors authorized four additional stock
       repurchase programs of up to 5.9 million shares, of the Company's
       outstanding common stock for the treasury. Under these programs the
       Company repurchased 5.5 million shares at a total cost of $122.6 million.
       In 2001, the Company under the Stock-Based Incentive Plan purchased an
       additional 51,496 shares at a cost of $1.1 million.

(9)    BENEFIT PLANS

       (a)    PENSION PLAN

              The Company has a non-contributory defined benefit plan (the
              "Plan") covering substantially all employees who have attained age
              21 and completed 1,000 hours of service in a consecutive twelve
              month period. Participants in the Plan become vested in their
              accrued benefit upon completing five years of service.
              Participants also become vested in their accrued benefit upon
              attainment of their "normal retirement age" (as described in the
              Plan) or upon incurring a disability. The Plan provides a monthly
              benefit upon retirement based on years of service and compensation
              during the highest paid consecutive three years of employment. The
              Company's funding policy is to contribute annually the maximum
              amount that can be deducted for federal income tax purposes.


                                       76                            (Continued)
<PAGE>


                        AMERICAN FINANCIAL HOLDINGS, INC.

                   Notes to Consolidated Financial Statements

                        December 31, 2001, 2000 and 1999


The following table sets forth changes in the benefit obligation, changes in
Plan assets and the funded status of the Plan for the periods indicated. The
table also provides a reconciliation of the Plan's funded status and the amounts
recognized in the Company's consolidated balance sheets:

<TABLE>
<CAPTION>

                                                                                              DECEMBER 31,

                                                                                        ---------------------------
                                                                                           2001           2000
                                                                                        ------------   ------------
                                                                                             (In thousands)
<S>           <C>                                                                    <C>            <C>
              Change in benefit obligation:
                  Projected benefit obligation at beginning of year                  $     11,047   $     10,461
                  Service cost                                                                476            425
                  Interest cost                                                               784            766
                  Plan amendments                                                            (220)             -
                  Actuarial loss                                                              344             95
                  Benefits paid                                                              (732)          (700)
                                                                                        ------------   ------------

                  Projected benefit obligation at end of year                              11,699         11,047
                                                                                        ------------   ------------
              Change in plan assets:
                  Fair value of plan assets at beginning of year                            9,550          9,994
                  Actual return on plan assets                                               (588)             1
                  Employer contributions                                                    1,162             12
                  Benefits paid                                                              (732)          (700)
                                                                                        ------------   ------------

                  Fair value of plan assets at end of year                                  9,392          9,307
                                                                                        ------------   ------------

              Funded status at end of year                                                 (2,307)        (1,740)
              Unrecognized transition obligation                                                -           (123)
              Unrecognized prior service cost                                                 542            824
              Unrecognized net actuarial loss                                               3,167          1,647
                                                                                        ------------   ------------
                        Net amount recognized                                        $      1,402   $        608
                                                                                        ============   ============
              Amounts recognized in other assets/liabilities in the
                  consolidated balance sheets:
                       Prepaid benefit cost                                          $      2,167   $      1,183
                       Accrued benefit liability                                           (1,248)          (720)
                       Intangible asset                                                       483            145
                                                                                        ------------   -----------

                        Net amount recognized                                        $      1,402   $        608
                                                                                        ============   ===========
</TABLE>


                                       77                            (Continued)
<PAGE>


                        AMERICAN FINANCIAL HOLDINGS, INC.

                   Notes to Consolidated Financial Statements

                        December 31, 2001, 2000 and 1999


The components of net periodic pension cost for the periods indicated were as
follows:

<TABLE>
<CAPTION>

                                                                                    YEARS ENDED DECEMBER 31,

                                                                              --------------------------------------
                                                                                2001         2000           1999
                                                                              ----------   ----------    -----------
                                                                                         (In thousands)

<S>           <C>                                                          <C>          <C>           <C>
              Service cost - benefits earned during the period             $       476  $       425   $       471
              Interest cost on projected benefit obligation                        783          766           697
              Expected return on plan assets                                      (850)        (869)         (878)
              Amortization and deferral                                            (42)         (33)          (22)
                                                                              ----------   ----------    -----------

              Net periodic pension cost                                    $       367  $       289   $       268
                                                                              ==========   ==========    ===========
</TABLE>


Significant actuarial assumptions used in determining the actuarial present
value of the projected benefit obligation and the net periodic pension cost were
as follows:

<TABLE>
<CAPTION>

                                                                                     DECEMBER 31,

                                                                              ---------------------------
                                                                                 2001           2000
                                                                              ------------  -------------

<S>                                                                                <C>           <C>
              Discount rate                                                        7.25%         7.50%
              Rate of increase in compensation levels                              4.50          4.50
              Long-term rate of return on assets                                   9.00          9.00
</TABLE>


The Plan also includes a supplemental benefit equalization plan (the
"Supplemental Plan"), that provides benefits to key executives with pension
benefits that cannot be provided directly through the Company's tax-qualified
employee pension plan as a result of Internal Revenue Code limitations on the
benefits available through a tax-qualified plan. Benefits under the Supplemental
Plan are based on the same formula as the employee pension plan, but are
determined without regard to the limitations on the amount of salary that may be
taken into account for benefits purposes under the pension plan or the level of
contributions permitted under the pension plan. The benefits under the
Supplemental Plan are reduced by the benefits actually payable under the pension
plan. At December 31, 2001, three officers and one retired officer of the Bank
participated in the Supplemental Plan. The Supplemental Plan's projected benefit
obligation at December 31, 2001 and 2000 was approximately $767,000 and
$901,000, respectively. Total expense attributable to the Supplemented Plan was
$120,000, $157,000 and $137,000 for the years ended December 31, 2001, 2000 and
1999, respectively.


                                       78                            (Continued)
<PAGE>


                       AMERICAN FINANCIAL HOLDINGS, INC.

                   Notes to Consolidated Financial Statements

                        December 31, 2001, 2000 and 1999


       (b)    SAVINGS AND PROFIT SHARING PLAN

              The American Savings Bank Employees' Savings and Profit Sharing
              Plan (the "Savings Plan") is a tax-qualified profit sharing plan
              with a qualified cash or deferred arrangement under Section 401(k)
              of the Internal Revenue Code. The Savings Plan currently provides
              participants with savings and retirement benefits based on
              employee deferrals of compensation, as well as matching and other
              discretionary contributions made by the Company. In 1999, the
              Company made a regular contribution of up to 3% of a participant's
              compensation, matching 50% of the first 6% of compensation
              deferred. A participant is always 100% vested in his or her
              elective deferrals of compensation under the Savings Plan.
              Participants vest in the regular matching contributions on the
              first of the month following two years of participation in the
              plan.

              Contributions made by the Company to the Savings Plan amounted to
              $197,000 for the year ended December 31, 1999. Due to the
              establishment of the ESOP plan in late 1999, the Company did not
              make any contributions to the Savings Plan in the year 2001 and
              2000.

       (c)    OTHER POSTRETIREMENT BENEFIT PLANS

              The Company sponsors a health care plan and a life insurance plan
              that provides postretirement benefits to full-time employees who
              meet minimum age and service requirements. The cost of providing
              retiree health care and other postretirement benefits is
              recognized over the period the employee renders service to the
              Company.


                                       79                            (Continued)
<PAGE>


                       AMERICAN FINANCIAL HOLDINGS, INC.

                   Notes to Consolidated Financial Statements

                        December 31, 2001, 2000 and 1999


              The following table presents changes in the benefit obligation,
              changes in plan assets and the funded status of this plan for the
              periods indicated. The table also provides a reconciliation of the
              plan's funded status and the amount recognized in the Company's
              consolidated balance sheets:

<TABLE>
<CAPTION>

                                                                                                      DECEMBER 31,

                                                                                                --------------------------
                                                                                                   2001           2000
                                                                                                ------------   -----------
                                                                                                     (In thousands)

<S>                                                                                          <C>            <C>
              Change in benefit obligation:
                  Accumulated benefit obligation at beginning of year                        $      1,088   $      1,016
                  Service cost                                                                         30             20
                  Curtailment gain                                                                   (151)            --
                  Interest cost                                                                        77             77
                  Actuarial loss                                                                        1             42
                  Benefits paid                                                                       (63)           (67)
                                                                                                ------------   -----------

                  Accumulated benefit obligation at end of year                                       982          1,088
                                                                                                ------------   -----------
              Change in plan assets:
                  Fair value of plan assets at beginning of year                                       --             --
                  Employer contributions                                                               63             67
                  Benefits paid                                                                       (63)           (67)
                                                                                                ------------   -----------

                  Fair value of plan assets at end of year                                             --             --
                                                                                                ------------   -----------

              Funded status at end of year                                                           (982)        (1,088)
              Unrecognized net actuarial loss                                                         122            121
              Unrecognized prior service cost                                                          34             42
                                                                                                ------------   -----------

               Accumulated post-retirement liability                                         $       (826)  $       (925)
                                                                                                ============   ===========
</TABLE>


                                       80                            (Continued)
<PAGE>


                       AMERICAN FINANCIAL HOLDINGS, INC.

                   Notes to Consolidated Financial Statements

                        December 31, 2001, 2000 and 1999


              Periodic postretirement benefit cost includes the following
              components for the periods indicated:

<TABLE>
<CAPTION>

                                                                                YEARS ENDED DECEMBER 31,

                                                                            ----------------------------------
                                                                             2001         2000        1999
                                                                            --------    ---------   ----------
                                                                                      (In thousands)

<S>                                                                     <C>         <C>          <C>
                Service cost                                            $       30  $       20   $      34
                Interest cost                                                   77          77          70
                Curtailment gain                                              (151)          -           -
                Amortization                                                    10          10          10
                Recognized net actuarial loss                                    -           1           -
                                                                           --------    ---------   ----------

                Postretirement benefit cost                             $      (34) $      108   $     114
                                                                           ========    =========   ==========
</TABLE>


              For measurement purposes, the assumed annual rate of increase in
              the per capita cost of covered benefits (i.e., health care cost
              trend rate) was 10.0% and 8.7% for December 31, 2001 and 2000,
              respectively. The rate was assumed to decrease gradually to 5% by
              the year 2007 and remain at that level thereafter. An increase of
              1% in the assumed health care cost trend rate would increase the
              postretirement benefit obligation by $10,000 at December 31, 2001
              and increase the periodic postretirement benefit cost by $3,900
              for the year ended December 31, 2001. A decrease of 1% in the
              assumed health care cost trend rate would decrease the
              postretirement benefit obligation by $8,700 at December 31, 2001
              and decrease the postretirement benefit cost by $3,200 for the
              year ended December 31, 2001.

              The weighted-average discount rate used in determining the
              accumulated postretirement benefit obligation was 7.25% and 7.5%
              for December 31, 2001 and December 31, 2000, respectively.

       (d)    EMPLOYEE STOCK OWNERSHIP PLAN

              The Bank established the ESOP to provide substantially all
              employees of the Company the opportunity to also become
              stockholders. The ESOP borrowed $25.7 million from the Company and
              used the funds to purchase 1,336,625 shares of common stock in the
              initial subscription offering, and an additional 973,063 shares of
              the common stock of the Company in the open market subsequent to
              the offering. The loan will be repaid principally from the Bank's
              discretionary contributions to the ESOP over a remaining period of
              approximately 17 years from December 31, 2001. The unallocated
              ESOP shares are pledged as collateral for the loan. Dividends paid
              on unallocated shares are not considered dividends for financial
              reporting purposes and are used to pay principal and interest on
              the ESOP loan. Dividends on allocated shares are charged to
              retained earnings. At December 31, 2001, the loan had an
              outstanding balance of $23.4 million and an interest rate of 8.5%.
              Both the loan and the related interest are not recorded in the
              Company's consolidated financial statements. The amount of loan
              repayments made by the ESOP are used to reduce the unallocated
              common stock held by the ESOP. The


                                       81                            (Continued)
<PAGE>


                       AMERICAN FINANCIAL HOLDINGS, INC.

                   Notes to Consolidated Financial Statements

                        December 31, 2001, 2000 and 1999


              Company recorded approximately $2.7 million and $1.8 million ESOP
              compensation expense for the years ended December 31, 2001 and
              2000, respectively.

              The ESOP shares are summarized as follows:

<TABLE>
<CAPTION>

                                                                              2001          2000
                                                                              ----          ----

<S>                                                                         <C>           <C>
              Number of shares released for allocation during the year      118,526       118,526
              Number of  unallocated shares at end of year                2,014,958     2,133,484
              Market value of unallocated shares at end of year
                 (in thousands)                                          $   51,200    $   44,003
</TABLE>

       (e)    PERFORMANCE APPRECIATION UNIT PLANS

              From 1996 through October 1999, the Bank sponsored the Performance
              Appreciation Unit Plans ("PAU") for senior officers and
              nonemployee directors. Benefits under these plans were determined
              by reference to the performance of the Bank as reflected in
              year-to-year changes in the Bank's equity. The PAU, which was
              intended to provide participants with benefits and incentives that
              were comparable to those provided by a stock-based compensation
              program such as a stock option or stock appreciation rights plan,
              was terminated in 1999 due to the Conversion. Under the PAU,
              participants were awarded units corresponding to an interest in
              the appreciation over the term of the award of a "hypothetical
              share" of the Bank's equity. However, the recipient had no right
              to, or interest in, the Bank's equity. The initial awards were
              based on the Bank's equity at December 31, 1994 when each unit was
              valued at $18.33. At December 31, 1998, each unit was valued at
              $24.06. To compensate award participants for the potential
              reduction in benefits attributable to the early termination of the
              program, the Bank credited an additional value to outstanding
              awards. At the date of the Conversion (November 30, 1999), awards
              representing 246,750 units were outstanding. Expense under this
              plan in 1999 was $1.6 million. The 1999 expense included an
              additional charge of $620,000 for the additional value credited in
              connection with the termination of this plan. At termination,
              participants were given the option of receiving a cash payment
              equal to the value of their awards, or of deferring such payments.
              If the participant elected to defer receipt of the award, the
              amounts deferred could be transferred to a trust which acquired
              shares of the Company stock during the subscription period.
              Alternatively, the amount deferred could be held by the Company in
              its cash deferred compensation plan.

       (f)    STOCK-BASED DEFERRED COMPENSATION PLAN

              In November 1999, the Company established the Stock-Based Deferred
              Compensation Plan for the benefit of its directors and key
              employees. Under this plan, participants are allowed to defer
              compensation up to a selected date and then receive either a lump
              sum payment, or payments over periods of one to ten years.
              Compensation deferred is invested in the stock of the Company and
              placed in a grantor trust. The deferred compensation obligation
              was recorded in equity at an amount equal to the original amount
              of the compensation deferred. Distributions from the trust to



                                       82                            (Continued)
<PAGE>


                       AMERICAN FINANCIAL HOLDINGS, INC.

                   Notes to Consolidated Financial Statements

                        December 31, 2001, 2000 and 1999


              participants in this plan are made solely in the form of whole
              shares of common stock. If a participant dies prior to the
              distribution of all amounts he or she is entitled to, amounts will
              be distributable to his or her beneficiary in accordance with the
              distribution election. In addition to future deferral of
              compensation, each participant was allowed to transfer previously
              accrued benefits to this plan. As of December 31, 2001 and 2000,
              the trust held 154,020 and 160,579 shares of Company common stock,
              respectively.

       (g)    CASH DEFERRED COMPENSATION PLAN

              In November 1999, the Company established the Cash Deferred
              Compensation Plan for the benefit of its directors and key
              employees. The Plan allows participants to defer compensation
              until termination of service or another distribution date selected
              by the participant. The deferred compensation obligation is
              classified as a liability and adjusted with a corresponding charge
              to expense to reflect the changes in the amount owed to the
              participant. Amounts owed participants are credited with interest
              based on an annually adjusted rate. The obligation at December 31,
              2001 and December 31, 2000 was $1.5 million and $1.4 million,
              respectively. The expense for this plan in 2001 and 2000 was
              approximately $80,000 and $78,000, respectively.

       (h)    SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN

              In 1999, the Company entered into a special supplemental
              retirement plan with the President and CEO as an incentive for his
              continued employment. This plan provides benefits based on a
              percentage of his final average compensation less benefits
              available to him under other plans, including the Supplemental
              Plan. The projected benefit obligation under this plan as of
              December 31, 2001 and 2000 was $2.5 million and $2.3 million,
              respectively. The expense for this plan in 2001 and 2000 was
              approximately $160,000 and $121,000, respectively. In conjunction
              with the acquisition of American Bank of Connecticut (note 17),
              the Company terminated the special supplemental retirement plan.

        (i)   THE ESOP SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN

              In 1999, the Company also implemented a new plan to provide for
              similar supplemental executive benefits with respect to the ESOP.
              Specifically, the supplemental plan provides benefits to eligible
              individuals that cannot be provided under the ESOP as a result of
              the compensation limitations imposed by the Internal Revenue Code,
              but that would have been provided under the ESOP had there not
              been such limitations.

              The plan also provides supplemental benefits to designated
              individuals who retire, who terminate employment in connection
              with a change in control, or whose participation in the ESOP ends
              due to termination of the ESOP prior to the scheduled repayment of
              the ESOP loan. Generally, the plan provides the eligible
              individual with a benefit equal to what the individual would have
              received under the ESOP had he or she remained employed throughout
              the term of the ESOP or had the ESOP not been terminated prior to
              the scheduled repayment of the ESOP loan, less the benefits
              actually provided under the ESOP on behalf of such individual. An
              individual's benefits


                                       83                            (Continued)
<PAGE>


                       AMERICAN FINANCIAL HOLDINGS, INC.

                   Notes to Consolidated Financial Statements

                        December 31, 2001, 2000 and 1999


              under this plan will generally become payable upon the
              participant's retirement at age 65 or upon the change in control
              of the Company or the Bank. In 2001 this portion of the plan was
              terminated, however, the change in control provision remains in
              effect. The accrued liability was reversed which resulted in a net
              credit for the year in the plan expense of $336,000. In 2000 and
              1999, the Company recognized expense of $277,000 and $189,000,
              respectively, for this plan. The obligation under this Plan is
              invested in the Company's common stock and placed in a grantor
              trust. During 2001 the trust paid a portion of its obligation
              resulting in a decrease in the number of shares held to 6,827 as
              of December 31, 2001 from 12,874 shares as of December 31, 2000.
              These shares are recorded as a reduction of stockholders' equity
              at their original cost of $45,000 and $199,000 as of December 31,
              2001 and 2000, respectively.

       (j)    DIRECTORS' RETIREMENT PLAN

              In December 1998, the Company adopted a retirement plan for
              incumbent nonemployee directors to provide a retirement income
              supplement for directors with long service. The projected benefit
              obligation under this plan at December 31, 2001 and 2000 was
              $724,000 and $715,000, respectively. The Company recorded
              approximately $185,000, $173,000 and $66,000 of expense in
              connection with this plan for the years ended December 31, 2001,
              2000 and 1999, respectively.

       (k)    STOCK-BASED INCENTIVE PLAN

              In June 2000, the Company adopted a Stock-Based Incentive Plan
              ("Plan"). The Plan provides for grants of options to purchase
              common stock and awards of restricted stock ("Stock Awards") to
              eligible officers, employees and directors of the Company.

              The Plan allows the granting of Stock Awards at no cost to the
              recipients in an amount up to 4% of the shares issued in the
              Conversion, or 1,154,844 shares. During 2000, the Company granted
              Stock Awards equal to 3.8% of the shares issued in the Conversion
              or 1,104,840 shares using shares acquired for this purpose at a
              cost of $18.0 million. Compensation cost is being recognized for
              these awards over the five-year period from the grant date. The
              compensation cost charged to employee benefits expense for the
              Stock Awards during 2001 and 2000 was $3.6 million and $2.3
              million, respectively. The increase was due to the recording of a
              full twelve months of expense in 2001, whereas only six months of
              expense was recorded in 2000. The expense recorded in 2000
              includes a charge of $422,000 to reflect the cost of immediately
              vesting shares upon the death of one of the Company's directors.

              The Plan also allows the granting of stock options (either
              incentive stock options or nonqualified stock options) up to 10%
              of the shares issued in the Conversion or 2,887,110 shares. During
              2001 and 2000, the Company granted stock options equal to 0.1% and
              8.7% of the shares issued in the Conversion, or 31,500 and
              2,506,200 shares, respectively. Under the terms of the Plan, the
              exercise price of each option granted equals the market price of
              the Company's stock on the date of grant. Each option has a
              maximum contractual life of ten years and shares vest over five
              years from the grant date.


                                       84                            (Continued)
<PAGE>


                       AMERICAN FINANCIAL HOLDINGS, INC.

                   Notes to Consolidated Financial Statements

                        December 31, 2001, 2000 and 1999


              The following is a summary of the Company's stock options at
              December 31, 2001 and 2000 and changes during the year:

<TABLE>
<CAPTION>

                                                                      2001                            2000
                                                          ------------------------------  ------------------------------
                                                                           WEIGHTED-                        Weighted-
                                                                            AVERAGE                          Average
                                                                            EXERCISE                         Exercise
                                                             SHARES          PRICE           Shares           Price
                                                          ------------   ---------------  -------------    -------------
         (Shares in thousands)
<S>                                                           <C>        <C>                    <C>       <C>
         Options outstanding at beginning of  year            2,485      $       16.06              -     $          -

         Granted                                                 32              22.30          2,506            16.06
         Exercised                                             (121)             16.03              -                -
         Forfeited/cancelled                                    (22)             16.21           (21)            16.06
                                                          ------------   ---------------  -------------    -------------
         Options outstanding at end of year                   2,374      $       16.14          2,485     $      16.06

         Options exercisable at year-end                        675              16.04              -                -

         Weighted average per share fair value of
             options granted during the year                             $        4.62                    $       6.04
</TABLE>

                                       85                            (Continued)

<PAGE>


                       AMERICAN FINANCIAL HOLDINGS, INC.

                   Notes to Consolidated Financial Statements

                        December 31, 2001, 2000 and 1999


       In accordance with the provisions of APB No. 25 related to fixed stock
       options, compensation expense is not recognized in the Consolidated
       Statements of Income with respect to the Company's options since the
       exercise price equals the fair values of the common stock at the grant
       data. Had compensation cost for the Company stock option plans been
       determined consistent with SFAS No. 123 (the grant data fair value of
       stock options is recognized as expense over the vesting period) and
       recorded in the Consolidated Statement of Income, the Company's net
       income and earnings per share would have been reduced to the pro forma
       amounts indicated as follows:

<TABLE>
<CAPTION>

                                                                               YEARS ENDED DECEMBER 31
                                                                       -----------------------------------------
                                                                                2001                 2000
                                                                          -----------------    -----------------
                                                                        (In thousands, except per share data)

<S>                                                                       <C>                  <C>
       NET INCOME:
            As reported                                                   $        28,630      $       31,126
            Pro forma                                                              26,331              29,861

       BASIC EARNINGS PER SHARE:
            As reported                                                   $          1.40      $         1.19
            Pro forma                                                                1.29                1.14

       DILUTED EARNINGS PER SHARE:
            As reported                                                   $          1.33      $         1.18
            Pro forma                                                                1.22                1.13
</TABLE>


       The per share fair value of options granted in 2001 and 2000 was
       estimated using the Black-scholes option pricing model with assumptions
       used for grants issued during 2001 and 2000, respectively are as follows:
       dividend yield of 2.69% and 3.0%, expected volatility rate of 21.2% and
       21.3%, risk-free interest rate of 4.3% and 4.7% and expected option life
       of 5.0 and 6.0 years.


                                       86                            (Continued)
<PAGE>


                       AMERICAN FINANCIAL HOLDINGS, INC.

                   Notes to Consolidated Financial Statements

                        December 31, 2001, 2000 and 1999


         The following table summarizes information about the Company's
         stock options at December 31, 2001:

<TABLE>
<CAPTION>

                                                        Weighted-
                                                         Average           Weighted-                          Weighted
                                           Number       Remaining           Average                            Average
                                            Out-       Contractual          Exercise         Number           Exercise
                                          standing         Life              Price        Exercisable           Price
                                        -----------------------------------------------------------------------------------

         (Shares in thousands)

         Range of exercise prices:

<S>      <C>                                 <C>              <C>       <C>                      <C>      <C>
         $16.00 - $18.06 per share           2,342            8.46      $      16.06             675      $      16.04

         $18.13 - $26.94 per share              32            9.32             22.19               -                 -
                                        -------------- --------------    --------------- ---------------   ----------------
                                             2,374            8.47      $     $16.15             675      $      16.04
                                        ============== ==============    =============== ===============   ================
</TABLE>

(10)     INCOME TAXES

         The components of income tax expense are summarized as follows:

<TABLE>
<CAPTION>

                                                                              YEARS ENDED DECEMBER 31,
                                                                     --------------------------------------------
                                                                        2001             2000           1999
                                                                     ------------    -------------   ------------
                                                                                   (In thousands)

<S>      <C>                                                      <C>            <C>              <C>
         Current tax expense (benefit):
           Federal                                                $     14,130   $      15,112    $      7,539
           State                                                             -               -             (98)
                                                                     ------------    -------------   ------------

              Total current                                             14,130          15,112           7,441
                                                                     ------------    -------------   ------------

         Deferred tax expense (benefit):
           Federal                                                        (814)            607          (5,728)
           State (including effect of valuation  allowance )                 -               -              98
                                                                     -------------   -------------   ------------

              Total deferred                                              (814)            607          (5,630)
                                                                     ------------    -------------   ------------

           Total income tax expense                               $     13,316   $      15,719    $      1,811
                                                                     ============    =============   ============
</TABLE>


                                       87                            (Continued)

<PAGE>


                       AMERICAN FINANCIAL HOLDINGS, INC.

                   Notes to Consolidated Financial Statements

                        December 31, 2001, 2000 and 1999


       Income tax expense of $13.3 million, $15.7 million and $1.8 million for
       the years ended December 31, 2001, 2000 and 1999, respectively, differed
       from the amounts computed by applying the Federal income tax rate of 35%
       to pre-tax income as a result of the following:

<TABLE>
<CAPTION>

                                                                              YEARS ENDED DECEMBER 31,
                                                                     --------------------------------------------
                                                                        2001             2000           1999
                                                                     ------------    -------------   ------------
                                                                                   (In thousands)

<S>                                                               <C>            <C>              <C>
       Statutory federal income tax                               $     14,681   $      16,396    $      1,608

       Increase (decrease) in tax rates resulting from:

            Nondeductible expense                                            -               -             589

            Dividend received deduction                                   (316)           (366)           (327)

            Tax  exempt interest                                          (444)           (349)            (34)

            Increase in cash surrender value of bank-owned
               life insurance                                           (1,092)             (8)              -

            Other, net                                                     487              46             (25)
                                                                     ------------    -------------   ------------

       Income tax expense                                         $     13,316   $      15,719    $      1,811
                                                                     ============    =============   ============
</TABLE>


                                       88                          (Continued)

<PAGE>


                       AMERICAN FINANCIAL HOLDINGS, INC.

                   Notes to Consolidated Financial Statements

                        December 31, 2001, 2000 and 1999


       The tax effects of temporary differences and tax carryforwards that give
       rise to deferred tax assets and liabilities are presented below:

<TABLE>
<CAPTION>

                                                                                            DECEMBER 31,
                                                                                  --------------------------------
                                                                                        2001             2000
                                                                                  ---------------   --------------
                                                                                           (In thousands)
<S>                                                                          <C>                 <C>
       Deferred tax assets:
           Allowance for loan losses                                         $           3,941   $         3,836
           Postretirement benefits other than pensions                                     400               380
           Charitable contribution carryforward for tax purposes                         6,931             8,663
           Net operating loss carryforwards                                              1,761               850
           Stock options exercised                                                         677                 -
           Restricted stock awarded                                                      1,442                 -
           Other                                                                         2,823             1,447
                                                                                  ---------------   --------------
                 Total gross deferred tax assets                                        17,975            15,176

       Less valuation allowance                                                         (5,048)           (4,024)
                                                                                  ---------------   --------------

                 Deferred tax asset after valuation allowance                           12,927            11,152
                                                                                  ---------------   --------------

       Deferred tax liabilities:
           Net unrealized gains on securities available for sale                       (27,716)          (31,859)
           Net deferral of loan origination costs                                       (2,989)           (1,758)
           Bank premises and equipment, principally due to
              differences in depreciation                                                 (551)             (835)
           Excess of tax bad debt reserve over base year                                  (314)             (471)
           Pension plan                                                                   (565)             (382)
           Other                                                                          (113)             (127)
                                                                                  ---------------   --------------

                 Total gross deferred tax liabilities                                  (32,248)          (35,432)
                                                                                  ---------------   --------------

           Net deferred tax liability                                        $         (19,321)  $       (24,280)
                                                                                  ===============   ==============
</TABLE>


       At December 31, 2001, the Company had charitable contribution
       carryforwards of $17.4 million which expire in 2004. The utilization of
       charitable contributions for any tax year is limited to 10% of taxable
       income without regard to charitable contributions, net operating losses,
       and dividends received deductions. A corporation is permitted to carry
       over to the five succeeding tax year's contributions that exceeded the
       10% limitation, but deductions in those years are also subject to the
       maximum limitation. The Company also had state net operating loss
       carryforwards at December 31, 2001 of $36.1 million which principally
       expire in 2021.


                                       89                            (Continued)

<PAGE>


                       AMERICAN FINANCIAL HOLDINGS, INC.

                   Notes to Consolidated Financial Statements

                        December 31, 2001, 2000 and 1999


       Management believes it is more likely than not that the reversal of
       deferred tax liabilities and results of future operations will generate
       sufficient taxable income to realize the deferred tax assets, net of the
       valuation allowance. As of December 31, 2001, 2000 and 1999, the Company
       had a valuation allowance of $2.5 million, $1.5 million, and $1.2
       million, respectively, against its state deferred tax asset resulting
       from its creation of a Connecticut passive investment company in addition
       to other net deductible temporary differences. Under legislation that was
       enacted in 1998, Connecticut passive investment companies are not subject
       to the Connecticut Corporate Business Tax and dividends paid by the
       passive investment company to the Company are exempt from the Connecticut
       Corporate Business Tax. During 2001, the Company increased its valuation
       allowance by $1.0 million to offset an increase in the state deferred tax
       asset attributable to net deductible temporary differences and net
       operating loss carryforwards arising during the year. As of December 31,
       2001 and 2000 the Company had a valuation allowance of $2.5 million
       against the charitable contribution carryforward. There was no increase
       in the allowance during 2001.

       For income tax purposes, a bad debt reserve is maintained equal to the
       excess of tax bad debt deductions over actual losses charged against the
       reserve. The Company's base-year tax bad debt reserve was $24.6 million
       and the related unrecognized deferred tax liability was approximately
       $8.6 million at December 31, 2001. A deferred tax liability has not been
       recognized for the base-year tax bad debt reserve, since the Company does
       not expect that the reserve will become taxable in the foreseeable
       future. Events that would result in the recapture of the pre-1988 tax bad
       debt reserves into taxable income include distributions to the Parent
       Company from the Bank in excess of the Bank's earnings and profits or the
       repurchase of any of the Bank's outstanding stock.

(11)   NET INCOME PER COMMON SHARE

       Net income per common share for the year ended December 31, 2001 and 2000
       was computed as follows:

<TABLE>
<CAPTION>

                                                                                  2001              2000
                                                                              -----------------------------
                                                                            (In thousands, except per share data)
<S>                                                                          <C>           <C>
                 Net income                                                  $   28,630      $       31,126

                 Weighted-average common shares outstanding                      20,447              26,211
                 Plus common stock equivalents                                    1,109                 151
                                                                               ---------      --------------
                 Diluted weighted-average common shares                          21,556              26,362
                                                                               =========      ==============

                 Net income per common share:
                       Basic                                                 $     1.40      $         1.19
                       Diluted                                                     1.33                1.18
                                                                               =========      ==============
</TABLE>


       There were 5,000 and 18,500 anti-dilutive stock options not included in
       the computation of common stock equivalents because the options' exercise
       prices exceeded the average market price of the Company's common stock
       for 2001 and 2000, respectively.


                                       90                            (Continued)
<PAGE>

                       AMERICAN FINANCIAL HOLDINGS, INC.

                   Notes to Consolidated Financial Statements

                        December 31, 2001, 2000 and 1999


       Net income per common share data for the period of November 30, 1999 (the
       date of the Conversion) to December 31, 1999 is not meaningful due to the
       shortness of the period and, accordingly, has not been presented.
       Earnings per share data does not apply to periods prior to the
       Conversion, since the Bank was a mutual savings bank with no outstanding
       stock.

       As discussed more completely in note 17, on January 18, 2002, the Company
       completed its previously announced acquisition of American Bank of
       Connecticut. In conjunction with that acquisition the Company issued
       3,208,715 common shares and converted outstanding vested American Bank
       options to 807,066 American Financial Holdings, Inc. options.

(12)   FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK

       The Company is party to financial instruments with off-balance-sheet risk
       in the normal course of business to meet the financial needs of its
       customers. These financial instruments expose the Company to credit risk
       in excess of the amount recognized in the balance sheet.

       The Company's exposure to credit loss in the event of nonperformance by
       the other party to commitments to extend credits if such commitments are
       fulfilled, is represented by the contractual amount of those instruments.
       The Company uses the same credit policies in making commitments and
       conditional obligations as it does for on-balance-sheet instruments.

       The contract amounts of financial instruments with off-balance-sheet risk
       are as follows:

<TABLE>
<CAPTION>

                                                                                    DECEMBER 31,
                                                                          2001           2000             1999
                                                                  --------------    --------------   -------------
                                                                                    (In thousands)
<S>                                                           <C>               <C>               <C>
       Approved real estate loan commitments:
            Fixed rate                                        $        18,530   $         5,477   $        2,050
            Variable rate                                              60,877            17,036           20,371
       Approved consumer loan commitments                              11,713             3,193            5,069
       Approved commercial loan commitments                               955               143                -
       Unused portion of home equity lines of credit                  265,856           209,474          190,361
       Unused portion of construction loans                             7,809             7,251           16,003
       Unused checking overdraft lines of credit                          809             1,060              902
</TABLE>


       Commitments to extend credit are agreements to lend to a customer as long
       as there is no violation of any condition established in the contract.
       Commitments generally have fixed expiration dates or other termination
       clauses and may require payment of a fee. The Company evaluates each
       customer's creditworthiness on a case-by-case basis. The amount of
       collateral obtained, if deemed necessary, by the Company upon extension
       of credit is based on management's credit evaluation of the counterparty.
       Collateral obtained is primarily residential property located in
       Connecticut.


                                       91                            (Continued)
<PAGE>

                       AMERICAN FINANCIAL HOLDINGS, INC.

                   Notes to Consolidated Financial Statements

                        December 31, 2001, 2000 and 1999


(13)   OTHER COMPREHENSIVE INCOME

       The following tables summarize components of other comprehensive income
       and the related tax effects for the years ended December 31, 2001, 2000
       and 1999:

<TABLE>
<CAPTION>

                                                                             YEAR ENDED DECEMBER 31, 2001
                                                                   --------------------------------------------------
                                                                      BEFORE
                                                                        TAX           INCOME TAX        NET-OF-TAX
                                                                      AMOUNT            EFFECT            AMOUNT
                                                                   --------------   ---------------   ---------------
                                                                                    (In thousands)
<S>                                                             <C>                <C>              <C>
       Unrealized loss on available for sale securities:
           Unrealized holding losses arising during
              the period                                        $        (2,181)   $          870   $       (1,311)
           Reclassification adjustment for gains
              realized during the period                                 (8,212)            3,273           (4,939)
                                                                   --------------   ---------------   ---------------
              Other comprehensive loss                          $       (10,393)   $        4,143   $       (6,250)
                                                                   ==============   ===============   ===============

                                                                             Year ended December 31, 2000
                                                                   --------------------------------------------------
                                                                      Before
                                                                        tax           Income tax        Net-of-tax
                                                                      amount            effect            amount
                                                                   --------------   ---------------   ---------------
                                                                                    (In thousands)
       Unrealized gain on available for sale securities:
          Unrealized holding gains arising during
              the period                                        $         35,756   $      (14,257)  $       21,499
          Reclassification adjustment for gains
             realized during the period                                   (6,068)           2,419           (3,649)
                                                                   --------------   ---------------   ---------------
                    Other comprehensive income                  $         29,688   $      (11,838)  $       17,850
                                                                   ==============   ===============   ===============

                                                                             Year ended December 31, 1999
                                                                   --------------------------------------------------
                                                                      Before
                                                                       tax           Income tax         Net-of-tax
                                                                      amount           effect             Amount
                                                                   -------------   ----------------   ---------------
                                                                                    (In thousands)
       Unrealized loss on available for sale securities:
           Unrealized holding losses arising during
              the period                                        $       (16,088)  $         7,956   $       (8,132)
           Reclassification adjustment for gains
              realized during the period                                 (2,850)            1,410           (1,440)
                                                                   --------------  ----------------   ---------------
              Other comprehensive loss                          $       (18,938)  $         9,366   $       (9,572)
                                                                   ==============  ================   ===============
</TABLE>


                                       92                            (Continued)
<PAGE>


                      AMERICAN FINANCIAL HOLDINGS, INC.

                   Notes to Consolidated Financial Statements

                        December 31, 2001, 2000 and 1999


(14)  FOUNDATIONS

       In connection with the Conversion in 1999, the Company established
       American Savings Charitable Foundation (the "Charitable Foundation"). The
       Charitable Foundation was funded with 2,138,600 shares of the Company's
       common stock. The Charitable Foundation paid $21,386 and the Company
       contributed the remainder of the value for a total of $21.4 million. The
       Charitable Foundation makes grants and donations to non-profit and
       community groups in the community served by the Company. The Charitable
       Foundation is exempt by statute from federal income taxes under
       applicable provisions of the Internal Revenue Code.

       In 1995, the Bank established the American Savings Bank Foundation, Inc.
       (the "Foundation"). The Foundation was organized for charitable purposes
       and is exempt by statute from federal income taxes under applicable
       provisions of the Internal Revenue Code. The Bank has made annual
       contributions to the Foundation subject to the determination of its Board
       of Directors. In 1999, the Bank funded a 1998 contribution amounting to
       $212,000. In 1998, the Bank contributed $3.6 million to the Foundation,
       of which $2.3 million was for the 1998 contribution and $1.3 million
       represented a Board designated contribution for 1999. The contributions
       to the Foundation in 1999 and 1998 were made primarily in the form of
       investment securities. The Company did not make any contributions to the
       Foundation in 2000 and 2001.

       On November 28, 2000, the Boards of Directors of the Charitable
       Foundation and the Foundation voted to approve a merger of the two
       organizations effective December 31, 2000. The resulting organization was
       re-named the American Savings Foundation.

       In order to maintain Internal Revenue Code compliance, assets of the
       American Savings Foundation cannot be returned to the Company or directed
       for use of, or for the benefit of, the Company.

(15)   FAIR VALUE OF FINANCIAL INSTRUMENTS

       The methods and assumptions used to estimate fair values for the
       Company's financial instruments are set forth below.

       Fair values of cash and due from banks, federal funds sold, accrued
       interest receivable and accrued interest payable are based on the
       carrying amounts as reported in the consolidated balance sheet.

       Fair values of investment and mortgage-backed securities are based on
       quoted market prices or dealer quotes for similar instruments. The fair
       value of the Federal Home Loan Bank stock is estimated to equal the
       carrying amount, due to the historical experience that this stock is
       redeemed at par.

       Fair values for fixed-rate loans are estimated using discounted cash flow
       analyses using yields currently expected for pools of loans with similar
       terms and credit quality. Variable-rate loans are valued at carrying
       amount due to the repricing characteristics of the portfolio.

       The fair values of deposits with no stated maturity, such as demand
       deposits, regular savings, money management accounts, escrow and other
       deposits are assumed to equal the amount payable on demand.


                                       93                            (Continued)
<PAGE>
                      AMERICAN FINANCIAL HOLDINGS, INC.

                   Notes to Consolidated Financial Statements

                        December 31, 2001, 2000 and 1999


       Fair values of time deposits are estimated using a discounted cash flow
       calculation that applies interest rates currently being offered to a
       schedule of aggregate expected monthly maturities.

       Fair values of advances from the FHLB and borrowings under securities
       repurchase agreements are estimated using a discounted cash flow
       technique that applies interest rates currently being offered to
       schedules of aggregated monthly maturities of borrowings.

       The fair values of the Company's commitments to extend credit approximate
       their carrying amounts, which are insignificant at December 31, 2001 and
       2000.

       The following are the carrying amounts and estimated fair values of the
       Company's financial assets and liabilities, none of which were held for
       trading purposes:

<TABLE>
<CAPTION>

                                                                                 DECEMBER 31,
                                                    ----------------------------------------------------------------------
                                                                  2001                                 2000
                                                    ---------------------------------    ---------------------------------
                                                      CARRYING          ESTIMATED          Carrying          Estimated
                                                       AMOUNTS         FAIR VALUES          Amounts         fair values
                                                    --------------    ---------------    --------------    ---------------
                                                                                (In thousands)

<S>                                              <C>               <C>                <C>               <C>
       FINANCIAL ASSETS
       Cash and due from banks                   $       22,133    $       22,133     $       17,314    $       17,314
       Federal funds sold                                17,050            17,050             11,740            11,740
       Investment securities available
           for sale                                     311,293           311,293            351,211           351,211
       Mortgage-backed securities
           available for sale                           225,101           225,101            255,270           255,270
       Federal Home Loan Bank stock                      17,279            17,279             12,194            12,194
       Loans, net                                     1,214,847         1,253,420          1,151,048         1,158,166
       Accrued interest receivable                       11,120            11,120             13,012            13,012

       FINANCIAL LIABILITIES
       Regular savings                                  225,659           225,659            202,564           202,564
       NOW, money market,
           and demand deposits                          220,951           220,951            171,626           171,626
       Time deposits                                    677,639           687,462            752,146           755,343
       Mortgagors' escrow and other
           deposits                                      27,505            27,505             19,554            19,554
       Federal Home Loan Bank
           advances                                     301,444           307,264            167,944           168,283
       Securities repurchase
           agreements                                    10,000            11,385             10,000            10,783
       Accrued interest payable on
           deposits and borrowings                        1,855             1,855              1,622             1,622
</TABLE>


                                       94                            (Continued)
<PAGE>


                        AMERICAN FINANCIAL HOLDINGS, INC.

                   Notes to Consolidated Financial Statements

                        December 31, 2001, 2000 and 1999


(16)   PARENT COMPANY ONLY FINANCIAL INFORMATION

       The Parent Company began operations on November 30, 1999 in conjunction
       with the Bank's mutual-to-stock conversion and the Parent Company's
       subscription and direct community offering of its common stock. The
       following represents the Parent Company's balance sheets as of December
       31, 2001 and 2000, and the statements of income and cash flows for the
       year ended December 31, 2001, 2000 and the period from November 30, 1999
       through December 31, 1999.

<TABLE>
<CAPTION>

                                                                         DECEMBER 31,        December 31,
       BALANCE SHEETS                                                        2001                2000
                                                                      -----------------     ----------------
                                                                                   (In thousands)
       ASSETS

<S>                                                                <C>                  <C>
       Cash and cash equivalents                                   $           16,149   $           100,361
       Investment in American Savings Bank                                    369,746               409,787
       Investment securities available for
           sale (at fair value)                                                 4,007                 2,697
       Due from subsidiary                                                      1,445                     -
       Deferred tax asset                                                       6,105                13,668
       Other assets                                                                67                   248
                                                                      -----------------     ----------------

             Total assets                                          $          397,519   $           526,761
                                                                      =================     ================

       LIABILITIES AND STOCKHOLDERS' EQUITY
       Total liabilities                                          $            2,572   $            12,794
       Stockholders' equity                                                   394,947               513,967
                                                                      -----------------     ----------------

              Total liabilities and stockholders'
                equity                                             $          397,519   $           526,761
                                                                      =================     ================
</TABLE>


                                       95                            (Continued)
<PAGE>



                        AMERICAN FINANCIAL HOLDINGS, INC.

                   Notes to Consolidated Financial Statements

                        December 31, 2001, 2000 and 1999

<TABLE>
<CAPTION>

                                                                                                           For the period
                                                                                                          November 30, 1999
                                                    YEAR-ENDED                  Year-ended                     through
STATEMENTS OF INCOME                             DECEMBER 31, 2001           December 31, 2000            December 31, 1999
                                              ------------------------    ------------------------     ------------------------
                                                                               (In thousands)

<S>                                          <C>                          <C>                         <C>
Interest income                              $                1,167       $               2,841       $                   92
Dividend income                                                 121                         113                            -
Contribution of common stock
  to the Charitable Foundation                                    -                           -                      (21,365)
Salaries and employee benefits                               (5,366)                     (4,242)                           -
Other expenses                                                 (694)                       (535)                        (779)
                                              ------------------------    ------------------------     ------------------------
Loss before income taxes and
  undistributed loss of American
  Savings Bank                                               (4,772)                     (1,823)                     (22,052)
Income tax benefit\(expense)                                  1,711                        (122)                       7,478
                                              ------------------------    ------------------------     ------------------------
Loss before undistributed loss of
  American Savings Bank                                      (3,061)                     (1,945)                     (14,574)
Undistributed income/(loss) of
  American Savings Bank                                      31,691                      33,071                       (1,942)
                                              ------------------------    ------------------------     ------------------------
Net income/(loss)                            $               28,630       $              31,126       $              (16,516)
                                              ========================    ========================     ========================
</TABLE>


                                       96                            (Continued)
<PAGE>


                        AMERICAN FINANCIAL HOLDINGS, INC.

                   Notes to Consolidated Financial Statements

                        December 31, 2001, 2000 and 1999

<TABLE>
<CAPTION>

                                                                                        YEAR ENDED DECEMBER 31,
                                                                         ------------------------------------------------------
STATEMENTS OF CASH FLOWS                                                        2001               2000              1999
                                                                            --------------     -------------     --------------
                                                                                            (In thousands)

<S>                                                                      <C>               <C>               <C>
Operating activities:
  Net income (loss):                                                     $        28,630   $        31,126   $        (16,516)
    Adjustments to reconcile net income (loss) to each
      provided by operating activities:
    Contribution of common stock to the Charitable
      Foundation                                                                       -                 -             21,365
    Undistributed (income)/loss of American Savings Bank                         (31,691)          (33,071)             1,942
      (Decrease) increase in other liabilities                                   (10,222)            6,275              6,519
      (Increase) decrease in other assets                                         (1,264)             (246)                (3)
      Decrease (increase) in deferred tax asset                                    7,148                 -            (13,767)
      Distribution of ESOP shares                                                  2,745             1,845                706
                                                                            --------------     -------------     --------------
             Net cash (used) provided by operating activities                     (4,654)            5,929                246
                                                                            --------------     -------------     --------------
Investing activities:
  Distribution from (investment in) bank subsidiary                               64,859            60,274           (130,518)
  Purchase of investment securities available for sale                              (275)           (2,450)                 -
                                                                            --------------     -------------     --------------
              Net cash (used) provided by investing activities                    64,584            57,824           (130,518)
                                                                            --------------     -------------     --------------
Financing activities:
  Net proceeds from stock offering                                                     -                 -            260,986

  Net proceeds from issuance of common stock to Charitable
    Foundation                                                                         -                 -                 21
  Net shares issued for stock option plan                                          7,686                 -                  -
  Acquisition of common stock by ESOP                                                  -                 -            (25,661)
  Acquisition of common stock for stock-based compensation
    plans                                                                              -                 -             (1,755)
  Obligation to stock-based deferred compensation plans                             (188)               82              1,595
  Purchase of treasury stock                                                    (137,873)          (56,707)                 -
  Cash dividends paid                                                            (13,767)          (11,681)                 -
                                                                            --------------     -------------     --------------
                 Net cash (used) provided by financing activities               (144,142)          (68,306)           235,186
                                                                            --------------     -------------     --------------

Net (decrease) increase in cash and cash equivalents                             (84,212)           (4,553)           104,914

Cash and cash equivalents at beginning of period                                 100,361           104,914                  -
                                                                            --------------     -------------     --------------

Cash and cash equivalents at end of period                               $        16,149    $      100,361   $        104,914
                                                                            ==============     =============     ==============
</TABLE>


                                       97                            (Continued)


<PAGE>

                        AMERICAN FINANCIAL HOLDINGS, INC.

                   Notes to Consolidated Financial Statements

                        December 31, 2001, 2000 and 1999


(17)   RECENT ACQUISITION

       Following the close of business on January 18, 2002, the Parent Company
       completed the acquisition of American Bank of Connecticut, a state
       chartered savings bank, with American Bank of Connecticut merging into
       American Savings Bank. American Bank of Connecticut with assets of
       approximately $900 million, was headquartered in Waterbury, Connecticut
       and operated 17 branches in the cities of Waterbury, Torrington and
       contiguous towns. The transaction was accounted for using the purchase
       method of accounting in accordance with Statement of Financial Accounting
       Standards No. 141, "Business Combinations." The Company acquired all of
       the outstanding common stock of American Bank of Connecticut for
       approximately $159.6 million ($73.8) million in cash and $85.8 million in
       common stock and options), excluding transaction costs.


                                       98                            (Continued)
<PAGE>

                       AMERICAN FINANCIAL HOLDINGS, INC.

                   Notes to Consolidated Financial Statements

                        December 31, 2001, 2000 and 1999


(18)   SELECTED QUARTERLY CONSOLIDATED FINANCIAL INFORMATION (UNAUDITED)

       The following table presents quarterly financial information of the
       Company for 2001 and 2000:

<TABLE>
<CAPTION>

                                                                  FIRST          SECOND          THIRD           FOURTH
                                                                 QUARTER        QUARTER         QUARTER         QUARTER
                                                              ------------    -----------     -----------    -------------
                                                                                       (In thousands)

<S>                                                        <C>              <C>            <C>             <C>
     2001
     Interest and dividend income                          $     31,445     $     30,377   $      30,247   $     28,959
     Interest expense                                            15,593           15,691          15,313         14,643
                                                               ------------    -----------     -----------    -------------

     Net interest income before provision for loan losses        15,852           14,686          14,934         14,316
     Provision for loan losses                                      300              100              50              -
                                                               ------------    -----------     -----------    -------------

     Net interest income after provision for loan losses         15,552           14,586          14,884         14,316
     Non-interest income                                          3,677            6,589           3,941          4,447
     Non-interest expense                                         8,238           10,522           8,681          8,605
                                                               ------------    -----------     -----------    -------------

     Income before income taxes                                  10,991           10,653          10,144         10,158
     Income taxes                                                 3,541            3,403           3,110          3,262
                                                               ------------    -----------     -----------    -------------

     Net income                                            $      7,450     $      7,250   $       7,034   $      6,896
                                                               ============    ===========     ===========    =============
     Net income per common share:
       Basic                                               $       0.32     $       0.35   $        0.37   $       0.38
       Diluted                                             $       0.31     $       0.34   $        0.34   $       0.35
                                                               ============    ===========     ===========    =============

     2000
     Interest and dividend income                          $     31,092     $     31,730   $      32,343   $     32,458
     Interest expense                                            14,408           14,478          15,465         15,580
                                                               ------------    -----------     -----------    -------------

     Net interest income before provision for loan losses        16,684           17,252          16,878         16,878
     Provision for loan losses                                      550              570             400            375
                                                               ------------    -----------     -----------    -------------

     Net interest income after provision for loan losses         16,134           16,682          16,478         16,503
     Non-interest income                                          2,847            3,046           3,257          2,944
     Non-interest expense                                         7,259            7,101           8,272          8,414
                                                               ------------    -----------     -----------    -------------

     Income before income taxes                                  11,722           12,627          11,463         11,033
     Income taxes                                                 4,147            4,240           3,833          3,499
                                                               ------------    -----------     -----------    -------------

     Net income                                            $      7,575     $      8,387   $       7,630   $      7,534
                                                               ============    ===========     ===========    =============

     Net income per common share:
       Basic                                               $       0.28     $      0.31    $        0.30   $       0.30
       Diluted                                             $       0.28     $      0.31    $        0.29   $       0.30
                                                               ============    ===========     ===========    =============
</TABLE>

                                       99