<PAGE>
INTERESTS IN
AMERICAN SAVINGS BANK
EMPLOYEES' SAVINGS & PROFIT SHARING PLAN AND TRUST
AND
OFFERING OF 700,000 SHARES OF
AMERICAN FINANCIAL HOLDINGS, INC.
COMMON STOCK ($.01 PAR VALUE)
This prospectus supplement relates to the offer and sale to participants in
the American Savings Bank Employees' Savings & Profit Sharing Plan and Trust of
participation interests and shares of common stock of American Financial
Holdings, Inc.
The Board of Directors of American Savings has adopted a plan that will
convert the structure of American Savings from a mutual savings institution to a
stock savings institution. As part of the conversion, American Financial
Holdings, Inc. has been established to acquire all of the stock of American
Savings and simultaneously offer American Financial common stock to the public
under certain purchase priorities in the plan of conversion. Savings Plan
participants are now permitted to direct the trustee of the Savings Plan to use
their current account balances to subscribe for and purchase shares of American
Financial common stock through the American Financial Stock Fund. Based upon
the value of the Savings Plan assets at May 31, 1999, the trustee of the Savings
Plan could purchase up to 700,000 shares of American Financial common stock
assuming a purchase price of $10.00 per share. This prospectus supplement
relates to the election of Savings Plan participants to direct the trustee of
the Savings Plan to invest all or a portion of their Savings Plan accounts in
American Financial common stock.
The prospectus dated October 12, 1999, of American Financial, which we have
attached to this prospectus supplement, includes detailed information regarding
the conversion of American Savings, American Financial common stock and the
financial condition, results of operations and business of American Savings.
This prospectus supplement provides information regarding the Savings Plan. You
should read this prospectus supplement together with the prospectus and keep
both for future reference.
Please refer to "Risk Factors" beginning on page 10 of the prospectus.
Neither the Securities and Exchange Commission, the Office of Thrift
Supervision, the Federal Deposit Insurance Corporation, nor any other state or
federal agency or any state securities commission, has approved or disapproved
these securities. Any representation to the contrary is a criminal offense.
These securities are not deposits or accounts and are not insured or guaranteed
by the Federal Deposit Insurance Corporation or any other government agency.
This prospectus supplement may be used only in connection with offers and
sales by American Financial of interests or shares of common stock under the
Savings Plan to employees of American Savings. No one may use this prospectus
supplement to reoffer or resell interests or shares of common stock acquired
through the Savings Plan.
You should rely only on the information contained in this prospectus
supplement and the attached prospectus. American Financial, American Savings
and the Savings Plan have not authorized anyone to provide you with information
that is different.
This prospectus supplement does not constitute an offer to sell or
solicitation of an offer to buy any securities in any jurisdiction to any person
to whom it is unlawful to make an offer or solicitation in that jurisdiction.
Neither the delivery of this prospectus supplement and the prospectus nor any
sale of common stock shall under any circumstances imply that there has been no
change in the affairs of American Savings or the Savings Plan since the date of
this prospectus supplement, or that the information contained in this prospectus
supplement or incorporated by reference is correct as of any time after the date
of this prospectus supplement.
The date of this Prospectus Supplement is October 12, 1999.
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TABLE OF CONTENTS
<TABLE>
<S> <C>
THE OFFERING................................................................. 1
Securities Offered...................................................... 1
Election to Purchase American Financial Common Stock in the Conversion
of American Savings.................................................. 1
Value of Participation Interests........................................ 1
Method of Directing Transfer............................................ 2
Time for Directing Transfer............................................. 2
Irrevocability of Transfer Direction.................................... 2
Purchase Price of American Financial Common Stock....................... 2
Nature of a Participant's Interest in American Financial Common Stock... 2
Voting and Tender Rights of American Financial Common Stock............. 2
DESCRIPTION OF THE SAVINGS PLAN.............................................. 3
Introduction............................................................ 3
Eligibility and Participation........................................... 3
Contributions Under the Savings Plan.................................... 3
Limitations on Contributions............................................ 4
Investment of Contributions............................................. 5
Benefits Under the Savings Plan......................................... 7
Withdrawals and Distributions From the Savings Plan..................... 7
Administration of the Savings Plan...................................... 7
Reports to Savings Plan Participants.................................... 8
Plan Administrator...................................................... 8
Amendment and Termination............................................... 8
Merger, Consolidation or Transfer....................................... 8
Federal Income Tax Consequences......................................... 8
Restrictions on Resale.................................................. 10
SEC Reporting and Short-Swing Profit Liability.......................... 11
LEGAL OPINIONS............................................................... 11
CHANGE OF INVESTMENT ALLOCATION FORM
</TABLE>
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THE OFFERING
Securities Offered
The securities offered in connection with this prospectus supplement are
participation interests in the Savings Plan. Assuming a purchase price of
$10.00 per share, the trustee may acquire up to 700,000 shares of American
Financial common stock for the American Financial Stock Fund. The interests
offered under this prospectus supplement are conditioned on the completion of
the conversion of American Savings. Your investment in the American Financial
Stock Fund in connection with the conversion of American Savings is also
governed by the purchase priorities contained in the plan of conversion of
American Savings.
This prospectus supplement contains information regarding the Savings Plan.
The attached prospectus contains information regarding the conversion of
American Savings and the financial condition, results of operations and business
of American Savings. The address of the principal executive office of American
Savings is 178 Main Street, New Britain, Connecticut 06051. The telephone
number of American Savings is (860) 832-4000.
Election to Purchase American Financial Common Stock in the Conversion of
American Savings
In connection with the conversion of American Savings, the Savings Plan
will permit you to direct the trustee to transfer all or part of the funds which
represent your current beneficial interest in the assets of the Savings Plan to
the American Financial Stock Fund. The trustee of the Savings Plan will
subscribe for American Financial common stock offered for sale in connection
with the conversion of American Savings in accordance with each participant's
direction. If there is not enough Common Stock in the conversion to fill all
subscriptions, the Common Stock will be apportioned and the trustee for the
Savings Plan may not be able to purchase all of the Common Stock you requested.
In such case, the trustee will purchase shares in the open market, on your
behalf, after the conversion to fulfill your initial request. Such purchases
may be at prices higher than the initial public offering price.
All plan participants are eligible to direct a transfer of funds to the
American Financial Stock Fund. However, such directions are subject to the
purchase priorities in the plan of conversion of American Savings. Your order
will be filled based on your status as an eligible account holder or
supplemental eligible account holder in the conversion of American Savings. An
eligible account holder is a depositor whose savings account(s) totalled $50.00
or more on December 31, 1997. A supplemental eligible account holder is a
depositor whose savings account(s) totalled $50 or more on September 30, 1999.
No eligible account holders or supplemental eligible account holders may
purchase in the subscription offering more than $500,000 of American Financial
common stock. If you fall into one of the above subscription offering
categories, you have subscription rights to purchase shares of common stock in
the subscription offering and you may use funds in the Savings Plan account to
pay for the shares of American Financial common stock which you are eligible to
purchase.
Value of Participation Interests
As of May 31, 1999, the market value of the assets of the Savings Plan
equaled approximately $7,000,000. The plan administrator has informed each
participant of the value of his or her beneficial interest in the Savings Plan
as of May 31, 1999. The value of Savings Plan assets represents past
contributions to the Savings Plan on your behalf, plus or minus earnings or
losses on the contributions, less previous withdrawals and loans.
Method of Directing Transfer
The last two pages of this prospectus supplement is a form for you to
direct a transfer to the American Financial Stock Fund (the "Change of
Investment Allocation Form"). If you wish to transfer
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all, or part, in multiples of not less than 1%, of your beneficial interest in
the assets of the Savings Plan to the American Financial Stock Fund, you should
complete the Change of Investment Allocation Form. If you do not wish to make
such an election at this time, you do not need to take any action. The minimum
investment in the American Financial Stock Fund during the initial public
offering is $250.
Time for Directing Transfer
The deadline for submitting a direction to transfer amounts to the American
Financial Stock Fund in connection with the conversion of American Savings is
October 29, 1999. You should return the Change of Investment Allocation Form to
the Human Resources Department of American Savings by 4:00 p.m. on October 29,
1999.
Irrevocability of Transfer Direction
Your direction to transfer amounts credited to such account in the Savings
Plan to the American Financial Stock Fund cannot be changed.
Purchase Price of American Financial Common Stock
The trustee will use the funds transferred to the American Financial Stock
Fund to purchase shares of American Financial common stock in the conversion of
American Savings. The trustee will pay the same price for shares of American
Financial common stock as all other persons who purchase shares of American
Financial common stock in the conversion of American Savings. If there is not
enough Common Stock in the conversion to fill all subscriptions, the Common
Stock will be apportioned and the trustee for the Savings Plan may not be able
to purchase all of the Common Stock you requested. In such case, the trustee
will purchase shares in the open market, on your behalf, after the conversion to
fulfill your initial request. Such purchases may be at prices higher than the
initial public offering price.
Nature of a Participant's Interest in American Financial Common Stock
The trustee will hold American Financial common stock in the name of the
Savings Plan. The trustee will allocate shares of common stock acquired at your
direction to your account under the Savings Plan. Therefore, earnings with
respect to your account should not be affected by the investment designations of
other participants in the Savings Plan.
Voting and Tender Rights of American Financial Common Stock
The Trustee generally will exercise voting and tender rights attributable
to all American Financial common stock held by the American Financial Stock Fund
as directed by participants with interests in the American Financial Stock Fund.
With respect to each matter as to which holders of American Financial common
stock have a right to vote, you will be given voting instruction rights
reflecting your proportionate interest in the American Financial Stock Fund.
The number of shares of American Financial common stock held in the American
Financial Stock Fund that are voted for and against on each matter will be
proportionate to the number of voting instruction rights exercised in such
manner. If there is a tender offer for American Financial common stock, the
Savings Plan provides that each participant will be allotted a number of tender
instruction rights reflecting such participant's proportionate interest in the
American Financial Stock Fund. The percentage of shares of American Financial
common stock held in the American Financial Stock Fund that will be tendered
will be the same as the percentage of the total number of tender instruction
rights that are exercised in favor of tendering. The remaining shares of
American Financial common stock held in the American Financial Stock Fund will
not be tendered. The Savings Plan makes provisions for participants to exercise
their voting instruction rights and tender instruction rights on a confidential
basis.
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DESCRIPTION OF THE SAVINGS PLAN
I. Introduction
Effective September 1, 1999, American Savings adopted the American Savings
Bank Employees' Savings & Profit Sharing Plan and Trust. American Savings
intends for the Savings Plan to comply, in form and in operation, with all
applicable provisions of the Internal Revenue Code and the Employee Retirement
Income Security Act or "ERISA." American Savings may change the Savings Plan
from time to time in the future to ensure continued compliance with these laws.
American Savings may also amend the Savings Plan from time to time in the future
to add, modify, or eliminate certain features of the plan, as it sees fit. As a
plan governed by the Employee Retirement Income Security Act of 1974, as
amended, federal law provides you with various rights and protections as a plan
participant. Although the Savings Plan is governed by many of the provisions of
the Employee Retirement Income Security Act of 1974, as amended, your benefits
under the plan are not guaranteed by the Pension Benefit Guaranty Corporation.
Reference to Full Text of Plan. The following portions of this prospectus
supplement provide an overview of the material provisions of the Savings Plan.
American Savings qualifies this overview in its entirety by reference to the
full text of the Savings Plan. You may obtain copies of the full Savings Plan
document by sending a request to the Human Resources Department at American
Savings. You should carefully read the full text of the Savings Plan document
to understand your rights and obligations under the plan.
II. Eligibility and Participation
Any employee of American Savings may participate in the Savings Plan as of
the first day of the month following completion of one "year of service". For
purposes of the Savings Plan, you generally complete one "year of service" if
you complete 1,000 hours of service with American Savings within a twelve-
consecutive-month period.
As of September 8, 1999, 232 of the 244 eligible employees of American
Savings elected to participate in the Savings Plan.
III. Contributions Under the Savings Plan
Savings Plan Participant Contributions. The Savings Plan permits each
participant to annually defer receipt of up to 15% of compensation that American
Savings would otherwise currently pay. For purposes of calculating deferrals,
the Savings Plan considers compensation to include your base salary, plus
overtime, bonuses and commissions. However, by law, the Savings Plan may not
consider more than $160,000 of compensation for purposes of determining
deferrals for 1999. Participants in the Savings Plan may modify the amount
contributed to the plan, effective on the first day of each calendar quarter.
American Savings Contributions. American Savings has discretion under the
Savings Plan about whether or not to make matching contributions. American
Savings currently makes matching contributions to the Savings Plan equal to 50%
of a Participant's contributions up to 6% of a participant's compensation for
purposes of the Savings Plan. American Savings may also make special
contributions to the Savings Plan in an amount determined by American Savings as
of the last day of the plan year for all employees who participated in the
Savings Plan on the last day of the plan year.
IV. Limitations on Contributions
Limitation on Employee Salary Deferral. Although the Savings Plan permits
you to defer up to 15% of your compensation, by law your total deferrals under
the Savings Plan, together with similar
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plans, may not exceed $10,000 for 1999. The Internal Revenue Service will
periodically increase this annual limitation. Contributions in excess of this
limitation, or excess deferrals, will be included in an affected participant's
gross income for federal income tax purposes in the year they are made. In
addition, a participant will have to pay federal income taxes on any excess
deferrals when distributed by the Savings Plan to the participant, unless the
excess deferral and any related income allocable is distributed to the
participant not later than the first April 15th following the close of the
taxable year in which the excess deferral is made. Any income on the excess
deferral that is distributed not later than such date shall be treated, for
federal income tax purposes, as earned and received by the participant in the
taxable year in which the distribution is made.
Limitations on Annual Additions and Benefits. Under the requirements of
the Internal Revenue Code, the Savings Plan provides that the total amount of
contributions and forfeitures (annual additions) allocated to a participant
during any year may not exceed the lesser of 25% of the participant's
compensation for that year, or $30,000. The Savings Plan will also limit annual
additions to the extent necessary to prevent the limitations contained in the
Internal Revenue Code for all of the qualified defined benefit plans and defined
contribution plans maintained by American Savings from being exceeded.
Limitation on Plan Contributions for Highly Compensated Employees. Special
provisions of the Internal Revenue Code limit the amount of salary deferrals and
matching contributions that may be made to the Savings Plan in any year on
behalf of highly compensated employees in relation to the amount of deferrals
and matching contributions made by or on behalf of all other employees eligible
to participate in the Savings Plan. If these limitations are exceeded, the
level of deferrals by highly compensated employees must be adjusted.
In general, a highly compensated employee includes any employee who, (1)
was a five percent owner of the sponsoring employer at any time during the year
or preceding year, or (2) had compensation for the preceding year in excess of
$80,000 and, if the sponsoring employer so elects, was in the top 20% of
employees by compensation for such year. The dollar amounts in the foregoing
sentence are for 1999, but maybe adjusted annually to reflect increases in the
cost of living.
Top-Heavy Plan Requirements. If for any calendar year the Savings Plan is
a Top-Heavy Plan, then American Savings may be required to make certain minimum
contributions to the Savings Plan on behalf of non-key employees. In addition,
certain additional restrictions would apply with respect to the combination of
contributions to the Savings Plan and projected annual benefits under any
defined benefit plan maintained by American Savings.
In general, the Savings Plan will be treated as a "Top-Heavy Plan" for any
calendar year if, as of the last day of the preceding calendar year, the
aggregate balance of the accounts of participants who are Key Employees exceeds
60% of the aggregate balance of the accounts of all participants. Key Employees
generally include any employee who, at any time during the calendar year or any
of the four preceding years, is:
(1) an officer of American Savings Bank having annual compensation in
excess of $60,000 who is in an administrative or policy-making capacity,
(2) one of the ten employees having annual compensation in excess of
$30,000 and owning, directly or indirectly, the largest interests in American
Savings,
(3) a person who owns directly or indirectly more than 5% of the stock of
American Financial, or stock possessing more than 5% of the total combined
voting power of all stock of American Financial, or
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(4) a person who owns directly or indirectly combined voting power of all
stock and more than 1% of the total stock of American Financial and has annual
compensation in excess of $150,000.
The foregoing dollar amounts are for 1999.
V. Investment of Contributions
All amounts credited to participants' accounts under the Savings Plan are
held in trust. A trustee appointed by the Board of Directors of American
Savings administers the trust.
The Savings Plan offers the following investment choices:
S&P 500 Stock Fund. This stock fund invests in the stocks of a broad array
of established U.S. companies. Its objective is long-term: to earn higher
returns by investing in the largest companies in the U.S. economy.
Stable Value Fund. This fund invests primarily in Guaranteed Investment
Contracts and Synthetic Guaranteed Investment Contracts. These contracts pay a
steady rate of interest over a certain period of time, usually between three and
five years. Its objective is short to intermediate term: to achieve a stable
return over short to intermediate periods of time while preserving the value of
your investment.
S&P MidCap Stock Fund. This stock fund invests in the stocks of mid-sized
U.S. companies, which are expected to grow faster than larger, more established
companies. Its objective is long-term: to earn higher returns which reflect the
growth potential of mid-sized companies.
Money Market Fund. This fund invests in a broad range of high-quality,
short-term instruments issued by banks, corporations and the U.S. Government and
its agencies. These instruments include certificates of deposit and U.S.
Treasury bills. Its objective is short-term: to achieve competitive, short-term
rates of return while preserving the value of your principal.
Government Bond Fund. This bond fund invests in U.S. Treasury bonds with a
maturity of 20 years or more. Its objective is long-term: to earn a higher
level of income along with the potential for capital appreciation.
International Stock Fund. This fund invests in over 1,000 foreign stocks
in 20 countries, based in Europe, Australia, and the Far East. Its objective is
long-term: to offer the potential return of investing in the stocks of
established non-U.S. companies, as well as the potential risk-reduction of broad
diversification.
Income Plus Asset Allocation Fund. This fund diversifies among a broad
range of stable value securities to reduce short-term risk and among a broad
range of large U.S. and international companies to capture growth potential.
The Fund is structured to take advantage of market opportunities with a small
flexible component. Its objective is intermediate-term: to preserve the value
of your investment over short periods of time and to offer some potential for
growth.
Growth and Income Asset Allocation Fund. This fund diversifies among U.S.
and international stocks, U.S. bonds, and stable value investments to pursue
long-term appreciation and short-term stability and takes advantage of market
opportunities with a small flexible component. Its objective is intermediate-
term: to provide a balance between the pursuit of growth and protection from
risk.
Growth Asset Allocation Fund. This fund diversifies among a broad range of
domestic and international stocks and takes advantage of market opportunities
with a large flexible component. Its objective is long-term: to pursue high
growth of your investment over time.
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The Savings Plan now provides the American Financial Stock Fund as an
additional choice to these investment alternatives. The American Financial
Stock Fund invests primarily in the common stock of American Financial.
Participants in the Savings Plan may direct the trustee to invest all or a
portion of their Savings Plan account balance in the American Financial Stock
Fund.
The annual percentage return on the funds (net of fees) listed above for
the prior three years was:
<TABLE>
<CAPTION>
1998 1997 1996
------ ------ ------
<S> <C> <C> <C>
S&P 500 Stock Fund.................................. 27.9% 32.7% 22.3%
Stable Value Fund................................... 5.9 6.2 6.5
S&P MidCap Stock Fund............................... 18.6 31.5 18.6
Money Market Fund................................... 5.5 5.5 5.6
Government Bond Fund................................ 13.8 15.4 (2.3)
International Stock Fund............................ 19.3 3.6 10.6
Income Plus Asset Allocation Fund................... 9.7 8.9 8.3
Growth and Income Asset Allocation Fund............. 15.5 13.6 12.3
Growth Asset Allocation Fund........................ 24.3 19.0 18.0
</TABLE>
The American Financial Stock Fund consists of investments in the common
stock of American Financial made on the effective date of the conversion of
American Savings. After the conversion of American Savings, the trustee of the
Savings Plan will, to the extent practicable, use all amounts held by it in the
American Financial Stock Fund, including cash dividends paid on the common stock
held in the fund, to purchase shares of common stock of American Financial.
As of the date of this prospectus supplement, none of the shares of
American Financial common stock have been issued or are outstanding and there is
no established market for the American Financial common stock. Accordingly,
there is no record of the historical performance of the American Financial Stock
Fund. Performance of the American Financial Stock Fund depends on a number of
factors, including the financial condition and profitability of American
Financial and American Savings and market conditions for American Financial
common stock generally.
Investments in the American Financial Stock Fund may involve certain
special risks in investments in the common stock of American Financial. For a
discussion of these risk factors, see "Risk Factors" beginning on page 10 of the
prospectus.
VI. Benefits Under the Savings Plan
Vesting. You are always 100% vested in your elective deferrals under the
Savings Plan. You vest in regular matching contributions at a rate of 100%
after three (3) years of employment with American Savings.
VII. Withdrawals and Distributions From the Savings Plan
Withdrawals Before Termination of Employment. You may receive in-service
distributions from the Savings Plan under limited circumstances in the form of
hardship distributions, withdrawal of rollover contributions . In order to
qualify for a hardship withdrawal, you must have an immediate and substantial
need to meet certain expenses and have no other reasonably available resources
to meet the financial need. If you qualify for a hardship distribution, the
trustee will make the distribution proportionately from the investment funds in
which you have invested your account balances. You may not receive more than
one (1) hardship withdrawal in any calendar year.
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Distribution Upon Retirement or Disability. Upon retirement or disability,
you may receive a partial lump sum payment or a full lump sum payment from the
Savings Plan equal to the vested value of your accounts.
Distribution Upon Death. If you die before your benefits are paid from the
Savings Plan, your benefits will be paid to your surviving spouse or beneficiary
under one or more of the forms available under the Savings Plan.
Distribution Upon Termination for Any Other Reason. If you terminate
employment for any reason other than retirement, disability or death and your
account balance exceeds $500, the trustee will make your distribution on your
normal retirement date, unless you request otherwise. If your account balances
does not exceed $500, the trustee will generally distribute your benefits to you
as soon as administratively practicable following termination of employment.
Nonalienation of Benefits. Except with respect to federal income tax
withholding and as provided with respect to a qualified domestic relations
order, benefits payable under the Savings Plan shall not be subject in any
manner to anticipation, alienation, sale, transfer, assignment, pledge,
encumbrance, charge, garnishment, execution, or levy of any kind, either
voluntary or involuntary, and any attempt to anticipate, alienate, sell,
transfer, assign, pledge, encumber, charge or otherwise dispose of any rights to
benefits payable under the Savings Plan shall be void.
Applicable federal tax law requires the Savings Plan to impose substantial
restrictions on your right to withdraw amounts held under the plan before your
termination of employment with American Savings. Federal law may also impose an
excise tax on withdrawals made from the Savings Plan before you attain 59 1/2
years of age regardless of whether the withdrawal occurs during your employment
with American Savings or after termination of employment.
Administration of the Savings Plan
The trustee with respect to the Savings Plan is the named fiduciary of the
Savings Plan for purposes of ERISA.
Trustees. The board of trustees of American Savings appoints the trustee
to serve at its pleasure. The board of trustees has appointed Bank of New York
as trustee of the American Financial Stock Fund.
The trustee receives, holds and invests the contributions to the Savings
Plan in trust and distributes them to participants and beneficiaries in
accordance with the terms of the Savings Plan and the directions of the plan
administrator. The trustee is responsible for investment of the assets of the
trust.
Reports to Savings Plan Participants
The plan administrator will furnish you a statement at least quarterly
showing the balance in your account as of the end of that period, the amount of
contributions allocated to your account for that period, and any adjustments to
your account to reflect earnings or losses.
Plan Administrator
The current plan administrator of the Savings Plan is American Savings.
The plan administrator is responsible for the administration of the Savings
Plan, interpretation of the provisions of the plan, prescribing procedures for
filing applications for benefits, preparation and distribution of information
explaining the plan, maintenance of plan records, books of account and all other
data necessary for the proper administration of the plan, and preparation and
filing of all returns and reports relating to the Plan which are required to be
filed with the U.S. Department of Labor and the Internal Revenue Service, and
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for all disclosures required to be made to participants, beneficiaries and
others under Employee Retirement Income Security Act of 1974, as amended.
Amendment and Termination
American Savings intends to continue the Savings Plan indefinitely.
Nevertheless, American Savings may terminate the Savings Plan at any time. If
American Savings terminates the Savings Plan in whole or in part, then
regardless of other provisions in the plan, all affected participants will
become fully vested in their accounts. American Savings reserves the right to
make, from time to time, changes which do not cause any part of the trust to be
used for, or diverted to, any purpose other than the exclusive benefit of
participants or their beneficiaries; provided, however, that American Savings
may amend the plan as it determines necessary or desirable, with or without
retroactive effect, to comply with the Employee Retirement Income Security Act
of 1974, as amended, or the Internal Revenue Code.
Merger, Consolidation or Transfer
If the Savings Plan merges or consolidates with another plan or transfers
the trust assets to another plan, and if either the Savings Plan or the other
plan is then terminated, the Savings Plan requires that you would receive a
benefit immediately after the merger, consolidation or transfer. The benefit
would be equal to or greater than the benefit you would have been entitled to
receive immediately before the merger, consolidation or transfer if the Savings
Plan had then terminated.
Federal Income Tax Consequences
The following is only a brief summary of the material federal income tax
aspects of the Savings Plan. You should not rely on this survey as a complete
or definitive description of the material federal income tax consequences
relating to the Savings Plan. Statutory provisions change, as do their
interpretations, and their application may vary in individual circumstances.
Finally, the consequences under applicable state and local income tax laws may
not be the same as under the federal income tax laws. You are urged to consult
your tax advisor with respect to any distribution from the Savings Plan and
transactions involving the plan.
As a "qualified retirement plan," the Code affords the Savings Plan special
tax treatment, including:
(1) The sponsoring employer is allowed an immediate tax deduction for the
amount contributed to the plan each year;
(2) participants pay no current income tax on amounts contributed by the
employer on their behalf; and
(3) earnings of the plan are tax-deferred thereby permitting the tax-free
accumulation of income and gains on investments.
American Savings will administer the Savings Plan to comply in operation
with the requirements of the Internal Revenue Code as of the applicable
effective date of any change in the law. If American Savings receives an
adverse determination letter regarding its tax exempt status from the Internal
Revenue Service, all participants would generally recognize income equal to
their vested interest in the Savings Plan, the participants would not be
permitted to transfer amounts distributed from the Savings Plan to an Individual
Retirement Account or to another qualified retirement plan, and American Savings
may be denied certain deductions taken with respect to the Savings Plan.
Lump Sum Distribution. A distribution from the Savings Plan to a
participant or the beneficiary of a participant will qualify as a lump sum
distribution if it is made within one taxable year, on account
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of the participant's death, disability or separation from service, or after the
participant attains age 59 1/2; and consists of the balance to the credit of the
participant under this plan and all other profit sharing plans, if any,
maintained by American Savings. The portion of any lump sum distribution
required to be included in your taxable income for federal income tax purposes
consists of the entire amount of the lump sum distribution less the amount of
after-tax contributions, if any, you have made to any other profit sharing plans
maintained by American Savings which is included in the distribution.
Averaging Rules. The portion of any lump sum distribution, required to be
included in your federal taxable income for federal income tax purposes,
attributable to participation after 1973 in the Savings Plan or in any other
profit-sharing plan maintained by American Savings, known as the "ordinary
income portion," will be taxable generally as ordinary income for federal income
tax purposes. However, if you have completed at least five (5) years of
participation in the Savings Plan before the taxable year in which the
distribution is made, or receive a lump sum distribution on account of your
death, regardless of the period of your participation in this plan or any other
profit-sharing plan maintained by American Savings, you may elect to have the
ordinary income portion of such lump sum distribution taxed according to a
special five-year averaging rule. The election of the special five-year
averaging rules may apply only to one lump sum distribution you or your
beneficiary receive, provided such amount is received on or after the date your
turn 59-1/2 and the recipient elects to have any other lump sum distribution
from a qualified plan received in the same taxable year taxed under the special
five-year averaging rule. Under a special grandfather rule, individuals who
turned 50 by 1986 may elect to have their lump sum distribution taxed under
either the five-year averaging rule or under the prior law ten-year averaging
rule. These individuals also may elect to have that portion of the lump sum
distribution attributable to the participant's pre-1974 participation in the
plan taxed at a flat 20% rate as gain from the sale of a capital asset.
American Financial Common Stock Included in Lump Sum Distribution. If a
lump sum distribution includes American Financial common stock, the distribution
generally will be taxed in the manner described above, except that the total
taxable amount will be reduced by the amount of any net unrealized appreciation
with respect to American Financial common stock that is the excess of the value
of American Financial common stock at the time of the distribution over its cost
or other basis of the securities to the trust. The tax basis of American
Financial common stock for purposes of computing gain or loss on its subsequent
sale equals the value of American Financial common stock at the time of
distribution less the amount of net unrealized appreciation. Any gain on a
subsequent sale or other taxable disposition of American Financial common stock,
to the extent of the amount of net unrealized appreciation at the time of
distribution, will constitute long-term capital gain regardless of the holding
period of American Financial common stock. Any gain on a subsequent sale or
other taxable disposition of American Financial common stock in excess of the
amount of net unrealized appreciation at the time of distribution will be
considered long-term capital gain regardless of the holding period of American
Financial common stock. Any gain on a subsequent sale or other taxable
disposition of American Financial common stock in excess of the amount of net
unrealized appreciation at the time of distribution will be considered either
short-term, mid-term or long-term capital gain depending upon the length of the
holding period of American Financial common stock. The recipient of a
distribution may elect to include the amount of any net unrealized appreciation
in the total taxable amount of the distribution to the extent allowed by the
regulations to be issued by the IRS.
Distributions: Rollovers and Direct Transfers to Another Qualified Plan or
to an IRA. You may roll over virtually all distributions from the Savings Plan
to another qualified plan or to an individual retirement account generally.
We have provided you with a brief description of the material federal
income tax aspects of the Savings Plan which are of general application under
the Code. It is not intended to be a complete or definitive description of the
federal income tax consequences of participating in or receiving distributions
from the Savings Plan. Accordingly, you are urged to consult a tax advisor
9
<PAGE>
concerning the federal, state and local tax consequences of participating in and
receiving distributions from the Savings Plan.
Restrictions on Resale
Any person receiving a distribution of shares of common stock under the
Savings Plan who is an "affiliate" of American Financial under Rules 144 and 405
under the Securities Act of 1933, as amended, may reoffer or resell such shares
only under a registration statement filed under the Securities Act of 1933, as
amended, assuming the availability of a registration statement, under Rule 144
or some other exemption of the registration requirements of the Securities Act
of 1933, as amended. Directors, officers and substantial shareholders of
American Financial are generally considered "affiliates." Any person who may be
an "affiliate" of American Savings may wish to consult with counsel before
transferring any common stock they own. In addition, participants are advised
to consult with counsel as to the applicability of Section 16 of the Securities
Exchange Act of 1934, as amended, which may restrict the sale of American
Financial common stock acquired under the Savings Plan, or other sales of
American Financial common stock.
Persons who are not deemed to be "affiliates" of American Savings at the
time of resale will be free to resell any shares of American Financial common
stock distributed to them under the Savings Plan, either publicly or privately,
without regard to the registration and prospectus delivery requirements of the
Securities Act or compliance with the restrictions and conditions contained in
the exemptive rules under federal law. An "affiliate" of American Savings is
someone who directly or indirectly, through one or more intermediaries,
controls, is controlled by, or is under common control, with American Savings.
Normally, a director, principal officer or major shareholder of a corporation
may be deemed to be an "affiliate" of that corporation. A person who may be
deemed an "affiliate" of American Savings at the time of a proposed resale will
be permitted to make public resales of the common stock only under a "reoffer"
prospectus or in accordance with the restrictions and conditions contained in
Rule 144 under the Securities Act of 1933, as amended, or some other exemption
from registration, and will not be permitted to use this prospectus in
connection with any such resale. In general, the amount of the common stock
which any such affiliate may publicly resell under Rule 144 in any three-month
period may not exceed the greater of one percent of American Financial common
stock then outstanding or the average weekly trading volume reported on the
National Association of Securities Dealers Automated Quotation System during the
four calendar weeks before the sale. Such sales may be made only through
brokers without solicitation and only at a time when American Financial is
current in filing the reports required of it under the Securities Exchange Act
of 1934, as amended.
SEC Reporting and Short-Swing Profit Liability
Section 16 of the Securities Exchange Act of 1934, as amended, imposes
reporting and liability requirements on officers, directors and persons
beneficially owning more than ten percent of public companies such as American
Financial. Section 16(a) of the Securities Exchange Act of 1934, as amended,
requires the filing of reports of beneficial ownership. Within ten days of
becoming a person required to file reports under Section 16(a), a Form 3
reporting initial beneficial ownership must be filed with the Securities and
Exchange Commission. Certain changes in beneficial ownership, such as
purchases, sales, gifts and participation in savings and retirement plans must
be reported periodically, either on a Form 4 within ten days after the end of
the month in which a change occurs, or annually on a Form 5 within 45 days after
the close of American Savings' fiscal year. Participation in the American
Financial Stock Fund of the Savings Plan by officers, directors and persons
beneficially owning more than ten percent of common stock of American Financial
must be reported to the SEC annually on a Form 5 by such individuals.
In addition to the reporting requirements described above, Section 16(b) of
the Securities Exchange Act of 1934 provides for the recovery by American
Financial of profits realized by any officer,
10
<PAGE>
director or any person beneficially owning more than ten percent of the common
stock resulting from the purchase and sale or sale and purchase of the common
stock within any six-month period.
The SEC has adopted rules that exempt many transactions involving the
Savings Plan from the "short-swing" profit recovery provisions of Section 16(b).
The exemptions generally involve restrictions upon the timing of elections to
buy or sell employer securities for the accounts of any officer, director or any
person beneficially owning more than ten percent of the common stock.
Except for distributions of the common stock due to death, disability,
retirement, termination of employment or under a qualified domestic relations
order, persons who are governed by Section 16(b) may, under limited
circumstances involving the purchase of common stock within six months of the
distribution, be required to hold shares of the common stock distributed from
the Savings Plan for six months following the distribution date.
LEGAL OPINIONS
The validity of the issuance of the common stock of American Financial will
be passed upon by Muldoon, Murphy & Faucette LLP, Washington, D.C. Muldoon,
Murphy & Faucette LLP acted as special counsel for American Savings in
connection with the conversion of American Savings.
11
<PAGE>
AMERICAN SAVINGS BANK EMPLOYEES' SAVINGS & PROFIT SHARING PLAN AND TRUST
CHANGE OF INVESTMENT ALLOCATION
- -------------------------------
1. Member Data
<TABLE>
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C>
Print your full name above (Last, first, middle initial) Social Security Number
- ---------------------------------------------------------------------------------------------------------
Street Address City State Zip
</TABLE>
2. Instructions
American Savings Bank Employees' Savings & Profit Sharing Plan and Trust (the
"Plan" or "401(k) Plan") is giving members a special opportunity to invest their
401(k) Plan account balances in a new investment fund - the American Financial
Stock Fund - which is comprised primarily of common stock ("Common Stock")
issued by American Financial Holdings, Inc. (the "Company") in connection with
the conversion of American Savings Bank from mutual to stock form. The
percentage of a member's account transferred at the direction of the member into
the American Financial Stock Fund will be used to purchase shares of Common
Stock during the Subscription and Community Offering. Please review the
Prospectus (the "Prospectus") and the Prospectus Supplement ( the "Supplement")
before making any decision.
If there is not enough Common Stock in the conversion to fill all subscriptions,
the Common Stock will be apportioned and the trustee for the Plan may not be
able to purchase all of the Common Stock you requested. In such case, the
trustee will purchase shares in the open market, on your behalf, after the
conversion to fulfill your initial request. Such purchases may be at prices
higher than the initial public offering price.
Investing in Common Stock entails some risks, and we encourage you to discuss
this investment decision with your spouse and investment advisor. The Plan
trustee and the Plan administrator are not authorized to make any
representations about this investment other than what appears in the Prospectus
and Supplement, and you should not rely on any information other than what is
contained in the Prospectus and Supplement. For a discussion of certain factors
that should be considered by each member as to an investment in the Common
Stock, see "Risk Factors" beginning on page 10 of the Prospectus. Any shares
purchased by the Plan pursuant to your election will be subject to the
conditions or restrictions otherwise applicable to Common Stock, as discussed in
the Prospectus and Supplement.
3. Investment Directions (Applicable to Accumulated Balances Only)
To direct a transfer of all or part of the funds credited to your accounts to
the American Financial Stock Fund, you should complete and file this form with
the Human Resources Department at American Savings Bank, no later than October
29, 1999 at 4:00 p.m. If you need any assistance in completing this form,
please contact Human Resources. If you do not complete and return this form to
Human Resources by 4:00 p.m., the funds credited to accounts under the Plan will
continue to be invested in accordance with your prior investment direction, or
in accordance with the terms of the 401(k) Plan if no investment direction had
been provided.
<PAGE>
I hereby revoke any previous investment direction and now direct that the market
value of the units that I have invested in the following funds, to the extent
permissible, be transferred out of the specified fund and invested (in whole
percentages) in the American Financial Stock Fund as follows:
Fund Percentage to be transferred
---- ----------------------------
S&P 500 Stock Fund _____%
Stable Value Fund _____%
S&P MidCap Stock Fund _____%
Money Market Fund _____%
Government Bond Fund _____%
International Stock Fund _____%
Income Plus Fund _____%
Growth & Income Fund _____%
Growth Fund _____%
Note: The total amount transferred may not exceed the total value of your
accounts.
4. Investment Directions (Applicable to Future Contributions Only)
I hereby revoke any previous investment instructions and now direct that any
future contributions and/or loan repayments, if any, made by me or on my behalf
by American Savings Bank, including those contributions and/or repayments
received by American Savings Bank Employees' Savings & Profit Sharing Plan and
Trust during the same reporting period as this form, be invested in the
following whole percentages. If I elect to invest in American Financial
Holdings, Inc. Common Stock, such future contributions or loan repayments, if
any, will be invested in the American Financial Stock Fund the month following
the conclusion of the Offering.
Fund Percentage
---- ----------
S&P 500 Stock Fund ____%
Stable Value Fund ____%
S&P MidCap Stock Fund ____%
Money Market Fund ____%
Government Bond Fund ____%
International Stock Fund ____%
Income Plus Fund ____%
Growth & Income Fund ____%
Growth Fund ____%
American Financial Stock Fund ____%
Total (Important!) 100 %
Notes: No amounts invested in the Stable Value Fund may be transferred directly
to the Money Market Fund. Stable Value Fund amounts invested in the S&P
500 Stock Fund, S&P MidCap Stock Fund, Government Bond Fund,
International Stock Fund, Income Plus Fund, Growth & Income Fund, Growth
Fund and/or Employer Stock Fund, for a period of three months may be
transferred to the Money Market Fund upon the submission of a separate
Change of Investment Allocation Form.
The percentage that can be transferred to the Money Market Fund may be
limited by any amounts previously transferred form the Stable Value Fund
that have not satisfied the equity wash
<PAGE>
requirement. Such amounts will remain in either the S&P 500 Stock Fund, S&P
MidCap Stock Fund, Government Bond Fund, International Stock Fund, Income
Plus Fund, Growth & Income Fund, Growth Fund and/or Employer Stock Fund and
a separate direction to transfer them to the Money Market Fund will be
required when they become available.
5. Participant Signature and Acknowledgment - Required
By signing this Change Of Investment Allocation Form, I authorize and direct the
Plan administrator and trustee to carry out my instructions. I acknowledge that
I have been provided with and read a copy of the Prospectus and Supplement
relating to the issuance of Common Stock. I am aware of the risks involved in
the investment in Common Stock, and understand that the trustee and Plan
administrator are not responsible for my choice of investment.
MEMBER'S SIGNATURE
- ----------------------------------- ------------------------
Signature of Member Date
Pentegra Services, Inc. is hereby authorized to make the above listed change(s)
to this member's record.
- ----------------------------------- ------------------------
Signature of American Savings Bank Date
Authorized Representative
Minimum Stock Purchase is $250.
Maximum Stock Purchase is $500,000
PLEASE COMPLETE AND RETURN TO HUMAN RESOURCES AT
AMERICAN SAVINGS BANK BY 4:00 P.M. ON OCTOBER 29, 1999.
<PAGE>
Filed Pursuant to Rule 424(B)(3)
Registration No. 333-84463
PROSPECTUS AMERICAN FINANCIAL HOLDINGS, INC.
[LOGO] (PROPOSED HOLDING COMPANY FOR AMERICAN SAVINGS BANK)
36,167,500 SHARES OF COMMON STOCK
American Savings Bank is converting from the mutual form to the stock form of
organization. After the conversion, American Financial will own all of American
Savings' common stock.
PRICE PER SHARE: $10.00
EXPECTED TRADING MARKET AND SYMBOL: NASDAQ NATIONAL MARKET "AMFH"
<TABLE>
<CAPTION>
Minimum Maximum
------- -------
<S> <C> <C>
Number of shares.................... 26,732,500 36,167,500
Gross offering proceeds............. $267,325,000 $361,675,000
Estimated underwriting commissions
and other offering expenses....... $ 5,905,000 $ 7,069,000
Estimated net proceeds.............. $261,420,000 $354,606,000
Estimated net proceeds per share.... $ 9.78 $ 9.80
</TABLE>
If the appraiser increases the estimated value, American Financial may increase
the maximum number of shares by up to 15%, to 41,592,625 shares.
Sandler O'Neill will use its best efforts to assist American Financial in
selling at least the minimum number of shares but does not guarantee that this
number will be sold. Sandler O'Neill is not obligated to purchase any shares of
common stock in the offering. Sandler O'Neill intends to make a market in the
common stock.
THE OFFERING TO DEPOSITORS, OFFICERS, DIRECTORS, EMPLOYEES AND CORPORATORS OF
AMERICAN SAVINGS WILL END AT 4:00 P.M., EASTERN TIME, ON NOVEMBER 9, 1999. An
offering to the general public may also be held and may end as early as 4:00
p.m., Eastern Time, on November 9, 1999. If the conversion is not completed by
December 24, 1999, and the State of Connecticut Department of Banking allows
more time to complete the conversion, all subscribers will be able to increase,
decrease or cancel their orders. All extensions may not go beyond August 3,
2001. American Financial will hold all funds of subscribers in an interest-
bearing savings account until the conversion is completed or terminated. Funds
will be returned promptly with interest if the conversion is terminated.
- --------------------------------------------------------------------------------
THESE SECURITIES ARE NOT DEPOSITS OR ACCOUNTS AND ARE NOT INSURED OR GUARANTEED
BY AMERICAN SAVINGS, AMERICAN FINANCIAL, THE FEDERAL DEPOSIT INSURANCE
CORPORATION OR ANY OTHER FEDERAL OR STATE GOVERNMENT AGENCY. THE COMMON STOCK
IS SUBJECT TO INVESTMENT RISK, INCLUDING THE POSSIBLE LOSS OF MONEY INVESTED.
FOR A DISCUSSION OF CERTAIN RISKS THAT YOU SHOULD CONSIDER, SEE "RISK FACTORS"
BEGINNING ON PAGE 10.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION, THE FEDERAL DEPOSIT INSURANCE
CORPORATION, THE STATE OF CONNECTICUT DEPARTMENT OF BANKING, NOR ANY STATE
SECURITIES COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR
DETERMINED IF THIS PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO
THE CONTRARY IS A CRIMINAL OFFENSE.
- -------------------------------------------------------------------------------
FOR ASSISTANCE, PLEASE CONTACT THE CONVERSION CENTER AT (860) 612-2733.
SANDLER O'NEILL & PARTNERS, L.P.
THE DATE OF THIS PROSPECTUS IS OCTOBER 12, 1999
<PAGE>
Map Page
[Map of the parts of New York, Vermont, New Hampshire and Massachusetts and all
of Connecticut, with enlarged inset of Hartford, Middlesex and Tolland counties
in Connecticut. The insert denotes the location of the American Savings'
corporate office and twelve banking offices. The map also lists the names and
addresses of the corporate office and each banking office. The banking offices
are located in New Britain, Avon, Berlin, Glastonbury, Killingworth, Mansfield,
Newington, Plainville, Rocky Hill, Simsbury, West Hartford and Wethersfield,
Connecticut.]
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Summary........................................................................... 1
Risk Factors...................................................................... 10
Selected Consolidated Financial Information....................................... 14
Recent Developments............................................................... 16
Use of Proceeds................................................................... 20
Dividend Policy................................................................... 21
Market for Common Stock........................................................... 22
Capitalization.................................................................... 23
Historical and Pro Forma Regulatory Capital Compliance............................ 24
Pro Forma Data.................................................................... 25
Comparison of Independent Valuation and Pro Forma Financial Information With and
Without the Foundation........................................................ 31
American Savings Bank Consolidated Statements of Income........................... 32
Management's Discussion and Analysis of Financial Condition
and Results of Operations...................................................... 33
Business of American Financial.................................................... 48
Business of American Savings...................................................... 48
Management of American Financial.................................................. 70
Management of American Savings.................................................... 71
Regulation and Supervision........................................................ 84
Federal and State Taxation of Income.............................................. 93
Shares to Be Purchased by Management with Subscription Rights..................... 95
The Conversion.................................................................... 96
Restrictions on Acquisition of American Financial and American Savings............ 117
Description of American Financial Stock........................................... 123
Description of American Savings Stock............................................. 125
Transfer Agent and Registrar...................................................... 126
Registration Requirements......................................................... 126
Legal and Tax Opinions............................................................ 126
Experts........................................................................... 126
Where You Can Find More Information............................................... 126
Index to Consolidated Financial Statements - American Savings Bank F-1
</TABLE>
<PAGE>
SUMMARY
You should read the entire prospectus carefully before you decide to
invest. For assistance, please contact the conversion center at (860) 612-2733.
The Companies
American Financial Holdings, Inc. American Savings formed American Financial
(page 48) 102 West Main Street to be its holding company. To date, American
New Britain, Connecticut 06051 Financial has only conducted organizational
(860) 832-4000 activities. After the conversion, it will own
all of American Savings' capital stock and
will direct, plan and coordinate American
Savings' business activities. After the
conversion, American Financial might become
an operating company or organize or acquire
other operating subsidiaries, including other
financial institutions or financial services
companies. American Financial intends to
retain 50% of the net conversion proceeds.
American Savings Bank (page 48) American Savings is a community bank
178 Main Street dedicated to serving the financial service
New Britain, Connecticut 06051 needs of consumers within its primary
(860) 832-4000 market area. Currently, American Savings
operates out of its main office in New
Britain, Connecticut and its 16 branch
offices in Hartford, Middlesex and Tolland
counties, which American Savings considers as
its primary market area for making loans and
attracting deposits.
Historically, American Savings' principal
business has been attracting deposits from
the general public and using those funds to
originate loans secured by residential real
estate, which accounted for 96.0% of American
Savings' total loan portfolio at May 31,
1999. American Savings also makes consumer
loans, including automobile loans. American
Savings also invests in U.S. government and
agency securities, U.S. government insured or
guaranteed mortgage-backed securities,
corporate bonds and marketable equity
securities. At May 31, 1999, American Savings
had total assets of $1.61 billion, deposits
of $1.15 billion and total equity of $286.0
million.
Recently, American Savings expanded the
products it offers. In 1993, it began to
offer mutual funds, annuities and other non-
deposit investment products and in 1996 it
began to offer trust services. See "Business
of American Savings--Trust Services" and
"-- Subsidiary Activities--American
Investment Services, Inc."
Going forward, American Savings intends to
initiate a commercial banking program
targeted at small businesses operating within
its primary market area. This initiative
includes offering commercial deposit products
and commercial business loans that are
primarily secured by business assets other
than real estate. Additionally, American
Savings intends to expand the offering of
insurance products to its customers
potentially through the acquisition or
establishment of an insurance agency and to
expand its market share by opening additional
branch offices and alternative delivery
channels over the next five years.
1
<PAGE>
For a discussion of American Savings'
business strategy and recent results of
operations, see "Management's Discussion and
Analysis of Financial Condition and Results
of Operations." For a discussion of American
Savings' business activities, see "Business
of American Savings."
The Conversion
What is the Conversion (page 96) The conversion is a change in American
Savings' legal form of organization. As a
mutual savings bank, American Savings
currently has no stock or stockholders.
Instead, American Savings operates for the
mutual benefit of its depositors. American
Savings' corporators elect directors and vote
on other important matters. After the
conversion, the corporators will cease to
exist and will no longer have voting rights.
Instead, through the conversion American
Savings will become a stock savings bank and
will be owned and controlled by American
Financial. Voting rights in American
Financial will belong to its stockholders.
American Savings is conducting the conversion
under the terms of its plan of conversion.
The corporators approved and adopted the plan
of conversion at a special meeting of
corporators called for that purpose on August
3, 1999. The State of Connecticut Department
of Banking approved the plan of conversion on
October 12, 1999. In addition, the Federal
Deposit Insurance Corporation has informed
American Savings that, subject to certain
conditions, it does not intend to object to
the conversion. If American Savings fulfills
those conditions, the Federal Deposit
Insurance Corporation will issue a final non-
objection letter.
Reasons for the Conversion By converting to the stock form of
(page 101) organization, American Savings will be
structured in the form used by commercial
banks, most business entities and a large
number of savings institutions. The
conversion will be important to American
Savings' future growth and performance
because it will:
. enhance its ability to expand through the
acquisition of other financial
institutions or their assets;
. enhance its ability to attract and retain
qualified management through stock-based
compensation plans;
. expand its ability to serve the public;
. enhance its ability to diversify into
other financial services related
activities; and
. provide a larger capital base from which
to operate.
Currently, American Savings does not have any
specific contracts, understandings, or
arrangements for the acquisition of other
financial service companies or their assets.
2
<PAGE>
American Savings Charitable To continue its long-standing commitment to
Foundation (page 97) its local communities, American Savings
intends to establish a charitable foundation,
American Savings Charitable Foundation, in
connection with the conversion. The
foundation will be funded with American
Financial common stock equal to 8% of the
shares sold in the conversion. This would
range from 2,138,600 shares, assuming
26,732,500 shares are sold in the conversion,
to 2,893,400 shares, assuming 36,167,500
shares are sold in the conversion, or
3,327,410 shares if the number of shares sold
in the conversion is increased to 41,592,625
shares. Based on the purchase price of $10.00
per share, the foundation would be funded
with between $21.4 million and $28.9 million
of common stock, or $33.3 million, if the
number of shares sold in the conversion is
increased to 41,592,625 shares. American
Savings Charitable Foundation will make
grants and donations to non-profit and
community groups within the communities where
American Savings operates. If American
Savings Charitable Foundation was not
established as part of the conversion, then
the amount of common stock sold would be
greater than if the conversion was completed
with the foundation. For a further discussion
of the financial impact of the foundation,
including its dilutive effect on those who
purchase shares in the conversion, see "Risk
Factors--The contribution to American Savings
Charitable Foundation means that a
stockholder's total ownership interest will
be 7.4% less after the contribution," "Pro
Forma Data" and "Comparison of Independent
Valuation and Pro Forma Financial Information
With and Without the Foundation."
American Savings Charitable Foundation will
complement the activities of American Savings
Bank Foundation, Inc., a private foundation
established by American Savings in 1995.
American Savings contributed $4.0 million in
1998 and $2.4 million in 1997 to community
organizations and to American Savings Bank
Foundation, Inc. American Savings Bank
Foundation, Inc., which had assets of $11.2
million at May 31, 1999, provides grants to
charitable organizations that focus primarily
on children and education and provides
scholarships to qualified students in the
communities in which American Savings
operates. American Savings does not expect to
make any further contributions to American
Savings Bank Foundation, Inc. after the
conversion.
Benefits of the Conversion to American Financial and American Savings
Management (page 75) intend to adopt the following benefit
plans and employment agreements:
. Employee Stock Ownership Plan. This plan
intends to acquire an amount of shares
equal to 8% of the shares issued in the
conversion. This would range from 2,309,688
shares, assuming 28,871,100 shares are
issued in the conversion, to 3,124,872
shares, assuming 39,060,900 shares are
issued in the conversion, or 3,593,602
shares if the number of shares issued in
the conversion is increased to 44,920,035
shares. This plan intends to acquire these
shares by subscribing for 5% of the shares
sold in the conversion and by purchasing
the
3
<PAGE>
remaining amount of shares in the open
market. American Savings will allocate
these shares to employees over a period of
years in proportion to their compensation.
. Stock-Based Incentive Plan. Under this
plan, which will be adopted after the
conversion and will be submitted to
stockholders for their approval, American
Financial may award stock options to key
employees and directors of American
Financial and its affiliates. No
determinations have been made as to who
will be awarded options or the amounts that
will be awarded. The number of options
available under this plan will be equal to
10% of the number of shares issued in the
conversion. This would range from 2,887,100
shares, assuming 28,871,100 shares are
issued in the conversion, to 3,906,090
shares, assuming 39,060,900 shares are
issued in the conversion, or 4,492,003
shares if the number of shares issued in
the conversion is increased to 44,920,035
shares.
This plan may also award shares of stock to
key employees and directors at no cost to
the recipient. No determinations have been
made as to who will be awarded shares of
stock or the amounts that will be awarded.
The number of shares available for stock
awards will equal 4% of the number of
shares issued in the conversion. This would
range from 1,154,844 shares, assuming
28,871,100 shares are issued in the
conversion, to 1,562,436 shares, assuming
39,060,900 shares are issued in the
conversion, or 1,796,801 shares if the
number of shares issued in the conversion
is increased to 44,920,035 shares.
. Employment Agreements. American Financial
and American Savings intend to enter into
employment agreements with six officers of
American Savings. These agreements will
provide for severance benefits if the
executive is terminated following a change
in control of American Financial or
American Savings.
. Employee Stock Ownership Plan Supplemental
Executive Retirement Plan. This plan will
provide benefits to eligible employees if
their retirement benefits under the
employee stock ownership plan are reduced
because of federal tax law limitations. The
plan will also provide benefits to eligible
employees if they retire or are terminated
following a change in control of American
Financial or American Savings but before
the complete allocation of shares under the
employee stock ownership plan.
. Employee Severance Compensation Plan. This
plan will provide severance benefits to
eligible employees if there is a change in
control of American Financial or American
Savings.
The following table summarizes the total
number and dollar value of the shares of
common stock, assuming 39,060,900 shares are
issued in the conversion, which the employee
stock ownership plan expects to acquire and
the total value of all
4
<PAGE>
stock awards that are expected to be
available under the stock-based incentive
plan. The table assumes the value of the
shares is $10.00 per share. The table does
not include a value for stock options because
their value would be equal to the fair market
value of the common stock on the day that the
options are granted. As a result, financial
gains can be realized on options only if the
market price of common stock increases above
the price at which the options are granted.
<TABLE>
<CAPTION>
Percentage
of Shares
Number Estimated Issued
of Value in the
Shares of Shares Conversion
--------- ---------- -----------
<S> <C> <C> <C>
Employee stock ownership plan ... 3,124,872 $31,248,720 8.0%
Stock awards .................... 1,562,436 15,624,360 4.0
Stock options ................... 3,906,090 -- 10.0
--------- ----------- ----
Total ........................ 8,593,398 $46,873,080 22.0%
========= =========== ====
</TABLE>
For a discussion of risks associated with
these plans and agreements, see "Risk
Factors--Implementation of additional benefit
plans will increase future compensation
expense and may lower American Savings' net
income," "Risk Factors--Issuance of shares
for benefit program may lower your ownership
interest" and "Risk Factors--Employment
agreements, the employee stock ownership
plan, the supplemental executive retirement
plan and the severance plan could make
takeover attempts more difficult to achieve."
THE OFFERING
Subscription Offering (page 105) American Savings has granted subscription
rights in the following order of priority to:
Note: Subscription rights are
not transferable, and persons 1. Persons with $50 or more on deposit at
with subscription rights may American Savings as of December 31, 1997.
not subscribe for shares for
the benefit of any other person. 2. American Savings employee stock ownership
If you violate this prohibition, plan.
you may lose your rights to
purchase shares and may 3. Persons with $50 or more on deposit at
face criminal prosecution and/or American Savings as of September 30,
other sanctions. 1999, other than American Savings'
officers, directors and employees.
4. American Savings' directors, officers and
employees who do not have a higher
priority right.
5. American Savings' corporators who do not
have a higher priority right.
To ensure that American Savings properly
identifies your subscription rights, you must
list all of your deposit accounts as of the
eligibility dates on the stock order form. If
you fail to do so, your subscription may be
reduced or rejected.
5
<PAGE>
The subscription offering will end at 4:00
p.m., Eastern time, on November 9, 1999. If
the offering is oversubscribed, shares will
be allocated in order of the priorities
described above under a formula outlined in
the plan of conversion.
Direct Community Offering American Financial may offer shares not sold
(page 106) in the subscription offering to the general
public in a direct community offering. People
and trusts of people who are residents of
Hartford, Middlesex, Tolland and Windham
counties, Connecticut will have first
preference to purchase shares in a direct
community offering. If shares are available,
American Financial expects to offer them to
the general public immediately after the end
of the subscription offering, but may begin a
direct community offering at any time during
the subscription offering.
American Financial and American Savings may
reject orders received in the direct
community offering either in whole or in
part. If your order is rejected in part, you
cannot cancel the remainder of your order.
Time Period for Completing the If the conversion is not completed by
Conversion December 24, 1999, and the State of
Connecticut Department of Banking allows more
time to complete the conversion, everyone who
subscribed for shares will be contacted to
determine if they still want to subscribe for
stock. This is known as a "resolicitation
offering." A material change in the
independent appraisal of American Financial
and American Savings would be the most
likely, but not necessarily the only, reason
for a delay in completing the conversion. The
conversion must be completed by August 3,
2001, unless the State of Connecticut
Department of Banking allows more time to
complete the conversion.
In the resolicitation offering, if you
subscribed for stock, you will receive a
supplement to this prospectus which will
instruct you how to confirm, modify or cancel
your subscription. If you fail to respond to
the resolicitation offering, it would be as
if you had canceled your order. If you paid
for stock by check or money order, your
subscription funds would be returned to you,
together with accrued interest. If you
authorized payment by withdrawal of funds on
deposit at American Savings, that
authorization would terminate.
If you affirmatively confirm your
subscription order during the resolicitation
offering, your subscription funds will be
held until the end of the resolicitation
offering. You would be unable to cancel your
resolicitation order without the approval of
American Financial and American Savings until
the conversion is completed or terminated.
Purchase Price The purchase price is $10.00 per share. The
Boards of Directors of American Financial and
American Savings consulted with Sandler
O'Neill in determining it. You will not pay a
commission to buy any shares in the
conversion.
6
<PAGE>
Number of Shares to be Sold American Financial will sell between
(page 111) 26,732,500 and 36,167,500 shares of its
common stock in this offering. With
regulatory approval, American Financial may
increase the number of shares to be sold to
41,592,625 shares without giving you further
notice.
The amount of common stock that American
Financial will offer in the conversion is
based on an independent appraisal of the
estimated market value of American Financial
and American Savings as if the conversion had
occurred as of the date of the appraisal.
FinPro, Inc., an independent appraiser, has
estimated that, in its opinion, as of August
3, 1999, the estimated market value ranged
between $267.3 million and $361.7 million,
with a midpoint of $314.5 million. The
appraisal was based in part on American
Savings' financial condition and results of
operations and the effect on American Savings
of the additional capital raised by the sale
of common stock in this offering. The
independent appraisal will be updated before
the conversion is completed.
In preparing its independent appraisal,
FinPro focused primarily on the
price/earnings and price/book valuation
methodologies, both of which are discussed in
the appraisal report. See "Where You Can Find
More Information" for how to obtain a copy of
the appraisal report. The following table
compares American Savings' pro forma
price/earnings and price/book ratios at the
minimum and maximum of the offering range to
the medians for all publicly traded thrift
institutions, all publicly traded Connecticut
thrift institutions and a comparable group of
11 publicly traded thrift institutions
identified in the appraisal report. Thrift
institutions in the mutual holding company
structure are excluded from each comparison
group.
The pro forma price/earnings ratios for
American Savings presented in the following
table are based on earnings for the trailing
12 months as required by regulatory appraisal
guidelines. Therefore, these ratios differ
from the ratios presented in the tables under
"Pro Forma Data."
<TABLE>
<CAPTION>
Price/ Price/
Earnings Book
Ratio Ratio
---------- --------
<S> <C> <C>
American Savings:
Minimum...................... 12.35x 55.49%
Maximum...................... 15.38 68.68
Median for all publicly traded
thrifts...................... 14.76 108.36
Median for all publicly traded
Connecticut thrifts.......... 13.89 163.73
Median for the comparable
group........................ 12.61 131.42
</TABLE>
7
<PAGE>
The independent appraisal does not indicate
market value. Do not assume or expect that
American Savings' valuation as shown in the
above table means that the common stock will
trade above the $10.00 purchase price after
the conversion. American Financial cannot
guarantee that anyone who purchases shares in
the conversion will be able to sell their
shares at or above the $10.00 purchase price.
Purchase Limitations (page 114) The minimum purchase is 25 shares.
The maximum purchase in the subscription
offering by any person or group of persons
through a single deposit account or similarly
titled deposit accounts is $500,000 of common
stock, which equals 50,000 shares.
The maximum purchase by any person, related
persons or persons acting together in the
direct community offering is $500,000 of
common stock, which equals 50,000 shares.
The maximum purchase in the subscription
offering and direct community offering
combined by any person, related persons or
persons acting together is 1% of the common
stock offered for sale, which is $3,616,750
of common stock, which equals 361,675 shares.
How to Purchase Common Stock If you want to subscribe for shares in the
(page 110) subscription offering or order shares in the
direct community offering, you must complete
Note: Once American Financial an original stock order form and send it
receives your order, you together with full payment to American
cannot cancel or change it Savings in the postage-paid envelope
without American Financial's provided. You must sign the certification
consent. If American Financial that is part of the stock order form.
intends to sell fewer than American Savings must receive your stock
26,732,500 shares or more than order form before the end of the subscription
41,592,625 shares, all offering or the end of the direct community
subscribers will be notified offering, as appropriate.
and given the opportunity to
change or cancel their orders.
If you do not respond to this
notice, American Financial will You may pay for shares in the subscription
return your funds promptly with offering or the direct community offering in
interest. any of the following ways:
. By cash, if delivered in person to a full-
service banking office of American
Savings.
. By check or money order made payable to
American Financial Holdings, Inc.
. By withdrawal from an account at American
Savings. To use funds in an Individual
Retirement Account at American Savings,
you must transfer your account to an
unaffiliated institution or broker-dealer.
Please contact the conversion center as
soon as possible for assistance.
American Savings will pay interest on your
subscription funds at the rate it pays on
passbook accounts from the date it receives
your funds until the conversion is completed
or terminated. All funds authorized for
withdrawal from deposit accounts with
American Savings will earn interest at the
applicable account rate until the conversion
is completed. There will be no early
withdrawal penalty for withdrawals from
certificates of deposit used to pay for
stock.
8
<PAGE>
No prospectus will be mailed later than five
days before the end of the offering or hand-
delivered less than 48 hours before the end
of the offering.
Use of Proceeds (page 20) American Financial will use 50% of the net
offering proceeds to buy all of the common
stock of American Savings and will retain the
remaining net proceeds for general business
purposes. These purposes may include
investment in securities, paying cash
dividends or repurchasing shares of its
common stock, although American Financial has
no specific plans to pay dividends or
repurchase its common stock at this time.
American Savings will use the funds it
receives for general business purposes,
including originating loans and purchasing
securities.
American Financial will also loan an amount
equal to 8% of the total dollar value of the
stock to be issued in the conversion to the
employee stock ownership plan to fund its
purchase of common stock both in the
conversion and in the open market after the
conversion.
American Financial and American Savings may
also use the proceeds of the offering to
expand and diversify their businesses,
although they do not have any specific
contracts, understandings or arrangements for
the acquisition of other financial service
companies or their assets.
Purchases by Directors and American Savings' directors and executive
Executive Officers (page 95) officers intend to subscribe for 308,000
shares, which equals 0.85% of the 36,167,500
shares that would be sold at the maximum of
the offering range. If fewer shares are sold
in the conversion, then directors and
executive officers may own a greater
percentage of American Financial. Directors
and executive officers will pay the $10.00
per share price as will everyone else who
purchases shares in the conversion.
Market for Common Stock American Financial has received conditional
(page 22) approval to have its common stock quoted on
the Nasdaq National Market under the trading
symbol "AMFH." After shares of the common
stock begin trading, you may contact a stock
broker to buy or sell shares. American
Financial cannot assure you that there will
be an active trading market for the common
stock.
Dividend Policy (page 21) American Financial intends to adopt a policy
of paying regular cash dividends, but has not
yet decided on the exact amount or range of
amounts, or the frequency of payments.
9
<PAGE>
RISK FACTORS
Before investing in American Financial Holdings, Inc.'s common stock please
carefully consider the matters discussed below.
American Savings' lower return on average equity after conversion may decrease
the market price of the common stock
Return on average equity, which equals net income divided by average
equity, is a ratio used by many investors to compare the performance of a
particular company with other companies. In recent years, American Savings'
return on average equity has been below the average return on equity for
publicly-traded savings associations and banks of comparable size. As a result
of the additional capital that will be raised in this offering, American
Financial's equity will increase substantially. American Financial will not be
able to immediately deploy the increased capital from the offering into higher-
yielding loans. American Financial's ability to invest in loans will depend on
market interest rates, demand in its market area and its ability to compete
successfully for loans. Unless and until the capital can be invested in higher-
yielding loans, American Financial expects that its return on average equity
will continue to be below average. In addition, compensation expense will
increase as a result of the new benefit plans. Over time, American Financial
intends to use the net proceeds from this offering to increase earnings per
share and book value per share, without assuming undue risk, with the goal of
achieving a return on average equity competitive with other publicly traded
financial institutions. This goal could take a number of years to achieve, and
American Financial cannot assure you that this goal can be attained.
Consequently, you should not expect a competitive return on equity in the near
future. See "Pro Forma Data" for an illustration of the financial effects of
this stock offering.
Competition has hurt American Savings' net interest income
American Savings faces intense competition both in making loans and
attracting deposits. This competition has made it more difficult for American
Savings to make new loans and has forced it to offer higher deposit rates in its
market area. This competition for loans and deposits has contributed to a
narrowing of its interest rate spread, which has hurt net interest income. The
competition for deposits, particularly from mutual funds and other stock market
investment vehicles, also has contributed to slower growth in American Savings'
deposit base in recent years. American Savings expects that the intense
competition for loans and deposits will continue and may increase in the future.
For more information about American Savings' market area and the competition it
faces, see "Business of American Savings--Market Area" and "Business of American
Savings--Competition."
American Savings' plans to enter commercial business lending may hurt both asset
quality and net income
American Savings has limited experience with commercial business lending,
which involves loans secured by business assets other than real estate. These
loans generally offer a higher rate of return but also possess a greater risk of
loss than loans secured by real estate. Currently, American Savings does not
make any commercial loans. Subject to market conditions, American Savings
intends to begin making commercial loans secured by business assets other than
real estate, such as equipment, inventory and accounts receivable. American
Savings cannot assure you that the level of nonaccruing commercial business
loans will not be higher in future periods which would reduce net interest
income, or that it will not have to charge-off material amounts of commercial
business loans in future periods, which could lead to a material increase in the
provision for loan losses in future periods which would also reduce net income.
See "Business of American Savings--Lending Activities--Nonperforming Assets and
Delinquencies" and "Business of American Savings--Lending Activities--Commercial
Business Loans" for additional information.
10
<PAGE>
Establishment of the American Savings Charitable Foundation will hurt American
Savings' earnings
American Financial intends to contribute to American Savings Charitable
Foundation shares of its common stock equal to 8% of the shares sold in the
conversion. This contribution will hurt operating results during the fiscal
year in which the foundation is established, which is expected to be 1999,
possibly resulting in an operating loss for the year. For a further discussion
regarding the effect of the contribution to the foundation, see "The Conversion-
- -Establishment of the Charitable Foundation."
Management will have substantial discretion over investment of the offering
proceeds and may make investments with which you may disagree
The net offering proceeds to American Savings are estimated to range from
$130.7 million to $204.1 million. The net offering proceeds to American
Financial are estimated to range from $107.6 million to $168.2 million after it
loans a portion of the proceeds to American Savings' employee stock ownership
plan to purchase shares of common stock. American Financial and American
Savings intend to use these funds for general business purposes, giving
management substantial discretion over their investment. You may disagree with
investments that management makes. See "Use of Proceeds" for further
discussion.
Implementation of additional benefit plans will increase future compensation
expense and may lower American Savings' net income
American Savings will recognize additional material employee compensation
and benefit expenses stemming from the shares purchased or granted to employees
and executives under new benefit plans. American Savings cannot predict the
actual amount of these new expenses because applicable accounting practices
require that they be based on the fair market value of the shares of common
stock at specific points in the future. American Savings would recognize
expenses for its employee stock ownership plan when shares are committed to be
released to participants' accounts and would recognize expenses for the stock-
based incentive plan over the vesting period of awards made to recipients. These
expenses have been estimated in the pro forma financial information under "Pro
Forma Data" assuming the $10.00 per share purchase price as fair market value.
Actual expenses, however, may be higher or lower. For further discussion of
these plans, see "Management of American Savings--Benefits."
Year 2000 data processing problems could interrupt and hurt American Savings'
operations
Computer programs that use only two digits to identify a year could fail or
create erroneous results at or after the year 2000. While American Savings
performs all of its data processing through in-house systems, a third party
vendor provides all core application software to American Savings. If the
vendor is unable to complete its year 2000 adjustments in a timely fashion, or
if it does not successfully make all the necessary year 2000 adjustments,
resulting computer malfunctions could interrupt the operations of American
Savings and have a significant adverse impact on American Savings' financial
condition and results of operations. For further discussion of American
Savings' year 2000 compliance program, see "Management's Discussion and Analysis
of Financial Condition and Results of Operations--Year 2000 Readiness."
Declining interest rates could hurt American Savings' profits
Like most financial institutions, American Savings' ability to earn a
profit depends largely on its net interest income, which is the difference
between interest income it receives from its loans and securities and interest
it pays on deposits and borrowings. A large percentage of American Savings'
interest-earning assets have shorter maturities. Therefore, if interest rates
decline, American Savings anticipates that its net interest income would decline
as interest earned on its assets would decrease more quickly than the interest
paid on deposits. For further discussion of how changes in interest rates could
impact American Savings, see "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Management of Interest Rate Risk and Market
Risk Analysis."
11
<PAGE>
Issuance of shares for benefit program may lower your ownership interest
If stockholders approve the new stock-based incentive plan, American
Financial intends to issue shares to its officers and directors through this
plan. If the restricted stock awards under the stock-based incentive plan are
funded from authorized but unissued stock, your ownership interest could be
reduced by up to approximately 3.85%. If the options under the stock-based
incentive plan are granted from authorized but unissued stock, your ownership
interest could be reduced by up to approximately 9.09%. See "Pro Forma Data" and
"Management of American Savings--Benefits."
Expected voting control by management and employees may make takeover attempts
more difficult to achieve
The shares of common stock that American Savings' directors and executive
officers intend to purchase in the conversion, when combined with the shares
that may be awarded to participants under American Savings' employee stock
ownership plan and American Financial's stock-based incentive plan, could result
in management and employees controlling a significant percentage of American
Financial's common stock. If these individuals were to act together, they could
have significant influence over the outcome of any stockholder vote. This
voting power may discourage takeover attempts you might like to see happen. In
addition, the total voting power of management and employees could reach in
excess of 20% of American Financial's outstanding stock. That level would
enable management and employees as a group to defeat any stockholder matter that
requires an 80% vote. For information about management's intended stock
purchases and the number of shares that may be awarded under new benefit plans,
see "Management of American Savings--Executive Compensation," "Shares to Be
Purchased by Management with Subscription Rights" and "Restrictions on
Acquisition of American Financial and American Savings."
The contribution to American Savings Charitable Foundation means that a
stockholder's total ownership interest will be 7.4% less after the contribution
Purchasers of shares will have their ownership and voting interests in
American Financial diluted by 7.4% when American Financial issues an additional
8% of its shares and contributes those shares to the foundation. For a further
discussion regarding the effect of the contribution to the foundation, see "Pro
Forma Data" and "Comparison of Independent Valuation and Pro Forma Financial
Information With and Without the Foundation."
The contribution to the foundation may not be tax deductible, which could hurt
American Savings' earnings
American Financial believes that its contribution to the American Savings
Charitable Foundation should be deductible for federal income tax purposes.
However, American Financial does not have any assurance that the Internal
Revenue Service will grant tax-exempt status to the foundation. If the
contribution is not deductible, American Financial would not receive any tax
benefit from the contribution. In addition, even if the contribution is tax
deductible, American Financial may not have sufficient earnings to be able to
use the deduction in full. For a further discussion of the contribution to the
charitable foundation, see "The Conversion--Establishment of the Charitable
Foundation."
Anti-takeover provisions and statutory provisions could make takeover attempts
more difficult to achieve and may decrease the market price of the common stock
Provisions in American Financial's Certificate of Incorporation and Bylaws,
the corporate law of the State of Delaware, and federal regulations may make it
difficult and expensive to pursue a takeover attempt that management opposes.
These provisions may discourage or prevent takeover attempts you might like to
see happen and may decrease the market price of the common stock. These
provisions will also make the removal of the current board of directors or
management of American Financial, or the appointment of new directors, more
difficult. These provisions include: limitations on voting rights of
beneficial owners of more than 5% or 10% of American Financial's common stock;
supermajority voting requirements for certain business combinations; the
12
<PAGE>
election of directors to staggered terms of three years; and the elimination of
cumulative voting for directors. The Certificate of Incorporation of American
Financial also contains provisions regarding the timing and content of
stockholder proposals and nominations and limiting the calling of special
meetings. For further information about these provisions, see "Restrictions on
Acquisition of American Financial and American Savings."
Employment agreements, the employee stock ownership plan, the supplemental
executive retirement plan and the severance plan could make takeover attempts
more difficult to achieve
The employment agreements to be entered into with officers of American
Financial and American Savings provide for cash severance payments and/or the
continuation of health, life and disability benefits if the officers are
terminated following a change in control of American Financial or American
Savings. If a change in control had occurred at December 31, 1998, the
aggregate value of the severance benefits available to these officers under the
agreements would have been approximately $3.9 million based on 1998 compensation
data. In addition, if a change in control had occurred at December 31, 1998 and
all eligible employees had been terminated, the aggregate payment due under the
employee stock ownership plan supplemental executive retirement plan would have
been approximately $3.9 million and the aggregate payment due under the
severance plan would have been approximately $10.5 million. These estimates do
not take into account future salary adjustments or bonus payments or the value
of the continuation of other employee benefits. All of these arrangements may
have the effect of increasing the costs of acquiring American Financial, thereby
discouraging future attempts to take over American Financial or American
Savings. For information about the proposed employment and severance agreements
and severance plan, see "Management of American Savings--Executive
Compensation."
Banking reform legislation may reduce American Financial's powers
The U.S. Congress is currently considering legislation intended to
modernize the financial services industry. Under the pending legislation, newly
formed unitary savings and loan holding companies would not have the broad
powers currently available to them. American Financial will be a unitary savings
and loan holding company after the conversion. American Financial does not know
whether federal legislation will be enacted that affects unitary savings and
loan holding companies or, if the legislation is enacted, what form it might
take. Accordingly, management of American Savings and American Financial cannot
predict what effect, if any, banking reform legislation would have on the
activities and operations of American Financial and its subsidiaries.
American Financial cannot assure or guarantee an active trading market for the
common stock
Because American Financial has never issued stock, there is no current
trading market for the common stock. Consequently, American Financial cannot
assure or guarantee that an active trading market for the common stock will
develop or that, if developed, will continue. An active and orderly trading
market will depend on the existence and individual decisions of willing buyers
and sellers at any given time over which neither American Financial nor any
market maker will have any control. If an active trading market does not develop
or is sporadic, this may hurt the market value of the common stock. Furthermore,
American Financial cannot assure or guarantee that purchasers of common stock in
the offering will be able to sell their shares after the conversion at or above
the $10.00 per share purchase price. For further information, see "Market for
Common Stock."
Sandler O'Neill has not given an opinion or recommendation that the common stock
is a good investment
American Financial and American Savings have engaged Sandler O'Neill to
consult with and advise American Savings and American Financial with respect to
the conversion and to assist, on a best-efforts basis, with the solicitation of
subscriptions and purchase orders for shares of common stock. Sandler O'Neill
has not prepared or delivered any opinion or recommendation as to prices at
which the common stock may trade after the conversion or the appropriateness of
the amount of common stock to be issued in the conversion. Sandler O'Neill also
has not verified the accuracy or completeness of the information contained in
this prospectus, nor has it prepared a report or opinion constituting
recommendations to American Savings or American Financial.
13
<PAGE>
SELECTED CONSOLIDATED FINANCIAL INFORMATION
The following tables contain certain information concerning the financial
position and results of operations of American Savings at the dates and for the
periods indicated. The data presented at May 31, 1999 and 1998 and for the five
month periods then ended are derived from unaudited financial statements but, in
the opinion of management, reflects all adjustments necessary to present fairly
the results for these interim periods. These adjustments consist only of normal
recurring adjustments. The results of operations for the five months ended May
31, 1999 are not necessarily indicative of the results of operations that may be
expected for the year ending December 31, 1999. This information should be read
in conjunction with the Consolidated Financial Statements included in this
prospectus.
<TABLE>
<CAPTION>
At May 31, At December 31,
--------------------------------- ---------------------------------------------------
1999 1998 1998 1997 1996
------------- ------------- ------------- ------------- -------------
(In thousands)
<S> <C> <C> <C> <C> <C>
Selected Financial Data:
Total assets $ 1,609,709 $ 1,513,743 $ 1,590,451 $ 1,475,262 $ 1,385,844
Loans, net................................ 941,251 859,541 907,254 837,683 747,540
Mortgage-backed securities:
Available for sale.................. 205,868 138,418 172,855 132,817 103,677
Held to maturity.................... -- -- -- -- --
Investment securities:
Available for sale.................. 370,390 444,462 417,673 432,032 441,401
Held to maturity.................... -- -- -- -- --
Deposits.................................. 1,151,648 1,124,194 1,143,754 1,096,398 1,075,558
FHLB advances............................. 129,744 80,244 120,244 80,244 50,244
Total equity..................... 286,028 269,492 280,984 258,141 230,164
Real estate owned, net.................... 617 1,359 720 739 1,094
Nonperforming loans....................... 2,872 5,636 3,986 6,874 6,508
<CAPTION>
--------------------------------
1995 1994
------------- -------------
<S> <C> <C>
Selected Financial Data:
Total assets.............................. $ 1,290,279 $ 1,165,153
Loans, net................................ 678,822 625,443
Mortgage-backed securities:
Available for sale.................. 111,046 --
Held to maturity.................... -- 49,750
Investment securities:
Available for sale.................. 368,146 279,809
Held to maturity.................... -- 73,356
Deposits.................................. 1,053,464 970,019
FHLB advances............................. 244 244
Total equity..................... 210,801 183,322
Real estate owned, net.................... 1,943 2,179
Nonperforming loans....................... 5,735 4,066
</TABLE>
<TABLE>
<CAPTION>
For the Five Months
Ended May 31, For the Year Ended December 31,
------------------------------- ------------------------------------------------
1999 1998 1998 1997 1996
----------- ----------- ---------- ---------- ----------
(In thousands)
<S> <C> <C> <C> <C> <C>
Selected Operating Data:
Total interest and dividend income....... $ 41,314 $ 41,260 $ 98,989 $ 95,255 $ 88,488
Total interest expense................... 22,394 22,391 54,067 52,507 49,051
----------- ----------- ---------- ---------- ----------
Net interest income................... 18,920 18,869 44,922 42,748 39,437
Provision for loan losses................ 800 1,000 2,400 2,154 2,250
----------- ----------- ---------- ---------- ----------
Net interest income after
provision for loan losses.......... 18,120 17,869 42,522 40,594 37,187
Non-interest income:
Service charges and fees.............. 1,830 1,473 4,114 2,449 2,345
Net gain on sale/contribution
of securities...................... 2,797 4,196 6,696 4,655 3,950
Other................................. 223 241 454 601 371
Total non-interest expense............... 10,873 10,491 26,705 21,946 19,496
----------- ----------- ---------- ---------- ----------
Income before income taxes............ 12,097 13,288 27,081 26,353 24,357
Income taxes............................. 4,198 4,272 9,066 8,093 8,627
----------- ----------- ---------- ---------- ----------
Net income............................ $ 7,899 $ 9,016 $ 18,015 $ 18,260 $ 15,730
=========== =========== ========== ========== ==========
<CAPTION>
1995 1994
---------- ----------
<S> <C> <C>
Selected Operating Data:
Total interest and dividend income............. $ 83,813 $ 71,030
Total interest expense......................... 43,990 32,483
---------- ----------
Net interest income......................... 39,823 38,547
Provision for loan losses...................... 2,405 1,540
---------- ----------
Net interest income after
provision for loan losses................ 37,418 37,007
Non-interest income:
Service charges and fees.................... 1,896 2,086
Net gain on sale/contribution
of securities............................ 2,877 1,429
Other....................................... 508 555
Total non-interest expense..................... 18,298 14,995
---------- ----------
Income before income taxes.................. 24,401 26,082
Income taxes................................... 9,222 10,312
---------- ----------
Net income.................................. $ 15,179 $ 15,770
========== ==========
</TABLE>
14
<PAGE>
<TABLE>
<CAPTION>
At December 31,
At May 31, -------------------------------------------------------------------
1999 1998 1997 1996 1995 1994
------------- ---------- ---------- ---------- -------- --------
Selected Other Data:
Number of:
<S> <C> <C> <C> <C> <C> <C>
Mortgage loans outstanding.............. 6,805 6,769 6,918 7,050 7,140 6,963
Deposit accounts........................ 111,361 111,747 108,349 104,146 93,316 84,088
Full-service offices.................... 17 17 14 14 13 13
</TABLE>
<TABLE>
<CAPTION>
At or For the
Five Months At or For the Year
Ended May 31, Ended December 31,
---------------------- ------------------------
1999 1998 1998 1997
-------- -------- ---------- ---------
<S> <C> <C> <C> <C>
Selected Operating Ratios and Other Data:
Performance Ratios (1):
Average yield on interest-earning assets............ 6.72% 7.17% 7.06% 7.13%
Average rate paid on interest-bearing liabilities... 4.34 4.62 4.61 4.66
Interest rate spread (2)............................ 2.38 2.55 2.45 2.47
Net interest margin (3)............................. 3.08 3.27 3.20 3.20
Ratio of interest-bearing assets to
interest-bearing liabilities....................... 119.22 118.80 119.52 118.49
Ratio of net interest income after provision
for loan losses to non-interest expense.......... 166.66 170.33 159.23 184.70
Non-interest expense as a percent of average
assets........................................... 1.65 1.70 1.78 1.55
Return on average assets (4)........................ 1.20 1.46 1.20 1.29
Return on average equity (5)........................ 6.73 8.26 6.76 7.56
Ratio of average equity to average assets........... 17.81 17.67 17.78 17.01
Regulatory Capital Ratios:
Leverage capital ratio.............................. 15.48 15.67 16.35 15.95
Total risk-based capital ratio...................... 29.56 29.13 29.19 30.30
Asset Quality Ratios:
Nonperforming loans as a percent of total
loans (6)........................................ 0.30 0.65 0.44 0.81
Nonperforming assets as a percent of total
assets (7)....................................... 0.22 0.46 0.30 0.52
Allowance for loan losses as a percent of total
loans............................................ 0.84 0.77 0.83 0.74
Allowance for loan losses as a percent of
nonperforming loans.............................. 277.61 117.96 191.32 91.32
Net loans charged-off as a percent of average
interest-earning loans........................... 0.12 0.18 0.12 0.18
<CAPTION>
------------------------------------
1996 1995 1994
-------- -------- --------
<S> <C> <C> <C>
Selected Operating Ratios and Other Data:
Performance Ratios (1):
Average yield on interest-earning assets............ 7.08% 7.27% 6.48%
Average rate paid on interest-bearing liabilities... 4.65 4.47 3.49
Interest rate spread (2)............................ 2.43 2.80 2.99
Net interest margin (3)............................. 3.15 3.50 3.52
Ratio of interest-bearing assets to
interest-bearing liabilities....................... 118.48 118.47 137.32
Ratio of net interest income after provision
for loan losses to non-interest expense.......... 190.28 204.49 246.80
Non-interest expense as a percent of average
assets........................................... 1.48 1.50 1.14
Return on average assets (4)........................ 1.19 1.24 1.20
Return on average equity (5)........................ 7.28 7.94 9.33
Ratio of average equity to average assets........... 16.41 15.68 15.15
Regulatory Capital Ratios:
Leverage capital ratio.............................. 15.33 15.52 15.74
Total risk-based capital ratio...................... 29.79 30.84 34.74
Asset Quality Ratios:
Nonperforming loans as a percent of total
loans (6)........................................ 0.86 0.84 0.65
Nonperforming assets as a percent of total
assets (7)....................................... 0.55 0.60 0.54
Allowance for loan losses as a percent of total
loans............................................ 0.74 0.66 0.44
Allowance for loan losses as a percent of
nonperforming loans.............................. 85.86 78.19 68.69
Net loans charged-off as a percent of average
interest-earning loans........................... 0.16 0.11 0.05
</TABLE>
__________________________
(1) Regulatory Capital and Asset Quality Ratios are end of period ratios. With
the exception of end of period ratios, all ratios are based on average
monthly balances during the indicated periods and are annualized for
interim periods.
(2) Difference between weighted average yield on interest-earning assets and
weighted average cost of interest-bearing liabilities.
(3) Net interest income as a percentage of average interest-earning assets.
(4) Net income divided by average total assets.
(5) Net income divided by average total equity.
(6) Nonperforming loans consist of nonaccrual loans. See "Business of American
Savings--Lending Activities--Nonperforming Assets and Delinquencies."
(7) Nonperforming assets consist of nonaccrual loans and real estate owned.
See "Business of American Savings--Lending Activities--Nonperforming Assets
and Delinquencies."
15
<PAGE>
RECENT DEVELOPMENTS
The following tables contain certain information concerning the financial
position and results of operations of American Savings at the date and for the
periods indicated. The data presented at August 31, 1999 and 1998 and for the
eight month periods then ended are derived from unaudited condensed consolidated
financial statements but, in the opinion of management, reflect all adjustments
necessary to present fairly the results for these interim periods. These
adjustments consist only of normal recurring adjustments. The results of
operations for the eight months ended August 31, 1999 are not necessarily
indicative of the results of operations that may be expected for the year ending
December 31, 1999. This information should be read in conjunction with the
Consolidated Financial Statements included in this prospectus.
<TABLE>
<CAPTION>
At At
August 31, December 31,
1999 1998
------------- ----------------
(In thousands)
<S> <C> <C>
Selected Financial Data:
Total assets............................................................. $1,658,742 $1,590,451
Loans, net............................................................... 992,781 907,254
Mortgage-backed securities available for sale............................ 209,986 172,855
Investment securities available for sale................................. 397,172 417,673
Deposits................................................................. 1,152,221 1,143,754
FHLB advances............................................................ 189,744 120,244
Total equity............................................................. 285,183 280,984
Real estate owned........................................................ 386 720
Nonperforming loans...................................................... 2,787 3,986
</TABLE>
<TABLE>
<CAPTION>
For the Eight Months
Ended August 31,
----------------------------------
1999 1998
----------- ------------
<S> <C> <C>
(In thousands)
Selected Operating Data:
Total interest and dividend income....................................... $67,049 $66,024
Total interest expense................................................... 36,064 35,970
------- -------
Net interest income................................................... 30,985 30,054
Provision for loan losses................................................ 1,280 1,600
------- -------
Net interest income after provision for loan losses................... 29,705 28,454
Non-interest income:
Service charges and fees.............................................. 3,075 2,576
Net gain on sale/contribution of securities........................... 5,224 6,055
Other................................................................. 343 339
Total non-interest expense............................................... 16,606 17,825
------- -------
Income before income taxes............................................ 21,741 19,599
Income taxes............................................................. 7,563 6,127
------- -------
Net income............................................................ $14,178 $13,472
======= =======
</TABLE>
16
<PAGE>
<TABLE>
<CAPTION>
At or For the
Eight Months
Ended August 31,
----------------------------
1999 1998
-------- --------
<S> <C> <C>
Selected Operating Ratios and Other Data
Performance Ratios (1):
Average yield on interest-earning assets........................................... 6.63% 7.05%
Average rate paid on interest-bearing liabilities.................................. 4.28 4.57
Interest rate spread (2)........................................................... 2.35 2.48
Net interest margin (3)............................................................ 3.10 3.25
Ratio of interest-bearing assets to interest-bearing liabilities................... 120.01 118.91
Ratio of net interest income after provision for loan losses to
noninterest expense............................................................... 178.88 159.63
Non-interest expense as a percent of average assets................................ 1.56 1.80
Return on average assets (4)....................................................... 1.33 1.36
Return on average equity (5)....................................................... 7.51 7.62
Ratio of average equity to average assets.......................................... 17.74 17.81
Regulatory Capital Ratios:
Leverage capital ratio............................................................. 15.27 15.89
Total risk-based capital ratio..................................................... 28.09 30.04
Asset Quality Ratios:
Nonperforming loans as a percent of total loans (6)................................ 0.28 0.50
Nonperforming assets as a percent of total assets (7).............................. 0.19 0.37
Allowance for loan losses as a percent of total loans.............................. 0.83 0.77
Allowance for loan losses as a percent of nonperforming loans...................... 298.92 154.83
Net loans charged-off as a percent of average interest-earning loans............... 0.10 0.17
</TABLE>
__________________________________
(1) Regulatory Capital and Asset Quality Ratios are end of period ratios. With
the exception of end of period ratios, all ratios are based on average
monthly balances during the indicated periods and are annualized for interim
periods.
(2) Difference between weighted average yield on interest-earning assets and
weighted average cost of interest-bearing liabilities.
(3) Net interest income as a percentage of average interest-earning assets.
(4) Net income divided by average total assets.
(5) Net income divided by average total equity.
(6) Nonperforming loans consist of nonaccrual loans.
(7) Nonperforming assets consist of nonaccrual loans and real estate owned.
17
<PAGE>
Comparison of Financial Condition at August 31, 1999 and December 31, 1998
Total assets increased $68.3 million, or 4.3%, to $1.66 billion at August
31, 1999 from $1.59 billion at December 31, 1998. This increase was primarily a
result of an $85.5 million net increase in loans and a $37.1 million increase in
mortgage-backed securities available for sale, partially offset by a $30.7
million decrease in federal funds sold and a $20.5 million decrease in
investment securities available for sale. The shift in the composition of assets
reflects management's strategy to enhance the yield on its interest-earning
assets by reducing federal funds sold and using the proceeds, along with cash
flows from the securities portfolio, to invest in corporate debt obligations and
mortgage-backed securities, including collateralized mortgage obligations, with
maturities or average lives ranging from two to five years. The increase in
loans occurred primarily in one-to four-family and home equity loans and lines
of credit due to strong demand for new housing, expansion of American Savings'
loan markets in 1999 and lower interest rates which resulted in an increase in
loan originations for refinancings and home purchases. See "Business of American
Savings--Lending Activities" and "Business of American Savings--Investment
Activities."
Deposits increased $8.5 million, or 0.7%, to $1.15 billion at August 31,
1999, primarily due to the opening of three new branches in late 1998 and more
aggressive marketing of deposit products. Advances from the Federal Home Loan
Bank of Boston, which increased $69.5 million, or 57.8%, to $189.7 million at
August 31, 1999 from $120.2 million at December 31, 1998, were used to fund loan
originations. Mortgagors' escrow deposits decreased $7.5 million to $3.1 million
at August 31, 1999, primarily due to property tax payments made in July.
Deferred income tax liability decreased $6.0 million primarily due to a decrease
in the net unrealized gains on securities available for sale.
Nonperforming assets totaled $3.2 million at August 31, 1999 compared to
$4.7 million at December 31, 1998, a decrease of $1.5 million, or 31.9%. This
decrease reflects a $1.2 million decline in nonperforming loans to $2.8 million
at August 31, 1999 and a $334,000 decrease in real estate owned to $386,000 at
August 31, 1999. The decline in nonperforming loans was primarily attributable
to the improved financial condition of borrowers, which management attributes to
the strong economy. The decline in real estate owned was due to the disposition
of foreclosed properties and the lack of additional significant foreclosures.
Total equity increased $4.2 million to $285.2 million at August 31, 1999 as
compared to $281.0 million at December 31, 1998, due to $14.2 million of net
income offset by a $10.0 million decrease in accumulated other comprehensive
income from a decline in the after-tax net unrealized gain on available for sale
securities.
Comparison of Operating Results for the Eight Months Ended August 31, 1999 and
1998
Net Income. Net income increased $706,000, or 5.2%, to $14.2 million for
the eight months ended August 31, 1999 from $13.5 million for the eight months
ended August 31, 1998. The increase was attributable to increases in interest
and dividend income, service charges and fees, and gains on sale of investment
securities of $1.0 million, $499,000 and $1.2 million, respectively, and a
$320,000 decrease in the provision for loan losses. This increase was partially
offset by increases of $1.4 million in non-interest expense excluding charitable
contributions, and $1.4 million in income tax expense. Charitable contributions
declined $2.6 million, and gain on contribution of investment securities
decreased $2.1 million, primarily due to the contribution of appreciated
investment securities to American Savings Bank Foundation, Inc. in the 1998
period.
Net Interest Income. Net interest income for the eight months ended August
31, 1999 increased by $931,000, or 3.1%, primarily as a result of increased
interest income resulting from an increase in the average balance of interest-
earning assets offset by lower yields due to a lower market interest rate
environment.
Interest and dividend income increased $1.0 million, or 1.6%, to $67.0
million for the eight months ended August 31, 1999 from $66.0 million for the
eight months ended August 31, 1998. The yield on interest-earning assets was
6.63% and 7.05% for the eight-month periods ended August 31, 1999 and 1998,
respectively, due to a lower market interest rate environment. Interest income
on loans increased by $1.3 million, or 2.9%, to $45.4 million for the eight
months ended August 31, 1999 from $44.1 million for the same period in 1998. The
increase was attributable to an $86.1 million increase in the average balance of
loans partially offset by a decrease in
18
<PAGE>
the average yield on loans from 7.63% during the first eight months of 1998 to
7.13% during the same period in 1999 due to a lower interest rate environment.
Interest and dividend income from investment securities decreased $2.3 million,
or 15.5%, to $12.6 million for the eight months ended August 31, 1999 from $14.9
million for the eight months ended August 31, 1998. This decrease was primarily
attributable to a $35.1 million decrease in the average balance of investment
securities to $318.1 million for the eight months ended August 31, 1999, as well
as a 36 basis point decrease in the average yield earned on investments due to a
lower market interest rate environment. The decrease in the average balance of
investment securities reflects management's strategy to reduce federal funds
sold and invest the proceeds in higher yielding mortgage-backed securities.
Interest income on mortgage-backed securities increased $2.0 million, or 32.8%,
from $6.2 million for the eight months ended August 31, 1998 to $8.2 million for
the eight months ended August 31, 1999. The increase resulted from a $58.3
million increase in the average balance of mortgage-backed securities due to
additional purchases of such securities, partially offset by a decrease in the
average yield of 47 basis points due to the lower market interest rate
environment.
Interest expense was approximately $36.0 million for the eight month
periods ended August 31, 1999 and 1998. Interest expense on deposits was lower
in 1999 than 1998 due to a lower market interest rate environment while interest
expense on borrowings increased due to increases in the average balance of
borrowings from the Federal Home Loan Bank of Boston that were used to fund loan
growth.
Provision for Loan Losses. The provision for loan losses decreased $320,000
to $1.3 million for the eight months ended August 31, 1999 from $1.6 million for
the eight months ended August 31, 1998. The decrease in the provision for loan
losses reflects a decrease in nonperforming loans, which totaled $2.8 million
and $4.5 million at August 31, 1999 and 1998, respectively, and represented
0.28% and 0.50% of total loans at August 31, 1999 and 1998, respectively. At
August 31, 1999 and 1998, the allowance for loan losses was $8.3 million and
$7.0 million, respectively, which represented 299% of nonperforming loans and
0.83% of total loans at August 31, 1999 as compared to 155% of nonperforming
loans and 0.77% of total loans at August 31, 1998. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations--Comparison of
Operating Results for the Five Months Ended May 31, 1999 and 1998" and "Business
of American Savings-Lending Activities-Allowance for Loan Losses."
Non-interest Income. Non-interest income decreased $328,000, or 3.7%, to
$8.6 million for the eight months ended August 31, 1999 from $9.0 million in the
same period in the prior year primarily due to a decrease in the gains on the
contribution of securities of $2.1 million, partially offset by an increase of
$1.2 million, or 30.6%, in the gain on sales of securities from $4.0 million for
the eight months ended August 31, 1998 to $5.2 million for the eight months
ended August 31, 1999. The decline in the gain on contribution of securities was
due to contributions of appreciated securities to American Savings Bank
Foundation, Inc. in 1998. There was no such contribution made in 1999. However,
due to the planned establishment of American Savings Charitable Foundation as
part of the conversion, American Savings does not intend to make further
contributions of securities to American Savings Bank Foundation, Inc. and,
therefore, no future gains on the contribution of appreciated securities will be
recognized. Gains on sales of securities for the 1999 period includes a $2.2
million gain recognized in June when American Savings received cash, that
exceeded the cost basis of the underlying shares, in exchange for shares of
common stock of a company that was acquired by merger. The proceeds from this
transaction were primarily invested in corporate debt obligations and mortgage-
backed securities, including collateralized mortgage obligations with maturities
or average lives ranging from two to five years. See "Business of American
Savings--Investment Activities" for further discussion of American Savings'
marketable equity securities. Service charges and fees increased $499,000 for
the eight months ended August 31, 1999 compared to the same period last year due
to the implementation of a new service charge structure, increased transaction
accounts and an increase in fees following the start of operations of American
Savings' financial services subsidiary in January 1998. See "Business of
American Savings--Subsidiary Activities--American Investment Services, Inc."
Non-interest Expense. Non-interest expense for the eight months ended
August 31, 1999 was $16.6 million, a decrease of $1.2 million, or 6.8%, compared
to $17.8 million for the eight months ended August 31, 1998. The decrease was
due primarily to a decrease in charitable contributions, offset by increases in
salary and occupancy expenses. Charitable contributions decreased $2.6 million,
or 80.8%, to $615,000 for the eight months ended August 31, 1999 compared to
$3.2 million in the same period in 1998. This decrease was due to American
Savings funding the majority of the contribution to the American Savings Bank
Foundation, Inc.
19
<PAGE>
during the first eight months of 1998, while no similar contribution was made
during the eight months ended August 31, 1999. Salaries and employee benefits
increased $896,000, or 11.3%, to $8.9 million for the eight months ended August
31, 1999 from $8.0 million for the same period in 1998. Occupancy expense for
the eight months ended August 31, 1999 increased $247,000 to $1.6 million from
$1.3 million in the same period last year. Both the salary and occupancy expense
increases are primarily due to the opening of three new branches during the
latter part of 1998 and the increased depreciation charges associated with
capital improvements to the main office completed in late 1998.
Income Tax Expense. Income taxes were $7.6 million for the eight months
ended August 31, 1999, compared to $6.1 million for the eight months ended
August 31, 1998. The effective tax rates were 34.8% and 31.3% for the eight
months ended August 31, 1999 and 1998, respectively. The increase in income tax
expense was primarily due to an increase in income before income taxes and the
absence in 1999 of a tax benefit received in 1998 due to the non-taxable gain on
the contribution of appreciated securities to American Savings Bank Foundation,
Inc.
USE OF PROCEEDS
The following table presents the estimated net proceeds of the offering,
the amount to be retained by American Financial, the amount to be contributed to
American Savings, and the amount of American Financial's loan to the employee
stock ownership plan. See "Pro Forma Data" for the assumptions used to arrive
at these amounts.
<TABLE>
<CAPTION>
26,732,500 36,167,500 41,592,625
Shares at Shares at Shares at
$10.00 $10.00 $10.00
Per Share Per Share Per Share
------------ ------------- -------------
(IN THOUSANDS)
<S> <C> <C> <C>
Gross proceeds................................................... $ 267,325 $ 361,675 $ 415,926
Less: estimated underwriting commissions and other offering
expenses................................................... 5,905 7,069 7,738
----------- ----------- -----------
Net proceeds..................................................... $ 261,420 $ 354,606 $ 408,188
=========== =========== ===========
Net proceeds to be retained by American Financial................ $ 130,710 $ 177,303 $ 204,094
Net proceeds to be contributed to American Savings............... $ 130,710 $ 177,303 $ 204,094
Amount of loan by American Financial to employee stock
ownership plan................................................ $ 23,097 $ 31,249 $ 35,936
</TABLE>
American Financial will purchase all of the capital stock of American
Savings to be issued in the conversion in exchange for 50% of the net proceeds
of the stock offering. Receipt of 50% of the net proceeds will increase
American Savings' capital and will support the expansion of American Savings'
existing business activities. American Savings will use these funds for general
business purposes, including, loan originations and investment in short-term
U.S. government agency obligations and U.S. government agency issued mortgage-
backed securities.
American Financial intends to loan the employee stock ownership plan the
amount necessary to acquire an amount of shares equal to 8% of the shares issued
in the conversion, including shares issued to American Savings Charitable
Foundation. Accordingly, the employee stock ownership plan acquisitions would
range between 2,309,688 shares at the minimum of the offering range and
3,124,872 shares at the maximum of the offering range. At the midpoint of the
offering range, the employee stock ownership plan would acquire 2,717,280
shares. If 44,920,035 shares are issued in the conversion, the employee stock
ownership plan would acquire 3,593,602 shares. The employee stock ownership
plan intends to acquire such amount of stock by subscribing for 5% of the shares
sold in the conversion in the stock offering and acquiring the remaining balance
of shares through open market purchases after the completion of the conversion.
For purposes of the above table, it is assumed that any shares of common stock
to be purchased by the employee stock ownership plan in the open market will be
purchased at $10.00 per share. If there are not enough shares to satisfy the
employee stock ownership plan's subscription for
20
<PAGE>
shares sold in the conversion, the plan may purchase such shares in the open
market after conversion. It is anticipated that the employee stock ownership
plan loan will have a 20-year term with interest payable at the prime rate as
published in The Wall Street Journal on the closing date of the conversion. The
loan will be repaid principally from American Savings' contributions to the
employee stock ownership plan and from any dividends paid on shares of common
stock held by the employee stock ownership plan.
The remaining net proceeds retained by American Financial will initially be
invested primarily in short- to intermediate-term securities. American
Financial may also use the funds it retains to support future expansion of
operations or diversification into other banking or financial services related
businesses and for other business or investment purposes. With the exception of
American Savings' strategic plan to acquire or establish an insurance agency and
expand its branch network over the next five years, there are no specific plans,
arrangements, agreements or understandings, written or oral, regarding any
expansion activities.
American Financial may also use available funds to repurchase shares of
common stock and for the payment of dividends, subject to any limitations of
applicable laws and regulations. Following the conversion, the Board of
Directors will have the authority to adopt plans that meet statutory and
regulatory requirements for repurchases of common stock. Since American
Financial has not yet issued stock, there currently is insufficient information
upon which an intention to repurchase stock could be based and consequently, no
intention currently exists. The Board of Directors will consider many facts and
circumstances in determining whether to repurchase stock in the future. These
factors include market and economic factors such as the price at which the stock
is trading in the market, the volume of trading, the attractiveness of other
investment alternatives in terms of the rate of return and risk involved in the
investment, the ability to increase the book value and/or earnings per share of
the remaining outstanding shares, and the ability to improve American
Financial's return on equity. The avoidance of dilution to stockholders by not
having to issue additional shares to cover the exercise of stock options or to
fund employee stock benefit plans is another factor that will be considered.
The Board of Directors will also consider any other circumstances in which
repurchases would be in the best interests of American Financial and its
stockholders.
Before undertaking any stock repurchases, the Board of Directors must
determine that both American Financial and American Savings will be capitalized
in excess of all applicable regulatory requirements after any repurchases and
that capital will be adequate, taking into account, among other things, American
Savings' level of nonperforming and classified assets, American Financial's and
American Savings' current and projected results of operations and
asset/liability structure, the economic environment and tax and other regulatory
considerations. For a discussion of the regulatory limitations applicable to
stock repurchases, see "The Conversion--Restrictions on Repurchase of Stock."
Except as described above, neither American Financial nor American Savings
has specific plans for the investment of the proceeds of this offering.
Although American Savings' capital currently exceeds regulatory requirements, it
is converting to stock form primarily to structure itself in the form of
organization used by commercial banks and most other financial services
companies. For a discussion of management's business reasons for undertaking
the conversion, see "The Conversion--Reasons for the Conversion."
DIVIDEND POLICY
General
American Financial's Board of Directors intends to adopt a policy of paying
regular cash dividends after the conversion, but has not decided the exact
amount or range of amounts that may be paid, when the payments may begin or the
frequency of any payments. In addition, the Board of Directors may declare and
pay periodic special cash dividends in addition to, or in lieu of, regular cash
dividends. In determining whether to declare or pay any dividends, whether
regular or special, the Board of Directors will take into account the amount of
the net proceeds retained by American Financial, American Financial's financial
condition, results of operations, tax considerations, capital requirements,
industry standards, and economic conditions. The regulatory restrictions that
affect the payment of dividends by American Savings to American Financial
discussed below will also be considered. American Financial is also subject to
Delaware law, which generally limits dividends to an amount equal to an
21
<PAGE>
excess of the net assets of a company (the amount by which total assets exceed
total liabilities) over statutory capital, or if there is no excess, to the
company's net profits for the current and/or immediately preceding fiscal year.
In order to pay cash dividends, however, American Financial must have available
cash either from the net proceeds raised in the conversion and retained by
American Financial, borrowings by American Financial, dividends received from
American Savings or earnings on American Financial's assets. No assurances can
be given that any dividends, either regular or special, will be declared or
paid, or if declared and paid, what the amount of dividends will be or whether
they will continue uninterrupted.
Regulatory Restrictions
Dividends from American Financial may depend, in part, upon receipt of
dividends from American Savings because American Financial initially will have
no source of income other than dividends from American Savings and earnings from
the investment of the net proceeds from the offering retained by American
Financial. American Savings, as a Connecticut-chartered savings bank, must also
comply with Connecticut law when considering paying a dividend. Connecticut law
limits all cash dividends declared by a bank in any calendar year, unless
specifically approved by the Connecticut Banking Commissioner, to the total of
net profits for that year and retained net profits for the preceding two years.
Net profits are defined as the remainder of all earnings from current
operations. Subject to the approval of the Connecticut Banking Commissioner,
stock dividends may be declared and paid up to the amount of the bank's surplus
earnings. In addition, American Savings may not declare or pay a cash dividend
on its capital stock if its effect would be to reduce the regulatory capital of
American Savings below the amount required for the liquidation account to be
established as required by American Savings' plan of conversion and below
amounts required to be maintained by the Federal Deposit Insurance Corporation.
See "The Conversion--Effects of Conversion to Stock Form--Liquidation Account."
Tax Considerations
In addition to the foregoing, retained earnings of American Savings
appropriated to bad debt reserves and previously deducted for federal income tax
purposes cannot be used by American Savings to pay cash dividends to American
Financial without the payment of federal income taxes by American Savings at the
then current income tax rate on the amount deemed distributed, which would
include the amounts of any federal income taxes paid by American Savings
relating to the distribution. See "Federal and State Taxation of Income--
Federal Income Taxation" and Note 11 of the Notes to Consolidated Financial
Statements included in this prospectus. American Financial does not contemplate
any distribution by American Savings that would result in a recapture of
American Savings' bad debt reserve or create the above-mentioned federal tax
liabilities.
MARKET FOR COMMON STOCK
American Financial and American Savings have not issued capital stock and,
consequently, no established market for the common stock exists. American
Financial has received conditional approval to have its common stock quoted on
the Nasdaq National Market under the symbol "AMFH" upon completion of the
conversion. American Financial must satisfy various conditions, including
selling the stock and meeting certain listing criteria, in order to be quoted on
the Nasdaq National Market. There can be no assurance that the common stock
will be able to meet the applicable listing criteria to maintain its quotation
on the Nasdaq National Market or that an active and liquid trading market will
develop or, if developed, will be maintained. No assurance can be given that an
investor will be able to resell the common stock at or above the purchase price
of the common stock after the conversion.
22
<PAGE>
CAPITALIZATION
The following table presents the historical capitalization of American
Savings at May 31, 1999, and the pro forma capitalization of American Financial
after giving effect to the assumptions listed under "Pro Forma Data," based on
the sale of the number of shares of common stock indicated in the table. Pro
forma capitalization does not reflect the issuance of additional shares under
the proposed stock-based incentive plan. A change in the number of shares to be
issued in the conversion may materially affect pro forma capitalization.
<TABLE>
<CAPTION>
American Financial Pro Forma
Capitalization Based Upon the Sale of
---------------------------------------------
15% Above
Minimum of Maximum of Maximum of
Estimated Estimated Estimated
Valuation Valuation Valuation
Range Range Range
---------------------------------------------
American Savings' 26,732,500 36,167,500 41,592,625
Capitalization Shares at Shares at Shares at
as of $10.00 $10.00 $10.00
May 31, 1999 Per Share Per Share Per Share
-------------------------------------------------------------
(In thousands)
<S> <C> <C> <C> <C>
Deposits (1)........................................................ $1,151,648 $ 1,151,648 $ 1,151,648 $ 1,151,648
Advances from Federal Home Loan Bank................................ 129,744 129,744 129,744 129,744
---------- ----------- ----------- -----------
Total deposits and borrowed funds................................... $1,281,392 $ 1,281,392 $ 1,281,392 $ 1,281,392
---------- ----------- ----------- -----------
Stockholders' equity:
Preferred stock:
10,000,000 shares, $.01 par value per share, authorized;
none issued or outstanding................................. $ -- $ -- $ -- $ --
Common stock:
120,000,000 shares, $.01 par value per share, authorized;
Specified number of shares assumed to be issued and
outstanding (2)............................................ -- 289 391 449
Additional paid-in capital.......................................... -- 261,131 354,215 407,739
Undivided profits (3)............................................... 249,122 249,122 249,122 249,122
Net unrealized gain on available-for-sale securities, net........... 36,906 36,906 36,906 36,906
Plus:
Contribution to foundation....................................... -- 21,386 28,934 33,274
Less:
Expense of contribution to foundation, net of taxes (4).......... -- (13,901) (18,807) (21,628)
Less:
Common stock acquired by employee stock ownership plan (5)....... -- (23,097) (31,249) (35,936)
Common stock to be acquired by stock-based incentive plan (6).... -- (11,548) (15,624) (17,968)
---------- ----------- ----------- -----------
Total stockholders' equity.......................................... $ 286,028 $ 520,288 $ 603,888 $ 651,958
========== =========== =========== ===========
</TABLE>
_________________________________
(1) Withdrawals from deposit accounts for the purchase of common stock are not
reflected. Withdrawals to purchase common stock will reduce pro forma
deposits by the amounts of the withdrawals.
(2) American Savings' authorized capital consists solely of 120,000,000 shares
of common stock, par value $1.00 per share, 1,000 shares of which will be
issued to American Financial, and 10,000,000 shares of preferred stock,
$1.00 par value per share, none of which will be issued in connection with
the conversion.
(3) Undivided profits are restricted by applicable regulatory capital
requirements. Additionally, American Savings will be prohibited from paying
any dividend that would reduce its regulatory capital below the amount in
the liquidation account, which will be established for the benefit of
American Savings' eligible depositors as of December 31, 1997 and September
30, 1999 at the time of the conversion and decreased subsequently as these
account holders reduce their balances or cease to be depositors. See "The
Conversion--Effects of Conversion to Stock Form--Liquidation Account."
(4) Represents the expense, net of tax, of the contribution of common stock to
American Savings Charitable Foundation based on a 35% tax rate. The
realization of the tax benefit is limited annually to 10% of American
Financial's annual taxable income. However, for federal tax and state
purposes, American Financial can carry forward any unused portion of the
deduction for five years following the year in which the contribution is
made.
(5) Assumes that 8% of the common stock issued in the conversion will be
acquired by the employee stock ownership plan in the conversion and in the
open market after the conversion at $10.00 per share with funds borrowed
from American Financial. The employee stock ownership plan intends to
purchase 5% of the shares sold in the conversion in the stock offering and
will acquire the remaining percentage through open market purchases after
the completion of the conversion. Under generally accepted accounting
principles, the amount of common stock to be purchased by the employee stock
ownership plan represents unearned compensation and accordingly, is
reflected as a reduction of capital. As shares are released to employee
stock ownership plan participants' accounts, a corresponding reduction in
the charge against capital will occur. Since the funds are borrowed from
American Financial, the borrowing will be eliminated in consolidation and no
liability or interest expense will be reflected in the consolidated
financial statements of American Financial. See "Management of American
Savings--Benefits--Employee Stock Ownership Plan."
(6) Assumes the purchase in the open market at $10.00 per share, under the
proposed stock-based incentive plan, of a number of shares equal to 4% of
the shares of common stock issued in the conversion. The shares are
reflected as a reduction of stockholders' equity. See "Risk Factors--
Issuance of shares for benefit program may lower your ownership interest,"
"Pro Forma Data" and "Management of American Savings--Benefits--Stock-Based
Incentive Plan." The stock-based incentive plan will be submitted to
stockholders for approval at a meeting following the conversion.
23
<PAGE>
HISTORICAL AND PRO FORMA REGULATORY CAPITAL COMPLIANCE
The following table presents American Savings' historical and pro forma
capital position relative to its regulatory capital requirements at May 31,
1999. The amount of capital infused into American Savings for purposes of the
following table is 50% of the net proceeds of the offering. For purposes of the
table, the amount expected to be borrowed by the employee stock ownership plan
and the cost of the shares expected to be awarded under the stock-based
incentive plan as restricted stock are deducted from pro forma regulatory
capital. For a discussion of the assumptions underlying the pro forma capital
calculations presented below, see "Use of Proceeds," "Capitalization" and "Pro
Forma Data." The definitions of the terms used in the table are those provided
in the capital regulations issued by the Federal Deposit Insurance Corporation.
For a discussion of the capital standards applicable to American Savings, see
"Regulation and Supervision--Federal Regulations--Capital Requirements."
<TABLE>
<CAPTION>
Pro Forma at May 31, 1999
----------------------------------------------------------------------
15% Above
Minimum Maximum Maximum
of of of
Estimated Estimated Estimated
Valuation Valuation Valuation
Range Range Range
-------------------------------------------------------------------------
Historical at 26,732,500 Shares 36,167,500 Shares 41,592,625 Shares
May 31, at $10.00 at $10.00 at $10.00
1999 Per Share Per Share Per Share
--------------------------------------------------------------------------------------------------
Percent Percent of Percent of
Adjusted Adjusted Adjusted
Total Total Total
Amount Assets Amount Assets Amount Assets Amount
--------------------------------------------------------------------------------------------------
(Dollars in Thousand
<S> <C> <C> <C> <C> <C> <C> <C>
Generally Accepted Accounting
Principles capital.............. $286,028 17.77% $ 382,093 22.40% $416,458 23.93% $436,218
======== ====== ======== ===== ======== ===== ========
Leverage Capital:
Capital level (2)............... $249,123 15.48% $345,188 20.24% $379,553 21.81% $399,313
Requirement..................... 64,380 4.00 68,223 4.00 69,598 4.00 70,388
-------- ----- -------- ----- -------- ----- --------
Excess.......................... $184,743 11.48% $276,965 16.24% $309,955 17.81% $328,925
======== ===== ======== ===== ======== ===== ========
Total Risk-Based Capital:
Total risk-based capital (3).... $286,130 29.56% $382,195 37.62% $416,560 40.32% $436,320
Requirement..................... 77,434 8.00 81,277 8.00 82,651 8.00 83,442
-------- ----- -------- ----- -------- ----- --------
Excess.......................... $208,696 21.56% $300,918 29.62% $333,909 32.32% $352,878
======== ===== ======== ===== ======== ===== ========
<CAPTION>
----------------
Percent of
Adjusted
Total
Assets
----------------
<S> <C>
Generally Accepted Accounting
Principles capital.............. 24.79%
======
Leverage Capital:
Capital level (2)............... 22.69%
Requirement..................... 4.00
------
Excess.......................... 18.69%
======
Total Risk-Based Capital:
Total risk-based capital (3).... 41.83%
Requirement..................... 8.00
------
Excess.......................... 33.83%
======
</TABLE>
_______________________________
(1) Leverage capital levels are shown as a percentage of adjusted total assets
of $1.61 billion. Risk-based capital levels are shown as a percentage of
risk-weighted assets of $967.9 million.
(2) A portion of the net unrealized gains on available-for-sale investment
securities accounts for the difference between generally accepted accounting
principles capital and leverage capital.
(3) Percentage represents total core and supplementary capital divided by total
risk-weighted assets. Assumes net proceeds are invested in assets that
carry a 50% risk-weighting.
24
<PAGE>
PRO FORMA DATA
The plan of conversion requires that the common stock must be sold at a
price equal to the estimated market value of American Financial and American
Savings, as converted, based upon an independent appraisal by FinPro, Inc. The
estimated valuation range as of August 3, 1999, is from a minimum of $267.3
million to a maximum of $361.7 million with a midpoint of $314.5 million. At a
price per share of $10.00, this results in a minimum number of shares of
26,732,500, a maximum number of shares of 36,167,500 and a midpoint number of
shares of 31,450,000.
The actual net proceeds from the sale of the common stock cannot be
determined until the conversion is completed. However, net proceeds indicated in
the following tables are based upon the following assumptions:
(1) All shares of common stock will be sold in the subscription and direct
community offerings;
(2) Sandler O'Neill will receive a fee equal to 1.35% of the aggregate
purchase price of the shares sold in the subscription and direct
community offerings, except that no fee will be paid with respect to
shares purchased by the employee plans, officers, employees, directors
of American Savings or American Financial and their immediate
families. See "The Conversion--Plan of Distribution for the
Subscription, Direct Community and Syndicated Community Offerings";
and
(3) conversion expenses, excluding the 1.35% fee paid to Sandler O'Neill,
will total approximately $2,650,000 regardless of the number of shares
sold in the conversion.
Actual expenses may vary from this estimate, and the fees paid will depend
upon whether a syndicate of broker-dealers or other means is necessary to sell
the shares, and other factors.
American Financial and American Savings prepared the following pro forma
data with the assistance of FinPro. The following tables summarize the
historical net income and equity of American Savings and the pro forma net
income and stockholders' equity of American Financial at and for the five months
ended May 31, 1999 and, at and for the year ended December 31, 1998. Pro forma
net income for the five months ended May 31, 1999 and for the year ended
December 31, 1998 has been calculated as if the conversion were completed on
January 1, 1999 and 1998, respectively, and the estimated net proceeds had been
invested at 4.93% beginning on those dates, which represents the one-year U.S.
Treasury Bill yield as of May 31, 1999.
A pro forma after-tax return of 3.20% is used for both American Financial
and American Savings for the five months ended May 31, 1999 and the year ended
December 31, 1998 after giving effect to a combined federal and state income tax
rate of 35%. Historical and pro forma per share amounts have been calculated by
dividing historical and pro forma amounts by the number of shares of common
stock indicated in the table.
When reviewing the following tables you should consider the following:
. The final column gives effect to the sale of an additional 5,425,125
shares in the conversion, which may be issued without any further
notice if FinPro increases its appraisal to reflect the results of
this offering or changes in the financial condition or results of
operations of American Savings or changes in market conditions after
the date of the appraisal. See "The Conversion--Stock Pricing and
Number of Shares to be Issued."
. Since funds on deposit at American Savings may be withdrawn to
purchase shares of common stock, the amount of funds available for
investment will be reduced by the amount of withdrawals for stock
purchases. The pro forma tables do not reflect withdrawals from
deposit accounts.
. Historical per share amounts have been computed as if the shares of
common stock expected to be issued in the conversion had been
outstanding at January 1, 1998 or January 1, 1999, as
25
<PAGE>
applicable. However, neither historical nor pro forma stockholders'
equity has been adjusted to reflect the investment of the estimated
net proceeds from the sale of the shares in the conversion, the
additional employee stock ownership plan expense or the proposed
stock-based incentive plan.
. Pro forma stockholders' equity ("book value") represents the
difference between the stated amounts of American Savings' assets and
liabilities. The amounts shown do not reflect the liquidation
account, which will be established for the benefit of eligible
depositors as of December 31, 1997 and September 30, 1999, or the
federal income tax consequences of the restoration to income of
American Savings' special bad debt reserves for income tax purposes,
which would be required in the unlikely event of liquidation. See
"Federal and State Taxation of Income" and "The Conversion--Effects of
Conversion to Stock Form." The amounts shown for book value do not
represent fair market values or amounts available for distribution to
stockholders in the unlikely event of liquidation.
. The amounts shown as pro forma stockholders' equity per share do not
represent possible future price appreciation or depreciation of
American Financial's common stock.
. The amounts shown do not account for the shares to be reserved for
issuance upon the exercise of stock options that may be granted under
the proposed stock-based incentive plan, which requires stockholder
approval at a meeting following the conversion. Recently proposed
accounting rules would require American Financial to recognize
compensation expense for stock options awarded to nonemployee
directors.
The following pro forma data, which are based on American Savings' equity
at May 31, 1999, and net income for the year ended December 31, 1998 and for the
five months ended May 31, 1999, may not represent the actual financial effects
of the conversion or the operating results of American Financial after the
conversion. The pro forma data rely exclusively on the assumptions outlined
above. The pro forma data do not represent the fair market value of American
Financial's common stock, the current fair market value of American Savings' or
American Financial's assets or liabilities, or the amount of money that would be
available for distribution to stockholders if American Financial is liquidated
after the conversion.
The following tables assume that American Savings Charitable Foundation is
funded as part of the conversion and therefore gives effect to the issuance of
authorized but unissued shares of American Financial common stock to the
American Savings Charitable Foundation. The valuation range accounts for the
dilutive impact of the issuance of shares to the American Savings Charitable
Foundation.
26
<PAGE>
<TABLE>
<CAPTION>
At or For the Five Months Ended May 31, 1999
---------------------------------------------------
15% Above
Minimum of Maximum of Maximum of
Estimated Estimated Estimated
Valuation Valuation Valuation
Range Range Range
---------------- ----------------- ---------------
26,732,500 36,167,500 41,592,625
Shares Shares Shares
at $10.00 at $10.00 at $10.00
Per Share Per Share Per Share
---------------- ----------------- ---------------
(Dollars in thousands, except per share amounts)
<S> <C> <C> <C>
Gross proceeds............................................................... $ 267,325 $ 361,675 $ 415,926
Plus: shares issued to the foundation (equal to 8% of the shares issued in
the conversion)........................................................... 21,386 28,934 33,274
----------- ----------- -----------
Pro forma market capitalization.............................................. $ 288,711 $ 390,609 $ 449,200
=========== =========== ===========
Gross proceeds............................................................... $ 267,325 $ 361,675 $ 415,926
Less: estimated expenses.................................................... (5,905) (7,069) (7,738)
Estimated net proceeds....................................................... 261,420 354,606 408,188
Less: common stock acquired by employee stock ownership plan................ (23,097) (31,249) (35,936)
Less: common stock to be acquired by stock-based incentive plan............. (11,548) (15,624) (17,968)
----------- ----------- -----------
Net investable proceeds................................................... $ 226,775 $ 307,733 $ 354,284
=========== =========== ===========
Pro Forma Net Income:
Number of shares used to calculate pro forma net income per share............ 26,609,531 36,001,130 41,401,297
Pro forma net income (1):
Historical................................................................ $ 7,899 $ 7,899 $ 7,899
Pro forma income on net investable proceeds............................... 3,024 4,103 4,724
Less: pro forma employee stock ownership plan adjustments (2)............ (313) (423) (487)
Less: pro forma stock-based incentive plan adjustments (3)............... (626) (846) (973)
----------- ----------- -----------
Pro forma net income................................................... $ 9,984 $ 10,733 $ 11,163
=========== =========== ===========
Pro forma net income per share (1):
Historical................................................................ $ 0.30 $ 0.22 $ 0.19
Pro forma income on net investable proceeds............................... 0.11 0.11 0.11
Less: pro forma employee stock ownership plan adjustments (2)............ (0.01) (0.01) (0.01)
Less: pro forma stock-based incentive plan adjustments (3)............... (0.02) (0.02) (0.02)
----------- ----------- -----------
Pro forma net income per share (4)..................................... $ 0.38 $ 0.30 $ 0.27
=========== =========== ===========
Pro Forma Stockholders' Equity:
Number of shares used to calculate pro forma stockholders' equity per share.. 28,871,100 39,060,900 44,920,035
Pro forma stockholders' equity (book value):
Historical................................................................ $ 286,028 $ 286,028 $ 286,028
Estimated net proceeds.................................................... 261,420 354,606 408,188
Plus: tax benefit to the foundation...................................... 7,485 10,127 11,646
Less: common stock acquired by employee stock ownership plan............. (23,097) (31,249) (35,936)
Less: common stock to be acquired by stock-based incentive plan (3)...... (11,548) (15,624) (17,968)
----------- ----------- -----------
Pro forma stockholders' equity (4)..................................... $ 520,288 $ 603,888 $ 651,958
=========== =========== ===========
Pro forma stockholders' equity per share:
Historical................................................................ $ 9.91 $ 7.32 $ 6.37
Estimated net proceeds.................................................... 9.05 9.08 9.09
Plus: tax benefit to the foundation...................................... 0.26 0.26 0.26
Less: common stock acquired by employee stock ownership plan............. (0.80) (0.80) (0.80)
Less: common stock to be acquired by stock-based incentive plan (3)...... (0.40) (0.40) (0.40)
----------- ----------- -----------
Pro forma stockholders' equity per share............................... $ 18.02 $ 15.46 $ 14.52
=========== =========== ===========
Purchase price as a percentage of pro forma stockholders' equity per share... 55.49% 64.68% 68.87%
Purchase price as a multiple of pro forma net income per share (annualized).. 10.96x 13.89x 15.43x
</TABLE>
(footnotes begin on page 29)
27
<PAGE>
<TABLE>
<CAPTION>
At or For the Year Ended December 31, 1998
-----------------------------------------------
15% Above
Minimum of Maximum of Maximum of
Estimated Estimated Estimated
Valuation Valuation Valuation
Range Range Range
-------------- ------------ --------------
26,732,500 36,167,500 41,592,625
Shares Shares Shares
at $10.00 at $10.00 at $10.00
Per Share Per Share Per Share
-------------- ------------ --------------
(Dollars in thousands, except per share amounts)
<S> <C> <C> <C>
Gross proceeds............................................................. $ 267,325 $ 361,675 $ 415,926
Plus: shares issued to the foundation (equal to 8% of the shares
issued in the conversion)............................................... 21,386 28,934 33,274
----------- ----------- -----------
Pro forma market capitalization............................................ $ 288,711 $ 390,609 $ 449,200
=========== =========== ===========
Gross proceeds............................................................. $ 267,325 $ 361,675 $ 415,926
Less: estimated expenses.................................................. (5,905) (7,069) (7,738)
Estimated net proceeds..................................................... 261,420 354,606 408,188
Less: common stock acquired by employee stock ownership plan.............. (23,097) (31,249) (35,936)
Less: common stock to be acquired by stock-based incentive plan........... (11,548) (15,624) (17,968)
----------- ----------- -----------
Net investable proceeds................................................. $ 226,775 $ 307,733 $ 354,284
=========== =========== ===========
Pro Forma Net Income:
Number of shares used to calculate pro forma net income per share.......... 26,676,896 36,092,272 41,506,110
Pro forma net income (1):
Historical.............................................................. $ 18,015 $ 18,015 $ 18,015
Pro forma income on net investable proceeds............................. 7,257 9,847 11,337
Less: pro forma employee stock ownership plan adjustments (2).......... (751) (1,016) (1,168)
Less: pro forma stock-based incentive plan adjustments (3)............. (1,501) (2,031) (2,336)
----------- ----------- -----------
Pro forma net income................................................. $ 23,020 $ 24,815 $ 25,848
=========== =========== ===========
Pro forma net income per share (1):
Historical.............................................................. $ 0.68 $ 0.50 $ 0.43
Pro forma income on net investable proceeds............................. 0.27 0.27 0.27
Less: pro forma employee stock ownership plan adjustments (2).......... (0.03) (0.03) (0.03)
Less: pro forma stock-based incentive plan adjustments (3)............. (0.06) (0.06) (0.06)
----------- ----------- -----------
Pro forma net income per share (4)................................... $ 0.86 $ 0.68 $ 0.61
=========== =========== ===========
Pro Forma Stockholders' Equity:
Number of shares used to calculate pro forma stockholders'
equity per share.......................................................... 28,871,100 39,060,900 44,920,035
Pro forma stockholders' equity (book value):
Historical.............................................................. $ 280,984 $ 280,984 $ 280,984
Estimated net proceeds.................................................. 261,420 354,606 408,188
Plus: tax benefit to the foundation.................................... 7,485 10,127 11,646
Less: common stock acquired by employee stock ownership plan........... (23,097) (31,249) (35,936)
Less: common stock to be acquired by stock-based
incentive plan (3)..................................................... (11,548) (15,624) (17,968)
----------- ----------- -----------
Pro forma stockholders' equity (4)................................... $ 515,244 $ 598,844 $ 646,914
=========== =========== ===========
Pro forma stockholders' equity per share:
Historical.............................................................. $ 9.73 $ 7.19 $ 6.26
Estimated net proceeds.................................................. 9.05 9.08 9.09
Plus: tax benefit to the foundation.................................... 0.26 0.26 0.26
Less: common stock acquired by employee stock ownership plan........... (0.80) (0.80) (0.80)
Less: common stock to be acquired by stock-based
incentive plan (3)..................................................... (0.40) (0.40) (0.40)
----------- ----------- -----------
Pro forma stockholders' equity per share............................. $ 17.84 $ 15.33 $ 14.41
=========== =========== ===========
Purchase price as a percentage of pro forma stockholders'
equity per share.......................................................... 56.05% 65.23% 69.40%
Purchase price as a multiple of pro forma net income
per share................................................................. 11.63x 14.71x 16.39x
</TABLE>
(footnotes begin on next page)
28
<PAGE>
_______________________
(1) Does not give effect to the non-recurring expense that will be recognized in
1999 as a result of the establishment of the American Savings Charitable
Foundation. The following table shows the estimated after-tax expense
associated with the contribution to the foundation, as well as pro forma net
income and pro forma net income per share assuming the contribution to the
foundation was expensed during the periods presented. The pro forma data
assumes that American Financial will realize 100% of the income tax benefit
as a result of the contribution to the foundation based on a 35% tax rate.
The realization of the tax benefit is limited annually to 10% of American
Financial's annual taxable income. However, for federal and state tax
purposes, American Financial can carry forward any unused portion of the
deduction for five years following the year in which the contribution is
made.
<TABLE>
<CAPTION>
15% Above
Minimum Maximum Maximum
of Estimated of Estimated of Estimated
Valuation Valuation Valuation
Range Range Range
--------------- --------------- ---------------
26,732,500 36,167,500 41,592,625
Shares Shares Shares
at $10.00 at $10.00 at $10.00
Per Share Per Share Per Share
--------------- --------------- ---------------
(Dollars in thousands, except per share data)
<S> <C> <C> <C>
After-tax expense of contribution to foundation:
Five months ended May 31, 1999................................ $ 13,901 $ 18,807 $ 21,628
Year ended December 31, 1998.................................. 13,901 18,807 21,628
Pro forma net income (loss):
Five months ended May 31, 1999................................ (3,917) (8,074) (10,465)
Year ended December 31, 1998.................................. 9,119 6,008 4,220
Pro forma net income (loss) per share:
Five months ended May 31, 1999................................ (0.15) (0.22) (0.25)
Year ended December 31, 1998.................................. 0.34 0.17 0.10
</TABLE>
(2) Assumes that the employee stock ownership plan will acquire an amount of
stock equal to 8% of the shares of common stock issued in the conversion.
The employee stock ownership plan intends to purchase 5% of the shares sold
in the conversion in the stock offering and acquire the remaining percentage
through open market purchases after the completion of the conversion.
Shares purchased in the open market are assumed to be purchased at $10.00
per share. The employee stock ownership plan will borrow the funds used to
acquire these shares from the net proceeds from the conversion retained by
American Financial. The amount of this borrowing, which will have an
interest rate equal to the prime rate as published in The Wall Street
Journal, which was 8.00% as of May 31, 1999, has been reflected as a
reduction from gross proceeds to determine estimated net investable
proceeds. American Savings intends to make contributions to the employee
stock ownership plan in amounts at least equal to the principal and interest
requirement of the debt. As the debt is paid down, stockholders' equity
will be increased. American Savings' payment of the employee stock
ownership plan debt is based upon equal installments of principal over a 20-
year period, assuming a combined federal and state income tax rate of 35%.
Interest income earned by American Financial on the loan to the employee
stock ownership plan offsets the interest paid on the loan by American
Savings. No reinvestment is assumed on proceeds contributed to fund the
employee stock ownership plan. Applicable accounting principles require
that compensation expense for the employee stock ownership plan be based
upon shares committed to be released and that unallocated shares be excluded
from earnings per share computations. The valuation of shares committed to
be released would be based upon the average market value of the shares
during the year, which, for purposes of this calculation, was assumed to be
equal to the $10.00 per share purchase price. See "Management of American
Savings--Benefits--Employee Stock Ownership Plan."
(3) Assumes that the stock-based incentive plan will acquire an amount of stock
equal to 4% of the common stock issued in the conversion for award to key
employees and directors. In calculating the pro forma effect of the stock-
based incentive plan, it is assumed that the required stockholder approval
has been received, that the shares were acquired by the stock-based
incentive plan at the beginning of the respective period in open market
purchases at the $10.00 per share purchase price, that 20% of the amount
contributed was an amortized expense during the period, that the combined
federal and state income tax rate is 35%, and that stock options which may
be issued under the stock-based incentive plan are not granted or exercised.
The issuance of authorized but unissued shares of the common stock instead
of open market purchases would dilute the voting interests of existing
stockholders by approximately 3.85%.
29
<PAGE>
For purposes of this table, shares issued under the stock-based incentive
plan vest 20% per year and compensation expense is recognized on a straight-
line basis over each vesting period. If the fair market value per share is
greater than $10.00 per share on the date shares are awarded under the
stock-based incentive plan, total stock-based incentive plan expense would
be greater. The total estimated stock-based incentive plan expense was
multiplied by 20%, which is the total percent of shares for which expense is
recognized in the first year.
The following table shows the estimated pro forma net income and
stockholders' equity per share if shares for the stock-based incentive plan
were authorized but unissued shares instead of repurchased shares. The table
also shows the estimated pre-tax stock-based incentive plan expense.
<TABLE>
<CAPTION>
15% Above
Minimum Maximum Maximum
of Estimated of Estimated of Estimated
Valuation Valuation Valuation
Range Range Range
--------------- --------------- ---------------
26,732,500 36,167,500 41,592,625
Shares Shares Shares
at $10.00 at $10.00 at $10.00
Per Share Per Share Per Share
--------------- --------------- ---------------
(Dollars in thousands, except per share data)
<S> <C> <C> <C>
Pro forma net income per share:
Five months ended May 31, 1999......................... $ 0.37 $ 0.29 $ 0.26
Year ended December 31, 1998........................... 0.84 0.67 0.61
Pro forma stockholders' equity per share:
At May 31, 1999........................................ 17.33 14.87 13.96
At December 31, 1998................................... 17.16 14.74 13.85
Pre-tax stock-based incentive plan expense:
Five months ended May 31, 1999......................... 962 1,302 1,497
Year ended December 31, 1998........................... 2,310 3,125 3,594
</TABLE>
(4) In calculating the pro forma effect of the stock-based incentive plan, no
effect has been given for any shares that may be reserved for issuance upon
the exercise of stock options that may be granted under the stock-based
incentive plan. The number of options available under the stock-based
incentive plan will be equal to 10% of the number of shares issued in the
conversion. The issuance of authorized but unissued shares of common stock
instead of open market purchases would dilute the voting interests of
existing stockholders by approximately 9.09%.
The following table shows the estimated pro forma net income and
stockholders' equity per share if shares for stock issued as a result of the
exercise of stock options were authorized but unissued shares instead of
repurchased shares.
<TABLE>
<CAPTION>
15% Above
Minimum Maximum Maximum
of Estimated of Estimated of Estimated
Valuation Valuation Valuation
Range Range Range
--------------- --------------- ---------------
26,732,500 36,167,500 41,592,625
Shares Shares Shares
at $10.00 at $10.00 at $10.00
Per Share Per Share Per Share
--------------- --------------- ---------------
(Dollars in thousands, except per share data)
<S> <C> <C> <C>
Pro forma net income per share:
Five months ended May 31, 1999............................... $ 0.34 $ 0.27 $ 0.24
Year ended December 31, 1998................................. 0.78 0.62 0.56
Pro forma stockholders' equity per share:
At May 31, 1999.............................................. 16.38 14.05 13.19
At December 31, 1998......................................... 16.22 13.94 13.09
</TABLE>
30
<PAGE>
COMPARISON OF INDEPENDENT VALUATION AND
PRO FORMA FINANCIAL INFORMATION WITH AND WITHOUT THE FOUNDATION
As set forth in the following table, if the American Savings Charitable
Foundation is not established and funded as part of the conversion, FinPro
estimates that the pro forma valuation of American Financial and American
Savings would be greater than if the foundation was established and funded, and
would result in an increase in the amount of common stock offered for sale in
the conversion. If the foundation is not established and funded, there is no
assurance that the appraisal prepared at that time of conversion would conclude
that the pro forma market value of American Financial and American Savings would
be the same as the estimate set forth in the table below. Any appraisal
prepared at the time of conversion would be based on the facts and circumstances
existing at that time, including, among other things, market and economic
conditions.
The information presented in the following table is for comparative
purposes only. It assumes that the conversion was completed at May 31, 1999,
based on the assumptions set forth under "Pro Forma Data."
<TABLE>
<CAPTION>
At the Maximum,
At the Minimum of At the Maximum of as Adjusted, of
Estimated Valuation Range Estimated Valuation Range Estimated Valuation Range
-------------------------- -------------------------- -------------------------
With No With No With No
Foundation Foundation Foundation Foundation Foundation Foundation
------------ ------------ ----------- ------------ ----------- -----------
(Dollars in thousands, except per share amounts)
<S> <C> <C> <C> <C> <C> <C>
Estimated pro forma valuation (1).............. $ 267,325 $ 306,000 $ 361,675 $ 414,000 $ 415,926 $ 476,100
Estimated offering amount...................... 267,325 306,000 361,675 414,000 415,926 476,100
Pro forma market capitalization................ 288,711 306,000 390,609 414,000 449,200 476,100
Total assets................................... 1,843,969 1,872,580 1,927,569 1,966,279 1,975,639 2,020,155
Total liabilities.............................. 1,323,681 1,323,681 1,323,681 1,323,681 1,323,681 1,323,681
Pro forma stockholders' equity................. 520,288 548,899 603,888 642,598 651,958 696,474
Pro forma net income (2)....................... 9,984 10,409 10,733 11,307 11,163 11,824
Pro forma stockholders' equity per share....... 18.02 17.94 15.46 15.52 14.52 14.63
Pro forma net income per share (2)............. 0.38 0.37 0.30 0.30 0.27 0.27
Pro Forma Pricing Ratios:
Offering price as a percentage of pro forma
stockholders' equity per share........... 55.49% 55.74% 64.68% 64.43% 68.87% 68.35%
Offering price to pro forma net income
per share................................ 10.96 11.26 13.89 13.89 15.43 15.43
Offering price to assets.................... 15.66 16.34 20.26 21.05 22.74 23.57
Pro Forma Financial Ratios:
Return on assets (annualized)............... 1.30 1.33 1.34 1.38 1.36 1.40
Return on stockholders' equity
(annualized)............................. 4.61 4.55 4.27 4.22 4.11 4.07
Stockholders' equity to total assets........ 28.22 29.31 31.33 32.68 33.00 34.48
</TABLE>
_________________
(1) Based on independent valuation prepared by FinPro as of August 3, 1999.
(2) Net income and net income per share data are based on the five month period
ended May 31, 1999.
31
<PAGE>
AMERICAN SAVINGS BANK
CONSOLIDATED STATEMENTS OF INCOME
The following Consolidated Statements of Income for each of the years in
the three year period ended December 31, 1998 have been audited by KPMG LLP,
independent certified public accountants. The report of KPMG LLP on these
Consolidated Statements of Income appears on page F-2 of this prospectus.
Information for the five months ended May 31, 1999 and 1998, which is unaudited,
includes all adjustments which, in the opinion of management, are of a normal
recurring nature and are necessary for a fair presentation of these interim
periods. Results for the five months ended May 31, 1999 are not necessarily
indicative of the results that may be expected for the year ending December 31,
1999. These statements should be read in conjunction with the Consolidated
Financial Statements and Notes and with the Management's Discussion and Analysis
of Financial Condition and Results of Operations included elsewhere in this
prospectus.
<TABLE>
<CAPTION>
Five Months Ended May 31, Year Ended December 31,
---------------------------------- ---------------------------------------------
1999 1998 1998 1997 1996
---------------------------------- ---------------------------------------------
(Unaudited)
<S> <C> <C> <C> <C> <C>
Interest and dividend income:
Real estate mortgage loans................. $19,270,532 $19,262,111 $46,897,585 $44,538,518 $41,901,888
Consumer loans............................. 8,564,827 8,094,263 19,856,252 17,662,892 14,879,279
Mortgage-backed securities................. 4,841,810 3,968,693 9,064,117 7,278,009 7,472,723
Federal funds sold......................... 723,509 551,496 1,599,613 1,378,611 2,219,440
Investment securities:
Interest................................ 6,897,924 8,609,568 19,434,383 21,884,851 17,128,824
Dividends............................... 1,015,469 773,678 2,136,915 2,512,353 4,886,142
----------- ----------- ----------- ----------- -----------
Total interest and dividend income... 41,314,071 41,259,809 98,988,865 95,255,234 88,488,296
----------- ----------- ----------- ----------- -----------
INTEREST EXPENSE:
Deposits (note 7).......................... 19,398,423 20,287,766 48,822,600 49,121,033 48,989,125
Federal Home Loan Bank advances............ 2,995,309 2,103,260 5,244,037 3,385,975 61,745
----------- ----------- ----------- ----------- -----------
Total interest expense............... 22,393,732 22,391,026 54,066,637 52,507,008 49,050,870
----------- ----------- ----------- ----------- -----------
Net interest income before provision
for loan losses................... 18,920,339 18,868,783 44,922,228 42,748,226 39,437,426
Provision for loan losses (note 4)............ 800,000 1,000,000 2,400,000 2,154,500 2,250,000
----------- ----------- ----------- ----------- -----------
Net interest income after provision
for loan losses................... 18,120,339 17,868,783 42,522,228 40,593,726 37,187,426
----------- ----------- ----------- ----------- -----------
NON-INTEREST INCOME:
Service charges and fees................... 1,829,482 1,472,688 4,114,039 2,448,984 2,345,181
Gain on sale of investment securities
available for sale (note 3)............. 2,797,133 2,142,454 3,148,740 508,342 3,950,256
Gain on contribution of investment
securities available for sale (note 3).. -- 2,053,726 3,547,193 4,146,913 --
Net gain (loss) on sale of loans........... 54,834 3,404 (16,602) 5,577 (27,420)
Other...................................... 167,755 237,750 470,058 594,851 397,949
----------- ----------- ----------- ----------- -----------
Total non-interest income............ 4,849,204 5,910,022 11,263,428 7,704,667 6,665,966
----------- ----------- ----------- ----------- -----------
Non-interest expense:
Salaries and employee benefits............. 5,771,149 5,197,279 12,281,110 10,102,372 9,121,552
Occupancy expense.......................... 995,437 826,477 2,053,072 1,707,325 1,494,830
Furniture and fixture expense.............. 680,561 637,030 1,453,833 1,342,428 927,947
Charitable contributions (note 15)......... 375,435 1,010,486 3,963,624 2,410,400 2,267,039
Advertising................................ 591,942 419,513 1,456,063 1,372,950 1,445,629
Deposit insurance expense.................. 55,825 56,889 133,768 137,760 (1,027)
Real estate owned expenses, net............ 52,992 100,339 84,019 510,977 308,960
Other...................................... 2,349,469 2,242,681 5,279,525 4,361,655 3,931,695
----------- ----------- ----------- ----------- -----------
Total non-interest expense........... 10,872,810 10,490,694 26,705,014 21,945,867 19,496,625
----------- ----------- ----------- ----------- -----------
Income before income taxes........... 12,096,733 13,288,111 27,080,642 26,352,526 24,356,767
Income taxes (note 11)........................ 4,198,000 4,272,000 9,066,000 8,092,744 8,626,771
----------- ----------- ----------- ----------- -----------
Net income........................... $ 7,898,733 $ 9,016,111 $18,014,642 $18,259,782 $15,729,996
=========== =========== =========== =========== ===========
</TABLE>
Note references are to the Notes to the Consolidated Financial Statements
beginning on page F-6.
32
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the "Selected
Consolidated Financial Information" and the Consolidated Financial Statements
and Notes appearing elsewhere in the prospectus. In addition to historical
information, the following "Management's Discussion and Analysis of Financial
Condition and Results of Operations" contains forward-looking statements as a
result of certain factors, including those discussed in "Risk Factors,"
contained elsewhere in this prospectus.
General
American Savings' results of operations depend primarily on net interest
income, which is the difference between the interest income earned on American
Savings' interest-earning assets, such as loans and securities, and the interest
expense on its interest-bearing liabilities, such as deposits and borrowings.
American Savings also generates non-interest income primarily from service
charges and other fees earned on fee-based activities such as trust operations
and insurance sales and from investment services provided through its wholly
owned subsidiary, American Investment Services, Inc. Gains on the sale and
contribution of securities is another source of non-interest income. Gains on
the contributions of securities arise from donations to American Savings'
existing private foundation, American Savings Bank Foundation, Inc. See
"Business of American Savings--American Savings Bank Foundation, Inc." American
Savings' non-interest expenses primarily consist of employee compensation and
benefits, occupancy expense, charitable contributions (including donations to
American Savings Bank Foundation, Inc.), advertising and other operating
expenses. American Savings' results of operations are also affected by general
economic and competitive conditions, notably changes in market interest rates,
government policies and regulations. American Savings exceeded all of its
regulatory capital requirements at May 31, 1999.
Forward Looking Statements
This prospectus contains forward-looking statements that are based on
assumptions and describe future plans, strategies, and expectations of American
Savings and American Financial. These forward-looking statements are generally
identified by use of the words "believe," "expect," "intend," "anticipate,"
"estimate," "project," or similar expressions. American Savings' and American
Financial'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 American Savings and American
Financial and their subsidiaries include, but are not limited to, changes in
interest rates, general economic conditions, legislative/regulatory changes,
monetary and fiscal policies of the U.S. Government, including policies of the
U.S. Treasury and the Federal Reserve Board, the quality and composition of the
loan or investment portfolios, demand for loan products, deposit flows,
competition, demand for financial services in American Savings' and American
Financial'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. American Savings and
American Financial do not undertake - and specifically disclaim 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.
Operating Strategy
American Savings is an independent, community-oriented savings bank,
delivering quality customer service and offering a wide range of deposit, loan
and investment products to its customers. In recent years, American Savings'
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, American Savings has sought to:
33
<PAGE>
. Provide superior customer service by expanding delivery systems
through the opening of new branches, establishing a customer call
center and increasing the functionality of its ATM network.
. Increase fee income by broadening non-depository product offerings and
services, including expansion of its trust services, and establishment
of a new subsidiary, American Investment Services, Inc., to provide a
wide array of investment offerings through financial service
specialists and representatives.
. Increase loan production through an expanded correspondent network and
market area.
. Control credit risk by focusing on the origination of single-family,
owner-occupied residential mortgage loans and consumer loans,
consisting primarily of home equity loans and lines of credit.
. Monitor and control interest rate risk primarily by selling longer-
term fixed rate loans as market interest rate conditions dictate and
investing in shorter-term mortgage-backed securities.
. Invest funds in excess of loan demand primarily in mortgage-backed
securities, investment grade debt and equity mutual funds.
. Invest in technological enhancements to increase productivity and
efficiency.
Comparison of Financial Condition at May 31, 1999 and December 31, 1998
Total assets increased $19.3 million, or 1.2%, to $1.61 billion at May 31,
1999 from $1.59 billion at December 31, 1998. This increase was primarily the
result of a $34.0 million increase in net loans and a $33.0 million increase in
mortgage-backed securities primarily funded by an increase in deposits and
Federal Home Loan Bank borrowings. These increases were partially offset by a
$47.3 million decrease in investment securities. The decrease in investment
securities was primarily due to the sale of investment securities to fund loan
growth and investments in mortgage-backed securities. The change in the
composition of the debt securities portfolio was due to a change in management's
strategy to attempt to enhance the yield on its interest earning assets through
restructuring its securities portfolio by reinvesting proceeds from maturing
shorter-term debt securities into mortgage-backed securities with longer
estimated maturities. See "Business of American Savings--Investment
Activities."
Deposits totaled $1.15 billion at May 31, 1999, representing an increase of
$7.9 million compared to $1.14 billion at December 31, 1998. The deposit growth
primarily reflects an $11.6 million, or 6.0%, increase in savings accounts, a
$3.9 million, or 5.7%, increase in NOW accounts and a $2.9 million, or 4.6%,
increase in money market accounts. These increases were offset by an $8.1
million, or 1.3%, decrease in certificates of deposit. The overall increase in
deposits and the slight change in the composition of the deposit base were due
primarily to the effects of the opening of three branch offices in late 1998 and
broadening of American Savings' deposit products offered to customers.
Advances from the Federal Home Loan Bank increased $9.5 million, or 7.9%, to
$129.7 million at May 31, 1999 from $120.2 million at December 31, 1998, and
were used primarily to fund the purchase of mortgage-backed securities and the
origination of one- to four-family mortgage loans.
Nonperforming assets totaled $3.5 million at May 31, 1999 compared to $4.7
million at December 31, 1998, a decrease of $1.2 million, or 25.9%. The
decrease was primarily due to a $1.1 million, or 31.0%, decrease in the amount
of nonaccruing one- to four-family loans from $3.7 million at December 31, 1998
to $2.5 million at May 31, 1999. The decrease in nonaccruing one- to four-
family loans was primarily due to an improving local and state economy and, to a
lesser extent, the implementation of more focused loan collection efforts.
Total equity increased $5.0 million to $286.0 million at May 31, 1999 as
compared to $281.0 million at December 31, 1998. This increase was due to net
income of $7.9 million for the five months ended May 31, 1999. This increase
was partially offset by a $2.9 million decrease in accumulated other
comprehensive income to
34
<PAGE>
$36.9 million at May 31, 1999 from $39.8 million at December 31, 1998 caused by
a decrease in the after-tax net unrealized gain on available for sale
securities.
Comparison of Financial Condition at December 31, 1998 and 1997
Total assets increased $115.2 million, or 7.8%, to $1.59 billion at
December 31, 1998 as compared to $1.48 billion at December 31, 1997. This
increase was primarily a result of increases of $69.6 million in net loans due
to increased loan originations, $40.0 million in mortgage-backed securities due
to purchases of mortgage-backed securities, $8.9 million in cash and due from
banks and $6.9 million in federal funds sold. These increases were partially
offset by a $14.4 million decrease in investment securities resulting primarily
from the sale of equity securities. The growth in assets was funded by growth
in deposits and additional Federal Home Loan Bank advances. The growth in loans
was primarily due to an improving state and local economy, expansion of loan
products offered by American Savings, increased marketing efforts and expansion
of its market area in 1998 and lower market interest rates in 1998, which
resulted in an increase in loan refinancings.
Deposits totaled $1.14 billion at December 31, 1998, representing an
increase of $47.4 million compared to $1.10 billion at December 31, 1997. The
deposit growth reflects an increase of $11.6 million, or 6.4%, in savings
accounts, an increase of $15.9 million, or 30.3%, in NOW accounts, an increase
of $9.2 million, or 48.1%, in demand deposits, and an increase of $13.3 million,
or 2.2%, in certificates of deposit. The increase in deposits was primarily
attributable to the opening of three new branches in late 1998 and more
aggressive marketing of deposit products. In addition, borrowings from the
Federal Home Loan Bank increased $40.0 million, or 49.8%, to $120.2 million at
December 31, 1998 from $80.2 million at December 31, 1997, and were used
primarily to fund the origination of loans and the purchase of mortgage-backed
securities.
Nonperforming assets totaled $4.7 million at December 31, 1998 compared to
$7.6 million at December 31, 1997, a decrease of $2.9 million, or 38.2%. The
decrease was primarily due to a $2.8 million, or 43.2%, decrease in the amount
of nonaccruing one- to four-family loans from $6.5 million at December 31, 1997
to $3.7 million at December 31, 1998. The decrease in nonaccruing one- to four-
family loans during this period was primarily due to an improving state and
local economy and, to a lesser extent, the implementation of more focused loan
collection efforts.
Total equity increased $22.8 million to $281.0 million at December 31, 1998
compared to $258.1 million at December 31, 1997. This increase was due to net
income of $18.0 million and an increase of $4.8 million in accumulated other
comprehensive income, unrealized gains on available for sale securities, for the
year ended December 31, 1998.
Comparison of Operating Results for the Five Months Ended May 31, 1999 and 1998
Net Income. Net income decreased approximately $1.1 million, or 12.4%, to
$7.9 million for the five months ended May 31, 1999 from $9.0 million for the
five months ended May 31, 1998. The decrease was primarily attributable to a
$1.4 million combined reduction in the gains on sale and contribution of
securities. The reduction in the gain on contributions of securities was due to
the recognition of a $2.1 million gain in the five months ended May 31, 1998,
resulting from funding the 1998 contribution to the American Savings Bank
Foundation, Inc., with the transfer of investment securities owned by American
Savings. The gain represents the excess of the fair value of the transferred
securities over the cost basis at the date of the transfer. American Savings
recognizes an expense for the contribution in an amount equal to the fair value
of the securities transferred. There was no similar contribution made in the
five months ended May 31, 1999. The decrease in gains on contributions was
partially offset by an increase of $655,000 in gains on sales of equity
securities during the five months ended May 31, 1999 compared to the five months
ended May 31, 1998.
Net Interest Income. Net interest income for the five months ended May 31,
1999 increased by $51,000, or 0.3%, primarily as a result of increased interest
income resulting from an increase in the average balance of interest earning
assets due to increased loan originations and mortgage-backed securities
purchases and reduced interest
35
<PAGE>
expense on deposit accounts due to a lower interest rate environment. These were
offset, in part, by higher interest expense on borrowings due to an increase in
the average balance of Federal Home Loan Bank advances.
Interest and dividend income remained consistent at $41.3 million for the
five-month periods ended May 31, 1999 and 1998. The yield on interest-earning
assets was 6.72% and 7.17% for the five-month periods ended May 31, 1999 and
1998, respectively, due to a lower market interest rate environment. Interest
income on loans increased by $479,000, or 1.8%, to $27.8 million for the five
months ended May 31, 1999 from $27.4 million for the same period in 1998. The
increase was attributable to a $72.3 million increase in the average balance of
loans partially offset by a decrease in the average yield on loans from 7.77%
during the first five months of 1998 to 7.28% during the same period in 1999 due
to a lower interest rate environment. Interest and dividend income from
investment securities decreased $1.5 million, or 15.7%, to $7.9 million for the
five months ended May 31, 1999 from $9.4 million for the five months ended May
31, 1998, which was primarily attributable to a $33.3 million decrease in the
average balance of investment securities to $323.1 million for the five months
ended May 31, 1999, as well as a 38 basis point decrease in the average yield
earned on such investments due to a lower interest rate environment. Interest
income on mortgage-backed securities increased $873,000, or 22.0%, from $4.0
million for the five months ended May 31, 1998 to $4.8 million for the five
months ended May 31, 1999. The increase in interest income on mortgage-backed
securities resulted from a $44.4 million increase in the average balance of
mortgage-backed securities due to additional purchases of mortgage-backed
securities, partially offset by a decrease in the average yield of 51 basis
points due to the lower interest rate environment.
Interest expense remained consistent at $22.4 million for the five-month
periods ended May 31, 1999 and 1998. The cost of interest-bearing liabilities
decreased by 28 basis points from 4.62% for the five months ended May 31, 1998
to 4.34% for the same period in 1999 primarily due to a lower market interest
rate environment. Interest on deposits decreased $889,000, or 4.4%, despite a
$32.5 million, or 3.0%, increase in the average balance of deposits primarily
due to a 33 basis point decrease in the average rate paid on deposits resulting
from a lower interest rate environment. The decrease in interest expense on
deposits was offset by an increase of $892,000 in interest on Federal Home Loan
Bank advances for the five months ended May 31, 1999 compared to the same period
in the prior year due to an increase in the average balance of Federal Home Loan
Bank advances which were used primarily to fund loan growth and the purchase of
mortgage-backed securities.
Provision for Loan Losses. The provision for loan losses decreased by
$200,000 to $800,000 for the five months ended May 31, 1999 from $1.0 million
for the five months ended May 31, 1998. The decrease in the provision for loan
losses reflects management's assessment of the losses inherent in the loan
portfolio. In determining the provision for the five months ended May 31, 1999,
management considered the 48.2% decrease in nonperforming loans, which totaled
$2.9 million and $5.6 million at May 31, 1999 and 1998, respectively, and 0.30%
and 0.65% of total loans at May 31, 1999 and 1998, respectively. At May 31,
1999 and 1998, the allowance for loan losses was $8.0 million and $6.6 million,
respectively, which represented 278% of nonperforming loans and 0.84% of total
loans at May 31, 1999 as compared to 118% of nonperforming loans and 0.77% of
total loans at May 31, 1998.
American Savings' management assesses the adequacy of the allowance for
loan losses based on known and inherent risks in the loan portfolio and upon
management's continuing analysis of the quality of the loan portfolio. While
management believes that, based on information currently available, American
Savings' allowance for loan losses is sufficient to cover probable losses
inherent in its loan portfolio at this time, no assurances can be given that
American Savings' level of allowance for loan losses will be sufficient to cover
loan losses incurred by American Savings or that future adjustments to the
allowance for loan losses will not be necessary if economic and other conditions
differ substantially from the economic and other conditions used by management
to determine the current level of the allowance for loan losses. Management may
increase its level of allowance for loan losses as a percentage of total loans
and nonperforming loans if the level of multi-family, construction or consumer
lending as a percentage of its total loan portfolio increases. In addition,
various regulatory agencies, as an integral part of their examination process,
periodically review American Savings' allowance for loan losses. These agencies
may require American Savings to provide additions to the allowance based on
judgments different from management. See "Business of American Savings--Lending
Activities--Allowance for Loan Losses."
36
<PAGE>
Non-interest Income. Non-interest income decreased $1.1 million, or 17.9%,
to $4.8 million for the five months ended May 31, 1999 from $5.9 million in the
same period in the prior year primarily due to a decrease in the combined gains
on the sale and contribution of securities of $1.4 million, or 33.3%, from $4.2
million for the five months ended May 31, 1998 to $2.8 million for the five
months ended May 31, 1999. The decrease was due to the funding, in 1998, of part
of the contribution to American Savings Bank Foundation, Inc. which was
originally planned for 1999. The 1998 contribution was made with appreciated
investment securities, which resulted in American Savings recognizing a $2.1
million gain. The gain recognized on the contribution of appreciated securities
to American Savings Bank Foundation, Inc. was not subject to income tax. There
was no similar contribution during the five months ended May 31, 1999. However,
due to the planned establishment of American Savings Charitable Foundation as
part of the conversion, American Savings does not intend to make further
contributions of securities to American Savings Bank Foundation, Inc. and,
therefore, it is not expected that future gains on the contribution of
appreciated securities will be recognized. Gains on sales of investment
securities increased $655,000 during the five months ended May 31, 1999 compared
to the five months ended May 31, 1998 due to increased sales of equity
securities in 1999 that took advantage of the favorable equity market
conditions. American Savings has reinvested the proceeds of sale of equity
securities primarily in actively traded diversified equity mutual funds in order
to diversify risk as the equity securities portfolio is heavily weighted toward
actively traded financial institution equities. As a result, the effect on
American Savings' liquidity has been neutral. See "Business of American Savings
- --Investment Activities" for additional information. Depending on the market
value of investment securities in future periods at the time of any sale, future
gains may be reduced or eliminated or American Savings may recognize losses.
Service charges and fees increased $357,000 for the five months ended May 31,
1999 compared to the prior year due to the implementation of a new service
charge structure, increased transaction accounts and an increase in fees
following the commencement of operations of American Savings' financial services
subsidiary in January 1998.
Non-interest Expense. Non-interest expense for the five months ended May
31, 1999 was $10.9 million, an increase of $382,000, or 3.6%, compared to $10.5
million for the five months ended May 31, 1998. Salaries and employee benefits
increased $574,000, or 11.0%, to $5.8 million for the five months ended May 31,
1999 from $5.2 million for the same period in 1998. Occupancy expense for the
five months ended May 31, 1999 increased $169,000 to $995,000 from $826,000 in
the same period last year. Both the salary and occupancy expense increases are
primarily due to the opening of three new branches during the latter part of
1998 and the increased depreciation charges associated with capital improvements
to the main office completed in late 1998. Advertising expense increased
$172,000 to $592,000 for the five months ended May 31, 1999, compared to
$420,000 for the five months ended May 31, 1998. The increase is primarily
attributable to a direct mail program promoting American Savings' three new
branch offices, additional print advertising to support asset generation
strategies and timing of marketing promotions. These increases were offset in
part by lower foreclosure expenses, due to fewer foreclosures, and a decrease in
charitable contributions. Charitable contributions decreased $635,000, or 62.8%,
to $375,000 for the five months ended May 31, 1999, compared to $1.0 million in
the prior period. This decrease was due to American Savings funding a portion of
the contribution to the American Savings Bank Foundation, Inc. during the first
five months of 1998 and no similar contribution during the five months ended May
31, 1999.
Other expenses for the five months ended May 31, 1999 were $2.3 million
compared to $2.2 million for the five months ended May 31, 1998. The $107,000,
or 4.8%, increase was primarily attributable to an $83,000 increase in directors
fees and expenses. The increase in other expenses was offset by a $63,000
decrease in professional services due to higher expenses incurred by American
Savings in 1998 related to employee sales training and consulting related to
state income tax refund claims.
Income Tax Expense. Income taxes were $4.2 million for the five months
ended May 31, 1999, compared to $4.3 million for the five months ended May 31,
1998. The effective tax rates were 34.7% and 33.1% for the five months ended May
31, 1999 and 1998, respectively. The decrease in income tax expense was
primarily attributed to the decrease of $1.2 million in pre-tax income. In
addition, state income taxes decreased in 1999 due to the operation of a passive
investment company which American Savings established in order to benefit from
changes in Connecticut tax statutes enacted in 1998. American Savings expects
that the operation of the passive investment company will assist in minimizing
American Savings' overall effective tax rate for 1999. These decreases were
37
<PAGE>
partially offset by a decrease in the tax benefit resulting from a lower gain on
the contribution of appreciated securities to American Savings Bank Foundation,
Inc.
Comparison of Operating Results for the Years Ended December 31, 1998 and 1997
Net Income. Net income decreased by $245,000, or 1.3%, to $18.0 million
for the year ended December 31, 1998 from $18.3 million for 1997. The decrease
was primarily attributable to a $4.8 million increase in non-interest expense, a
$246,000 increase in the provision for loan losses and a $1.0 million increase
in income taxes, partially offset by a $2.2 million increase in net interest
income and a $3.6 million increase in non-interest income.
Net Interest Income. Net interest income increased by $2.2 million, or
5.1%, primarily as a result of higher interest income from an increase in the
level of average interest-earning assets and a decrease in the average rate paid
on interest-bearing liabilities due to a lower interest rate environment.
Interest and dividend income increased $3.7 million, or 3.9%, to $99.0 million
for the year ended December 31, 1998 from $95.3 million for 1997. The average
yield on interest-earning assets declined to 7.06% in 1998 from 7.13% in 1997
primarily due to a decline in market interest rates. Interest income on loans
increased $4.6 million, or 7.3%, to $66.8 million for 1998, compared to $62.2
million for the prior year. This increase was due to an $81.8 million increase
in the average balance of loans outstanding, offset by a 22 basis point decrease
in the average yield on such loans primarily due to a decline in market interest
rates. In addition, interest income on mortgage-backed securities increased $1.8
million, or 24.5%, for the year ended December 31, 1998, compared to the prior
year due to a $28.7 million increase in the average balance of such securities,
partially offset by a decrease of 15 basis points in the yield earned on such
securities due to lower market interest rates. The increases in interest income
on loans and mortgage-backed securities were offset by a decrease in interest
and dividend income from investment securities of $2.8 million, or 11.6%, from
$24.4 million for 1997 to $21.6 million in 1998. The decrease in interest and
dividend income from investment securities was due to a decrease in the average
balance of investment securities of $55.5 million, or 13.8%, to $348.1 million
for the year ended December 31, 1998, and a 22 basis point decrease in the
average yield. The increase in mortgage-backed securities and the decrease in
investment securities reflects management's restructuring of its securities
portfolio and the sale of equity securities in 1998.
Interest expense increased $1.6 million, or 3.0%, to $54.1 million for the
year ended December 31, 1998 from $52.5 million for the prior year primarily due
to an increase in interest expense on Federal Home Loan Bank advances of $1.9
million to $5.2 million for the year ended December 31, 1998 from $3.4 million
for the year ended December 31, 1997. The average balance of such advances was
$52.5 million for 1997 and $83.3 million for 1998, an increase of $30.8 million,
or 58.7%. These advances were used primarily to fund the purchase of mortgage-
backed securities and, to a lesser extent, loan originations. The rate paid on
Federal Home Loan Bank advances decreased 16 basis points to 6.29% in 1998 from
6.45% in 1997 due to a lower market interest rate environment. The increase in
Federal Home Loan Bank advances was offset, in part, by a decrease in the cost
of interest-bearing liabilities from 4.66% in 1997 to 4.61% for 1998. Interest
on deposits decreased by $298,000 to $48.8 million for the year ended December
31, 1998 from $49.1 million in the prior year due to a decrease in the average
rate paid on deposits of 9 basis points during 1998 offset by an increase in the
average balance of $15.7 million.
Provision for Loan Losses. The provision for loan losses increased by
$246,000 from $2.2 million for 1997 to $2.4 million for 1998. The increase in
the provision was primarily due to an overall increase in the loan portfolio,
particularly increases in consumer and construction loans. As a result, the
allowance for loan losses was 0.83% of total loans and 191% of nonperforming
loans at December 31, 1998 compared to 0.74% and 91%, respectively, at December
31, 1997.
Non-interest Income. Non-interest income totaled $11.3 million and $7.7
million for 1998 and 1997, respectively. The $3.6 million increase in non-
interest income was attributable to an increase in service charges and fees of
$1.7 million, or 68.0%, to $4.1 million for 1998 from $2.4 million for 1997.
This increase was attributable primarily to increased fee income from the
expansion of American Savings' trust services, offering new consumer products
and forming a new subsidiary, American Investment Services, Inc. In addition,
the combined gains on sale
38
<PAGE>
and contribution of securities increased $2.0 million, or 43.8%, to $6.7 million
for the year ended December 31, 1998 from $4.7 million for the year ended
December 31, 1997. The $2.0 million increase in gains on securities was
primarily due to additional sales of equity securities during 1998 as compared
to 1997 to take advantage of the strong performance of the stock market and to
restructure the securities portfolio. American Savings has reinvested the
proceeds of sale of equity securities primarily in actively traded diversified
equity mutual funds in order to diversify risk as the equity securities
portfolio is heavily weighted toward actively traded financial institution
equities. As a result, the effect on American Savings' liquidity has been
neutral. Depending on the market value of investment securities in future
periods at the time of any sale, future gains may be reduced or eliminated or
American Savings may recognize losses. See "Business of American Savings--
Investment Activities" for additional information.
Non-interest Expense. Non-interest expense increased by $4.8 million, or
21.7%, to $26.7 million for 1998 from $21.9 million for 1997. The increase in
non-interest expense was primarily attributable to an increase in salaries and
employee benefits of $2.2 million, or 21.6%, to $12.3 million for the year ended
December 31, 1998, from $10.1 million for the year ended December 31, 1997,
resulting from the hiring of personnel in connection with the expansion of trust
and investment services, the establishment of a call center and the opening of
three new branches. In addition, charitable contributions increased by $1.6
million in 1998 compared to the prior year, while other non-interest expenses
increased by $918,000, or 21.0%. These increases were partially offset by a
$427,000 decrease in real estate owned expenses in 1998 due primarily to reduced
holding periods for foreclosed properties in 1998 compared to 1997. The
increase in charitable contributions was due to American Savings taking
advantage of a provision in the tax code, that excludes from taxable income
gains recognized upon the contribution of securities to charitable
organizations, that was expected to expire, by making in 1998 approximately $1.5
million of the contribution planned for 1999. The increase in other non-
interest expenses was primarily due to an increase in general expenses
associated with the operation of three additional branches and training costs
associated with American Savings' strategic goal of implementing a sales and
service culture.
Income Tax Expense. Income taxes increased $973,000 to $9.1 million for
the year ended December 31, 1998, compared to $8.1 million for the year ended
December 31, 1997. The effective tax rates were 33.5% and 30.7% for the years
ended December 31, 1998 and 1997, respectively. The increase in income taxes in
1998 was primarily the result of higher pre-tax income, higher state income
taxes and a decrease in the tax benefit resulting from a lower gain on the
contribution of appreciated securities to American Savings Bank Foundation, Inc.
Comparison of Operating Results for the Years Ended December 31, 1997 and 1996
Net Income. Net income increased $2.6 million, or 16.1%, to $18.3 million
for the year ended December 31, 1997 from $15.7 million for the prior year. The
increase was primarily attributable to a $3.3 million increase in net interest
income and a $1.0 million increase in non-interest income, partially offset by a
$2.4 million increase in non-interest expense.
Net Interest Income. Net interest income increased by $3.3 million, or
8.4%, from $39.4 million for 1996 to $42.7 million for 1997. The increase was
primarily due to increased interest income from an increase in the average
balance of interest-earning assets which was offset in part by higher interest
expense from Federal Home Loan Bank advances. Interest and dividend income
increased $6.8 million, or 7.6%, to $95.3 million for the year ended December
31, 1997 from $88.5 million for the year ended December 31, 1996. The increase
in interest and dividend income was primarily attributable to a $5.4 million, or
9.5%, increase in interest income on loans to $62.2 million for the year ended
December 31, 1997 from $56.8 million in the prior year. The average balance of
loans increased $88.1 million, or 12.5%, from $704.5 million during 1996 to
$792.6 million during 1997 due to a strong refinance market due to lower market
interest rates, the expansion of American Savings' loan markets by adding loan
correspondents and a more aggressive consumer loan pricing strategy. The
increase in interest income due to the increase in loans was offset, in part, by
a 21 basis point decrease in the average yield earned on loans due to a lower
market interest rate environment. Interest and dividends on investment
securities increased $2.4 million, or 10.8%, to $24.4 million in 1997 from $22.0
million in 1996 due to an increase in the average balance of investment
securities of $36.1 million, or 9.8%, from $367.6 million for 1996 to $403.6
million for 1997 and a 37
39
<PAGE>
basis point increase in the average yield earned on investment securities. These
increases were offset in part by a decrease in interest income on federal funds
sold of $841,000 from $2.2 million for 1996 to $1.4 million for 1997 primarily
due to a $15.2 million decrease in the average balance.
Interest expense increased $3.5 million, or 7.0%, to $52.5 million for 1997
from $49.1 million for 1996. The increase in interest expense was primarily
attributable to a $3.3 million increase in interest on Federal Home Loan Bank
advances to $3.4 million for the year ended December 31, 1997, from $62,000 for
the year ended December 31, 1996 and, to a lesser extent, due to a $132,000, or
0.3%, increase in interest expense on deposits due to an increase in the average
balance of interest-earning deposits. The average balance of Federal Home Loan
Bank advances increased from $1.0 million for 1996 to $52.4 million for 1997 and
the average rate paid on the advances increased 39 basis points from 6.06% in
1996 to 6.45% in 1997. The additional Federal Home Loan Bank advances were used
primarily to fund loan growth.
Provision for Loan Losses. The provision for loan losses decreased $96,000
from $2.3 million for 1996 to $2.2 million for 1997. The decrease reflects a
decrease in nonperforming loans as a percentage of total loans to 0.81% at
December 31, 1997 from 0.86% at December 31, 1996, and an increase in the level
of total loans, which increased to $837.7 million at December 31, 1997 from
$747.5 million at December 31, 1996. As a result, the allowance for loan losses
represented 0.74% of total loans at December 31, 1997 and 1996, and represented
91% and 86% of nonperforming loans at December 31, 1997 and 1996, respectively.
Non-interest Income. Non-interest income totaled $7.7 million and $6.7
million for the years ended December 31, 1997 and 1996, respectively. The $1.0
million increase in non-interest income was attributable to a $705,000 combined
increase in gains on sales and contributions of securities and an increase of
$197,000 in other non-interest income. The increase in gains on sales and
contributions of securities was primarily due to gains recognized upon the
contribution of appreciated investment securities to the American Savings Bank
Foundation, Inc. in 1997, partially offset by a decline in gains on sales of
securities. The contribution to the American Savings Bank Foundation, Inc. in
1996 was made in cash. The increase in other non-interest income was primarily
due to insurance recoveries in 1997.
Non-interest Expense. Non-interest expense increased $2.4 million, or
12.6%, to $22.0 million for the year ended December 31, 1997 from $19.5 million
for the year ended December 31, 1996. The increase in non-interest expense was
primarily attributable to an increase of $1.0 million in salaries and employee
benefits, a $212,000 increase in occupancy expense, a $414,000 increase in
furniture and fixture expense, a $202,000 increase in real estate owned
expenses, and a $430,000 increase in other non-interest expenses. The increase
in salaries and employee benefits was due to American Savings' strategic
objectives of expanding delivery systems and its trust services as well as
normal merit increases. The increase in occupancy expense and furniture and
fixture expense was due to an increase in depreciation and amortization related
to capital improvements made at American Savings' corporate and branch offices,
increases in rent related to a new branch opening and an increase in charges for
expenses related to maintenance and repairs. The increase in real estate owned
expenses was due to a higher level of foreclosures in 1997 compared to 1996.
Income Tax Expense. Income taxes were $8.1 million for the year ended
December 31, 1997 compared to $8.6 million for the year ended December 31, 1996.
The effective tax rate decreased to 30.7% in 1997 from 35.4% in 1996 primarily
as a result of the exclusion from 1997 taxable income of the gain on securities
that were contributed to the American Savings Bank Foundation, Inc.
40
<PAGE>
Average Balances, Interest and Average Yields/Cost
The following table presents certain information for the periods indicated
regarding average balances of assets and liabilities, as well as the total
dollar amounts of interest income from average interest-earning assets and
interest expense on average interest-bearing liabilities and the resulting
average yields and costs. The yields and costs for the periods indicated are
derived by dividing income or expense by the average balances of assets or
liabilities, respectively, for the periods presented. Average balances were
derived from daily balances.
<TABLE>
<CAPTION>
For the Five Months Ended May 31,
--------------------------------------------------------
At May 31, 1999 1999 1998
----------------------- ----------------------- ---------------------------------
Average Average
Yield/ Average Yield/ Average
Balance Rate Balance Interest Rate Balance Interest
----------- ---------- ------------ ---------- -------- ---------- ----------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans (1)................................... $ 941,251 7.20% $ 917,625 $ 27,835 7.28% $ 845,375 $ 27,356
Federal funds sold.......................... 31,600 4.81 37,302 723 4.65 24,470 551
Investment securities....................... 307,351 5.80 323,078 7,577 5.63 356,408 8,977
Mortgage-backed securities.................. 204,708 6.33 183,848 4,842 6.32 139,418 3,969
FHLB stock.................................. 10,434 6.30 9,857 260 6.33 8,847 228
Interest-earning deposits................... 5,290 5.15 3,608 77 5.12 7,367 179
---------- ---- ---------- -------- ------ ---------- --------
Total interest-earning assets......... 1,500,634 6.73 1,475,318 41,314 6.72 1,381,885 41,260
Non-interest earning assets................. 109,075 106,782 99,910
---------- ---------- ----------
Total assets.......................... $1,609,709 $1,582,100 $1,481,795
========== ========== ==========
Interest-bearing liabilities:
Deposits:
Money market accounts.................... $ 66,277 2.73 $ 64,434 $ 723 2.69 $ 61,100 $ 692
NOW accounts............................. 72,123 1.39 67,464 379 1.35 54,890 304
Savings accounts (2)..................... 212,912 2.09 202,058 1,711 2.03 188,509 1,603
Certificates of deposit and
retirement accounts................... 782,880 5.01 781,532 16,586 5.09 778,476 17,689
---------- ---- ---------- -------- ------ ---------- --------
Total interest-bearing deposits....... 1,134,192 4.10 1,115,488 19,399 4.17 1,082,975 20,288
FHLB advances............................... 129,744 5.85 121,942 2,995 5.89 80,244 2,103
---------- ---- ---------- -------- ------ ---------- --------
Total interest-bearing liabilities.... 1,263,936 4.28 1,237,430 22,394 4.34 1,163,219 22,391
Non-interest-bearing demand deposits........ 25,731 24,319 23,371
Other non-interest-bearing liabilities...... 34,014 38,579 33,354
---------- ---------- ----------
Total liabilities..................... 1,323,681 1,300,328 1,219,944
Equity...................................... 286,028 281,772 261,851
---------- ---------- ----------
Total liabilities and equity.......... $1,609,709 $1,582,100 $1,481,795
========== ========== ==========
Net interest-earning assets................. $ 236,698 $ 237,888 $ 218,666
========== ========== ==========
Net interest income......................... $ 18,920 $ 18,869
======== ========
Interest rate spread........................ 2.38%
Net interest margin (net interest income
as a percentage of total
interest-earning assets)................. 3.08%
Ratio of total interest-earning assets
to total interest-bearing liabilities.... 119.22%
<CAPTION>
------------
Average
Yield/
Rate
------------
<S> <C>
Interest-earning assets:
Loans (1).................................... 7.77%
Federal funds sold........................... 5.40
Investment securities........................ 6.04
Mortgage-backed securities................... 6.83
FHLB stock................................... 6.19
Interest-earning deposits.................... 5.83
------
Total interest-earning assets.......... 7.17
Non-interest earning assets..................
Total assets...........................
Interest-bearing liabilities:
Deposits:
Money market accounts..................... 2.72
NOW accounts.............................. 1.33
Savings accounts (2)...................... 2.04
Certificates of deposit and
retirement accounts.................... 5.45
------
Total interest-bearing deposits........ 4.50
FHLB advances................................ 6.29
------
Total interest-bearing liabilities..... 4.62
Non-interest-bearing demand deposits.........
Other non-interest-bearing liabilities.......
Total liabilities......................
Equity.......................................
Total liabilities and equity...........
Net interest-earning assets..................
Net interest income..........................
Interest rate spread......................... 2.55%
Net interest margin (net interest income
as a percentage of total
interest-earning assets)................. 3.27%
Ratio of total interest-earning assets
to total interest-bearing liabilities..... 118.80%
</TABLE>
__________________________
(1) Average balances include nonaccrual loans.
(2) Includes mortgagors' escrow accounts.
41
<PAGE>
<TABLE>
<CAPTION>
For the Years Ended December 31,
-----------------------------------------------------------------------
1998 1997
--------------------------------- -----------------------------------
Average Average
Average Yield/ Average Yield/
Balance Interest Rate Balance Interest Rate
---------- ----------- -------- ---------- ---------- ----------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans (1).................................. $ 874,373 $ 66,754 7.63% $ 792,578 $ 62,202 7.85%
Federal funds sold......................... 29,683 1,600 5.39 25,072 1,379 5.50
Investment securities...................... 348,089 20,585 5.91 403,636 23,855 5.91
Mortgage-backed securities................. 134,201 9,064 6.75 105,545 7,278 6.90
FHLB stock................................. 9,169 580 6.33 8,371 541 6.46
Interest-earning deposits.................. 6,943 406 5.85 -- -- --
---------- ---------- ------- ---------- --------- -------
Total interest-earning assets........... 1,402,458 98,989 7.06 1,335,202 95,255 7.13
Non-interest earning assets................ 97,056 85,755
---------- ----------
Total assets............................ $1,499,514 $1,420,957
========== ==========
Interest-bearing liabilities:
Deposits:
Money market accounts................... $ 61,190 $ 1,678 2.74 $ 62,440 $ 1,694 2.71
NOW accounts............................ 58,551 785 1.34 44,852 712 1.59
Savings accounts (2).................... 192,212 3,962 2.06 189,360 3,871 2.04
Certificates of deposit and
retirement accounts.................. 778,142 42,398 5.45 777,725 42,844 5.51
---------- ---------- ------- ---------- --------- ------
Total interest-bearing deposits...... 1,090,095 48,823 4.48 1,074,377 49,121 4.57
FHLB advances.............................. 83,312 5,244 6.29 52,490 3,386 6.45
---------- ---------- ------- ---------- --------- ------
Total interest-bearing liabilities... 1,173,407 54,067 4.61 1,126,867 52,507 4.66
Non-interest-bearing demand deposits....... 23,733 23,063
Other non-interest-bearing liabilities..... 35,754 29,351
---------- ----------
Total liabilities.................... 1,232,894 1,179,281
Equity..................................... 266,620 241,676
---------- ----------
Total liabilities and equity......... $1,499,514 $1,420,957
========== ==========
Net interest-earning assets................ $ 229,051 $ 208,335
========== ==========
Net interest income........................ $ 44,922 $ 42,748
========== =========
Interest rate spread....................... 2.45% 2.47%
Net interest margin (net interest
income as a percentage of total
interest-earning assets)................ 3.20% 3.20%
Ratio of total interest-earning assets
to total interest-bearing liabilities... 119.52% 118.49%
<CAPTION>
------------------------------------------
1996
------------------------------------------
Average
Average Yield/
Balance Interest Rate
---------- ---------- ----------
<S> <C> <C> <C>
Interest-earning assets:
Loans (1).................................. $ 704,501 $ 56,781 8.06%
Federal funds sold......................... 40,295 2,219 5.51
Investment securities...................... 367,573 20,360 5.54
Mortgage-backed securities................. 109,106 7,473 6.85
FHLB stock................................. 8,371 541 6.46
Interest-earning deposits.................. 20,191 1,114 5.52
---------- --------- -------
Total interest-earning assets........... 1,250,037 88,488 7.08
Non-interest earning assets................ 67,094
----------
Total assets............................ $1,317,131
==========
Interest-bearing liabilities:
Deposits:
Money market accounts................... $ 64,348 $ 1,757 2.73
NOW accounts............................ 32,474 569 1.75
Savings accounts (2).................... 183,757 3,983 2.17
Certificates of deposit and
retirement accounts.................. 773,447 42,680 5.52
---------- --------- -------
Total interest-bearing deposits...... 1,054,026 48,989 4.65
FHLB advances............................... 1,023 62 6.06
---------- --------- -------
Total interest-bearing liabilities... 1,055,049 49,051 4.65
Non-interest-bearing demand deposits.......... 23,017
Other non-interest-bearing liabilities..... 22,939
---------
Total liabilities.................... 1,101,005
Equity..................................... 216,126
----------
Total liabilities and equity......... $1,317,131
==========
Net interest-earning assets................ $ 194,988
==========
Net interest income........................ $ 39,437
=========
Interest rate spread....................... 2.43%
Net interest margin (net interest
income as a percentage of total
interest-earning assets)................ 3.15%
Ratio of total interest-earning assets
to total interest-bearing liabilities... 118.48%
</TABLE>
__________________
(1) Average balances include nonaccrual loans.
(2) Includes mortgagors' escrow accounts.
42
<PAGE>
Rate/Volume Analysis
The following table presents the effects of changing rates and volumes on
the interest income and interest expense of American Savings. 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, which cannot be segregated, have been
allocated proportionately based on the absolute value of the change due to rate
and the change due to volume.
<TABLE>
<CAPTION>
Five Months Ended Year Ended
May 31, 1999 December 31, 1998
Compared to Compared to
Five Months Ended Year Ended
May 31, 1998 December 31, 1997
--------------------------------- -------------------------------
Increase (Decrease) Increase (Decrease)
Due to Due to
---------------------- ----------------------
Rate Volume Net Rate Volume Net
-------- -------- -------- --------- ---------- -------
(In thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans............................ $(1,774) $2,253 $ 479 $(1,729) $ 6,281 $ 4,552
Federal funds sold............... (85) 257 172 (28) 249 221
Investment securities............ (762) (638) (1,400) (953) (2,317) (3,270)
Mortgage-backed securities....... (320) 1,193 873 (248) 2,034 1,786
Federal Home Loan Bank
stock......................... 5 27 32 (12) 51 39
Interest-bearing deposits........ (20) (82) (102) -- 406 406
------- ------ ------- ------- ------- -------
Total interest-earning
assets..................... (2,956) 3,010 54 (2,970) 6,704 3,734
------- ------ ------- ------- ------- -------
Interest-bearing liabilities:
Deposits:
Money market accounts......... (6) 37 31 18 (34) (16)
NOW accounts.................. 4 71 75 (122) 195 73
Savings accounts.............. (7) 115 108 32 59 91
Certificates of deposit and
retirement accounts........ (1,172) 69 (1,103) (469) 23 (446)
------- ------ ------- ------- ------- -------
Total deposits............ (1,181) 292 (889) (541) 243 (298)
Federal Home Loan
Bank advances................. (140) 1,032 892 (84) 1,942 1,858
------- ------ ------- ------- ------- -------
Total interest-bearing
liabilities............. (1,321) 1,324 3 (625) 2,185 1,560
------- ------ ------- ------- ------- -------
Increase (decrease) in net
interest income.................. $(1,635) $1,686 $ 51 $(2,345) $ 4,519 $ 2,174
======= ====== ======= ======= ======= =======
<CAPTION>
Year Ended
December 31, 1997
Compared to
Year Ended
December 31, 1996
------------------------------------------
Increase (Decrease)
Due to
----------------------------
Rate Volume Net
------------- ------- -------
(In thousands)
<S> <C> <C> <C>
Interest-earning assets:
Loans........................... $(1,524) $ 6,945 $ 5,421
Federal funds sold.............. (3) (837) (840)
Investment securities........... 891 2,604 3,495
Mortgage-backed securities...... 45 (240) (195)
Federal Home Loan Bank
stock........................ -- -- --
Interest-bearing deposits....... -- (1,114) (1,114)
------- ------- -------
Total interest-earning
assets.................... (591) 7,358 6,767
------- ------- -------
Interest-bearing liabilities:
Deposits:
Money market accounts........ (11) (52) (63)
NOW accounts................. (58) 201 143
Savings accounts............. (231) 119 (112)
Certificates of deposit and
retirement accounts....... (72) 236 164
------- ------- -------
Total deposits........... (372) 504 132
Federal Home Loan
Bank advances................ 4 3,320 3,324
------- ------- -------
Total interest-bearing
liabilities............ (368) 3,824 3,456
------- -------- -------
Increase (decrease) in net
interest income................. $ (223) $ 3,534 $ 3,311
======= ======= =======
</TABLE>
Management of Interest Rate Risk and Market Risk Analysis
Qualitative Aspects of Market Risk. American Savings' most significant form
of market risk is interest rate risk. The principal objectives of American
Savings' interest rate risk management are to evaluate the interest rate risk
inherent in certain balance sheet accounts, determine the level of risk
appropriate given American Savings' business strategy, operating environment,
capital and liquidity requirements and performance objectives, and manage the
risk consistent with the Board of Director's approved guidelines. American
Savings 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 American Savings.
In recent years, American Savings 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
43
<PAGE>
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 to better
structure maturities of its interest rate sensitive liabilities. American
Savings currently does not participate in hedging programs, interest rate swaps
or other activities involving the use of off-balance sheet derivative financial
instruments.
American Savings' market risk also includes equity price risk. American
Savings' marketable equity securities portfolio had gross unrealized gains of
$64.6 million at May 31, 1999 which is included, net of taxes, in accumulated
other comprehensive income, a separate component of American Savings' capital.
If equity security prices decline due to unfavorable market conditions or other
factors, American Savings' capital would decrease.
Quantitative Aspects of Market Risk. American Savings 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 tables below set forth, as of
May 31, 1999 and December 31, 1998, estimated net interest income and the
estimated changes in American Savings' net interest income for the next twelve
month period which may result given instantaneous changes in market interest
rates of 200 basis points up and down.
<TABLE>
<CAPTION>
Increase/
(Decrease)
in market Estimated Changes in Annual Net Interest Income
--------------------------------------------------------------------------------------------------------
Interest Rates At May 31, 1999 At December 31, 1998
--------------------------------------------------------------------------------------------------------
Basis Points $ % $ %
Rate Shock) Amount Change Change Amount Change Change
- -------------- ------------ ------------ ----------- ---------- ----------- ----------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
200 $49,754 $ 983 2.02% $48,472 $ 2,474 5.38%
100 49,474 703 1.44 47,408 1,410 3.07
Static 48,771 -- -- 45,998 -- --
(100) 47,605 (1,166) (2.39) 44,054 (1,944) (4.23)
(200) 45,827 (2,944) (6.04) 42,060 (3,938) (8.56)
</TABLE>
The above table indicates that in the event of a sudden and sustained
decline in prevailing market interest rates, American Savings' net interest
income would be expected to decrease.
Computation of prospective effects of hypothetical interest rate changes
are based on a number of assumptions including the level of market interest
rates, the degree to which certain assets and liabilities with similar
maturities or periods to repricing react to changes in market interest rates,
the expected prepayment rates on loans and investments, the degree to which
early withdrawals occur on certificates of deposit and other deposit flows. As
a result, these computations should not be relied upon as indicative of actual
results. Further, the computations do not reflect any actions that management
may undertake in response to changes in interest rates.
Liquidity and Capital Resources
Liquidity is the ability to meet current and future short-term financial
obligations. American Savings 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. Primary sources of
funds consist of deposit inflows, loan repayments, maturities, paydowns, and
sales of investment and mortgage-backed securities and borrowings from the
Federal Home Loan Bank. While maturities and scheduled amortization of loans
and securities are predictable sources of funds, deposit outflows and mortgage
prepayments are greatly influenced by general interest rates, economic
conditions and competition.
The primary investing activities of American Savings are (1) the
origination of residential one-to four-family mortgage loans and, to a lesser
extent, multi-family loans, single-family construction loans, home equity loans
and lines of credit and consumer loans and (2) the investment in mortgage-backed
securities, U.S. Government and agency obligations and corporate equity
securities and debt obligations. These activities are
44
<PAGE>
funded primarily by principal and interest payments on loans, maturities of
securities, deposit growth and Federal Home Loan Bank advances. During the five
months ended May 31, 1999 and the years ended December 31, 1998 and 1997,
American Savings' loan originations totaled $212.3 million, $394.1 million, and
$279.8 million, respectively. At May 31, 1999 and December 31, 1998 and 1997,
American Savings' investments in mortgage-backed securities, U.S. Government and
agency obligations and corporate equity securities and debt obligations totaled
$576.3 million, $590.5 million and $564.8 million, respectively. American
Savings experienced a net increase in total deposits of $7.9 million, $47.4
million, and $20.8 million for the five months ended May 31, 1999 and the years
ended December 31, 1998 and 1997, respectively, primarily as a result of the
introduction of new products and the opening of new branches. Deposit flows are
affected by the overall level of interest rates, the interest rates and products
offered by American Savings and its local competitors and other factors.
American Savings closely monitors its liquidity position on a daily basis. If
American Savings should require funds beyond its ability to generate them
internally, additional sources of funds are available through Federal Home Loan
Bank advances and through repurchase agreement borrowing facilities with
broker/dealers.
Outstanding commitments for all loans and unadvanced construction loans and
lines of credit totaled $254.2 million at May 31, 1999. Management of American
Savings 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 May 31, 1999 totaled $565.5 million. American Savings
relies primarily on competitive rates, customer service, and long-standing
relationships with customers to retain deposits. From time to time, American
Savings will also offer special competitive promotions to its customers to
increase retention and promote deposit growth. Based upon American Savings'
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 American Savings.
American Savings 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 May 31, 1999,
American Savings exceeded all of its regulatory capital requirements with (1) a
leverage capital level of $249.1 million, or 15.48% of average assets, which is
above the required level of $64.4 million, or 4%, and (2) risk-based capital of
$286.1 million, or 29.56% of risk weighted assets, which is above the required
level of $77.4 million, or 8%. American Savings is considered "well
capitalized" under regulatory guidelines.
The capital from the conversion will significantly increase liquidity and
capital resources. Over time, the initial level of liquidity will be reduced as
net proceeds are used for general corporate purposes, including the funding of
lending activities. American Savings' financial condition and results of
operations will be enhanced by the capital from the conversion, resulting in
increased net interest-earning assets and net income. However, due to the large
increase in equity resulting from the capital injection, return on equity will
be adversely impacted following the conversion.
Year 2000 Readiness
The Year 2000 issue refers to the potential failure of computer systems and
applications as a result of programs using only two digits to identify a year in
the date field. If not corrected, many computer systems and applications could
fail or create erroneous results by, at or after the Year 2000. American
Savings established a Year 2000 Team to evaluate and assess American Savings'
exposure to the Year 2000 issue and developed a plan consisting of five phases.
These phases include awareness, risk assessment, renovation, validation or
testing, and implementation.
The awareness phase consists of defining the Year 2000 problem, developing
the necessary resources to perform compliance testing, establishing a Year 2000
program team, and developing an overall strategy that encompasses in-house
systems, service bureaus, vendors, customers and suppliers. American Savings
completed the awareness phase of the Year 2000 project in July of 1998.
The assessment phase requires American Savings to evaluate the size and
complexity of the problem and detail the magnitude of the effort necessary to
address Year 2000 issues. The objective of this phase is to identify all
hardware, software, networks, automated teller machines, other various
processing platforms and customer and
45
<PAGE>
vendor dependencies affected by the Year 2000 date change. The assessment phase
goes beyond information systems and includes environmental systems that depend
on embedded microchips, such as security systems, elevators, sprinkler systems,
alarms and vaults. The assessment phase was substantially completed on December
31, 1998, but is continually monitored by American Savings.
American Savings maintains an internal computer system for its operating
functions and a substantial majority of American Savings' data processing is
provided by a core banking software system that is supported by a third party
vendor. American Savings recognizes that its ability to be Year 2000 compliant
depends upon the cooperation of its vendors and other third parties. American
Savings is requiring its computer systems and software vendors to represent that
the products provided are or will be Year 2000 compliant and have planned a
program for testing for compliance. American Savings utilizes these
representations from its computer system and software vendors for the purpose of
determining the vendors' Year 2000 readiness. Upon receiving such
representations, American Savings then determines the need for replacement of or
remediations to each particular vendor's system. Rather than solely relying on
representations from its vendors, American Savings also independently tests both
critical and non-critical vendor applications. American Savings has received
representations from its primary third party data processing vendor confirming
the Year 2000 compliance of that vendor's internally developed programs.
Remaining internal and external programs have been converted to Year 2000
compliant versions. American Savings began testing the core banking system
renovated programs in October 1998. American Savings has completed testing of
its critical vendors' computer applications and believes that all identified
Year 2000 issues were addressed by March 31, 1999. All remaining Year 2000
issues for American Savings, including testing of non-critical systems, were
completed and any problems identified were addressed by July 31, 1999.
The renovation phase includes the remediation of any systems identified in
the awareness phase as not Year 2000 compliant. For institutions relying on
outside servicers or third-party software providers, ongoing discussions and
monitoring of vendor progress is necessary. American Savings has substantially
completed activities related to the renovation phase and expects to complete
such phase by August 31, 1999. Most of American Savings' systems are vendor
supplied or supported and are being remediated by the vendors. American
Savings' primary software vendor has provided American Savings with a Year 2000
ready release that has been installed. This release has been tested and
validated by American Savings.
American Savings has substantially completed its validation or testing
phase with primary focus on core software that operates basic banking
applications. Testing of mission critical systems was substantially completed as
of December 31, 1998. Further testing with mission critical vendors and other
significant third party vendors was completed by July 31, 1999. To date,
American Savings has not identified any Year 2000 problems with any of its
systems that would have a material adverse impact upon its operations. Testing
will continue as needed on newly acquired applications and vendor upgrades. In
addition, American Savings has designated an internal independent group to
validate the test plan and test results and has retained an outside independent
party to validate the business resumption contingency plan. Both validations
were completed by June 30, 1999 without any material exceptions.
The implementation phase is the final Year 2000 activity. Only after
passing the validation phase where the hardware and software have been tested
and where the tests have been validated will the hardware and software be
certified as implemented and placed in service for the year 2000. If any system
fails the certification test, American Savings will assess the impact and
implement the contingency plan developed for that application. American
Savings' primary internal technological systems, including the core processing
system, teller equipment, and local area network have already been placed in
service. All critical systems were implemented by June 30, 1999.
The potential impact of Year 2000 on American Savings' borrowers has been
evaluated. Because American Savings' has only a limited number of borrowers
with a commercial lending relationship, management believes that Year 2000
issues will not materially impair the ability of American Savings' borrowers to
repay their debts. In connection with American Savings' plans to enter
commercial lending, American Savings will assess the Year 2000 readiness of its
potential commercial borrowers.
American Savings has budgeted approximately $200,000 for costs associated
with Year 2000 compliance. As of May 31, 1999, American Savings expended
approximately $120,000 on Year 2000 issues. American Savings does not
separately track the internal costs associated with its Year 2000 readiness
project, and such costs are primarily the portion of an employee's time spent on
Year 2000 related issues.
46
<PAGE>
The impact of Year 2000 on American Savings will depend not only on
corrective actions taken by American Savings, but also on the way in which Year
2000 issues are addressed by parties over which American Savings has no control,
such as governmental agencies, businesses and other third parties that provide
services or data to, or receive services or data from, American Savings, or
whose financial condition or operational capability is important to American
Savings. To reduce this exposure, American Savings has an ongoing process of
identifying and contacting mission critical third party vendors and other
significant third party vendors to determine their Year 2000 plans and target
dates. Notwithstanding American Savings' efforts, there can be no assurance
that mission critical third party vendors or other significant third party
vendors will adequately address their Year 2000 issues.
American Savings has developed contingency plans for implementation in the
event that mission critical third party vendors fail to adequately address Year
2000 issues. The contingency plans involve identifying alternate vendors or
internal remediation. There can be no assurance that these plans will eliminate
any failures or problems. Furthermore, there may be certain mission critical
third parties, such as utilities and telecommunications companies, where
alternate arrangements or sources are limited or unavailable.
Impact of Inflation and Changing Prices
The consolidated financial statements and related data presented in this
prospectus have been prepared in conformity with generally accepted accounting
principles, which require the measurement of financial position and operating
results in terms of historical dollars, without considering changes in the
relative purchasing power of money over time due to inflation. Unlike many
industrial companies, substantially all of the assets and liabilities of
American Savings are monetary in nature. As a result, interest rates have a
more significant impact on American Savings' 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
Reporting Comprehensive Income. Statement of Financial Accounting
Standards No. 130, "Reporting Comprehensive Income," establishes standards for
reporting and displaying of comprehensive income and its components in a full
set of general-purpose financial statements. Comprehensive income is the total
of net income and all other non-owner changes in equity that are not reflected
in net income. This statement is effective for fiscal years beginning after
December 15, 1997 and reclassification of financial statements of earlier
periods is required. This statement was adopted by American Savings during the
year ended December 31, 1998.
Disclosures About Segments. Statement of Financial Accounting Standards
No. 131, "Disclosures about Segments of an Enterprise and Related Information,"
establishes standards for the manner in which public business enterprises report
information about operating segments in the annual financial statements and
requires that those enterprises report selected information about operating
segments in interim reports issued to shareholders. This statement requires
that public business enterprises report quantitative and qualitative information
about its reportable segments, including profit or loss, certain specific
revenue and expense items and segment assets. This statement also requires
reconciliations of total segment revenues, total segment profit or loss, total
segment assets and other amounts disclosed for segments to corresponding amounts
in the consolidated financial statements. This statement is effective for
financial statements for periods beginning after December 31, 1997 and in the
initial year of application, comparative information for earlier years is
required. As a community-orientated financial institution, substantially all of
American Savings' operations involve the delivery of loan and deposit products
to customers. Management makes operating decisions and assesses performance
based on an ongoing review of these community-banking operations, which
constitutes the only operating segment for financial reporting purposes.
Employers' Disclosure About Pensions and Other Postretirement Benefits.
Statement of Financial Accounting Standards No. 132, "Employers' Disclosure
about Pensions and Other Postretirement Benefits," standardizes the disclosure
requirements for pensions and other postretirement benefits. This statement
does not address measurement or recognition of pensions or other postretirement
benefits. It addresses disclosure requirements only. This statement was
adopted by American Savings during the year ended December 31, 1998 and the
required disclosures were made for all periods presented.
Accounting for Derivative Instruments and Hedging Activities. Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities," addresses the accounting for
47
<PAGE>
derivative instruments, including certain derivative instruments embedded in
other contracts and hedging activities. As recently 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. Earlier application is encouraged but is permitted only at the
beginning of any fiscal quarter that begins after issuance of the statement.
Earlier application of selected provisions of the statement is not permitted.
The statement shall not be applied retroactively to financial statements of
prior periods. The statement is not expected to affect American Savings because
it does not currently purchase derivative instruments or enter into hedging
activities.
BUSINESS OF AMERICAN FINANCIAL
General
American Financial was organized as a Delaware business corporation at the
direction of American Savings in July 1999 to become the holding company for
American Savings upon completion of the conversion. As a result of the
conversion, American Savings will be a wholly owned subsidiary of American
Financial because all of the issued and outstanding capital stock of American
Savings will be owned by American Financial.
Business
Before the completion of the conversion, American Financial will not engage
in any significant activities other than of an organizational nature. Upon
completion of the conversion, American Financial's business activity will be the
ownership of the outstanding capital stock of American Savings and management of
the investment of proceeds retained from the conversion. In the future,
American Financial may acquire or organize other operating subsidiaries. With
the exception of American Savings' strategic plan to acquire or establish an
insurance agency, there are no current plans, arrangements, agreements or
understandings, written or oral, to do so.
Initially, American Financial will neither own nor lease any property but
will instead use the premises, equipment and furniture of American Savings with
the payment of appropriate rental fees, as required by applicable law and
regulations.
Since American Financial will own the outstanding capital stock of American
Savings after the conversion, the competitive conditions applicable to American
Financial will be the same as those confronting American Savings. See "Business
of American Savings--Competition."
BUSINESS OF AMERICAN SAVINGS
General
American Savings was founded in 1862 as a Connecticut-chartered mutual
savings bank under the name "Savings Bank of New Britain." American Savings
changed its name to "American Savings Bank" in 1976. American Savings is
regulated by the State of Connecticut Department of Banking and the Federal
Deposit Insurance Corporation. American Savings' deposits are insured to the
maximum allowable amount by the Bank Insurance Fund of the Federal Deposit
Insurance Corporation. American Savings has been a member of the Federal Home
Loan Bank System since 1978.
American Savings is a traditional savings association, specializing in the
acceptance of retail deposits from the general public in the areas surrounding
its 17 full-service banking offices and using those funds, together with funds
generated from operations and borrowings, to originate residential mortgage
loans and consumer loans, primarily home equity loans and lines of credit.
American Savings originates loans primarily for investment. However, American
Savings also sells loans, primarily fixed-rate mortgage loans, in the secondary
market, while generally retaining the servicing rights. See "--Lending
Activities." American Savings also invests in mortgage-backed securities, debt
and equity securities and other permissible investments. American Savings'
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. American Savings' primary sources of funds are
deposits, principal and interest payments on loans and investments and mortgage-
backed securities and advances from the Federal Home Loan Bank of Boston.
48
<PAGE>
Market Area
American Savings is headquartered in New Britain, Connecticut in Hartford
County. American Savings' primary deposit gathering area is concentrated in the
communities surrounding its 17 banking offices located in Hartford, Middlesex
and Tolland counties. American Savings' primary lending area is significantly
broader than its deposit gathering area and includes all of the State of
Connecticut.
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. According to published
statistics, Hartford County's 1998 population was approximately 825,000 and
consisted of approximately 315,000 households. The population decreased
approximately 3.1% from 1990. Per capita income in 1998 for Hartford County was
approximately $24,000, which was less than the Connecticut average of
approximately $27,000 but significantly higher than the national average of
$18,000. Likewise, 1998 median household income for Hartford County was $48,000
compared to approximately $52,400 for Connecticut and $38,100 for the U.S.
Connecticut is in the midst of a broad based recovery from the severe
recession experienced in the New England region in the late 1980s and early
1990s, as evidenced by the state's 3.4% unemployment rate and personal income
growth of 3.90%. Connecticut and Hartford County continue to reflect personal
wealth characteristics above national averages. Furthermore, the gross domestic
product growth figures for the state compare quite favorably with the national
numbers and single-family home sales increased 14.2% from 1997 to 1998.
However, Connecticut has a high number of finance, insurance, real estate and
export related manufacturing jobs. As a result, the state's employment may be
more affected by the national financial market and, to a lesser extent,
international economies.
Competition
American Savings 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 American Savings' 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, American Savings faces significant competition for deposits from
the mutual fund industry as customers seek alternative sources of investment for
their funds. American Savings also faces significant competition for investors'
funds from their direct purchase of short-term money market securities and other
corporate and government securities. While American Savings' 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.
Additionally, competition may increase as a result of the lifting of
restrictions on the interstate operations of financial institutions and due to
the increasing trend for non-depository financial service companies entering the
financial services market, such as insurance companies, securities companies and
specialty financial companies. Competition for deposits and the origination of
loans may limit American Savings' growth in the future. See "Risk Factors--
Competition could hurt American Savings' net interest income."
Lending Activities
General. The types of loans that American Savings may originate are
limited by federal and state laws and regulations. Interest rates charged by
American Savings on loans are affected principally by American Savings' current
asset/liability strategy, the demand for such loans, the supply of money
available for lending purposes and the rates offered by competitors. 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.
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<PAGE>
Loan Portfolio Analysis. The following table presents the composition of
American Savings' loan portfolio at the dates indicated. American Savings had no
concentration of loans exceeding 10% of total loans receivable other than as
disclosed below.
<TABLE>
<CAPTION>
At December 31,
--------------------------------------------------
At May 31, 1999 1998 1997
---------------------------- -------------------------- --------------------
Percent Percent Percent
of of of
Amount Total Amount Total Amount Total
------------ ----------- ------------ ----------- -------- ---------
Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Real Estate Loans:
One- to four-family.................. $653,016 69.0% $624,819 68.4% $588,050 69.8%
Residential construction............. 15,745 1.7 17,177 1.9 11,755 1.4
Multi-family......................... 859 0.1 872 0.1 969 0.1
Commercial........................... 339 -- 351 -- 1,094 0.1
-------- ----- -------- ----- -------- -----
Total real estate loans........... 669,959 70.8 643,219 70.4 601,868 71.4
Consumer Loans:
Home equity loans and
lines of credit................... 255,985 27.0 243,102 26.6 216,814 25.7
Automobiles.......................... 17,319 1.8 20,085 2.2 20,793 2.5
Other................................ 3,542 0.4 6,940 0.8 3,557 0.4
-------- ----- -------- ----- -------- -----
Total consumer loans.............. 276,846 29.2 270,127 29.6 241,164 28.6
-------- ----- -------- ----- -------- -----
Total loans....................... 946,805 100.0% 913,346 100.0% 843,032 100.0%
===== ===== =====
Net deferred loan
origination costs (fees).......... 2,419 1,534 928
Allowance for loan losses............ (7,973) (7,626) (6,277)
-------- -------- --------
Total loans, net.................. $941,251 $907,254 $837,683
======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
At December 31,
------------------------------------------------------------------------------------
1996 1995 1994
------------------------- -------------------------- ---------------------
Percent Percent Percent
of of of
Amount Total Amount Total Amount Total
----------- --------- --------- ----------- --------- ----------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Real Estate Loans:
One- to four-family.................. $542,085 72.0% $507,023 74.2% $457,129 72.6%
Residential construction............. 8,979 1.2 2,821 0.4 370 0.1
Multi-family......................... 981 0.1 1,132 0.2 484 0.1
Commercial........................... 1,711 0.2 1,476 0.2 2,192 0.3
-------- ----- -------- ----- -------- -----
Total real estate loans........... 553,756 73.5 512,452 75.0 460,175 73.1
Consumer Loans:
Home equity loans and
lines of credit................... 184,370 24.5 160,372 23.5 163,521 26.0
Automobiles.......................... 10,945 1.5 6,435 0.9 1,932 0.3
Other................................ 3,573 0.5 4,323 0.6 3,864 0.6
-------- ----- -------- ----- -------- -----
Total consumer loans.............. 198,888 26.5 171,130 25.0 169,317 26.9
-------- ----- -------- ----- -------- -----
Total loans....................... 752,644 100.0% 683,582 100.0% 629,492 100.0%
===== ===== =====
Net deferred loan
origination costs (fees).......... 484 (276) (1,256)
Allowance for loan losses............ (5,588) (4,484) (2,793)
-------- -------- --------
Total loans, net.................. $747,540 $678,822 $625,443
======== ======== ========
</TABLE>
50
<PAGE>
One- to Four-Family Real Estate Loans. American Savings' primary lending
activity is the origination of loans secured by one- to four-family residences
located in its primary market area. At May 31, 1999, $653.0 million, or 69.0%,
of American Savings' total loans consisted of one- to four-family loans. Of the
one- to four-family loans outstanding at that date, 29% were fixed-rate mortgage
loans and 71% were adjustable-rate loans.
American Savings' originates fixed-rate fully amortizing loans with
maturities ranging between 10 and 30 years. Management establishes the loan
interest rate based on market conditions. American Savings offers mortgage
loans that conform to Fannie Mae and Freddie Mac guidelines, as well as jumbo
loans, which presently are loans in amounts over $240,000. Fixed-rate
conforming loans are generally originated for portfolio. However, such loans
may be sold by American Savings from time to time. The determination of whether
to sell loans is determined periodically by management in response to changes in
prevailing market interest rates. Loans that are sold are generally sold to
Freddie Mac, with the servicing rights retained. American Savings will
underwrite one- to four-family residential mortgage loans with 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.
American Savings also offers adjustable-rate mortgage loans, with an
interest rate based on the one year Constant Maturity Treasury Bill index, which
adjust annually from the outset of the loan or which adjust annually after a
three, five, seven or ten year initial fixed period and with terms up to 30
years. Interest rate adjustments are limited to no more than 2% during any
adjustment period and 6% over the life of the loan. Additionally, American
Savings 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 American Savings' 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. It is possible that 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. In addition,
although adjustable-rate mortgage loans allow American Savings 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. Because of these considerations American Savings has no
assurance that yields on adjustable-rate mortgage loans will be sufficient to
offset increases in American Savings' cost of funds during periods of rising
interest rates. American Savings believes these risks, which have not had a
material adverse effect on American Savings to date, generally are less than the
risks associated with holding fixed-rate loans in its portfolio in a rising
interest rate environment.
American Savings also requires fire, casualty, title, hazard insurance and,
if appropriate, flood insurance be maintained on all properties securing real
estate loans made by American Savings. An independent licensed appraiser
generally appraises all properties.
Residential Construction Loans. American Savings originates construction
loans to individuals for the construction and acquisition of personal
residences. At May 31, 1999, residential construction loans amounted to $15.7
million, or 1.7% of American Savings' total loans. At May 31, 1999, the
unadvanced portion of construction loans totalled $9.6 million.
American Savings' 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 balance
exceeds 80% of the appraised value or sales price of the secured property,
whichever is less. At May 31, 1999, the largest outstanding construction loan
commitment was for $700,000, $164,500 of which was outstanding. This loan was
performing according to its terms at May 31, 1999. Construction loans to
individuals are made on the same terms as American Savings' one- to four-family
mortgage loans.
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<PAGE>
Before making a commitment to fund a construction loan, American Savings
requires an appraisal of the property by an independent licensed appraiser.
American Savings 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.
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 construction cost proves to be inaccurate, American Savings may
be required to advance funds beyond the amount originally committed to protect
the value of the property. If the estimate of value upon completion proves to be
inaccurate, American Savings may be confronted with a property whose value is
insufficient to assure full repayment. American Savings has attempted to
minimize the foregoing risks by, among other things, limiting its construction
lending to residential properties, not making loans to builders 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. American Savings offers home equity
lines of credit and fully amortized home equity loans, both of which are secured
by owner-occupied one- to four-family residences. At May 31, 1999, home equity
loans and lines of credit totalled $256.0 million, or 27.0% of American Savings'
total loans and 92.5% of consumer loans. Additionally, at May 31, 1999, the
unadvanced amounts of home equity lines of credit totalled $170.0 million. The
underwriting standards employed by American Savings 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 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.
American Savings 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 secured by one- to four-
family properties and 70% for loans secured by condominiums.
Automobile and Other Consumer Lending. American Savings 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
lesser of the retail value shown in the NADA Used Car Guide or the purchase
price, and the maximum terms for used automobile loans range from up to 48
months for automobiles up to four years old to up to 36 months for older
vehicles. At May 31, 1999, automobile loans totalled $17.3 million, or 1.8% of
American Savings' total loans and 6.3% of consumer loans. For the five months
ended May 31, 1999 and for fiscal 1998, American Savings originated $2.2 million
and $10.0 million of automobile loans, respectively.
Other consumer loans at May 31, 1999 amounted to $3.5 million, or 0.4% of
American Savings' total loans and 1.3% of consumer loans. These loans include
unsecured personal loans, collateral loans and education loans. Unsecured
personal loans generally 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 for a defaulted consumer loan may not provide an adequate source of
repayment of the outstanding loan
52
<PAGE>
balance as a result of the greater likelihood of damage, loss or depreciation.
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.
Commercial Business Loans. American Savings has historically not
originated or purchased commercial business loans but is currently planning to
offer such loans to small businesses located in its primary market area.
Commercial business loans are generally secured by business assets other than
real estate, such as business equipment, inventory and accounts receivable.
American Savings is actively interviewing candidates to staff a commercial
business loan department. Once staffed, the department will be charged with
designing and implementing the necessary systems, policies and procedures.
Commercial business loans generally involve higher credit risks than loans
secured by real estate. 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. See "Risk Factors--American Savings' plans to enter
commercial business lending may hurt both asset quality and net income."
Loans to One Borrower. The maximum amount that American Savings may lend
to one borrower is limited by regulation. At May 31, 1999, American Savings'
regulatory limit on loans to one borrower was $37.4 million, which equaled 15%
of its Tier 1 capital at that date. At that date, American Savings' largest
amount of loans to one borrower, including the borrower's related interests, was
approximately $857,000 and consisted of one residential mortgage loan and one
home equity line of credit. These loans were performing according to their
original terms at May 31, 1999.
Maturity of Loan Portfolio. The following table presents certain
information at May 31, 1999 regarding the dollar amount of loans maturing in
American Savings' portfolio based on their contractual terms to maturity or
scheduled amortization, but does not include potential prepayments. Demand
loans, loans having no stated schedule of repayments and no stated maturity, and
overdrafts are reported as becoming due within one year. Loan balances do not
include undisbursed loan proceeds, net deferred loan origination costs and
allowance for loan losses.
<TABLE>
<CAPTION>
At May 31, 1999
-------------------------------------------------------------------------------------------------
One -to Home Equity
Four- Residential Multi- Loans and
Family Construction Family Commercial Lines of Credit Automobiles Other Total
-------------------------------------------------------------------------------------------------
(In thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Due in one year or less........ $ 20,568 $13,784 $ 18 $ 28 $ 14,913 $ 7,386 $3,262 $ 59,959
Due in one to two years........ 21,175 1,961 19 29 14,328 5,606 178 43,296
Due in two to three years...... 22,187 -- 21 30 13,876 3,124 102 39,340
Due in four to five years...... 45,086 -- 45 28 25,715 1,203 -- 72,077
Due in six to ten years........ 115,789 -- 451 58 174,675 -- -- 290,973
Due in eleven to fifteen
years........................ 124,705 -- 173 101 11,439 -- -- 136,418
Due in over fifteen years...... 303,506 -- 132 65 1,039 -- -- 304,742
-------- ------- ---- ---- -------- ------- ------ --------
Total amount due............ $653,016 $15,745 $859 $339 $255,985 $17,319 $3,542 $946,805
======== ======= ==== ==== ======== ======= ====== ========
</TABLE>
53
<PAGE>
The following table presents the dollar amount of all loans due after May 31,
2000, which have fixed interest rates and floating or adjustable interest rates.
<TABLE>
<CAPTION>
Due After May 31, 2000
----------------------------------------------------
Fixed Adjustable Total
----------- ------------- -----------
(In thousands)
<S> <C> <C> <C>
One- to four-family................................. $179,606 $452,842 $632,448
Residential construction............................ -- 1,961 1,961
Multi-family........................................ 408 433 841
Commercial.......................................... 311 -- 311
Home equity loans and lines of credit............... 140,635 100,437 241,072
Automobile.......................................... 9,933 -- 9,933
Other............................................... 280 -- 280
-------- -------- --------
Total amount due................................. $331,173 $555,673 $886,846
======== ======== ========
</TABLE>
Scheduled contractual principal repayments of loans do not reflect the actual
life of the loans. The average life of a loan is substantially less than its
contractual term because of prepayments. In addition, due-on-sale clauses on
loans generally give American Savings the right to declare loans immediately due
and payable if, among other things, the borrower sells the real property with
the mortgage and the loan is not repaid. The average life of a mortgage loan
tends to increase, however, when current mortgage loan market rates are
substantially higher than rates on existing mortgage loans and, conversely,
tends to decrease when rates on existing mortgage loans are substantially higher
than current mortgage loan market rates.
Loan Approval Procedures and Authority. American Savings' lending activities
follow written, non-discriminatory, underwriting standards and loan origination
procedures established by American Savings' Board of Directors and management.
American Savings' policies and loan approval limits are established by the
Chief Executive Officer and the Chief Lending Officer and are approved by 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 American Savings, may approve a
mortgage loan up to $300,000. For larger loans, all loans must be approved by
two members of the Mortgage Loan Committee, one of whom must be the Vice
President of Mortgage Loans, for loans up to $500,000, the 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.
Four individuals have been delegated significant approval authority with
respect to consumer loans. The Chief Executive Officer may approve any consumer
loan up to $800,000. 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 four other members of American Savings'
senior management and officers, is required on loans between $250,000 and
$700,000. A vice president in the lending department also has authority to
individually approve consumer loans up to $250,000; however loans between
$250,000 and $700,000 require the additional signature of the Chief Executive
Officer or the Chief Lending Officer. Lastly, an officer of American Savings
has authority to approve automobile loans up to $35,000 and home equity loans up
to $100,000. Loans greater than those limits require the approval of another
member of the Consumer Loan Committee and home equity loans between $250,000 and
$700,000 require the additional signature of either the Chief Executive Officer
or the Chief Lending Officer. All consumer loans greater than $800,000 require
the prior approval of the Board of Directors.
54
<PAGE>
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 $1,500 and $5,000 for unsecured loans.
Loan Originations, Purchases and Sales. American Savings lending activities
are conducted by its salaried and commissioned loan personnel and through the
use of non-bank third-party correspondents. Currently, American Savings
utilizes 12 loan correspondents who solicit and originate mortgage loans on
behalf of American Savings. These loan correspondents accounted for
approximately 75% of the adjustable-rate and none of the fixed-rate mortgage
loans originated by American Savings in the first five months of 1999. Loan
correspondents are compensated by a commission that is based upon the
origination fee charged to the borrower less payment of a portion of the
origination fee to American Savings, which currently is 50 basis points of the
loan amount. All loans originated by loan correspondents are underwritten to
conform to American Savings' loan underwriting policies and procedures.
Additionally, American Savings uses a non-bank third-party to solicit and
originate automobile loans on behalf of American Savings. This arrangement
accounted for approximately 26.6% of the automobile loans originated in the
first five months of 1999. All of the loans originated by the third party are
underwritten by American Savings according to its underwriting policies and
procedures. American Savings does not use loan correspondents or other third-
parties to originate other consumer loans. American Savings is not an active
purchaser of loans. At May 31, 1999, American Savings serviced $165.9 million
of loans for others.
American Savings 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 interest rate conditions. Sales are generally to Freddie Mac,
with servicing rights retained. Loan sale decisions are made by the Mortgage
Pipeline Committee of American Savings and are generally based on prevailing
market interest rates. American Savings occasionally obtains forward or standby
commitments from the prospective loan purchaser.
55
<PAGE>
The following table presents total loans originated, sold and repaid during
the periods indicated. American Savings did not purchase any loans during the
periods indicated.
<TABLE>
<CAPTION>
For the
Five Months Ended For the Year Ended
May 31, December 31,
------------------------- ---------------------------------------
1999 1998 1998 1997 1996
--------- --------- --------- --------- ---------
(In thousands)
<S> <C> <C> <C> <C> <C>
Loans at beginning of period.......................... $ 913,346 $ 843,032 $ 843,032 $ 752,644 $ 683,582
Originations:
Real estate:
One-to four-family........................... 103,052 79,397 182,982 117,109 114,464
Residential construction..................... 13,810 11,525 27,536 18,998 15,624
Multi-family................................. -- -- -- 216 313
--------- --------- --------- --------- ---------
Total real estate loans................... 116,862 90,922 210,518 136,323 130,401
--------- --------- --------- --------- ---------
Consumer:
Home equity loans and lines of credit........ 81,013 48,765 136,761 88,221 72,002
Other........................................ 14,464 20,576 46,831 55,285 45,856
--------- --------- --------- --------- ---------
Total consumer loans...................... 95,477 69,341 183,592 143,506 117,858
--------- --------- --------- --------- ---------
Total loans originated.......................... 212,339 160,263 394,110 279,829 248,259
--------- --------- --------- --------- ---------
Deduct:
Principal loan repayments, prepayments.......... 166,629 128,758 306,392 178,793 159,272
and other, net
Loan sales...................................... 10,442 6,462 13,475 6,327 16,838
Net loan charge-offs............................ 453 629 1,051 1,465 1,146
Transfers to REO................................ 1,356 2,328 2,878 2,856 1,941
--------- --------- --------- --------- ---------
Total deductions.......................... 178,880 138,177 323,796 189,441 179,197
--------- --------- --------- --------- ---------
Net increase in loans................................. 33,459 22,086 70,314 90,388 69,062
--------- --------- --------- --------- ---------
Loans at end of period.......................... $ 946,805 $ 865,118 $ 913,346 $ 843,032 $ 752,644
========= ========= ========= ========= =========
</TABLE>
Loan Commitments. American Savings 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 approval. At May 31, 1999, American Savings had loan commitments and
unadvanced loans and lines of credit totaling $254.2 million. See Note 12 of the
Notes to Consolidated Financial Statements included in this prospectus.
Loan Fees. In addition to interest earned on loans, American Savings 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 and competitive conditions. On loans originated by correspondents,
American Savings occasionally pays a premium to compensate a correspondent for
loans where the borrower is paying a higher rate on the loan.
American Savings 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 May 31, 1999, American
Savings had $2.4 million of net deferred loan costs. American Savings amortized
$235,000 and $228,000 of net deferred loan costs during the five months ended
May 31, 1999 and the year ended December 31, 1998, 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,
American Savings attempts to cure the deficiency by
56
<PAGE>
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 30th day of the month, the account is referred to an in-
house collector. While American Savings generally prefers to work with borrowers
to resolve problems, American Savings 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 monthly of the amount of loans
delinquent more than 60 days, all loans in foreclosure, and all foreclosed and
repossessed property that American Savings owns.
American Savings ceases accruing interest on mortgage loans when principal or
interest payments are delinquent 90 days or more. Once the accrual of interest
on a loan is discontinued, all interest previously accrued is reversed against
current period interest income once management determines that interest is
uncollectible.
The following table presents information with respect to American Savings'
nonperforming assets at the dates indicated.
<TABLE>
<CAPTION>
At May 31, At December 31,
----------------------- ------------------------------------------------------------
1999 1998 1998 1997 1996 1995 1994
-------- -------- -------- ------- ------- ------- --------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Nonaccruing loans:
One- to four-family real estate....... $2,542 $5,183 $3,683 $6,480 $6,119 $4,899 $3,561
Consumer.............................. 330 453 303 394 389 836 505
------ ------ ------ ------ ------ ------ ------
Total.............................. 2,872 5,636 3,986 6,874 6,508 5,735 4,066
Real estate owned........................ 617 1,359 720 739 1,094 1,943 2,179
------ ------ ------ ------ ------ ------ ------
Total nonperforming assets......... $3,489 $6,995 $4,706 $7,613 $7,602 $7,678 $6,245
====== ====== ====== ====== ====== ====== ======
Total nonperforming loans as a
percentage of total loans............. 0.30% 0.65% 0.44% 0.81% 0.86% 0.84% 0.65%
Total nonperforming assets as a
percentage of total assets............ 0.22% 0.46% 0.30% 0.52% 0.55% 0.60% 0.54%
</TABLE>
Interest income that would have been recorded for the five months ended May
31, 1999 and the year ended December 31, 1998 had nonaccruing loans been current
according to their original terms amounted to approximately $117,000 and
$180,000, respectively. No interest was included in interest income in either
period related to these loans.
57
<PAGE>
The following tables set forth the delinquencies in American Savings' loan
portfolio as of the dates indicated.
<TABLE>
<CAPTION>
At May 31, 1999 At December 31, 1998
------------------------------------------------- ------------------------------------------------
60-89 Days 90 Days or More 60-89 DAYS 90 Days or More
------------------------- ---------------------- ---------------------- ------------------------
Number Principal Number Principal Number Principal Number Principal
of Balance of Balance of Balance of Balance
Loans of Loans Loans of Loans Loans of Loans Loans of Loans
------------ ------------ ---------- ----------- ---------- ----------- ---------- ------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Real estate loans:
One- to four-family........... 14 $1,163 32 $2,542 17 $1,169 44 $3,683
Multi-family.................. -- -- -- -- -- -- -- --
Consumer loans:
Equity lines of credit........ 2 40 3 185 -- -- 1 36
All other..................... 9 40 10 145 13 96 21 267
-- ------ -- ------ -- ------ -- ------
Total...................... 25 $1,243 45 $2,872 30 $1,265 66 $3,986
== ====== == ====== == ====== == ======
Delinquent loans to total
loans......................... 0.13% 0.30% 0.14% 0.44%
<CAPTION>
At December 31, 1997 At December 31, 1996
------------------------------------------------- ------------------------------------------------
60-89 Days 90 Days or More 60-89 DAYS 90 Days or More
------------------------- ---------------------- ---------------------- ------------------------
Number Principal Number Principal Number Principal Number Principal
of Balance of Balance of Balance of Balance
Loans of Loans Loans of Loans Loans of Loans Loans of Loans
------------ ------------ ---------- ----------- ---------- ----------- ---------- ------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Real estate loans:
One- to four-family........... 14 $ 610 73 $6,480 17 $1,734 62 $5,254
Multi-family.................. -- -- -- -- 1 5 2 865
Consumer loans:
Equity lines of credit........ 1 98 3 84 -- -- 4 68
All other..................... 2 112 11 310 5 171 14 321
-- ----- -- ------ -- ------ -- ------
Total...................... 17 $ 820 87 $6,874 23 $1,910 82 $6,508
== ===== == ====== == ====== == ======
Delinquent loans to total
loans......................... 0.10% 0.81% 0.25% 0.85%
</TABLE>
Real Estate Owned. Real estate acquired by American Savings 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, establishing a new cost basis. Holding costs and declines
in fair market value result in charges to expense after acquisition are
expensed. At May 31, 1999, American Savings had $617,000 of real estate owned,
net, consisting primarily of 17 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
58
<PAGE>
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." American Savings does not perform 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
regulations. American Savings does, however, regularly analyze the losses
inherent in its 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, American Savings
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. American Savings 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 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 and 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 American Savings' allowance for loan
losses and may require American Savings to make additional provisions for
estimated losses based upon judgments different from those of management.
In assessing the allowance for loan losses, loss factors are applied to
various pools of outstanding loans and certain unused commitments. American
Savings segregates the loan portfolio according to risk characteristics (i.e.,
mortgage loans, home equity, consumer). Loss factors are derived using American
Savings' 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 allowance methodology reflects
management's objective that the overall allowance appropriately reflects a
margin for the imprecision necessarily inherent in estimates of expected credit
losses.
At May 31, 1999, American Savings had an allowance for loan losses of $8.0
million which represented 0.84% of total loans and 277.61% of nonperforming
loans at that date. 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
American Savings believes it has established its existing allowance for loan
losses in conformity with generally accepted accounting principles, there can be
no assurance that regulators, in reviewing American Savings' loan portfolio,
will not request American Savings 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
American Savings' financial condition and results of operations.
59
<PAGE>
The following table presents an analysis of American Savings' allowance for
loan losses.
<TABLE>
<CAPTION>
At or for The
Five Months
Ended
May 31, At or for the Year Ended December 31,
-------------------- ----------------------------------------------
1999 1998 1998 1997 1996 1995 1994
------- ------- ------- ------ ------ ------ ------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Allowance for loan losses, beginning of
period $ 7,626 $ 6,277 $ 6,277 $5,588 $4,484 $2,793 $1,620
Charged-off loans:
One- to four-family 531 723 1,145 1,481 1,117 713 369
Multi-family -- -- -- 39 -- -- --
Commercial real estate -- -- -- -- 37 -- --
Consumer 8 1 9 20 16 1 3
------- ------- ------- ------ ------ ------ ------
Total charged-off loans 539 724 1,154 1,540 1,170 714 372
------- ------- ------- ------ ------ ------ ------
Recoveries on loans previously charged off 86 95 103 74 24 -- 5
------- ------- ------- ------ ------ ------ ------
Net loans charged-off 453 629 1,051 1,466 1,146 714 367
Provision for loan losses 800 1,000 2,400 2,155 2,250 2,405 1,540
------- ------- ------- ------ ------ ------ ------
Allowance for loan losses, end of period $ 7,973 $ 6,648 $ 7,626 $6,277 $5,588 $4,484 $2,793
======= ======= ======= ====== ====== ====== ======
Ratios:
Net loans charged-off to average
interest-earning loans 0.12% 0.18% 0.12% 0.19% 0.16% 0.11% 0.05%
Allowance for loan losses to total loans 0.84% 0.77% 0.83% 0.74% 0.74% 0.66% 0.44%
Allowance for loan losses to non-
performing loans 277.61% 117.96% 191.32% 91.32% 85.86% 78.19% 68.69%
Net loans charged-off to allowance
for loan losses 13.64% 22.74% 13.78% 23.36% 20.51% 15.92% 13.14%
Recoveries to charge-offs 15.96% 12.98% 8.93% 4.81% 2.05% --% 1.34%
</TABLE>
For additional discussion regarding the provision for loan losses in recent
periods, see "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Comparison of Operating Results for the Five Months Ended
May 31, 1999 and 1998--Provision for Loan Losses."
60
<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>
At May 31, 1999
----------------------------------------
Percent of
Allowance Percent
in Each of Loans
Category in Each
to Total Category to
Amount Allowance Total Loans
------ ----------- -----------
(In thousands)
<S> <C> <C> <C>
Real estate loans.................................... $6,989 87.7% 70.8%
Consumer loans....................................... 984 12.3 29.2
------ ----- -----
Total allowance for loan losses................... $7,973 100.0% 100.0%
====== ===== =====
</TABLE>
<TABLE>
<CAPTION>
At December 31,
-----------------------------------------------------------------------------
1998 1997
------------------------------------ ------------------------------------
Percent of Percent of
Allowance Percent Allowance Percent
in Each of Loans in Each of Loans
Category in Each Category 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......................... $6,874 90.1% 70.4% $6,102 97.2% 71.4%
Consumer loans............................ 752 9.9 29.6 176 2.8 28.6
------ ----- ----- ------ ----- -----
Total allowance for loan
losses.............................. $7,626 100.0% 100.0% $6,278 100.0% 100.0%
====== ===== ===== ====== ===== =====
<CAPTION>
---------------------------------------
1996
---------------------------------------
Percent of
Allowance Percent
in Each of Loans
Category in Each
to Total Category to
Amount Allowance Total Loans
------ --------- -----------
<S> <C> <C> <C>
Real estate loans........................ $5,450 97.5% 73.5%
Consumer loans........................... 138 2.5 26.5
------ ----- -----
Total allowance for loan
losses............................. $5,588 100.0% 100.0%
====== ===== =====
</TABLE>
<TABLE>
<CAPTION>
At December 31,
-----------------------------------------------------------------------
1995 1994
---------------------------------- ---------------------------------
Percent of Percent of
Allowance Percent Allowance Percent
in Each of Loans in Each of Loans
Category in Each Category 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................... $4,319 96.3% 75.0% $2,671 95.6% 73.1%
Consumer loans...................... 165 3.7 25.0 122 4.4 26.9
------ ----- ----- ------ ----- -----
Total allowance for loan
losses........................ $4,484 100.0% 100.0% $2,793 100.0% 100.0%
====== ===== ===== ====== ===== =====
</TABLE>
Investment Activities
General. Under Connecticut law, American Savings has authority to purchase
a wide range of investment securities. As a result of recent changes in federal
banking laws, however, financial institutions such as American Savings 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
American Savings is in compliance with applicable capital standards. In 1993,
the Regional Director of the Federal Deposit Insurance Corporation approved a
request by American Savings to invest in certain listed stocks and/or registered
stocks subject to certain conditions. See "Regulation and Supervision."
61
<PAGE>
The Investment Subcommittee of the Asset/Liability Committee is responsible
for developing and reviewing American Savings' investment policy, which is
designed to diversify American Savings' assets, improve liquidity, and provide
interest, dividend and capital gain income while optimizing American Savings'
tax position. The Investment Subcommittee meets weekly to evaluate potential
investments. Investment decisions are made in accordance with American Savings'
investment policy and are based upon the quality of a particular investment, its
inherent risks, the composition of the balance sheet, market expectations,
American Savings' liquidity, income and collateral needs and how the investment
fits within American Savings' interest rate risk management strategy. In recent
periods, American Savings has attempted to enhance the average yield on the
investment securities portfolio by reinvesting the proceeds of securities that
have matured or repaid into mortgage-backed securities.
Currently, American Savings' investment policy does not permit engaging
directly in hedging activities or purchasing high risk mortgage derivative
products or other derivative investments. American Savings may amend its
investment policy after the conversion to permit limited investment in
derivative products, such as investment grade tranches of credit card
receivables or other asset-backed securities.
American Savings' 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. American Savings
generally invests in securities which have an "A" rating. All of American
Savings' 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. However, mortgage-backed securities still carry
market risk, the risk that increases in market interest rates may cause a
decrease in market value, and prepayment risk, the risk that the securities will
be repaid before maturity and that American Savings will have to reinvest the
funds at a lower interest rate. American Savings may make limited investments in
private issue mortgage-backed securities after the conversion in an effort to
enhance the average yield of the mortgage-backed securities portfolio.
The objective of the marketable equity securities portfolio is to produce
capital gains through price appreciation and lowering 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 May
31, 1999, the marketable equity securities portfolio totaled $77.5 million or
54% of its authorized limit. At May 31, 1999, the gross unrealized gains
associated with the marketable equity securities portfolio were $64.6 million.
In future periods and subject to market conditions and other factors, American
Savings intends to reduce its marketable equity securities portfolio through
periodic sales to realize a portion of these gains and to help diversify risk as
the marketable equity securities portfolio is heavily weighted toward financial
institution equities that actively trade on national securities exchanges.
American Savings currently intends to reinvest the proceeds of sale into
diversified equity mutual funds.
In addition to marketable equity securities, American Savings invests in
short-term auction market preferred stock, whose income is treated as a dividend
for tax purposes which reduces American Savings' federal and state taxable
income through the allowable deductions on such income. American Savings'
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 American Savings 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.
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.
American Savings does not
62
<PAGE>
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 equity.
All of American Savings' 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, so that
American Savings may have to invest the funds at a lower interest rate. The
marketable equity securities portfolio also carries equity price risk in that,
if equity prices decline due to unfavorable market conditions or other factors,
American Savings' capital would decrease.
At May 31, 1999, all of American Savings' investment securities and
mortgage-backed securities were classified as "available for sale." The
following table presents the amortized cost and fair value of American Savings'
securities, by type of security, at the dates indicated.
<TABLE>
<CAPTION>
At May 31, At December 31,
--------------------------------------------------
1999 1998 1997
---------------------------- ------------------------- -----------------------
Amortized Fair Amortized Fair Amortized Fair
Cost Value Cost Value Cost Value
--------------- ----------- ------------ ---------- ----------- ----------
(In Thousands)
<S> <C> <C> <C> <C> <C> <C>
Investment Securities:
Obligations of U.S. Treasury
and U.S. Government agencies....... $ 65,563 $ 65,520 $105,073 $105,834 $247,754 $248,207
Corporate bonds and notes............. 185,109 183,754 138,258 138,725 114,660 114,828
Other bonds and notes................. 43,699 43,615 55,633 55,683 1,303 1,455
Marketable equity securities.......... 12,980 77,501 12,027 77,431 8,671 67,542
Auction market preferred stock........ -- -- 40,000 40,000 -- --
-------- -------- -------- -------- -------- --------
Total investment securities........ 307,351 370,390 350,991 417,673 372,388 432,032
-------- -------- -------- -------- -------- --------
Mortgage-Backed Securities:
Freddie Mac........................... 154,981 155,800 132,294 134,406 90,964 91,977
Fannie Mae............................ 49,727 50,068 38,096 38,449 40,746 40,840
-------- -------- -------- -------- -------- --------
Total mortgage-backed securities... 204,708 205,868 170,390 172,855 131,710 132,817
-------- -------- -------- -------- -------- --------
Total securities................... $512,059 $576,258 $521,381 $590,528 $504,098 $564,849
======== ======== ======== ======== ======== ========
<CAPTION>
-----------------------
1996
-----------------------
Amortized Fair
Cost Value
----------- ---------
<S> <C> <C>
Investment Securities:
Obligations of U.S. Treasury
and U.S. Government agencies....... $215,671 $215,695
Corporate bonds and notes............. 101,511 101,572
Other bonds and notes................. 400 385
Marketable equity securities.......... 4,853 48,749
Auction market preferred stock........ 75,000 75,000
-------- --------
Total investment securities........ 397,435 441,401
-------- --------
Mortgage-Backed Securities:
Freddie Mac........................... 55,145 55,499
Fannie Mae............................ 48,647 48,178
-------- --------
Total mortgage-backed securities... 103,792 103,677
-------- --------
Total securities................... $501,227 $545,078
======== ========
</TABLE>
At May 31, 1999, American Savings 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 American
Savings' equity at that date.
63
<PAGE>
The following presents the activity in the investment securities and
mortgage-backed securities portfolios for the periods indicated, all of which
are classified as "available for sale."
<TABLE>
<CAPTION>
For the Five
Months Ended May 31, For the Year Ended December 31,
----------------------- -------------------------------------
1999 1998 1998 1997 1996
--------- --------- --------- --------- ---------
(In thousands)
<S> <C> <C> <C> <C> <C>
Investment securities:
Investment securities, beginning of period.............. $ 417,673 $ 432,032 $ 432,032 $ 441,401 $ 368,146
Purchases.................................................. 146,699 177,277 323,038 356,261 306,580
Sales...................................................... (2,489) (107) (125) (1,152) (195)
Maturities and calls....................................... (188,548) (169,089) (346,388) (382,750) (242,620)
Net (premium)/discount..................................... (1,640) 3,716 2,078 2,595 1,530
(Decrease)/Increase in unrealized gain..................... (1,305) 633 7,038 15,677 7,960
--------- --------- --------- --------- ---------
Net (decrease)/increase in investment securities........ (47,283) 12,430 (14,359) (9,369) 73,255
Investment securities, end of period.................... 370,390 444,462 417,673 432,032 441,401
--------- --------- --------- --------- ---------
Mortgage-backed securities:
Mortgage-backed securities, beginning of period......... 172,855 132,817 132,817 103,677 111,046
Purchases............................................... 57,458 21,621 81,008 45,779 14,639
Sales................................................... (39) (24) (41) (31) --
Repayments and prepayments.............................. (23,079) (16,570) (42,335) (17,828) (20,353)
Net discount/(premium)..................................... 2,317 (2,853) 48 (3) (12)
(Decrease)/Increase in unrealized gain..................... (3,644) 3,427 1,358 1,223 (1,643)
--------- --------- --------- --------- ---------
Net increase/(decrease) in mortgage-backed
securities........................................... 33,013 5,601 40,038 29,140 (7,369)
Mortgage-backed securities, end of period............... 205,868 138,418 172,855 132,817 103,677
--------- --------- --------- --------- ---------
Total securities, end of period............................ $ 576,258 $ 582,880 $ 590,528 $ 564,849 $ 545,078
========= ========= ========= ========= =========
</TABLE>
The following table presents certain information regarding the carrying
value, weighted average yields and maturities or periods to repricing of
American Savings' debt securities at May 31, 1999, all of which are classified
as "available for sale."
<TABLE>
<CAPTION>
At May 31, 1999
--------------------------------------------------------------------------------------------------
More Than More Than
One Year One Year to Five Years to More Than
or Less Five Years Ten Years Ten Years Totals
------------------ ------------------ ------------------ ------------------ -----------------
Weighted Weighted Weighted Weighted Weighted
Carrying Average Carrying Average Carrying Average Carrying Average Carrying 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:
Obligations of U.S. Treasury....
and U.S. Government agencies. $ 30,457 5.41% $ 29,729 5.50% $ 5,334 7.19% $ -- --% $ 65,520 5.59%
Corporate bonds and notes....... 82,460 6.02 96,442 5.94 4,852 5.94 -- -- 183,754 5.97
Other bonds and notes........... 39,230 5.16 2,999 5.95 1,386 6.65 -- -- 43,615 5.43
Mortgage-Backed Securities:
Freddie Mac..................... 19,909 6.84 -- -- -- -- 135,891 6.31 155,800 6.37
Fannie Mae...................... 18,245 6.64 -- -- -- -- 31,823 5.91 50,068 6.18
-------- -------- ------- -------- --------
Total securities............. $190,301 5.89% $129,170 5.84% $11,572 6.60% $167,714 6.23% $498,757 6.02%
======== ======== ======= ======== ========
</TABLE>
64
<PAGE>
Deposit Activities and Other Sources of Funds
General. Deposits are the major external source of funds for American
Savings' lending and other investment activities. In addition, American Savings
also generates funds internally from loan principal repayments and prepayments
and maturing investment securities. Scheduled loan repayments 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. American Savings may use borrowings from the Federal Home Loan Bank
of Boston to compensate for reductions in the availability of funds from other
sources. Presently, American Savings has no other borrowing arrangements aside
from Federal Home Loan Bank of Boston advances which totalled $129.7 million at
May 31, 1999.
Deposit Accounts. Nearly all of American Savings' depositors reside in
Connecticut. American Savings offers a wide variety of deposit accounts with a
range of interest rates and terms. American Savings' deposit accounts consist of
interest-bearing checking, non-interest-bearing checking, regular savings, money
market savings and certificates of deposit. The maturities of American Savings'
certificate of deposit accounts range from one month to five years. In addition,
American Savings offers retirement accounts, including Traditional IRAs, Roth
IRAs, Simple IRAs, Money Purchase and Profit Sharing Plans and Simplified
Employee Pension Plan Accounts. Going forward, American Savings intends to offer
commercial business products to small businesses operating within its primary
market area. Deposit account terms vary with the principal differences being the
minimum balance deposit, early withdrawal penalties, limits on the number of
transactions and the interest rate. American Savings reviews its deposit mix and
pricing weekly.
American Savings, through extensive market research, has determined that
customers consider their primary financial institution to be where they maintain
their checking accounts. Consequently, American Savings began an aggressive
marketing strategy to attract checking accounts through many programs
culminating in the introduction of the "American Rewards" program in 1997. This
program provides various benefits such as free checking, discounts on certain
loans and premium rates on certificates of deposits for those customers that
maintain multiple relationships, one of which is an interest-bearing checking
account, with American Savings. The level of benefits offered under the program
corresponds to the size of the deposit relationship with American Savings. As a
result of American Savings' efforts, the number of checking accounts increased
165% from 11,140 before the beginning of the market analysis to 29,561 at May
31, 1999. Additionally, during that period, American Savings determined that the
percentage of its customers' households that held checking accounts more than
doubled.
American Savings believes it is competitive in the interest rates it offers
on its deposit products. American Savings determines the rates paid based on a
number of factors, including rates paid by competitors, American Savings' need
for funds and cost of funds, borrowing costs and movements of market interest
rates. American Savings does not utilize brokers to obtain deposits and at May
31, 1999 had no brokered deposits.
In the unlikely event American Savings is liquidated after the conversion,
depositors will be entitled to full payment of their deposit accounts before any
payment is made to American Financial as the sole stockholder of American
Savings.
The following table presents the deposit activity of American Savings for
the periods indicated.
<TABLE>
<CAPTION>
For the Five Months
Ended May 31, For the Year Ended December 31,
-------------------------- -----------------------------------
1999 1998 1998 1997 1996
------- ------- ------- -------- --------
(In thousands)
<S> <C> <C> <C> <C> <C>
Increase/(Decrease) before interest credited........ $(10,825) $ 7,357 $(1,503) $(28,439) $(26,982)
Interest credited................................... 18,719 20,439 48,859 49,278 49,077
-------- ------- ------- -------- --------
Net increase........................................ $ 7,894 $27,796 $47,356 $ 20,839 $ 22,095
======== ======= ======= ======== ========
</TABLE>
65
<PAGE>
The following table indicates the amount of American Savings' jumbo
certificates of deposits by time remaining until maturity as of May 31, 1999.
Jumbo certificates of deposits have principal balances of $100,000 or more.
<TABLE>
<CAPTION>
Weighted
Average
Maturity Period Amount Rate
--------------- ------------- ---------
(In thousands)
<S> <C> <C>
Three months or less.................... $26,031 5.16%
Over 3 through 6 months................. 13,878 4.83
Over 6 through 12 months................ 19,394 5.84
Over 12 months.......................... 20,251 5.35
-------
Total................................ $79,554 5.32%
=======
</TABLE>
The following table presents information concerning average balances and
rates paid on American Savings' deposit accounts for the periods indicated.
<TABLE>
<CAPTION>
For the Five Months Ended For the Year Ended
May 31, 1999 December 31, 1998
---------------------------------------- -----------------------------
Percent Percent
of Total Weighted of Total Weighted
Average Average Average Average Average
Balance Deposits Rate Balance Deposits Rate
---------- -------- -------- ---------- -------- --------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Money market accounts.......................... $ 64,434 5.7% 2.69% $ 61,190 5.5% 2.74%
NOW accounts................................... 67,464 5.9 1.35 58,551 5.3 1.34
Savings (1).................................... 202,058 17.7 2.03 192,212 17.2 2.06
Certificates of deposit and retirement
accounts...................................... 781,532 68.6 5.09 778,142 69.9 5.45
Demand deposits................................ 24,319 2.1 -- 23,733 2.1 --
---------- ----- ---------- -----
Total....................................... $1,139,807 100.0% 4.17% $1,113,828 100.0% 4.48%
========== ===== ========== =====
</TABLE>
<TABLE>
<CAPTION>
For the Year Ended December 31,
----------------------------------------------------------------------------
1997 1996
------------------------------------------- ---------------------------
Percent Percent
of Total Weighted of Total Weight
Average Average Average Average Average Average
Balance Deposits Rate Balance Deposits Rate
---------- -------- -------- ---------- -------- -------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Money market accounts......................... $ 62,440 5.7% 2.71% $ 64,348 6.0% 2.73%
NOW accounts.................................. 44,852 4.1 1.59 32,474 3.0 1.75
Savings (1)................................... 189,360 17.2 2.04 183,757 17.1 2.17
Certificates of deposit and retirement
accounts..................................... 777,725 70.9 5.51 773,447 71.8 5.52
Demand deposits............................... 23,063 2.1 -- 23,017 2.1 --
---------- ----- ----------
Total................................... $1,097,440 100.0% 4.57% $1,077,043 100.0% 4.65%
========== ===== ==========
</TABLE>
____________________________________
(1) Includes mortgagors' escrow accounts.
66
<PAGE>
Certificates of Deposit by Rates and Maturities. The following table
presents the amount of certificates of deposits in American Savings categorized
by rates and maturities at the dates indicated.
<TABLE>
<CAPTION>
Period to Maturity from May 31, 1999 Total at December 31,
----------------------------------------------------- Total at --------------------------
Less than 1 - 2 2 - 3 After May 31,
One Year Years Years 4 Years 1999 1998 1997
--------- -------- -------- -------- -------- -------- --------
(In thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
0.00 - 4.00%........ $ 49,404 $ 20 $ -- $ -- $ 49,424 $ 25,199 $ 10,335
4.01 - 5.00%........ 219,587 91,915 3,183 1,141 315,826 250,881 92,215
5.01 - 6.00%........ 152,396 35,391 2,532 3,705 194,024 234,673 399,300
6.01 - 7.00%........ 45,620 2,571 -- -- 48,191 104,767 100,387
--------- -------- -------- -------- -------- -------- --------
Total............ $ 467,007 $129,897 $ 5,715 $ 4,846 $607,465 $615,520 $602,237
========= ======== ======== ======== ======== ======== ========
</TABLE>
Borrowings. American Savings has the ability to use advances from the
Federal Home Loan Bank of Boston to supplement its supply of lendable funds and
to meet deposit withdrawal requirements. 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, American Savings 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 credit. At May 31, 1999, American Savings had the ability to borrow a
total of approximately $750 million from the Federal Home Loan Bank of Boston.
At that date, American Savings had outstanding advances of $129.7 million.
The following table presents certain information regarding American
Savings' use of Federal Home Loan Bank of Boston advances during the periods and
at the dates indicated.
<TABLE>
<CAPTION>
Five Months
Ended May 31, Year Ended December 31,
---------------------------- -------------------------------------------
1999 1998 1998 1997 1996
------------ --------- ----------- --------- ---------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Maximum amount of advances
outstanding at any month end................. $130,225 $80,725 $120,725 $80,725 $50,725
Approximate average advances
outstanding.................................. 121,942 80,244 83,312 52,490 1,023
Approximate weighted average rate
paid on advances............................. 5.89% 6.29% 6.29% 6.45% 6.06%
</TABLE>
<TABLE>
<CAPTION>
At At December 31,
May 31, -----------------------------------------------
1999 1998 1997 1996
------------ ----------- --------- ---------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Balance outstanding at end of period.............. $129,744 $120,244 $80,244 $50,244
Weighted average rate paid on advances............ 5.85% 5.87% 6.26% 6.39%
</TABLE>
67
<PAGE>
Trust Services
In 1996, American Savings established American Savings Trust Services as a
department within American Savings which provides trust and investment services
to individuals, partnerships, corporations and institutions. American Savings
believes that the trust department allows it to provide investment opportunities
and fiduciary services to both current and prospective customers. Consistent
with American Savings' operating strategy, American Savings will continue to
emphasize the growth of its trust service operations to grow assets and increase
fee-based income. American Savings 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 May
31, 1999, the trust department managed 66 accounts with aggregate assets of
$112.0 million, of which two accounts belonging to one relationship totaled
$48.2 million, or 43% of the trust department's total assets, at May 31, 1999.
Subsidiary Activities
The following are descriptions of American Savings' wholly owned
subsidiaries, which will be indirectly owned by American Financial following the
conversion.
American Investment Services, Inc. American Investment Services, Inc.,
which was incorporated in December 1997, is the vehicle through which
alternative financial products and services are offered to customers of American
Savings. Through an arrangement with a third party registered broker-dealer,
American Investment Services offers a complete range of investment products,
including mutual funds, debt, equity and government securities and fixed and
variable annuities. American Investment Services receives a portion of the
commissions generated by the third party broker-dealer from sales to American
Savings' customers. American Investment Services may apply to become a
registered broker-dealer, which would allow it to offer brokerage services
directly, eliminating the need for a third party broker-dealer. American
Investment Services is also licensed as an insurance producer with the State of
Connecticut. In this capacity, American Investment Services engages directly in
certain insurance sales activities, offering a wide variety of insurance
products as well as the sale of fixed annuities. For 1998 and the five months
ended May 31, 1999, American Investment Services generated net income before
taxes of $325,000 and $150,000, respectively.
ASB Mortgage Servicing Company. ASB Mortgage Servicing Company was
established in February 1999 to service and hold loans secured by real property.
ASB Mortgage 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. Income tax savings to
American Savings from the use of a passive investment company was approximately
$650,000 for the five months ended May 31, 1999.
American Savings Bank Foundation, Inc.
In 1995, American Savings established a private charitable foundation,
American Savings Bank Foundation, Inc. This foundation, which is not a
subsidiary of American Savings, provides grants to charitable organizations that
focus primarily on children and education and scholarships to qualified students
in the communities in which American Savings operates. American Savings Bank
Foundation was funded initially by a $500,000 donation from American Savings. In
fiscal 1998, American Savings contributed to American Savings Bank Foundation
marketable equity securities with a cost basis and fair value of approximately
$85,000 and $3.6 million, respectively, at the date of donation and transfer.
American Savings also contributed appreciated investment securities with a fair
value of $4.3 million to American Savings Bank Foundation during 1997. At May
31, 1999, American Savings Bank Foundation had assets of approximately $11.2
million. The foundation's current 12 member Board of Trustees consists of
current directors, officers and employees of American Savings. After the
conversion, American Savings will continue to maintain American Savings Bank
Foundation. However, after the conversion, American Savings Bank Foundation may
decide to dedicate its funding exclusively to provide scholarships to qualified
students in its local community. Additionally, American Savings does not expect
to make any further contributions to American Savings Bank Foundation. It is not
expected that the existence of American Savings' current foundation will impact
the business and affairs of the American Savings Charitable Foundation which is
being established in connection with American Savings' conversion. See "The
Conversion--Establishment of the Charitable Foundation" and Note 15 of the Notes
to Consolidated Financial Statements.
68
<PAGE>
Properties
American Savings currently conducts its business through its main office
located in New Britain, Connecticut, and 16 other full-service banking offices.
American Financial believes that American Savings' facilities will be adequate
to meet the then present and immediately foreseeable needs of American Savings
and American Financial.
<TABLE>
<CAPTION>
Net Book Value
of Property
Leased Original Year or Leasehold
or Leased Date Of Lease Improvements
Location Owned or Acquired Expiration at May 31, 1999
- --------- --------- ---------------- ---------------- ------------------
<S> <C> <C> <C> <C>
(In thousands)
Administrative Office:
102 West Main Street
New Britain, Connecticut 06051 Owned 1995 -- $2,385
Banking Offices:
178 Main Street
New Britain, Connecticut 06051 Owned 1901 -- 2,598
655 West Main Street
New Britain, Connecticut 06053 Owned 1961 -- 309
1133 Main Street
Newington, Connecticut 06111 Owned 1965 -- 765
123 East Main Street
Plainville, Connecticut 06062 Owned 1966 -- 266
Route 195
Mansfield, Connecticut 06250 Leased 1975 2000(1) 56
25 New London Turnpike
Glastonbury, Connecticut 06033 Owned 1976 -- 152
184 Route 81
Killingworth, Connecticut 06419 Leased 1977 2002(1) 45
143 South Main Street
West Hartford, Connecticut 06107 Leased 1980 2000(2) 83
587 Hartford Road
New Britain, Connecticut 06053 Leased 1980 2000(2) 99
25 Wells Road
Wethersfield, Connecticut 06109 Leased 1986 2006 90
252 Allen Street
New Britain, Connecticut 06053 Leased 1988 2003(1) 77
714 Hopmeadow Street
Simsbury, Connecticut 06070 Leased 1988 2008(3) 49
29 South Main Street
West Hartford, Connecticut 06107 Leased 1996 2001(2) 17
315 West Main Street
Avon, Connecticut 06001 Leased 1997 2005 308
1127 Farmington Avenue
Berlin, Connecticut 06037 Leased 1998 2018(4) 509
747 Farmington Avenue
New Britain, Connecticut 06053 Leased 1998 2003(3) 161
632 Cromwell Avenue
Rocky Hill, Connecticut 06067 Leased 1998 2003(2) 286
------
$8,255
======
</TABLE>
________________________
(1) American Savings has an option to renew this lease for an additional five-
year period.
(2) American Savings has an option to renew this lease for two additional five-
year periods.
(3) American Savings has an option to renew this lease for three additional
five-year periods.
(4) American Savings has an option to renew this lease for four additional five-
year periods.
69
<PAGE>
Personnel
As of May 31, 1999, American Savings had 233 full-time employees and 100
part-time employees, none of whom is represented by a collective bargaining
unit. American Savings believes its relationship with its employees is good.
Legal Proceedings
Periodically, there have been various claims and lawsuits involving
American Savings, such as claims to enforce liens, condemnation proceedings on
properties in which American Savings holds security interests, claims involving
the making and servicing of real property loans and other issues incident to
American Savings' business. American Savings is not a party to any pending legal
proceedings that it believes would have a material adverse effect on the
financial condition or operations of American Savings.
MANAGEMENT OF AMERICAN FINANCIAL
Directors will be elected by the stockholders of American Financial for
staggered three-year terms, or until their successors are elected and qualified.
American Financial's Board of Directors consists of eight persons divided into
three classes, each of which contains approximately one-third of the Board. One
class, consisting of Messrs. Fred M. Hollfelder, Harry N. Mazadoorian and
Jeffrey T. Witherwax, has a term of office expiring at the first annual meeting
of stockholders; a second class, consisting of Messrs. Robert T. Kenney and
Steven T. Martin, has a term of office expiring at the second annual meeting of
stockholders; and a third class, consisting of Messrs. Adolf G. Carlson and Mark
E. Karp and Ms. Marie S. Gustin, has a term of office expiring at the third
annual meeting of stockholders. American Financial anticipates that its first
annual meeting of stockholders will be held in May 2000.
The executive officers of American Financial are elected annually and serve
at the Board's discretion. The executive officers of American Financial are:
<TABLE>
<CAPTION>
Name POSITION HELD WITH AMERICAN FINANCIAL
----- -------------------------------------
<S> <C>
Robert T. Kenney......................... Chairman, President and Chief Executive Officer
Charles J. Boulier III................... Executive Vice President, Treasurer and Chief
Financial Officer
Richard J. Moore......................... Senior Vice President and Secretary
Charles P. Ahern......................... Senior Vice President
Sheri C. Pasqualoni...................... Senior Vice President
Peter N. Perugini........................ Senior Vice President
Diane C. Dunn............................ Assistant Secretary
</TABLE>
70
<PAGE>
MANAGEMENT OF AMERICAN SAVINGS
Directors and Executive Officers
The Board of Directors of American Savings is presently composed of 14
members who are elected for terms of three years, approximately one-third of
whom are elected annually as required by the Bylaws of American Savings.
American Savings' executive officers are appointed annually by the Board of
Directors and hold office at the Board's discretion until their respective
successors are chosen and qualified or until their death, earlier resignation or
removal from office. The following table presents information with respect to
the directors and executive officers of American Savings.
Directors
<TABLE>
<CAPTION>
Director Term
Name Age (1) Position Held With American Savings Since Expires
- ----- --------- ------------------------------------ ---------- ---------
<S> <C> <C> <C> <C>
Charles S. Beach............... 78 Director 1971 2000
Adolf G. Carlson............... 68 Director 1972 2002
Donald Davidson................ 78 Director 1965 2000
Norman E.W. Erickson........... 74 Director 1965 2000
Marie S. Gustin................ 64 Director 1996 2002
Fred M. Hollfelder............. 65 Director 1981 2000
Joseph T. Hughes............... 77 Director 1975 2000
Mark E. Karp................... 52 Director 1995 2002
Robert T. Kenney............... 56 Chairman of the Board, President and Chief 1991 2001
Executive Officer
Steven T. Martin............... 58 Director 1979 2001
Harry N. Mazadoorian........... 61 Director 1993 2000
Geddes Parsons................. 81 Director 1959 2000
Stanley W. Shepard............. 76 Director 1978 2001
Jeffrey T. Witherwax........... 53 Director 1996 2000
<CAPTION>
Executive Officers Who Are Not Directors
Name Age (1) Position Held With American Savings
- ----- --------- ------------------------------------
<S> <C> <C>
Charles P. Ahern............... 48 Senior Vice President-Retail Banking
Charles J. Boulier III......... 43 Executive Vice President and Chief Financial Officer
Richard J. Moore............... 57 Senior Vice President-Human Resources and Secretary
Sheri C. Pasqualoni............ 41 Senior Vice President-Marketing, Trust & Investment Management
Peter N. Perugini.............. 55 Senior Vice President and Chief Lending Officer
</TABLE>
_________________
(1) As of May 31, 1999.
Biographical Information
Below is certain information regarding the directors and executive officers
of American Savings. Unless otherwise stated, each director and executive
officer has held his or her current occupation for the last five years. There
are no family relationships among or between the directors or executive
officers.
Charles S. Beach was a vice president of the Connecticut Light and Power
Company before his retirement in 1985.
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<PAGE>
Adolf G. Carlson was President of Adolf Carlson Insurance agency before its
merger with Sinclair Insurance Group in December 1992. Following the merger,
Mr. Carlson served as a consultant until his retirement in December 1998.
Donald Davidson is a Director and Chairman of the executive committee of the
Board of Directors of D & L Venture Corp., a retail merchandising firm located
in New Britain, Connecticut.
Norman E.W. Erickson was the former Chairman of the Board of Directors of
American Savings before his retirement in 1992.
Marie S. Gustin, Ph.D. was the superintendent of schools in New Britain,
Connecticut before her retirement in 1993.
Fred M. Hollfelder retired in 1990 as President of Corbin and Russwin
Architectural Hardware located in Berlin, Connecticut.
Joseph T. Hughes is a retired certified public accountant.
Mark E. Karp was President and Chief Executive Officer of Moore Medical Corp.,
a pharmaceutical company, located in New Britain, Connecticut, before his
retirement in 1998.
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 Chairman of Savings Bank Life
Insurance Company in Connecticut and a director and Vice Chairman of the Federal
Home Loan Bank of Boston. Mr. Kenney also serves on the board of directors of
many area civic and charitable organizations.
Steven T. Martin has served as Executive Vice President of Ingersoll Rand Co.,
an international diversified industrial company located in Woodcliff Lake, New
Jersey, since 1998. Between 1995 and 1998, Mr. Martin was President of the
Production Equipment Group of Ingersoll Rand. Before his involvement with
Ingersoll Rand, Mr. Martin was Vice President of Torrington Company and a
General Manager of Fafnir Bearing, both industrial companies, located in New
Britain, Connecticut.
Harry N. Mazadoorian is assistant general counsel for CIGNA Corporation, a
leading provider of health care, employee benefits, insurance and financial
services, located in Bloomfield, Connecticut.
Geddes Parsons was a business manager and assistant treasurer of St.
Margaret's School in Waterbury, Connecticut before his retirement in 1978.
Stanley W. Shepard is the former President and Chief Executive Officer of New
Britain General Hospital.
Jeffrey T. Witherwax is President of The Naugatuck Glass Company in Naugatuck,
Connecticut.
Executive Officers Who Are Not Directors
Charles P. Ahern joined American Savings in April 1996 and is Senior Vice
President-Retail Banking. Prior to joining American Savings, Mr. Ahern was Vice
President of Branch Administration at Lafayette American Bank from 1994 to 1996
and Vice President of Branch Administration at Centerbank from 1993 to 1994.
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,
72
<PAGE>
Treasurer and Chief Financial Officer. In June 1999 he was named Executive Vice
President and Chief Financial Officer.
Richard J. Moore joined American Savings in May 1998 and serves as Senior Vice
President of Human Resources and Corporate Secretary. From 1997 until joining
American Savings, Mr. Moore worked at Howell & Moore, a human resources
consulting firm. From 1986 until 1997, Mr. Moore was Senior Vice President of
Human Resources at Centerbank.
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 & Investment Management. Prior to joining
American Savings, Ms. Pasqualoni worked for fifteen years at Great County Bank.
Before her departure, she served as Senior Vice President and Chief
Communications Officer.
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.
Meetings and Committees of the Board of Directors of American Savings and
American Financial
The business of American Savings is conducted through meetings and activities
of the Board of Directors and its committees. During the fiscal year ended
December 31, 1998 the Board of Directors held 14 regular meetings and one
special meeting. No director attended fewer than 75% of the total meetings of
the Board of Directors and committees on which the director served.
The Board of Directors has established the following committees:
The Audit Committee consists of Messrs. Martin (Chairman), Beach, Carlson,
Hughes and Parsons. This committee reviews American Savings' financial
statements, supervises the internal auditor and engages the external auditors.
The committee meets quarterly and also in March to review the annual financial
statements and met five times in fiscal 1998.
The Finance Committee consists of Messrs. Hughes (Chairman), Erickson, Karp,
Kenney, Mazadoorian, Shepard and Witherwax. The Finance Committee oversees the
interest rate risk management of American Savings and approves all investment,
lending and asset/liability policies. The committee meets quarterly and met
four times in fiscal 1998.
The Human Resources Committee consists of Messrs. Hollfelder (Chairman), Karp,
Kenney, Martin and Parsons and Ms. Gustin. This committee is responsible for
all matters regarding compensation and fringe benefits for executive officers.
The committee meets quarterly and met four times in fiscal 1998. The review and
evaluation of the Chief Executive Officer is the responsibility of the CEO
Evaluation Committee which consists of Messrs. Davidson, Hollfelder, Hughes,
Martin and Mazadoorian. The CEO Evaluation Committee meets annually.
The Trust, Investment Management & Insurance Committee, which consists of
Messrs Mazadoorian (Chairman), Carlson, Davidson, Erickson, Kenney and
Witherwax, oversees American Savings' trust, investment management and insurance
activities. Such oversight includes the review and approval of the trust
department's policies, the coordination of an annual trust department audit and
the review of examination reports of the trust department. Additionally, the
committee adopts and reviews the policies and procedures of the investment
management and insurance activities and assesses the risk involved in their
operations. The committee meets quarterly and met four times in fiscal 1998.
The Board of Directors has also established a Nominating Committee and a
Director Evaluation Committee.
73
<PAGE>
The Board of Directors of American Financial has established the following
committees: the Audit Committee consisting of Messrs. Carlson, Martin and
Witherwax; the Pricing Committee consisting of the entire Board of Directors of
American Financial; the Compensation Committee consisting of Messrs. Hollfelder
and Karp and Ms. Gustin; and the Nominating Committee consisting of Messrs.
Kenney and Martin and Ms. Gustin.
Directors' Compensation
Fees. Directors of American Savings each receive an annual retainer of $4,500
and $600 for each board meeting attended. Additionally, each director receives
an annual retainer of $2,000 for their membership on a committee, except that
each committee chairman receives an annual retainer of $3,500, and each director
receives $450 for each committee meeting attended. Effective January 1, 2000,
directors of American Savings will each receive an annual retainer of $12,000
and $700 for each board meeting attended. The annual retainers for committee
membership will not change; however, each director will receive $500 for each
committee meeting attended.
Directors' Retirement Plan. American Savings has adopted a retirement program
for incumbent nonemployee directors to provide a retirement income supplement
for directors with long service. Current directors will receive an annual
benefit of approximately $12,000 at the normal retirement age of 75. Upon a
retired director's death, the director's surviving spouse will receive a
lifetime benefit equal to 50% of the retirement benefit. American Savings had
accrued $102,000 with respect to its anticipated liability under the director
retirement program. American Savings expects to accrue an additional $58,000 in
1999 with respect to its anticipated liability under the program.
Directors' Deferred Compensation Plans. American Savings sponsors deferred
compensation plans for directors as a vehicle for the deferral of fees and
retainers by directors. Deferrals are credited with interest at the Treasury
Constant Maturities yield for 52-week U.S. Treasury bills. As of May 31, 1999,
these plans have had only limited participation and American Savings' total
accrued liability with respect to such plans is $350,000. It is anticipated
that the deferral plans will terminate in connection with the conversion. For a
discussion of additional benefits currently provided to Directors, see
"Benefits--Performance Appreciation Unit Plans."
74
<PAGE>
Executive Compensation
Summary Compensation Table. The following information is furnished for the
Chief Executive Officer and the four other highest paid executive officers of
American Savings who received a salary and bonus of $100,000 or more during the
year ended December 31, 1998.
<TABLE>
<CAPTION>
Annual Compensation Other Annual All Other
--------------------------------------------
Name and Position Year (1) Salary Bonus (2) Compensation (3) Compensation (4)
- ------------------- -------------- ----------- ------------ ---------------- ----------------
<S> <C> <C> <C> <C> <C>
Robert T. Kenney
Chairman of the Board, President and
Chief Executive Officer...................... 1998 $365,000 $182,500 -- $20,000
Charles J. Boulier III
Executive Vice President and
Chief Financial Officer...................... 1998 $155,000 $ 62,000 -- $12,221
Peter N. Perugini
Senior Vice President and
Chief Lending Officer........................ 1998 $117,000 $ 35,100 -- $ 9,225
Sheri C. Pasqualoni
Senior Vice President-Marketing,
Trust & Investment Management................ 1998 $100,000 $ 30,000 -- $ 7,885
Charles P. Ahern
Senior Vice President-Retail Banking......... 1998 $ 96,000 $ 28,800 -- $ 7,569
</TABLE>
_____________________
(1) Compensation information for the years ended December 31, 1997 and 1996 has
been omitted as American Savings was neither a public company nor a
subsidiary of a public company at that time.
(2) Represents the total amount awarded under the American Savings' Incentive
Compensation Program in fiscal 1998. Under such plan, 60% of the total is
paid in January of the year after it is earned and 40% is deferred. For a
description of the plan, see "--Benefits--Incentive Compensation Program."
(3) Does not include the aggregate amount of perquisites and other personal
benefits, which was less than $50,000 or 10% of the total annual salary and
bonus reported.
(4) Represents matching and discretionary contributions made under American
Savings' Savings and Profit Sharing Plan. Does not reflect units awarded
under American Savings' Performance Appreciation Unit Incentive Plans. In
fiscal 1998, American Savings awarded 10,000, 5,000, 4,000, 3,000 and 5,000
units to Messrs. Kenney, Boulier, Perugini, Ahern and Ms. Pasqualoni,
respectively. For a description of the plan, see "--Benefits--Performance
Appreciation Unit Plans."
Employment Agreements. Effective January 1, 1995, American Savings entered
into employment agreements with Messrs. Kenney and Boulier. These agreements
will be terminated upon conversion and replaced with substantially similar
agreements. Upon the completion of the conversion, American Savings and American
Financial each intend to enter into employment agreements with Messrs. Kenney,
Ahern, Boulier, Moore, Perugini and Ms. Pasqualoni (individually, the
"Executive") (collectively, the "Employment Agreements"). The Employment
Agreements are intended to ensure that American Savings and American Financial
will be able to maintain a stable and competent management base after the
conversion. The continued success of American Savings and American Financial
depends to a significant degree on the skills and competence of the above
referenced officers.
The Employment Agreements will provide for a three-year term. The term of
the American Financial Employment Agreements shall be extended on a daily basis
unless written notice of non-renewal is given by the Board of Directors and the
term of American Savings Employment Agreements shall be renewable on an annual
basis. The Employment Agreements provide that the Executive's base salary will
be reviewed annually. The base salaries which will be effective for such
Employment Agreements for Messrs. Kenney, Ahern, Boulier, Moore, Perugini and
Ms. Pasqualoni, will be $430,000, $120,000, $185,000, $125,000, $132,000 and
$125,000, respectively. In addition to the base salary, the Employment
Agreements provide for, among other things, participation in stock benefits
plans and other fringe benefits applicable to executive personnel. The
Employment Agreements provide for termination by American Savings or American
Financial for cause, as defined in the
75
<PAGE>
Employment Agreements, at any time. If American Savings or American Financial
chooses to terminate the Executive's employment for reasons other than for
cause, or if the Executive resigns from American Savings or American Financial
after a: (1) failure to re-elect the Executive to his/her current offices; (2)
material change in the Executive's functions, duties or responsibilities; (3)
relocation of the Executive's principal place of employment by more than 25
miles; (4) reduction in the benefits and perquisites being provided to the
Executive in the Employment Agreement; (5) liquidation or dissolution of
American Savings or American Financial; or (6) breach of the Employment
Agreement by American Savings or American Financial; the Executive or, if the
Executive dies, his/her beneficiary, would be entitled to receive an amount
equal to the remaining base salary payments due to the Executive for the
remaining term of the Employment Agreement and the contributions that would have
been made on the Executive's behalf to any employee benefit plans of American
Savings and American Financial during the remaining term of the Employment
Agreement. American Savings and American Financial would also continue and/or
pay for the Executive's life, health, dental and disability coverage for the
remaining term of the Employment Agreement. Upon termination of the Executive
for reasons other than a change in control, the Executive must adhere to a one
year non-competition agreement.
Under the Employment Agreements, if voluntary or involuntary termination
follows a change in control of American Savings or American Financial, the
Executive or, if the Executive dies, his/her beneficiary, would be entitled to a
severance payment equal to the greater of: (1) the payments due for the
remaining terms of the agreement; or (2) three times the average of the five
preceding taxable years' annual compensation. American Savings and American
Financial would also continue the Executive's life, health, and disability
coverage for thirty-six months. Even though both American Savings and American
Financial Employment Agreements provide for a severance payment if a change in
control occurs, the Executive would only be entitled to receive a severance
payment under one agreement. The Executive would also be entitled to receive an
additional tax indemnification payment if payments under the Employment
Agreements or otherwise triggered liability under the Internal Revenue Code for
the excise tax applicable to "excess parachute payments." Under applicable law,
the excise tax is triggered by change in control-related payments which equal or
exceed three times the Executive's average annual compensation over the five
years preceding the change in control. The excise tax equals 20% of the amount
of the payment in excess of one times the Executive's average compensation over
the preceding five-year period. If a change in control of American Savings and
American Financial occurred, the total amount of payments due under the
Employment Agreements, based solely on the Executive's 1998 cash compensation
(and without regard to future base salary adjustments or bonuses and excluding
any benefits under any employee benefit plan which may be payable) would be
approximately $3.9 million.
Payments to the Executive under American Savings' Employment Agreement will be
guaranteed by American Financial if payments or benefits are not paid by
American Savings. Payment under American Financial's Employment Agreement would
be made by American Financial. All reasonable costs and legal fees paid or
incurred by the Executive under any dispute or question of interpretation
relating to the Employment Agreements shall be paid by American Savings or
American Financial, respectively, if the Executive is successful on the merits
in a legal judgment, arbitration or settlement. The Employment Agreements also
provide that American Savings and American Financial shall indemnify the
Executive to the fullest extent legally allowable.
Benefits
General. American Savings currently pays 70% of the premiums for medical
insurance benefits and 100% of premiums for life and disability insurance
benefits for full-time employees.
Pension Plan. American Savings maintains a non-contributory pension plan for
its employees. Generally, employees of American Savings begin participation in
the pension plan once they reach age 21 and complete 1,000 hours of service in a
consecutive 12-month period. A participant in the pension plan becomes vested
in his accrued benefit under the pension plan upon completing five years of
service. Participants also become 100% vested in their accrued benefit upon
attainment of their "normal retirement age" (as described in the pension plan)
and upon incurring a disability.
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<PAGE>
A participant's accrued benefit under the pension plan is determined by
multiplying 2% of the participant's final average pay (as described in the
pension plan) by the number of years of service the participant has with
American Savings and then subtracting from this total 2% of the participant's
annual social security benefit multiplied by the number of years of service the
participant has with American Savings. Social security benefits are used to
calculate the pension benefits. Participants receive their entire social
security benefit in addition to the pension plan benefit. However, pension
benefits are reduced in the event a participant retires before his or her
"normal retirement age." Participants in the pension plan may elect to receive
their benefits in the form of a 50% or 100% joint and survivor annuity or a life
only payment option.
The following table indicates the annual retirement benefits that would be
payable under the pension plan and the related supplemental executive retirement
plan (see below) upon retirement at age 65 to a participant electing to receive
his pension benefit in the standard form of benefit, assuming various specified
levels of plan compensation and various specified years of credited service.
Under the Internal Revenue Code, maximum annual benefits under the pension plan
are limited to $130,000 per year and annual compensation for calculation
purposes is limited to $160,000 per year for the 1999 calendar year.
<TABLE>
<CAPTION>
Average Annual Years of Service
--------------------------------------------------------------------------------------------------------
Compensation 5 10 15 20 25 30+
- ---------------- ---------- ---------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
$ 25,000 $ 1,431 $ 2,862 $ 4,292 $ 5,723 $ 7,154 $ 8,585
50,000 3,470 6,940 10,410 13,880 17,350 20,820
75,000 5,851 11,702 17,554 23,405 29,256 35,107
100,000 8,351 16,702 25,054 33,405 41,756 50,107
125,000 10,851 21,702 32,554 43,405 54,256 65,107
150,000 13,351 26,702 40,054 53,405 66,756 80,107
175,000 15,851 31,702 47,554 63,405 79,256 95,107
200,000 18,351 36,702 55,054 73,405 91,756 110,107
250,000 23,351 46,702 70,054 93,405 116,756 140,107
300,000 28,351 56,702 85,054 113,405 141,756 170,107
350,000 33,351 66,702 100,054 133,405 166,756 200,107
</TABLE>
At May 31, 1999, which is the date of the most recent pension plan statement,
the pension plan's assets exceeded the benefit obligation by approximately
$369,000.
Supplemental Executive Retirement Plans. American Savings maintains a non-
tax-qualified, supplemental retirement plan to provide key executives with
pension benefits that cannot be provided directly through American Savings' tax-
qualified employee pension plan as 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
available under the supplemental plan are reduced by the benefits actually
payable under the pension plan. Supplemental plan benefits are payable at the
same times and in the same forms as benefits payable under the pension plan.
Currently, three officers and one retired officer of American Savings
participate in the supplemental plan. At May 31, 1999, the supplemental plan's
benefit obligation was $851,000.
Robert T. Kenney, the President and Chief Executive Officer of American
Savings and American Financial, currently participates in the existing
supplemental retirement plan and a separate supplemental arrangement which
requires that Mr. Kenney reduce his current compensation in exchange for
additional service credit under the supplemental plan. In order to ensure that
Mr. Kenney's overall compensation reflects his significant role at American
Savings and to provide an incentive for his continued employment, the Board is
considering the adoption of a new supplemental retirement program that would
provide Mr. Kenney with an annual retirement benefit during his lifetime equal
to a maximum benefit of 60% of his final average compensation less
77
<PAGE>
benefits available to him under American Savings' tax-qualified pension plan and
a similar plan sponsored by his prior employer. It is anticipated that the new
program would provide Mr. Kenney with the option of electing retirement at or
after attaining age 62. In addition, the program would provide his surviving
spouse with a survivor benefit equal to 50% of the payment received by Mr.
Kenney during his lifetime. It is expected that the new supplemental program for
Mr. Kenney will be implemented during the fourth quarter of 1999. In connection
with the new program, American Savings estimates that it will accrue additional
compensation expense of $130,000 in 1999 and $650,000 in each of the next five
fiscal years to reflect its obligation to Mr. Kenney. However, it is possible
that based on the final design of the new program, the associated expense may be
recognized in an earlier period or periods.
Upon conversion, American Savings also intends to implement a new plan to
provide for similar supplemental benefits with respect to the Savings and Profit
Sharing Plan and the employee stock ownership plan, as well as benefits
otherwise limited by other provisions of the Internal Revenue Code or the terms
of the employee stock ownership plan loan (see below). Specifically, the new
plan will provide benefits to eligible individuals (designed by the Board of
Directors of American Savings or its affiliates) that cannot be provided under
the Savings and Profit Sharing Plan and/or the employee stock ownership plan as
a result of the limitations imposed by the Internal Revenue Code, but that would
have been provided under the Savings and Profit Sharing Plan and/or the employee
stock ownership plan but for such limitations. In addition to providing for
benefits lost under tax-qualified plans as a result of limitations imposed by
the Internal Revenue Code, the new plan will also provide supplemental benefits
to designated individuals who retire, who terminate employment in connection
with a change in control, or whose participation in the employee stock ownership
plan ends due to termination of the employee stock ownership plan (regardless of
whether the individual terminates employment) prior to the complete scheduled
repayment of the employee stock ownership plan loan. Generally, upon the
retirement of an eligible individual or upon a change in control of American
Savings or American Financial prior to complete repayment of the employee stock
ownership plan loan, the supplemental executive retirement plan will provide the
individual with a benefit equal to what the individual would have received under
the employee stock ownership plan had he remained employed throughout the term
of the employee stock ownership plan or had the employee stock ownership plan
not been terminated prior to the scheduled repayment of the employee stock
ownership plan loan less the benefits actually provided under the employee stock
ownership plan on behalf of such individual. An individual's benefits under the
supplemental executive retirement plan will generally become payable upon the
participant's retirement (in accordance with the standard retirement policies of
American Savings), upon the change in control of American Savings or American
Financial or as determined under the applicable tax-qualified retirement plans
sponsored by American Savings.
American Savings may establish a grantor trust in connection with the new
supplemental executive retirement plans to satisfy the obligations of American
Savings with respect to the supplemental executive retirement plans. The assets
of the grantor trust would remain subject to the claims of American Savings'
general creditors in the event of American Savings' insolvency until paid to the
individual pursuant to the terms of the supplemental executive retirement plans.
Savings and Profit Sharing Plan. American Savings has implemented the American
Savings Bank Employees' Savings and Profit Sharing Plan (the "Savings Plan"), a
tax-qualified profit sharing plan with a qualified cash or deferred arrangement
under Section 401(k) of the Internal Revenue Code for the benefit of its
eligible employees. 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 American Savings.
Eligible employees may begin participating in the Savings Plan upon the
completion of one year of service (as defined in the Savings Plan) and
attainment of age twenty-one. Participants currently may make annual salary
reduction contributions to the Savings Plan in amounts from 1% to 15% of their
base compensation, within a legally permissible limit ($10,000 for 1999).
American Savings makes a regular matching contribution equal to 50% of the
elective deferrals made by each participant up to 3% of a participant's base
compensation. 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.
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<PAGE>
Currently, participants may invest their accounts under the Savings Plan in
nine funds with varying investment characteristics. American Savings intends to
add, as an investment option, an employer stock fund in which participants may
invest a portion of their account balances primarily in American Financial
common stock, within the limitations set forth in the plan document. In
connection with the conversion, a participant's ability to invest in the
employer stock fund is based on his or her status as an eligible account holder
or supplemental eligible account holder in the conversion. Regardless of the
source of funds, no eligible account holders or supplemental eligible account
holders may elect to invest in excess of $500,000 in common stock.
Generally, distributions from the Savings Plan may commence upon a
participant's separation from service for any reason. However, participants may
request in-service distributions from the Savings Plan in the form of hardship
withdrawals, withdrawals of rollover contributions and the withdrawal of
unmatched after-tax contributions. Distributions from the Savings Plan
generally must comply with federal and state income taxes and distributions made
before a participant attains age 59 1/2 also must comply with a federal excise
tax.
Incentive Compensation Program. American Savings has maintained an incentive
compensation program for executive and senior officers which provides
participants with cash bonuses based on the attainment of American Savings and
individual performance targets. A range of American Savings and individual
performance targets are set for the calendar year by the Human Resources
Committee of the Board of Directors. American Savings targets are set by
reference to the performance of a selected peer group of financial institutions
reflecting geographic, type and size criteria and by reference to American
Savings' actual performance relative to its annual budget. Based on the level
of attainment of American Savings and individual targets, awards range from 50%
of base pay for the Chief Executive Officer to 15% of base pay for more junior
officers. Sixty percent of the individual award is payable during the first
quarter of the year following the year to which the award relates. The balance
of the award, or 40% of the total award, is payable on a deferred basis and
vests on the third anniversary of the award. In the event of an officer's
death, disability or retirement, deferred incentive awards are fully vested and
payable. In anticipation of American Savings' development of an incentive
compensation program appropriate to a publicly traded financial institution for
the year 2000 and subsequent years, American Savings will terminate the existing
incentive compensation program during the fourth quarter of 1999. It is
anticipated that all previously deferred awards will be fully vested and
participants will have the opportunity to elect a current cash payment or
continued deferral. An officer who elects continued deferral may also elect to
direct the investment of their benefits to the purchase of stock in the
conversion in the same manner as participants in American Savings' performance
appreciation unit plans (see below). It is anticipated that American Savings
will also provide incentive compensation payments to eligible employees based on
the institution's financial performance during 1999. However, no specific
determinations have been made regarding the size of such payments.
Performance Appreciation Unit Plans. Since 1996, American Savings has
sponsored Performance Appreciation Unit Plans for senior officers and
nonemployee directors. Benefits under the plans are determined by reference to
the performance of American Savings as reflected in year-to-year changes in
American Savings' net worth. The program is intended to provide participants
with benefits and incentives that are comparable to the benefits and incentives
provided by more traditional stock-based compensation programs such as a stock
option or stock appreciation rights plans.
American Savings has made annual awards under the plan to officers and
nonemployee directors of units corresponding to an interest in the appreciation
over the term of the award of a hypothetical "share" of American Savings'
capital. However, the recipient has no right to, or interest in, American
Savings' actual capital. Each award has a term of five years. At May 31, 1999,
awards representing 246,750 units were outstanding. Awards to officers are
earned or "vest" in equal installments over a five-year period. Awards to
directors are fully vested at the date of grant. During the five-year term of
each award, American Savings credits to each unit a value reflecting the
increase or decrease in American Savings' equity capital during the year,
assuming that certain minimum performance targets are satisfied. Upon the
expiration of the award, the participant's benefit equals the difference between
the unit value at the end of the five-year period and the unit value on the date
of grant. The initial awards were based on American Savings' equity capital
at December 31, 1994 when each unit was valued at $18.33. At December 31, 1998,
each unit had a value of $24.06. A participant may elect to receive the
accumulated
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appreciation in cash or defer receipt of the value until the participant's
termination of service as an officer or director. Deferrals are credited with
interest at the Treasury Constant Maturities yield for 52-week U.S. Treasury
bills.
In connection with the conversion, American Savings has determined that it is
appropriate to terminate the existing performance appreciation unit program in
anticipation of the introduction of stock-based compensation programs, such as
the employee stock ownership plan and the stock-based incentive plan (see below)
that will enable American Savings to provide officers and directors with
performance incentives directly linked to the performance of American
Financial's common stock. The existing program will terminate during the fourth
quarter of 1999 and, as provided under the program, all outstanding awards will
be fully vested and nonforfeitable. In addition, to compensate award
participants for the potential reduction in benefits attributable to the early
termination of the program, American Savings will credit an additional value to
outstanding awards at a rate consistent with the rate of increase in American
Savings' capital since 1996. It is anticipated that American Savings' will
recognize additional compensation expense of approximately $620,000 in
connection with the termination of the program.
In connection with the termination of the program, participants will have the
opportunity to elect to receive a cash payment equal to the value of their
awards or to defer such payments until termination of service or other
distribution date selected by the participant. Award participants who elect to
defer their benefits will also have the opportunity to elect to direct the
investment of their benefits to the purchase of stock in the conversion. To
facilitate such investments, American Savings will fund a trust with an amount
reflecting the level of the participants' investment directions to purchase
stock. For purposes of the conversion's stock purchase priorities, stock
purchased by a participant will be treated in the same manner as an individual
stock purchase and will be subject to the participant's individual eligibility
to purchase stock. If a participant does not elect to direct the investment of
his or her account to the purchase of stock, deferred amounts will be credited
with interest as described above until the account balance is fully paid.
Employee Stock Ownership Plan. American Savings' Board of Directors has
authorized the adoption of an employee stock ownership plan for employees of
American Savings to be effective upon the completion of the conversion.
Employees who are employed by American Savings on the conversion effective date
will be eligible to participate in the plan immediately. Thereafter, new
employees of American Financial and American Savings who have been credited with
at least 1,000 hours of service during a 12-month period and who have attained
age 21 will be eligible to participate in the employee stock ownership plan.
The employee stock ownership plan intends to purchase 5% of the shares sold in
the conversion through the offering. Following the conversion, the employee
stock ownership plan expects to acquire an additional number of shares through
open market purchases so that the employee stock ownership plan will acquire in
the aggregate, together with shares purchased in the conversion, 8% of the
outstanding shares of common stock of American Financial. In total, the
employee stock ownership plan expects to acquire 8% of the shares issued in the
conversion or between 2,309,688 shares, assuming 28,871,100 shares are issued in
the conversion, and 3,124,872 shares assuming 39,060,900 shares are issued in
the conversion. If the number of shares to be issued in the conversion is
increased to 44,920,035 shares, the employee stock ownership plan expects to
acquire 3,593,602 shares. It is anticipated that the employee stock ownership
plan will borrow funds from American Financial to purchase its stock. The loan
will equal 100% of the aggregate purchase price of the common stock. The loan to
the employee stock ownership plan will be repaid from American Savings'
contributions to the employee stock ownership plan and, to a lesser extent, from
dividends payable on American Financial common stock held by the employee stock
ownership plan over the anticipated 20-year term of the loan. The interest rate
for the employee stock ownership plan loan is expected to be the prime rate as
published in The Wall Street Journal on the closing date of the conversion. See
"Pro Forma Data." If the employee stock ownership plan is unable to acquire 5%
of the common stock issued in the conversion through the offering, it is
anticipated that these additional shares will also be acquired following the
conversion through open market purchases.
In any plan year, American Savings may make additional discretionary
contributions to the employee stock ownership plan for the benefit of plan
participants in either cash or shares of American Financial common stock,
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which may be acquired through the purchase of outstanding shares in the market
or from individual stockholders or which constitute authorized but unissued
shares or shares held in treasury by American Financial. The timing, amount, and
manner of discretionary contributions will be affected by several factors,
including applicable regulatory policies, the requirements of applicable laws
and regulations, and market conditions.
Shares purchased by the employee stock ownership plan with the proceeds of the
loan will be held in a suspense account and released on a pro rata basis as the
loan is repaid. Discretionary contributions to the employee stock ownership plan
and shares released from the suspense account will be allocated among
participants on the basis of each participant's proportional share of total
compensation. Any forfeitures will be reallocated among the remaining plan
participants.
Participants who are employed at the effective date of the conversion will be
fully vested upon the completion of one year of service. Participants who are
hired after the conversion effective date will vest in their accrued benefits
under the employee stock ownership plan upon the completion of five years of
service. A participant is fully vested at retirement, upon death or disability
or upon termination of the employee stock ownership plan. Benefits are
distributable upon a participant's retirement, early retirement, death,
disability, or termination of employment. American Savings' contributions to the
employee stock ownership plan are not fixed, so benefits payable under the
employee stock ownership plan cannot be estimated.
It is anticipated that the Board of Directors of American Savings will appoint
an independent trustee for the employee stock ownership plan. The trustee votes
all allocated shares held in the employee stock ownership plan as instructed by
the plan participants and unallocated shares and allocated shares for which no
instructions are received are voted in the same ratio on any matter as those
shares for which instructions are given.
Under applicable accounting requirements, compensation expense for a leveraged
employee stock ownership plan is recorded at the fair market value of the
employee stock ownership plan shares when committed to be released to
participants' accounts. See "Pro Forma Data."
The employee stock ownership plan must meet the requirements of the Employee
Retirement Income Security Act of 1974, as amended, and the regulations of the
Internal Revenue Service and the Department of Labor. American Savings intends
to request a determination letter from the Internal Revenue Service regarding
the tax-qualified status of the employee stock ownership plan. American Savings
expects to receive a favorable determination letter, but cannot guarantee it.
Employee Severance Compensation Plan. American Savings' Board of Directors
intends to adopt the American Savings Bank Employee Severance Compensation Plan
to provide benefits to eligible employees upon a change in control of American
Financial or American Savings. Eligible employees are those with a minimum of
one year of service with American Savings. Generally, all eligible employees,
other than officers who will enter into separate employment agreements with
American Financial and American Savings, will be eligible to participate in the
severance plan. Under the severance plan, if a change in control of American
Financial or American Savings occurs, eligible employees who are terminated or
who terminate employment, but only upon the occurrence of events specified in
the severance plan, within 24 months of the effective date of a change in
control will be entitled to a payment based on years of service with American
Savings with a maximum payment equal to 24 months of compensation, which would
be earned after 24 years of service. Employees of American Savings as of the
effective date of the conversion will be eligible to receive a minimum benefit
equal to 12 months of compensation without regard to their length of service.
In addition, certain designated officers and key employees will be eligible to
receive severance benefits without regard to length of service. Employees in
this category will receive a cash payment of three times the average of their
last five years' compensation and continued coverage for 36 months under
American Savings' employee benefit programs. The plan also provides that former
American Savings employees who are terminated during the 12-month period
beginning on the second anniversary of the change in control will be eligible to
receive severance compensation at a level not less than they would have been
eligible to receive under American Savings' severance policy as in effect
immediately prior to the change in control.
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Assuming that a change in control had occurred at December 31, 1998, and all
eligible employees were terminated, the maximum aggregate payment due under the
severance plan would be approximately $10.5 million.
Stock-Based Incentive Plan. Following the conversion, the Board of Directors
of American Financial intends to adopt a stock-based incentive plan which will
provide for the granting of options to purchase common stock ("Stock Options")
and restricted stock ("Stock Awards"), to eligible officers, employees, and
directors of American Financial and American Savings. If the stock-based
incentive plan is adopted within one year after conversion, applicable
regulations require such plan to be approved by a majority of American
Financial's stockholders at a meeting of stockholders to be held no earlier than
six months after the completion of the conversion.
Under the stock-based incentive plan, American Financial intends to grant
Stock Options in an amount equal to 10% of the shares of common stock issued in
the conversion. The amount granted would range from 2,887,110 shares, assuming
28,871,100 shares are issued in the conversion to 3,906,090 shares, assuming
39,060,900 shares are issued in the conversion. If the number of shares to be
issued in the conversion is increased to 44,920,035 shares, the amount of
options granted would equal 4,492,003 shares. Additionally, American Financial
intends to grant Stock Awards in an amount equal to 4% of the shares of common
stock issued in the conversion. The amount granted would range from 1,154,844
shares, assuming 28,871,100 shares are issued in the conversion to 1,562,436
shares, assuming 39,060,900 shares are issued in the conversion. If the number
of shares to be issued in the conversion is increased to 44,920,035 shares, the
amount of awards granted would equal 1,796,801 shares. Any common stock awarded
under the stock-based incentive plan will be awarded at no cost to the
recipients. The plan may be funded through the purchase of common stock by a
trust established in connection with the stock-based incentive plan or from
authorized but unissued shares. American Financial intends to appoint an
independent fiduciary to serve as trustee of a trust to be established in
connection with the stock-based incentive plan. If additional authorized but
unissued shares are acquired by the stock-based incentive plan after the
conversion, the interests of existing shareholders would be diluted. See "Pro
Forma Data."
The grants of Stock Options and Stock Awards will be designed to attract and
retain qualified personnel in key positions, provide officers and key employees
with a proprietary interest in American Financial as an incentive to contribute
to the success of American Financial and reward key employees for outstanding
performance. All employees of American Financial and its subsidiaries,
including American Savings, will be eligible to participate in the stock-based
incentive plan. It is expected that the committee administering the plan will
determine the terms of awards granted to officers and employees. The committee
will also determine whether Stock Options will be incentive or non-statutory
Stock Options, as defined below, the number of shares available for each Stock
Option and Stock Award, the exercise price of each non-statutory Stock Option,
whether Stock Options may be exercised by delivering other shares of common
stock, and when Stock Options become exercisable or Stock Awards vest. Only
employees may receive grants of Incentive Stock Options. Therefore, under the
stock-based incentive plan, directors may receive only grants of non-statutory
Stock Options. If such plan is adopted within one year after conversion,
applicable regulations provide that no individual officer or employee of
American Savings may receive more than 25% of the stock options available under
the stock-based incentive plan (or any separate plan for officers and employees)
and non-employee directors may not receive more than 5% individually, or 30% in
the aggregate, of the stock options available under the stock-based incentive
plan (or any separate plan for directors). Federal regulations also provide
that no individual officer or employee of American Savings may receive more than
25% of the restricted stock awards available under the stock-based incentive
plan (or any separate plan for officers and employees) and non-employee
directors may not receive more than 5% individually, or 30% in the aggregate, of
the restricted stock awards available under the stock-based incentive plan (or
any separate plan for directors).
The stock-based incentive plan will provide for the grant of: (1) Stock
Options intended to qualify as incentive Stock Options under Section 422 of the
Internal Revenue Code ("Incentive Stock Options"); and (2) Stock Options that do
not so qualify ("Non-Statutory Stock Options"). It is anticipated that all
Stock Options granted contemporaneously with stockholder approval of the stock-
based incentive plan will qualify as Incentive Stock Options to the extent
permitted under Section 422 of the Internal Revenue Code. Unless sooner
terminated, the stock-based incentive plan will be in effect for a period of ten
years from the earlier of adoption by the American
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Financial board of directors or approval by American Financial stockholders. If
the stockholders approve the Plan, American Financial intends to grant Stock
Options under the plan at an exercise price equal to at least the fair market
value of the underlying common stock on the date of grant.
An individual will not be deemed to have received taxable income upon the
grant or exercise of any Incentive Stock Option, provided that such shares
received through the exercise of such option are not disposed of by the employee
for at least one year after the date the stock is received in connection with
the stock option exercise and two years after the date of grant of the stock
option (a "disqualifying disposition"). No compensation deduction will be
available to American Financial as a result of the grant or exercise of
Incentive Stock Options unless there has been a disqualifying disposition. In
the case of a Non-Statutory Stock Option and in the case of a disqualifying
disposition of an Incentive Stock Option, an individual will realize ordinary
income upon exercise of the stock option (or upon the disqualifying disposition)
in an amount equal to the amount by which the exercise price exceeds the fair
market value of the common stock purchased by exercising the stock option on the
date of exercise. The amount of any ordinary income realized by an optionee
upon the exercise of a Non-Statutory Stock Option or due to a disqualifying
disposition of an Incentive Stock Option will be a deductible expense to
American Financial for income tax purposes.
The stock-based incentive plan will provide for the granting of Stock Awards.
Grants of Stock Awards to officers and employees may be made in the form of base
grants and/or performance grants (the vesting of which would be contingent upon
performance goals established by the committee administering the plan). In
establishing any performance goals, the committee may utilize the annual
financial results of American Savings, actual performance of American Savings as
compared to targeted goals such as the ratio of American Savings' net worth to
total assets, American Savings' return on average assets, or such other
performance standards as determined by the committee with the approval of the
American Financial board of directors.
When a participant becomes vested with respect to Stock Awards, the
participant will realize ordinary income equal to the fair market value of the
common stock at the time of vesting (unless the participant made an election
under Section 83(b) of the Internal Revenue Code). The amount of income
recognized by the participants will be a deductible expense for tax purposes for
American Financial. When restricted Stock Awards become vested and shares of
common stock are actually distributed to participants, the participants would
receive amounts equal to any accrued dividends with respect thereto. Before
vesting, recipients of Stock Awards may direct the voting of the shares awarded
to them. Shares not subject to grants and shares allocated subject to the
achievement of performance goals will be voted by the trustee in proportion to
the directions provided with respect to shares subject to grants. Vested shares
will be distributed to recipients as soon as practicable following the day on
which they vest.
The vesting periods for awards under the stock-based incentive plan will be
determined by the committee administering the plan. If the stock-based
incentive plan is adopted within one year after conversion, awards would become
vested and exercisable within the limits of applicable regulations, which such
regulations require that any awards begin vesting no earlier than one year from
the date of shareholder approval of the plan and, thereafter, vest at a rate of
no more than 20% per year and may not be accelerated except in the case of death
or disability. Stock Options would be exercisable for three months following
the date on which the employee or director ceases to perform services for
American Savings or American Financial, except that if an employee or director
dies or becomes disabled, Stock Options accelerate and become fully vested and
would be exercisable for up to one year thereafter or such longer period as
determined by American Financial. In the case of death or disability, Stock
Options may be exercised for a period of 12 months. However, any Incentive
Stock Options exercised more than three months following the date the employee
ceases to perform services as an employee would be treated as a Non-Statutory
Stock Option. If the optionee continues to perform services as a director or
consultant on behalf of American Savings, American Financial or an affiliate
after retirement, unvested Stock Options would continue to vest in accordance
with their original vesting schedule until the optionee ceases to serve as a
consultant or director. If a participant dies, is disabled or retires, American
Financial, if requested by the optionee, or the optionee's beneficiary, could
elect, in exchange for vested options, to pay the optionee, or the optionee's
beneficiary if the
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optionee dies, the amount by which the fair market value of the common stock
exceeds the exercise price of the Stock Options on the date of the employee's
termination of employment.
Within the limits of any applicable regulatory requirements, the stock-based
incentive plan may be amended after the first anniversary date of the conversion
to provide for accelerated vesting of previously granted Stock Options or Stock
Awards in the event of a participant's retirement or if a change in control of
American Financial or American Savings occurs. A change in control would
generally be considered to occur when a person or group of persons acting in
concert acquires beneficial ownership of 20% or more of any class of equity
security of American Financial or American Savings or if a tender or exchange
offer, merger or other form of business combination, sale of all or
substantially all of the assets of American Financial or American Savings or
similar transaction occurs or a contested election of directors which resulted
in the replacement of a majority of the American Financial board of directors by
persons not nominated by the directors in office before the contested election
occurs.
Transactions with American Savings
Federal regulations require that all loans or extensions of credit to
executive officers and directors must generally be made on substantially the
same terms, including interest rates and collateral, as those prevailing at the
time for comparable transactions with other persons, unless the loan or
extension of credit is made under a benefit program generally available to all
other employees and does not give preference to any insider over any other
employee, and must not involve more than the normal risk of repayment or present
other unfavorable features. American Savings' policy is not to make any new
loans or extensions of credit to American Savings' executive officers and
directors at different rates or terms than those offered to the general public.
In addition, loans made to a director or executive officer in an amount that,
when aggregated with the amount of all other loans to the person and his or her
related interests, are in excess of the greater of $25,000 or 5% of American
Savings' capital and surplus, up to a maximum of $500,000, must be approved in
advance by a majority of the disinterested members of the Board of Directors.
See "Regulation and Supervision--Transactions with Affiliates." The aggregate
amount of loans by American Savings to its executive officers and directors was
approximately $68,000 at May 31, 1999. These loans were performing according to
their original terms at May 31, 1999.
REGULATION AND SUPERVISION
General
As a savings bank chartered by the State of Connecticut, American Savings is
extensively regulated under state law with respect to many aspects of its
banking activities; this state regulation is administered by the Connecticut
Banking Commissioner. In addition, as a bank whose deposits are insured by the
Federal Deposit Insurance Corporation under the Bank Insurance Fund, American
Savings 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 American Savings, not bank stockholders.
American Financial will also be 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 American Financial and American
Savings is a summary and is qualified in its entirety by reference to such laws
and regulations.
Connecticut Banking Laws and Supervision
The Connecticut Banking Commissioner regulates American Savings' 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
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Banking Commissioner conducts periodic examinations of American Savings. 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 American Savings 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 25% of American Savings' equity capital and reserves for loan and
lease losses.
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." See "--Federal Regulations" and "--Prompt Corrective
Regulatory Action." The Federal Deposit Insurance Corporation may limit a
savings bank's ability to pay dividends. No dividends may be paid to American
Savings' stockholders if such dividends would reduce stockholders' 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. In 1996, legislation was enacted which requires the
board of directors of each Connecticut bank to adopt annually and to
periodically review an investment policy governing investments by such bank,
which policy must establish standards for the making of prudent investments. In
addition, Connecticut law now permits Connecticut banks to sell fixed and
variable rate annuities if licensed to do so by the Connecticut Insurance
Commissioner.
Further, legislation was enacted in 1996 which expands the ability of
Connecticut banks to invest in debt securities and debt mutual funds. Prior to
the legislation, Connecticut banks could 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 funds, if the debt
securities and debt mutual funds were 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 did not
exceed 15% of American Savings' 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 did not exceed 15% of its assets. In 1996, these percentages
each were increased to 25%. In addition, prior to 1996, the percentage
limitation described above also applied to certain government and agency
obligations. As a result of the 1996 legislation, this limitation was deleted
for such obligations.
The 1996 legislation also expanded the ability of Connecticut banks to invest
in equity securities and equity mutual funds. Connecticut banks now 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 does 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 does not exceed 25%
of its assets. Prior to the enactment of this legislation, Connecticut banks
could invest up to 15% of their assets in equity securities and equity mutual
funds of corporations incorporated and doing a major portion of their business
in the U.S.
Recent Legislation. Connecticut legislation enacted in 1999 authorizes a new
form of Connecticut bank to be known as an uninsured bank. An uninsured bank
does not accept retail deposits and is not required to insure
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deposits with the Federal Deposit Insurance Corporation. The 1999 legislation
also 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 American Savings, 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).
The Federal Deposit Insurance Corporation has also adopted risk-based capital
guidelines to which American Savings 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
American Savings' "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 weighting of 100%.
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. See "Historical and Pro Forma Regulatory Capital
Compliance."
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As a savings and loan holding company regulated by the Office of Thrift
Supervision, American Financial will not be 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.
Most recently, the agencies have issued guidelines for Year 2000 computer
compliance. 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. Federal Deposit
Insurance Corporation Improvement Act and the Federal Deposit Insurance
Corporation regulations thereunder permit exceptions to these limitations. For
example, state chartered banks, such as American Savings, 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. In addition, the Federal
Deposit Insurance Corporation is authorized to permit such institutions to
engage in state authorized activities or investments that do not meet this
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. The Federal Deposit Insurance Corporation has recently adopted revisions
to its regulations governing the procedures for institutions seeking approval to
engage in such activities or investments. These revisions, among other things,
streamline the application procedures for healthy banks and impose quantitative
and qualitative restrictions on a bank's dealings with its subsidiaries engaged
in activities not permitted for national bank subsidiaries. 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. American Savings 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 American Savings or if American Savings converts its charter,
other than a mutual to stock conversion, or undergoes a change in control. As
of May 31, 1999, American Savings had $77.5 million of securities which were
held under such grandfathering authority. See "Business of American Savings--
Investment Activities."
Interstate Branching
Until recently, branching across state lines was not generally available to
a state bank such as American Savings. 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
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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, such as
American Savings, 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 deemed 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 a leverage 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 I 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 I risk-based capital ratio of less than 4%, or generally a leverage
ratio of less than 4%. An institution is deemed to be "significantly
undercapitalized" if it has a total risk-based capital ratio of less than 6%, a
Tier I 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 is equal to or less than 2%. As of May 31, 1999, American Savings was a
"well capitalized" institution and immediately upon completion of the Conversion
expects to be 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. 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.
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.
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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 American Savings' 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 American Savings. 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.
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 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 1980's to recapitalize the Federal Savings and
Loan Insurance Corporation. Bank Insurance Fund members are currently assessed
about 1.2 basis points, which is generally 20% of the amount charged Savings
Association Insurance Fund members. Effective January 1, 2000, full pro rata
sharing of the payments between Bank Insurance Fund and Savings Association
Insurance Fund members will occur. 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 American Savings.
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
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practices, or has violated any applicable law, regulation, rule, order or
condition imposed by the Federal Deposit Insurance Corporation. The management
of American Savings 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 $46.5 million or less (which may be adjusted by the Federal Reserve
Board) the reserve requirement is 3%; and for accounts greater than $46.5
million, the reserve requirement is $1.4 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 $46.5 million. The first $4.9 million of
otherwise reservable balances (which may be adjusted by the Federal Reserve
Board) are exempted from the reserve requirements. American Savings 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 non-member 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.
American Savings' latest Community Reinvestment Act rating, received from the
Federal Deposit Insurance Corporation was "Outstanding."
Federal Home Loan Bank System
American Savings 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. American
Savings, 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. American Savings was in compliance with this
requirement with an investment in Federal Home Loan Bank of Boston stock at May
31, 1999 of $10.4 million. At May 31, 1999, American Savings had $129.7 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
five months ended May 31, 1999 and 1998 and the years ended December 31, 1998,
1997 and 1996, cash dividends from the Federal Home Loan Bank of Boston to
American Savings amounted to approximately $301,000, $273,000, $572,000,
$540,000 and $543,000, 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 American Savings.
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Holding Company Regulation
Federal law allows a state savings bank that qualifies as a "Qualified
Thrift Lender," discussed below, to elect to be treated as a savings association
for purposes of the savings and loan holding company provisions of the Home
Owners' Loan Act. Such election results in its holding company being 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. American Savings
has made such election and expects to receive approval from the Office of Thrift
Supervision to become a savings and loan holding company. American Financial
will be regulated as a non-diversified unitary savings and loan holding company
within the meaning of the Home Owners' Loan Act. As such, American Financial
will be required to register with the Office of Thrift Supervision and will have
to adhere to the Office of Thrift Supervision's regulations and reporting
requirements. In addition, the Office of Thrift Supervision may examine and
supervise American Financial and the Office of Thrift Supervision has
enforcement authority over American Financial 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, American
Savings will be required to notify the Office of Thrift Supervision at least 30
days before declaring any dividend to American Financial.
Under current law, as a unitary savings and loan holding company, American
Financial generally would not be restricted under existing laws as to the types
of business activities in which it may engage. Upon any non-supervisory
acquisition by American Financial of another savings association as a separate
subsidiary, American Financial would become a multiple savings and loan holding
company and would have extensive 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 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 of American Financial 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), American Savings must qualify as a Qualified Thrift Lender. To qualify
as a Qualified Thrift Lender, American Savings 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 May 31, 1999 American Savings maintained in excess of 81%
of its
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portfolio assets in qualified thrift investments. American Savings also met the
Qualified Thrift Lender test in each of the prior 12 months and, therefore, met
the Qualified Thrift Lender test.
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.
Prospective Legislation
American Savings is, and American Financial, as a savings and loan holding
company will be, extensively regulated and supervised. Regulations, which
affect American Savings 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 American Financial,
American Savings, its operations or the Conversion.
Legislation enacted several years ago provided that the Bank Insurance Fund
and the Savings Association Insurance Fund would have merged on January 1, 1999
if there had been no more savings associations as of that date. Congress did
not enact legislation eliminating the savings association charter by that date.
Bills that were passed by both the House and Senate would subject unitary
savings and loan holding companies to the activities restrictions generally
applicable to multiple savings and loan holding companies. A grandfathering
provision would allow existing unitary savings and loan holding companies to
continue to engage in activities permitted a unitary savings and loan holding
company under existing law and that grandfathering could be transferred to
acquirers under certain circumstances. Unless the grandfather date in the bill
is changed, American Financial would not qualify for the grandfathering if the
legislation is enacted. American Savings is unable to predict whether the
legislation will be enacted or, given such uncertainty, determine the extent to
which the legislation, if enacted, would affect its business. American Savings
is also unable to predict whether the Savings Association Insurance Fund and
Bank Insurance Fund will eventually be merged.
Federal Securities Laws
American Financial has filed with the Securities and Exchange Commission a
registration statement under the Securities Act for the registration of the
common stock to be issued in the conversion. Upon completion of the conversion,
American Financial's common stock will be registered with the Securities and
Exchange Commission under the Exchange Act. American Financial will then have
to observe the information, proxy solicitation, insider trading restrictions and
other requirements under the Exchange Act.
The registration under the Securities Act of shares of the common stock to
be issued in the conversion does not cover the resale of such shares. Shares of
the common stock purchased by persons who are not affiliates of American
Financial may be resold without registration. The resale restrictions of Rule
144 under the Securities Act govern shares purchased by an affiliate of American
Financial. If American Financial meets the current public information
requirements of Rule 144 under the Securities Act, each affiliate of American
Financial who complies with the other conditions of Rule 144 (including those
that require the affiliate's sale to be aggregated with those of other persons)
would be able to sell in the public market, without registration, a number of
shares not to exceed, in any three-month period, the greater of (1) 1% of the
outstanding shares of American Financial or (2) the average weekly volume of
trading in such shares during the preceding four calendar weeks. Provision may
be made in the
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future by American Financial to permit affiliates to have their shares
registered for sale under the Securities Act under specific circumstances.
FEDERAL AND STATE TAXATION ON INCOME
Federal Income Taxation
General. American Financial and American Savings intend to report their
income on a calendar year basis using the accrual method of accounting. The
federal income tax laws apply to American Financial and American Savings in the
same manner as to other corporations with some exceptions, including
particularly American Savings' 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
American Savings or American Financial. American Savings' federal income tax
returns have been either audited or closed under the statute of limitations
through tax year 1994. For its 1998 tax year, American Savings' maximum federal
income tax rate was 35%.
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.
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 American Savings accumulated bad debt reserves
would not be recaptured into taxable income unless American Savings makes a
"non-dividend distribution" to American Financial as described below.
Distributions. If American Savings makes "non-dividend distributions" to
American Financial, they will be considered to have been made from American
Savings' unrecaptured tax bad debt reserves, including the balance of its
reserves as of December 31, 1987, to the extent of the "non-dividend
distributions," and then from American Savings' supplemental reserve for losses
on loans, to the extent of those reserves, and an amount based on the amount
distributed, but not more than the amount of those reserves, will be included in
American Savings' taxable income. Non-dividend distributions include
distributions in excess of American Savings' current and accumulated earnings
and profits, as calculated for federal income tax purposes, distributions in
redemption of stock, and distributions in partial or complete liquidation.
Dividends paid out of American Savings' current or accumulated earnings and
profits will not be so included in American Savings' taxable income.
The amount of additional taxable income triggered by a non-dividend is an
amount that, when reduced by the tax attributable to the income, is equal to the
amount of the distribution. Therefore, if American Savings makes a non-dividend
distribution to American Financial, approximately one and one-half times the
amount of the distribution not in excess of the amount of the reserves would be
includable in income for federal income tax purposes, assuming a 35% federal
corporate income tax rate. American Savings does not intend to pay dividends
that would result in a recapture of any portion of its bad debt reserves.
Connecticut Taxation
American Financial and its subsidiaries are subject to the Connecticut
Corporate Business tax. American Financial and its subsidiaries will be
eligible to file a combined Connecticut income tax return and will pay the
larger of the regular corporation business tax (income tax) or a capital stock
tax, but no less than a nominal minimum tax.
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Connecticut income tax is based on the federal taxable income before net
operating loss and special deductions of American Financial and its subsidiaries
and makes certain modifications 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.
Connecticut capital stock tax is computed as the average value of American
Financial's issued and outstanding capital stock, including treasury stock at
par or face value, fractional shares, scrip certificates convertible into stock
and amounts received on capital stock subscriptions plus the average value of
its surplus and undivided profit and the average value of its surplus reserves
less the average value of any deficit carried on its balance sheets and the
average value of any stock it owns in private corporations, including treasury
shares. The average capital calculated so computed is then multiplied by the
Connecticut capital tax rate of 0.31% per dollar not to exceed $1 million.
In May 1998 the State of Connecticut enacted legislation permitting the
formation of passive investment company subsidiaries by financial institutions.
This legislation exempts qualifying passive investment companies from the
Connecticut Corporate Business tax and excludes dividends paid from a passive
investment company from the taxable income of the parent financial institution.
American Savings' formation of a passive investment company in February 1999 is
expected to substantially eliminate the state income tax expense of American
Financial's and its subsidiaries. See "Business of American Savings--Subsidiary
Activities--ASB Mortgage Servicing Company" for a discussion of American
Savings' passive investment company. However, American Financial will remain
liable for the capital stock tax.
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SHARES TO BE PURCHASED BY MANAGEMENT WITH SUBSCRIPTION RIGHTS
The following table presents certain information as to the approximate
purchases of common stock by each director and executive officer of American
Savings, including their associates, as defined by applicable regulations. No
individual has entered into a binding agreement to purchase these shares and,
therefore, actual purchases could be more or less than indicated. Directors and
executive officers and their associates may not purchase more than 30% of the
shares sold in the conversion. For purposes of the following table, sufficient
shares are assumed to be available to satisfy subscriptions in all categories.
<TABLE>
<CAPTION>
Percent of Percent of
Shares at Shares at
Anticipated Anticipated Minimum Maximum
Number of Dollar of Estimated of Estimated
Shares to be Amount to be Valuation Valuation
Name Purchased (1) Purchased (1) Range Range
- ---- ------------- ------------- ---------------- ---------------
<S> <C> <C> <C> <C>
Charles S. Beach................................ 5,000 $ 50,000 0.02% 0.01%
Adolf G. Carlson................................ 2,000 20,000 0.01 0.01
Donald Davidson................................. 2,500 25,000 0.01 0.01
Norman E.W. Erickson............................ 25,000 250,000 0.09 0.07
Marie S. Gustin................................. 10,000 100,000 0.04 0.03
Fred M. Hollfelder.............................. 10,000 100,000 0.04 0.03
Joseph T. Hughes................................ 10,000 100,000 0.04 0.03
Mark E. Karp.................................... 40,000 400,000 0.15 0.11
Robert T. Kenney................................ 25,000 250,000 0.09 0.07
Steven T. Martin................................ 50,000 500,000 (2) 0.19 0.14
Harry N. Mazadoorian............................ 15,000 150,000 0.06 0.04
Geddes Parsons.................................. 1,000 10,000 0.00 0.00
Stanley W. Shepard.............................. 5,000 50,000 0.02 0.01
Jeffrey T. Witherwax............................ 50,000 500,000 (2) 0.19 0.14
Charles P. Ahern................................ 10,000 100,000 0.04 0.03
Charles J. Boulier, III......................... 12,500 125,000 0.05 0.03
Richard J. Moore................................ 10,000 100,000 0.04 0.03
Sheri C. Pasqualoni............................. 10,000 100,000 0.04 0.03
Peter N. Perugini............................... 15,000 150,000 0.06 0.04
------- ---------- ---- ----
All Directors and Executive Officers
as a Group (19 persons)(3)................... 308,000 $3,080,000 1.15% 0.85%
======= ========== ==== ====
</TABLE>
__________________________
(1) Includes proposed purchases with funds contained in the individual's Savings
Plan account. Does not include shares to be awarded under the employee
stock ownership plan and stock-based incentive plan or options to acquire
shares under the stock-based incentive plan.
(2) Such amount represents the maximum allowable purchase for such individual.
(3) Including the effect of shares issued to American Savings Charitable
Foundation, the aggregate beneficial ownership of all directors and
executive officers as a group would be 1.07% and 0.79% at the minimum and
maximum of the estimated valuation range, respectively.
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THE CONVERSION
The Board of Directors of American Savings, the Connecticut Banking
Commissioner of the State of Connecticut Department of Banking and American
Savings' corporators have approved the plan of conversion subject to the
satisfaction of certain other conditions. However, any approvals by the
Connecticut Banking Commissioner are not a recommendation or endorsement of the
plan of conversion.
General
On May 24, 1999, the Board of Directors of American Savings unanimously
adopted the plan of conversion, under which American Savings will be converted
from a Connecticut-chartered mutual savings bank to a Connecticut-chartered
stock savings bank to be held as a wholly owned subsidiary of American
Financial, a recently formed Delaware corporation. The plan of conversion was
subsequently amended on June 28, 1999 and July 22, 1999. The following
discussion of the plan of conversion contains all material terms about the
conversion. Nevertheless, readers are urged to read carefully the plan of
conversion, which is available upon request. The plan of conversion is also
filed as an exhibit to the registration statement that American Financial has
filed with the Securities and Exchange Commission. See "Where You Can Find More
Information." The Connecticut Banking Commissioner of the State of Connecticut
Department of Banking has approved the plan of conversion and American Savings
has received a notice of intent not to object to the plan of conversion from the
Federal Deposit Insurance Corporation, subject to certain conditions. If
American Savings fulfills these conditions, the Federal Deposit Insurance
Corporation will issue its final non-objection to the conversion. Additionally,
American Savings' corporators adopted the plan of conversion at a special
meeting called for that purpose on August 3, 1999.
The conversion will be accomplished through adoption of a Stock Certificate
of Incorporation and Bylaws to authorize the issuance of capital stock by
American Savings. As part of the conversion, American Savings will issue all of
its newly issued capital stock, or 1,000 shares of common stock, to American
Financial in exchange for 50% of the net proceeds from the sale of common stock
by American Financial. American Financial expects to receive approval from the
Office of Thrift Supervision to become a savings and loan holding company and to
acquire American Savings' capital stock.
The plan of conversion provides that the Board of Directors of American
Savings, at any time before the issuance of the common stock, may decide not to
use the holding company form of organization in implementing the conversion.
This decision may be made to avoid possible delays resulting from overlapping
regulatory processing, or policies or conditions, which could hurt American
Savings' or American Financial's ability to complete the conversion and transact
its business after the conversion as is contemplated and in accordance with
American Savings' operating policies. If such a decision is made, American
Savings will withdraw American Financial's registration statement from the
Securities and Exchange Commission and will take all steps necessary to complete
the conversion without American Financial, including filing any necessary
documents. In such event, if American Savings determines to complete the
conversion, if permitted by the Connecticut Banking Commissioner, American
Savings will issue and sell its common stock and subscribers will be notified of
the elimination of American Financial and be permitted to affirm, modify or
rescind their orders. Subscribers will need to reconfirm their subscriptions
before the end of the resolicitation offering or their funds will be refunded
with interest. The following description of the plan of conversion assumes that
a holding company form of organization will be used in the conversion. If a
holding company form of organization is not used, all other pertinent terms of
the plan of conversion as described below will apply to the conversion of
American Savings from the mutual to stock form of organization and the sale of
American Savings' common stock.
The plan of conversion provides generally that: American Savings will convert
from a Connecticut-chartered mutual bank to a Connecticut-chartered stock
savings bank; the common stock will be offered by American Financial in the
subscription offering to persons having subscription rights; if necessary,
shares of common stock not subscribed for in the subscription offering will be
offered in a direct community offering to certain members of the general public,
with preference given to natural persons residing in Hartford, Middlesex,
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Tolland and Windham counties, Connecticut, and then to certain members of the
general public in a syndicated community offering through a syndicate of
registered broker-dealers under selected dealer agreements; and American
Financial will purchase all of the capital stock of American Savings to be
issued in the conversion.
As part of the conversion, American Financial is making a subscription
offering of its common stock to holders of subscription rights in the following
order of priority: (1) holders of savings accounts with $50 or more on deposit
as of December 31, 1997; (2) American Savings' employee stock ownership plan;
(3) holders of savings accounts of American Savings with $50 or more on deposit
as of September 30, 1999, other than American Savings' officers, directors and
employees; (4) directors, officers and employees of American Savings who do not
have a higher subscription priority; and (5) corporators of American Savings'
who do not have a higher subscription priority.
Shares of common stock not subscribed for in the subscription offering are
expected to be offered for sale in the direct community offering. The direct
community offering, if one is held, is expected to begin at the same time as the
subscription offering. Shares of common stock not sold in the subscription and
direct community offerings may be offered in the syndicated community offering.
Regulations require that the direct community and syndicated community offerings
be completed within 45 days after completion of the fully extended subscription
offering unless extended by American Savings or American Financial with the
approval of the regulatory authorities. If the syndicated community offering is
not feasible, the Board of Directors of American Savings will consult with the
regulatory authorities to determine an appropriate alternative method for
selling the unsubscribed shares of common stock. The plan of conversion provides
that the conversion must be completed within 24 months after the date of the
approval of the plan of conversion by the Board of Directors of American
Savings.
The completion of the offering, however, depends on market conditions and
other factors beyond American Savings' control. No assurance can be given as to
the length of time that will be required to complete the direct community or
syndicated community offerings or other sale of the common stock. If delays are
experienced, significant changes may occur in the estimated pro forma market
value of American Financial and American Savings as converted, together with
corresponding changes in the net proceeds realized by American Financial from
the sale of the common stock. If the conversion is terminated, American Savings
would be required to charge all conversion expenses against current income.
Orders for shares of common stock will not be filled until at least
26,732,500 shares of common stock have been subscribed for, the Connecticut
Banking Commissioner approves the final valuation, the Federal Deposit Insurance
Corporation issues its final non-objection and the Office of Thrift Supervision
approves the acquisition of American Savings by American Financial. If the
conversion is not completed within 45 days after the last day of the fully
extended subscription offering and the Connecticut Banking Commissioner consents
to an extension of time to complete the conversion, subscribers will be given
the right to increase, decrease or rescind their subscriptions. Unless an
affirmative indication is received from subscribers that they wish to continue
to subscribe for shares, the funds will be returned promptly, together with
accrued interest at American Savings' passbook rate from the date payment is
received until the funds are returned to the subscriber. If the period is not
extended, or, in any event, if the conversion is not completed, all withdrawal
authorizations will be terminated and all funds held will be promptly returned
together with accrued interest at American Savings' passbook rate from the date
payment is received until the conversion is terminated.
Establishment of the Charitable Foundation
General. In furtherance of American Savings' commitment to its local
community, the plan of conversion provides for the establishment of a charitable
foundation in connection with the conversion. The plan of conversion provides
that American Savings and American Financial will establish American Savings
Charitable Foundation, and will fund it with American Financial common stock, as
further described below. American Financial and American Savings believe that
the funding of American Savings Charitable Foundation with American Financial
common stock is a means of establishing a common bond between American Savings
and its community and thereby enables American Savings' community to share in
the potential growth and success of American Financial
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over the long-term. By further enhancing American Savings' visibility and
reputation in its local community, American Savings believes that the foundation
will enhance the long-term value of American Savings' community banking
franchise.
Purpose of American Savings Charitable Foundation. In recent years, American
Savings has emphasized community lending and community activities within its
local community. In 1995, American Savings formed American Savings Bank
Foundation, Inc., a charitable foundation that provides grants to charitable
organizations that focus primarily on children and education and scholarships to
qualified students in the communities in which American Savings operates.
However, after the conversion, American Savings Bank Foundation, Inc. may decide
to dedicate its funding exclusively to provide scholarships to qualified
students in its local communities. See "Business of American Savings--American
Savings Bank Foundation, Inc."
American Savings Charitable Foundation is being formed to complement, not to
replace American Savings' existing community activities and its existing
foundation's activities. American Savings intends to continue to emphasize
community lending and community activities following the conversion. However,
such activities are not American Savings' sole corporate purpose. American
Savings Charitable Foundation, conversely, will be completely dedicated to
community activities and the promotion of charitable causes, and may be able to
support such activities in manners that are not presently available to American
Savings. American Savings believes that American Savings Charitable Foundation
will enable American Financial and American Savings to assist within the
communities in which American Savings operates in areas beyond community
development and lending and will enhance its current activities under the CRA.
American Savings received an "Outstanding" CRA rating in its last CRA
examination by the Federal Deposit Insurance Corporation. American Savings'
latest CRA rating received from the Connecticut Banking Commissioner was
"Satisfactory."
The Board of Directors believes the establishment of the charitable
foundation is consistent with American Savings' commitment to community service.
The Board further believes that the funding of American Savings Charitable
Foundation with American Financial common stock will allow American Savings'
community to share in the potential growth and success of American Financial
long after the conversion. American Savings Charitable Foundation will
accomplish that goal by providing for continued ties between it and American
Savings, thereby forming a partnership within the communities in which American
Savings operates.
American Savings, however, does not expect the contribution to American
Savings Charitable Foundation to take the place of American Savings' traditional
community lending and charitable activities. For the years 1998, 1997 and 1996,
American Savings contributed $4.0 million, $2.4 million and $2.3 million,
respectively, to community organizations and to American Savings Bank
Foundation, Inc. American Savings expects to continue making charitable
contributions within its communities. Upon conversion, American Financial
intends to contribute to American Savings Charitable Foundation shares of its
common stock equal to 8% of the common stock sold in the conversion, or stock
valued at $28.9 million based on the purchase price of $10.00 per share, at the
maximum of the estimated valuation range. If the number of shares sold in the
conversion is increased to 41,592,625 shares, American Financial intends to
contribute to American Savings Charitable Foundation stock valued at $33.3
million, based on the purchase price of $10.00 per share. The conversion
presents American Savings and American Financial with a unique opportunity to
provide a substantial and continuing benefit to the communities in which
American Savings operates, and to receive the associated tax benefits, without
any significant cash cost to American Savings.
Structure of American Savings Charitable Foundation. American Savings
Charitable Foundation will be incorporated under Delaware law as a non-stock
corporation. Under its Bylaws, American Savings Charitable Foundation's Board
of Directors will be comprised of between seven and 12 members, all of whom will
be existing or former directors or officers of American Financial or American
Savings. The Certificate of Incorporation of American Savings Charitable
Foundation will provide that the corporation is organized exclusively for
charitable purposes, including community development, as set forth in Section
501(c)(3) of the Internal Revenue Code. American Savings Charitable
Foundation's Certificate of Incorporation will further provide that no part of
the net earnings of the foundation will inure to the benefit of, or be
distributable to, its directors, officers or members.
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The Board of Directors of American Savings Charitable Foundation will be
responsible for establishing its grant and donation policies, consistent with
the purposes for which it was established. As directors of a nonprofit
corporation, directors of American Savings Charitable Foundation will at all
times be bound by their fiduciary duty to advance American Savings Charitable
Foundation's charitable goals, to protect its assets and to act in a manner
consistent with the charitable purpose for which American Savings Charitable
Foundation is established. The Directors of American Savings Charitable
Foundation will also be responsible for directing the activities of the
foundation, including the management of the common stock of American Financial
held by American Savings Charitable Foundation. However, all shares of common
stock held by American Savings Charitable Foundation will be voted in the same
ratio as all other shares of the common stock on all proposals considered by
stockholders of American Financial.
American Savings Charitable Foundation's place of business will be located at
American Financial's administrative offices. The Board of Directors of American
Savings Charitable Foundation will appoint such officers and employees as may be
necessary to manage its operations.
American Financial intends to capitalize American Savings Charitable
Foundation with common stock equal to 8% of the common stock sold in the
conversion. This would range from 2,138,600 shares, assuming 26,732,500 shares
are sold in the conversion, to 2,893,400 shares assuming 36,167,500 shares are
sold in the conversion. The market value of the shares would range from $21.4
million to $28.9 million assuming a purchase price of $10.00 per share. If the
number of shares to be issued in the conversion is increased to 44,920,035
shares, the foundation would be funded with 3,327,410 shares of common stock.
American Savings Charitable Foundation will receive working capital from any
dividends that may be paid on American Financial's common stock in the future,
and within the limits of applicable federal and state laws, loans collateralized
by the common stock or from the proceeds of the sale of any of the common stock
in the open market from time to time as may be permitted to provide it with
additional liquidity. As a private foundation under Section 501(c)(3) of the
Internal Revenue Code, American Savings Charitable Foundation will be required
to distribute annually in grants or donations, a minimum of 5% of the average
fair market value of its net investment assets. One of the conditions imposed
on the gift of common stock by American Financial is that the amount of common
stock that may be sold by American Savings Charitable Foundation in any one year
shall not exceed 5% of the average market value of the assets held by American
Savings Charitable Foundation, except where the Board of Directors of American
Savings Charitable Foundation determines that the failure to sell an amount of
common stock greater than such amount would result in a long-term reduction of
the value of its assets and/or would otherwise jeopardize its capacity to carry
out its charitable purposes. Upon completion of the conversion and the
contribution of shares to American Savings Charitable Foundation immediately
following the conversion, American Financial would have 28,871,100, 33,966,000,
39,060,900 and 44,920,035 shares issued and outstanding at the minimum,
midpoint, maximum and 15% above the maximum of the estimated valuation range.
Because American Financial will have an increased number of shares outstanding,
the voting and ownership interests of shareholders in American Financial's
common stock would be diluted by 7.4%, compared to their interests in American
Financial if American Savings Charitable Foundation was not established. For
additional discussion of the dilutive effect, see "Pro Forma Data."
Tax Considerations. American Financial and American Savings have been
advised by their independent tax advisors that an organization created for the
above purposes should qualify as a Section 501(c)(3) exempt organization under
the Code, and should be classified as a private foundation. American Savings
Charitable Foundation will submit a request to the Internal Revenue Service to
be recognized as an exempt organization. As long as American Savings Charitable
Foundation files its application for tax-exempt status within 15 months from the
date of its organization, and provided the Internal Revenue Service approves the
application, its effective date as a Section 501(c)(3) organization will be the
date of its organization. American Financial's independent tax advisors,
however, have not rendered any advice on the regulatory condition to the
contribution agreed to by American Savings Charitable Foundation which requires
that all shares of common stock of American Financial held by American Savings
Charitable Foundation must be voted in the same ratio as all other outstanding
shares of common
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stock of American Financial on all proposals considered by stockholders of
American Financial. See "--Regulatory Conditions Imposed on American Savings
Charitable Foundation."
Under Delaware law, American Financial is authorized by statute to make
charitable contributions and case law has recognized the benefits of such
contributions to a Delaware corporation. In this regard, Delaware case law
provides that a charitable gift must be within reasonable limits as to amount
and purpose to be valid. Under the Internal Revenue Code, American Financial
and its subsidiaries may deduct up to 10% of its consolidated taxable income
before the charitable contribution deduction in any one year and any
contributions made by American Financial and its subsidiaries in excess of the
deductible amount will be deductible over each of the five succeeding taxable
years, subject to a 10% limitation each year. American Financial and American
Savings believe that the conversion presents a unique opportunity to establish
and fund a charitable foundation given the substantial amount of additional
capital being raised. In making such a determination, American Financial and
American Savings considered the dilutive impact of the contribution of common
stock to American Savings Charitable Foundation on the amount of common stock to
be sold in the conversion. Based on such consideration, American Financial and
American Savings believe that the contribution to American Savings Charitable
Foundation in excess of the 10% annual limitation is justified given American
Savings' capital position and its earnings, the substantial additional capital
being raised in the conversion and the potential benefits of American Savings
Charitable Foundation within the communities in which American Savings operates.
See "Historical and Pro Forma Regulatory Capital Compliance," "Capitalization,"
and "Comparison of Independent Valuation and Pro Forma Financial Information
With and Without the Foundation." Thus, the amount of the contribution will not
adversely impact the financial condition of American Financial and American
Savings. American Financial and American Savings therefore believe that the
amount of the charitable contribution is reasonable given American Financial's
and American Savings' pro forma capital positions and does not raise safety and
soundness concerns.
American Financial and American Savings have received an opinion from their
independent tax advisors that American Financial's contribution of its own stock
to American Savings Charitable Foundation should not constitute an act of self-
dealing, and that American Financial should be entitled to a deduction in the
amount of the fair market value of the stock at the time of the contribution
less the nominal amount that American Savings Charitable Foundation is required
to pay American Financial for such stock. A 10% limitation of American
Financial's annual taxable income before the charitable contribution deduction
applies to such deduction. American Financial should be able to carry forward
for federal and state income tax purposes any unused portion of the deduction
for five years following the contribution. American Financial is permitted
under the Internal Revenue Code to carry the excess contribution over the five
year period following the contribution to American Savings Charitable
Foundation. American Financial estimates that substantially all of the
contribution should be deductible over the six-year period. However, American
Financial does not have any assurance that the Internal Revenue Service will
grant tax-exempt status to the foundation. Furthermore, even if the
contribution is deductible, American Financial may not have sufficient earnings
to be able to use the deduction in full. Neither American Financial nor
American Savings expect to make any further contributions to American Savings
Charitable Foundation or American Savings Bank Foundation, Inc. within the first
five years following the initial contribution, unless such contributions would
be deductible under the Internal Revenue Code. Any such decisions would be
based on an assessment of, among other factors, the financial condition of
American Financial and American Savings at that time, the interests of
shareholders and depositors of American Financial and American Savings, and the
financial condition and operations of American Savings Charitable Foundation.
Although American Financial and American Savings have received an opinion
from their independent tax advisors that American Financial should be entitled
to a deduction for the charitable contribution, there can be no assurances that
the Internal Revenue Service will recognize American Savings Charitable
Foundation as a Section 501(c)(3) exempt organization or that the deduction will
be permitted. In such event, American Financial's tax benefit related to the
contribution to American Savings Charitable Foundation would be expensed without
tax benefit, resulting in a reduction in earnings in the year in which the
Internal Revenue Service makes such a determination. See "Risk Factors--The
contribution to the foundation may not be tax deductible, which could hurt
American Savings' earnings."
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As a private foundation, earnings and gains, if any, from the sale of common
stock or other assets are exempt from federal and state corporate taxation.
However, investment income, such as interest, dividends and capital gains, is
generally taxed at a rate of 2.0%. American Savings Charitable Foundation will
be required to make an annual filing with the Internal Revenue Service within
four and one-half months after the close of its fiscal year to maintain its tax-
exempt status. American Savings Charitable Foundation will be required to make
its annual information return available for public inspection for a three-year
period. The information return for a private foundation must include, among
other things, an itemized list of all grants made or approved, showing the
amount of each grant, the recipient, any relationship between a grant recipient
and the foundation's managers and a concise statement of the purpose of each
grant.
Regulatory Conditions Imposed on American Savings Charitable Foundation.
Establishment of American Savings Charitable Foundation is subject to the
following conditions to be agreed to by American Savings Charitable Foundation
in writing as a condition to receiving the Federal Deposit Insurance
Corporation's non-objection to the conversion:
1. the Federal Deposit Insurance Corporation can examine the foundation;
2. the foundation must comply with supervisory directives imposed by the
Federal Deposit Insurance Corporation;
3. the foundation will operate according to written policies adopted by
its board of directors, including a conflict of interest policy
acceptable to the Federal Deposit Insurance Corporation;
4. the foundation will give a proposed operating plan to the Federal
Deposit Insurance Corporation before the completion of the conversion;
5. the foundation will provide annual reports to the Federal Deposit
Insurance Corporation describing the grants made and the grant
recipients; and
6. any shares of American Financial common stock held by American Savings
Charitable Foundation must be voted in the same ratio as all other
shares of American Financial common stock voted on each and every
proposal considered by the stockholders of American Financial.
Reasons for the Conversion
The Board of Directors and management believe that the conversion is in the
best interests of American Savings, its customers, employees and the communities
it serves. American Savings' Board of Directors has formed American Financial to
serve as a holding company, with American Savings as its subsidiary, after the
conversion. By converting to the stock form of organization, American Financial
and American Savings will be structured in the form used by holding companies of
commercial banks, most business entities and by a growing number of savings
institutions. Management of American Savings believes that the conversion offers
a number of advantages which will be important to the future growth and
performance of American Savings. The capital raised in the conversion is
intended to support American Savings' future lending and operational growth and
may also support possible future branching activities or the acquisition of
other financial institutions or financial service companies or their assets and
to increase its ability to render services to the communities it serves. With
the exception of American Savings' strategic plan to acquire or establish an
insurance agency, there are no current specific plans, arrangements or
understandings, written or oral, regarding these activities. The conversion is
also expected to afford American Savings' management, members and others the
opportunity to become stockholders of American Financial and participate more
directly in, and contribute to, any future growth of American Financial and
American Savings. The conversion will also enable American Financial and
American Savings to raise additional capital in the public equity or debt
markets should the need arise, although there are no current specific plans,
arrangements or understandings, written or oral, regarding any financing
activities. American Savings, as a mutual savings bank, does not have the
authority to issue capital stock or debt instruments, other than by accepting
deposits.
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Effects of Conversion to Stock Form
General. Each depositor in a mutual savings bank has both a deposit
account in the institution and a pro rata ownership interest in the net worth of
the institution based upon the balance in his or her account, which interest may
only be realized if the institution is liquidated. However, this ownership
interest is tied to the depositor's account and has no value separate from such
deposit account. Any depositor who opens a deposit account obtains a pro rata
ownership interest in the net worth of the institution without any additional
payment beyond the amount of the deposit. A depositor who reduces or closes his
account receives a portion or all of the balance in the account but nothing for
his ownership interest in the net worth of the institution, which is lost to the
extent that the balance in the account is reduced.
Consequently, mutual savings bank depositors normally realize the value of
their ownership interest only in the unlikely event that the mutual savings bank
is liquidated. In such event, the depositors of record at that time, as owners,
would be able to share in any residual surplus and reserves after other claims,
including claims of depositors to the amounts of their deposits, are paid.
When a mutual savings bank converts to stock form, depositors lose all
rights to the net worth of the mutual savings bank, except the right to claim a
pro rata share of funds representing the liquidation account established in
connection with the conversion. Additionally, permanent nonwithdrawable capital
stock is created and offered to depositors which represents the ownership of the
institution's net worth. The common stock is separate and apart from deposit
accounts and cannot be and is not insured by the Federal Deposit Insurance
Corporation or any other governmental agency. Certificates are issued to
evidence ownership of the permanent stock. The stock certificates are
transferable, and therefore the stock may be sold or traded if a purchaser is
available with no effect on any deposit account the seller may hold in the
institution.
No assets of American Financial or American Savings will be distributed in
connection with the conversion other than the payment of those expenses incurred
in connection with the conversion.
Continuity. While the conversion is being accomplished, the normal
business of American Savings will continue without interruption, including being
regulated by the Connecticut Banking Commissioner and the Federal Deposit
Insurance Corporation. After conversion, American Savings will continue to
provide services for depositors and borrowers under current policies by its
present management and staff.
The Directors of American Savings at the time of conversion will serve as
directors of American Savings after the conversion. The Directors of American
Financial will be solely composed of individuals who served on the Board of
Directors of American Savings. All officers of American Savings at the time of
conversion will retain their positions after the conversion.
Savings Accounts and Loans. American Savings' savings accounts, account
balances and existing Federal Deposit Insurance Corporation insurance coverage
of savings accounts will not be affected by the conversion. Furthermore, the
conversion will not affect the loan accounts, loan balances or obligations of
borrowers under their individual contractual arrangements with American Savings.
Effect on Voting Rights of Corporators. American Savings presently
maintains a governing board of 49 corporators. Generally, corporators consist
of depositors of American Savings who are residents of the communities served by
American Savings. Corporators are nominated by American Savings' nominating
committee and elected by ballot at corporators' meetings. Generally,
corporators promote the goodwill of American Savings and consists, therefore, of
individuals who are successful in their occupations and respected in their
communities. Corporators also possess certain voting rights in American
Savings. Upon conversion, corporators will no longer be entitled to vote at
meetings of American Savings. Instead, American Financial, as the sole
stockholder of American Savings, will possess all voting rights in American
Savings. The holders of the common stock of American Financial will possess all
voting rights in American Financial. Depositors of American Savings will not
have voting rights after the conversion except to the extent that they become
stockholders of American Financial by purchasing common
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stock. American Savings intends to establish a community advisory board which
may consist of former corporators of American Savings.
Tax Effects. American Savings has received an opinion from Muldoon, Murphy
& Faucette LLP, Washington, D.C., that addresses all the material federal income
tax consequences of the conversion. The opinion, which relies upon factual
representations given by American Savings, concludes that the conversion will
constitute a nontaxable reorganization under Section 368(a)(1)(F) of the
Internal Revenue Code of 1986, as amended. Among other things, the opinion
states that:
1. no gain or loss will be recognized to American Savings in its mutual
or stock form by reason of the conversion;
2. no gain or loss will be recognized to its account holders upon the
issuance to them of accounts in American Savings immediately after the
conversion, in the same dollar amounts and on the same terms and
conditions as their accounts at American Savings in its mutual form
plus interest in the liquidation account;
3. the tax basis of account holders' accounts in American Savings
immediately after the conversion will be the same as the tax basis of
their accounts immediately before conversion;
4. the tax basis of each account holder's interest in the liquidation
account will be equal to the value, if any, of that interest;
5. the tax basis of the common stock purchased in the conversion will be
the amount paid and the holding period for the stock will begin on the
date of purchase; and
6. no gain or loss will be recognized to account holders upon the receipt
or exercise of subscription rights in the conversion, except if
subscription rights are deemed to have value as discussed below.
Unlike a private letter ruling issued by the Internal Revenue Service, an
opinion of counsel is not binding on the Internal Revenue Service and the
Internal Revenue Service could disagree with the conclusions reached in the
opinion. If there is a disagreement, no assurance can be given that the
conclusions reached in an opinion of counsel would be sustained by a court if
contested by the Internal Revenue Service.
Based upon past rulings issued by the Internal Revenue Service, the opinion
provides that the receipt of subscription rights by eligible account holders,
supplemental eligible account holders and other individuals under the plan of
conversion will be taxable if the subscription rights are deemed to have a fair
market value. FinPro, whose findings are not binding on the Internal Revenue
Service, has issued a letter indicating that the subscription rights do not have
any value, based on the fact that the rights are acquired by the recipients
without cost, are nontransferable and of short duration and afford the
recipients the right only to purchase shares of the common stock at a price
equal to its estimated fair market value, which will be the same price paid by
purchasers in the direct community offering for unsubscribed shares of common
stock. If the subscription rights are deemed to have a fair market value, the
receipt of the rights may only be taxable to those persons who exercise their
subscription rights. American Savings could also recognize a gain on the
distribution of subscription rights. Holders of subscription rights are
encouraged to consult with their own tax advisors as to the tax consequences if
the subscription rights are deemed to have a fair market value.
American Savings has also received an opinion from KPMG LLP, Hartford,
Connecticut, that, assuming the conversion does not result in any federal income
tax liability to American Savings, its account holders, or American Financial,
implementation of the plan of conversion will not result in any Connecticut
income tax liability to those entities or persons.
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The opinions of Muldoon, Murphy & Faucette LLP and KPMG LLP, and the letter
from FinPro are filed as exhibits to the registration statement that American
Financial has filed with the Securities and Exchange Commission. See "Where You
Can Find More Information."
Prospective investors are urged to consult with their own tax advisors
regarding the tax consequences of the conversion particular to them.
Liquidation Account. In the unlikely event of a complete liquidation of
American Savings, before the conversion, each depositor in American Savings
would receive a pro rata share of any assets of American Savings remaining after
payment of claims of all creditors, including the claims of all depositors up to
the withdrawal value of their accounts. Each depositor's pro rata share of the
remaining assets would be in the same proportion as the value of his or her
deposit account to the total value of all deposit accounts in American Savings
at the time of liquidation.
After the conversion, holders of withdrawable deposit(s) in American
Savings, including certificates of deposit, shall not be entitled to share in
any residual assets upon liquidation of American Savings. However, under the
Connecticut Conversion regulations, American Savings shall, at the time of the
conversion, establish a liquidation account in an amount equal to the amount of
its equity capital, less any subordinated debt approved as bona fide capital of
American Savings, as of the latest practicable date prior to the conversion.
The liquidation account shall be maintained by American Savings for a
period of ten years after the conversion for the benefit of eligible account
holders and supplemental eligible account holders who retain their deposit
accounts in American Savings. Each eligible account holder and supplemental
eligible account holder shall, with respect to each deposit account held, have a
related inchoate interest in a sub-account portion of the liquidation account
balance.
The initial subaccount balance for a deposit account held by an eligible
account holder or a supplemental eligible account holder shall be determined by
multiplying the opening balance in the liquidation account by a fraction of
which the numerator is the amount of the holder's "qualifying deposit" in the
deposit account and the denominator is the total amount of the "qualifying
deposits" of all eligible or supplemental eligible account holders. The initial
subaccount balance shall not be increased, and it shall be decreased as provided
below.
If the deposit balance in any deposit account of an eligible account holder
or supplemental eligible account holder at the close of business on any annual
closing day of American Savings after December 31, 1997, or September 30, 1999
is less than the lesser of the deposit balance in such deposit account at the
close of business on any other annual closing date after December 31, 1997 or
September 30, 1999, or the amount of the "qualifying deposit" in such deposit
account on December 31, 1997 or September 30, 1999, then the subaccount balance
for such deposit account shall be adjusted by reducing the subaccount balance in
an amount proportionate to the reduction in the deposit balance. Once reduced,
the subaccount balance shall not be subsequently increased, notwithstanding any
increase in the deposit balance of the related deposit account. If any deposit
account is closed, the related subaccount balance shall be reduced to zero.
Only upon a complete liquidation of American Savings, each eligible account
holder and supplemental eligible account holder shall be entitled to receive a
liquidation distribution from the liquidation account in the amount of the then
current adjusted subaccount balance(s) for deposit account(s) held by the holder
before any liquidation distribution may be made to stockholders. No merger,
consolidation, bulk purchase of assets with assumptions of deposit account and
other liabilities or similar transactions with another federally insured
institution in which American Savings is not the surviving institution shall be
considered to be a complete liquidation. In any of these transactions, the
liquidation account shall be assumed by the surviving institution.
In the unlikely event American Savings is liquidated after the conversion,
depositors will be entitled to full payment of their deposit accounts before any
payment is made to American Financial as the sole stockholder of American
Savings.
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The liquidation account will be a memorandum account on the books of
American Savings and will not be reflected in the audited or unaudited
consolidated financial statements of American Financial or in American Savings'
regulatory reports.
The Subscription, Direct Community and Syndicated Community Offerings
Subscription Offering. Under the plan of conversion, nontransferable
subscription rights to purchase the common stock have been issued to persons and
entities entitled to purchase the common stock in the subscription offering. The
amount of the common stock which these parties may purchase will depend on the
availability of the common stock for purchase under the categories described in
the plan of conversion. Subscription priorities have been established for the
allocation of stock that may be available. These priorities are as follows:
Category 1: Eligible Account Holders. Each depositor with a savings
account of $50 or more on deposit at American Savings as of December 31, 1997
will receive nontransferable subscription rights to subscribe for up to a
maximum of $500,000 worth of common stock, so long as the share equivalent of
such dollar amount does not exceed one-half of one percent (0.50%) of the total
number of shares offered in the conversion. If the exercise of subscription
rights in this category results in an oversubscription, shares of common stock
will be allocated among subscribing eligible account holders so as to permit
each one, if possible, to purchase a number of shares sufficient to make the
person's total allocation equal 100 shares or the number of shares actually
subscribed for, whichever is less. After that, unallocated shares will be
allocated proportionately, based on the amount of the eligible account holder's
qualifying deposits compared to total qualifying deposits of all subscribing
eligible account holders whose subscriptions remain unsatisfied. If the amount
so allocated exceeds the amount subscribed for by any one or more eligible
account holders, the excess shall be reallocated, one or more times as
necessary, among those eligible account holders whose subscriptions are still
not fully satisfied on the same principle until all shares have been allocated
or all subscriptions satisfied. Subscription rights received by officers,
directors, corporators and their associates in this category based on any
increased deposits in American Savings in the one year period preceding December
31, 1997 are subordinated to the subscription rights of other eligible account
holders.
Category 2: Employee Stock Ownership Plan. The plan of conversion provides
that the employee stock ownership plan shall receive nontransferable
subscription rights to purchase up to 5% of the shares of common stock sold in
the conversion. If the plan's subscription is not filled in its entirety, the
employee stock ownership plan may purchase shares in the open market or may
purchase shares directly from American Financial. Additionally, the employee
stock ownership plan currently intends to purchase shares of common stock in the
open market after the effective date of the conversion to enable it to acquire,
together with the shares acquired in the subscription offering, up to 8% of the
outstanding shares of American Financial common stock or 2,309,688 shares and
3,124,872 shares at the minimum and maximum of the estimated valuation range.
Category 3: Supplemental Eligible Account Holders. To the extent there are
sufficient shares of common stock remaining after the satisfaction of
subscriptions by eligible account holders and the employee stock ownership plan,
each depositor with a deposit account of $50 or more on deposit as of September
30, 1999 will receive nontransferable subscription rights to subscribe for up to
the maximum of $500,000 worth of common stock, so long as the share equivalent
of such dollar amount does not exceed one-half of one percent (0.50%) of the
total number of shares offered in the conversion. If the exercise of
subscription rights in this category results in an oversubscription, shares of
common stock will be allocated among subscribing supplemental eligible account
holders so as to permit each supplemental eligible account holder, if possible,
to purchase a number of shares sufficient to make his or her total allocation
equal 100 shares or the number of shares actually subscribed for, whichever is
less. After that, unallocated shares will be allocated among subscribing
supplemental eligible account holders proportionately, based on the amount of
their respective qualifying deposits compared to total qualifying deposits of
all subscribing supplemental eligible account holders whose subscriptions remain
unsatisfied. If the amount so allocated exceeds the amount subscribed for by
any one or more supplemental eligible account holders, the excess shall be
reallocated, one or more times as necessary, among those supplemental eligible
account holders whose subscriptions are still not fully satisfied on the same
principle until all shares have been allocated or all subscriptions satisfied.
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Category 4: Directors, Officers and Employees. To the extent there are
sufficient shares of common stock remaining after the satisfaction of
subscriptions by eligible account holders, the employee stock ownership plan and
supplemental eligible account holders, directors, officers and employees of
American Savings who are not eligible account holders shall receive
nontransferable subscription rights to subscribe for up to $500,000 of common
stock, so long as the share equivalent of such dollar amount does not exceed
one-half of one percent (0.50%) of the total number of shares offered in the
conversion.
Category 5: Corporators. To the extent there are sufficient shares of
common stock remaining after the satisfaction of subscriptions by eligible
account holders, the employee stock ownership plan, supplemental eligible
account holders and directors, officers and employees, corporators, who are not
eligible account holders or supplemental eligible account holders, shall receive
nontransferable subscription rights to subscribe for up to $500,000 of common
stock, so long as the share equivalent of such dollar amount does not exceed
one-half of one percent (0.50%) of the total number of shares offered in the
conversion.
Subscription rights are nontransferable. Persons selling or otherwise
transferring their rights to subscribe for common stock in the subscription
offering or subscribing for common stock on behalf of another person may forfeit
those rights and may face possible further sanctions and penalties imposed by
the State of Connecticut Department of Banking, the Federal Deposit Insurance
Corporation or another agency of the U.S. Government. Stock purchased in the
subscription offering must be registered in the name(s) of the registered
account holder(s) and failure to do so will result in the rejection of the
order. Joint registrations will be allowed only if the qualifying account is so
registered. Each person exercising subscription rights will be required to
certify that he or she is purchasing shares solely for his or her own account
and that he or she has no agreement or understanding with any other person for
the sale or transfer of the shares. Once tendered, subscription orders cannot be
revoked without the consent of American Savings and American Financial.
American Financial and American Savings will make reasonable attempts to
provide a prospectus and related offering materials to holders of subscription
rights. However, the subscription offering and all subscription rights under the
plan of conversion will expire at 4:00 p.m., Eastern time, on November 9, 1999,
whether or not American Savings has been able to locate each person entitled to
subscription rights. Orders for common stock in the subscription offering
physically received by American Savings after that time will not be accepted.
The subscription offering may be extended by American Financial and American
Savings up to December 3, 1999 without regulatory approval. The Connecticut
conversion regulations require that American Financial complete the sale of
common stock within 45 days after the close of the subscription offering unless
extended by the Connecticut Banking Commissioner. If regulatory approval of an
extension of the time period has been granted, all subscribers will be notified
of the extension and of the duration of any extension that has been granted, and
will be given the right to increase, decrease or rescind their orders. If an
affirmative response to any resolicitation is not received by American Financial
from a subscriber, the subscriber's order will be rescinded and all funds
received will be promptly returned with interest, or withdrawal authorizations
will be canceled. No single extension can exceed 90 days.
Direct Community Offering. Any shares of common stock which remain
unsubscribed for in the subscription offering will be offered by American
Financial to certain members of the general public in a direct community
offering, with preference given to natural persons residing in Hartford,
Middlesex, Tolland and Windham counties, Connecticut. Purchasers in the direct
community offering are eligible to purchase up to $500,000 of common stock,
which equals 50,000 shares. This amount may be increased up to 5% of the total
offering of shares without further approval of the American Savings' corporators
or a resolicitation of subscribers unless required by the Connecticut Banking
Commissioner or the Federal Deposit Insurance Corporation. If the purchase
limit is increased to 5% of the total offering of shares, orders accepted in the
direct community offering shall be filled up to a maximum of 2% of the total
offering and thereafter shall be allocated on a pro rata basis per order until
all orders have been filled or all of the remaining shares have been allocated.
The direct community offering, if held, may be concurrent with, during or
promptly after the subscription offering. The direct community offering may
terminate on or at any time after 4:00 p.m., Eastern time, on November 9, 1999,
but no later than 45
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days after the close of the subscription offering, unless extended by
American Financial and American Savings, with the approval of the Connecticut
Banking Commissioner and, if required, the Federal Deposit Insurance
Corporation. If regulatory approval of an extension of the time period has been
granted, all subscribers will be notified of the extension and of the duration
of any extension that has been granted, and will be given the right to increase,
decrease or rescind their orders. If an affirmative response to any
resolicitation is not received by American Financial from a subscriber, the
subscriber's order will be rescinded and all funds received will be promptly
returned with interest. American Financial and American Savings have the
absolute right to accept or reject in whole or in part any orders to purchase
shares in the direct community offering. If an order is rejected in part, the
purchaser does not have the right to cancel the remainder of the order. American
Financial presently intends to terminate the direct community offering as soon
as it has received orders for all shares available for purchase in the
conversion.
If all of the common stock offered in the subscription offering is
subscribed for, no common stock will be available for purchase in the direct
community offering.
Syndicated Community Offering. The plan of conversion provides that, if
necessary, all shares of common stock not purchased in the subscription offering
and direct community offering, if any, may be offered for sale to certain
members of the general public in a syndicated community offering through a
syndicate of registered broker-dealers to be formed and managed by Sandler
O'Neill acting as agent of American Financial. American Financial and American
Savings have the right to reject orders, in whole or part, in their sole
discretion in the syndicated community offering. Neither Sandler O'Neill nor any
registered broker-dealer shall have any obligation to take or purchase any
shares of the common stock in the syndicated community offering; however,
Sandler O'Neill has agreed to use its best efforts in the sale of shares in the
syndicated community offering.
Stock sold in the syndicated community offering also will be sold at the
$10.00 purchase price. See "--Stock Pricing and Number of Shares to be Issued."
No person will be permitted to subscribe in the syndicated community offering
for shares of common stock with an aggregate purchase price of more than
$500,000 of common stock, which equals 50,000 shares. See "--Plan of
Distribution for the Subscription, Direct Community and Syndicated Community
Offerings" for a description of the commission to be paid to the selected
dealers and to Sandler O'Neill.
Sandler O'Neill may enter into agreements with selected dealers to assist
in the sale of shares in the syndicated community offering. During the
syndicated community offering, selected dealers may only solicit indications of
interest from their customers to place orders with American Financial as of a
certain date for the purchase of shares. When and if Sandler O'Neill and
American Financial believe that enough indications of interest and orders have
been received in the subscription offering, the direct community offering and
the syndicated community offering to consummate the conversion, Sandler O'Neill
will request, as of that certain date, selected dealers to submit orders to
purchase shares for which they have received indications of interest from their
customers. Selected dealers will send confirmations to customers on the next
business day after that certain date. Selected dealers may settle the trade by
debiting the accounts of their customers on a date which will be three business
days from that certain date. Customers who authorize selected dealers to debit
their brokerage accounts are required to have the funds for payment in their
account on but not before the settlement date. On the settlement date, selected
dealers will remit funds to the account that American Financial established for
each selected dealer. Each customer's funds so forwarded to American Financial,
along with all other accounts held in the same title, will be insured by the
Federal Deposit Insurance Corporation up to the applicable $100,000 legal limit.
After payment has been received by American Financial from selected dealers,
funds will earn interest at American Savings' passbook rate until the completion
of the offering. At the completion of the conversion, the funds received will be
used to purchase the shares of common stock ordered. The shares issued in the
conversion cannot and will not be insured by the Federal Deposit Insurance
Corporation or any other government agency. If the conversion is not completed,
funds with interest will be returned promptly to the selected dealers, who, in
turn, will promptly credit their customers' brokerage accounts.
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The syndicated community offering may terminate no more than 45 days after
the expiration of the subscription offering, unless extended by American
Financial and American Savings, with approval of the Connecticut Banking
Commissioner and, if required, the Federal Deposit Insurance Corporation.
If American Savings is unable to find purchasers from the general public
for all unsubscribed shares, other purchase arrangements will be made by the
Board of Directors of American Savings, if feasible. Any other arrangements
must be approved by the Connecticut Banking Commissioner and, if required, the
Federal Deposit Insurance Corporation. The Connecticut Banking Commissioner may
grant one or more extensions of the offering period, provided that no single
extension exceeds 90 days, subscribers are given the right to increase, decrease
or rescind their subscriptions during the extension period, and the extensions
do not go more than two years beyond the date on which the Board of Directors
approved the plan of conversion. If the conversion is not completed within 45
days after the close of the subscription offering, either all funds received
will be returned with interest, and withdrawal authorizations canceled, or, if
the Connecticut Banking Commissioner has granted an extension of time, all
subscribers will be given the right to increase, decrease or rescind their
subscriptions before the end of the extension period. If an extension of time
is obtained, all subscribers will be notified of the extension and of their
rights to modify their orders. If an affirmative response to any resolicitation
is not received by American Financial from a subscriber, the subscriber's order
will be rescinded and all funds received will be promptly returned with interest
or withdrawal authorizations will be canceled.
Persons in Non-Qualified States. American Financial and American Savings
will make reasonable efforts to comply with the securities laws of all states in
the United States in which persons entitled to subscribe for stock under the
plan of conversion reside. However, American Financial and American Savings are
not required to offer stock in the subscription offering to any person who
resides in a foreign country or who resides in a state of the United States to
which both of the following apply: (a) less than 100 persons eligible to
subscribe for shares reside; and (b) the granting of subscription rights or the
offer or sale of shares to these persons would require American Financial or its
employees under the securities laws of the state to register as a broker, dealer
or agent, or to register or otherwise qualify the shares for sale in the state.
Neither American Financial nor American Savings will make any payments to
persons residing in these states in lieu of granting subscription rights to
them.
Plan of Distribution for the Subscription, Direct Community and Syndicated
Community Offerings
American Savings and American Financial have retained Sandler O'Neill to
consult with and advise American Savings and to assist American Savings and
American Financial, on a best efforts basis, in the distribution of shares in
the offering. Sandler O'Neill is a broker-dealer registered with the Securities
and Exchange Commission and a member of the National Association of Securities
Dealers, Inc. Sandler O'Neill will assist American Savings in the conversion by
acting as marketing advisor with respect to the subscription offering and will
represent American Savings as placement agent on a best efforts basis in the
sale of the common stock in the direct community offering if one is held;
conducting training sessions with directors, officers and employees of American
Savings regarding the conversion process; and assisting in the establishment and
supervision of American Savings' conversion center and, with management's input,
will train American Savings' staff to record properly and tabulate orders for
the purchase of common stock and to respond appropriately to customer inquiries.
Based on negotiations between American Savings and American Financial
concerning the fee structure, Sandler O'Neill will receive a fee equal to 1.35%
of the aggregate dollar amount of all stock sold in the subscription and direct
community offerings. Such amount does not include any shares sold to the
employee stock ownership plan, directors, officers and employees of American
Savings or American Financial or their immediate families or any shares sold to
American Savings Charitable Foundation. Such fee will be paid upon completion
of the conversion. Sandler O'Neill shall be reimbursed for its reasonable out-
of-pocket expenses, including legal fees. In addition, Sandler O'Neill will
perform conversion agent services and records management services for American
Savings in the conversion and will receive a fee for these services of $75,000.
Sandler O'Neill has not prepared any report or opinion constituting a
recommendation or advice to American Financial or American Savings or to persons
who subscribe for stock, nor has it prepared an opinion as to
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the fairness to American Financial or American Savings of the purchase price or
the terms of the stock to be sold. Sandler O'Neill expresses no opinion as to
the prices at which common stock to be issued may trade. Total marketing fees to
Sandler O'Neill are expected to be $3.3 million to $5.1 million at the minimum
and 15% above the maximum of the estimated valuation range, respectively. See
"Pro Forma Data" for the assumptions used to arrive at these estimates. Sandler
O'Neill and selected dealers participating in the syndicated community offering
may receive a commission in the syndicated community offering in a maximum
amount to be agreed upon by American Financial and American Savings to reflect
market requirements at the time of the allocation of shares in the syndicated
community offering.
With certain limitations, American Financial and American Savings have also
agreed to indemnify Sandler O'Neill against liabilities and expenses, including
legal fees, incurred in connection with certain claims or litigation arising out
of or based upon untrue statements or omissions contained in the offering
material for the common stock or with regard to allocations of shares if there
is an oversubscription, or determinations of eligibility to purchase shares.
Description of Sales Activities
The common stock will be offered in the subscription offering and direct
community offering principally by the distribution of this prospectus and
through activities conducted at American Savings' conversion center at its
administrative office. The conversion center is expected to operate during
normal business hours throughout the subscription offering and direct community
offering. It is expected that at any particular time one or more Sandler
O'Neill employees will be working at the conversion center. Employees of
Sandler O'Neill will be responsible for mailing materials relating to the
offering, responding to questions regarding the conversion and the offering, and
processing stock orders.
Sales of common stock will be made by registered representatives affiliated
with Sandler O'Neill or by the selected dealers managed by Sandler O'Neill. The
management and employees of American Savings may participate in the offering in
clerical capacities, providing administrative support in effecting sales
transactions or, when permitted by state securities laws, answering questions of
a mechanical nature relating to the proper execution of the order form.
Management of American Savings may answer questions regarding the business of
American Savings when permitted by state securities laws. Other questions of
prospective purchasers, including questions as to the advisability or nature of
the investment, will be directed to registered representatives. The management
and employees of American Financial and American Savings have been instructed
not to solicit offers to purchase common stock or provide advice regarding the
purchase of common stock.
No officer, director or employee of American Savings or American Financial
will be compensated, directly or indirectly, for any activities in connection
with the offer or sale of securities issued in the conversion.
None of American Savings' personnel participating in the offering is
registered or licensed as a broker or dealer or an agent of a broker or dealer.
American Savings' personnel will assist in the above-described sales activities
under an exemption from registration as a broker or dealer provided by Rule 3a4-
1 promulgated under the Securities Exchange Act of 1934, as amended. Rule 3a4-1
generally provides that an "associated person of an issuer" of securities shall
not be deemed a broker solely by reason of participation in the sale of
securities of the issuer if the associated person meets certain conditions.
These conditions include, but are not limited to, that the associated person
participating in the sale of an issuer's securities not be compensated in
connection therewith at the time of participation, that the person not be
associated with a broker or dealer and that the person observe certain
limitations on his or her participation in the sale of securities. For purposes
of this exemption, "associated person of an issuer" is defined to include any
person who is a director, officer or employee of the issuer or a company that
controls, is controlled by or is under common control with the issuer.
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Procedure for Purchasing Shares in the Subscription and Direct Community
Offerings
To purchase shares in the subscription offering, an executed order form
with the required full payment for each share subscribed for, or with
appropriate authorization indicated on the stock order form for withdrawal of
full payment from the subscriber's deposit account with American Savings, must
be received by American Savings by 4:00 p.m., Eastern time, on November 9, 1999.
Order forms that are not received by that time or are executed defectively or
are received without full payment or without appropriate withdrawal instructions
are not required to be accepted. In addition, American Savings and American
Financial are not obligated to accept orders submitted on photocopied or
facsimilied stock order forms and will not accept stock order forms
unaccompanied by an executed certification form. Notwithstanding the foregoing,
American Savings and American Financial shall have the right, each in their sole
discretion, to permit institutional investors to submit irrevocable orders
together with a legally binding commitment for payment and to thereafter pay for
the shares of common stock for which they subscribe in the direct community
offering at any time prior to 48 hours before the completion of the conversion.
American Financial and American Savings have the right to waive or permit the
correction of incomplete or improperly executed order forms, but do not
represent that they will do so. Under the plan of conversion, the interpretation
by American Financial and American Savings of the terms and conditions of the
plan of conversion and of the order form will be final subject to the authority
of the Connecticut Banking Commissioner and the Federal Deposit Insurance
Corporation. In order to purchase shares in the direct community offering, the
order form, accompanied by the required payment for each share subscribed for,
must be received by American Savings before the direct community offering
terminates, which may be on or at any time after the end of the subscription
offering. Once received, an executed order form may not be modified, amended or
rescinded without the consent of American Savings unless the conversion has not
been completed within 45 days after the end of the subscription offering.
In order to ensure that persons with subscription rights are properly
identified as to their stock purchase priorities, they must list all accounts on
the order form giving all names on each account and the account number. Failure
to list an account could result in fewer shares or no shares being allocated to
a subscribing member.
Full payment for subscriptions may be made by check, bank draft or money
order, or by authorization of withdrawal from deposit accounts maintained with
American Savings. Appropriate means by which withdrawals may be authorized are
provided on the order form. No wire transfers will be accepted. Interest will be
paid on payments made by cash, check, bank draft or money order at American
Savings' passbook rate from the date payment is received until the completion or
termination of the conversion. If payment is made by authorization of
withdrawal from deposit accounts, the funds authorized to be withdrawn from a
deposit account will continue to accrue interest at the contractual rates until
completion or termination of the conversion, unless the certificate matures
after the date of receipt of the order form but before closing, in which case
funds will earn interest at the passbook rate from the date of maturity until
the conversion is completed or terminated, but a hold will be placed on the
funds, making them unavailable to the depositor until completion or termination
of the conversion. When the conversion is completed, the funds received in the
offering will be used to purchase the shares of common stock ordered. The shares
of common stock issued in the conversion cannot and will not be insured by the
Federal Deposit Insurance Corporation or any other government agency. If the
conversion is not consummated for any reason, all funds submitted will be
promptly refunded with interest as described above.
If a subscriber authorizes American Savings to withdraw the amount of the
purchase price from his or her deposit account, American Savings will do so as
of the effective date of conversion, though the account must contain the full
amount necessary for payment at the time the subscription order is received.
American Savings will waive any applicable penalties for early withdrawal from
certificate accounts. If the remaining balance in a certificate account is
reduced below the applicable minimum balance requirement at the time funds are
actually transferred under the authorization the certificate will be canceled at
the time of the withdrawal, without penalty, and the remaining balance will earn
interest at American Savings' passbook rate.
The employee stock ownership plan will not be required to pay for the
shares subscribed for at the time it subscribes, but rather may pay for shares
of common stock subscribed for at the $10.00 purchase price upon the completion
of the subscription and direct community offerings, if all shares are sold, or
upon the completion of the
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syndicated community offering; provided that there is in force from the time of
its subscription until that time, a loan commitment from an unrelated financial
institution or American Financial to lend to the employee stock ownership plan,
at that time, the aggregate purchase price of the shares for which it
subscribed.
Individual retirement accounts maintained in American Savings do not permit
investment in the common stock. A depositor interested in using his or her
Individual Retirement Account funds to purchase common stock must do so through
a self-directed individual retirement account. Since American Savings does not
offer those accounts, it will allow a depositor to make a trustee-to-trustee
transfer of the individual retirement account funds to a trustee offering a
self-directed individual retirement account program with the agreement that the
funds will be used to purchase American Financial's common stock in the
offering. There will be no early withdrawal or Internal Revenue Service interest
penalties for transfers. The new trustee would hold the common stock in a self-
directed account in the same manner as American Savings now holds the
depositor's Individual Retirement Account funds. An annual administrative fee
may be payable to the new trustee. Depositors interested in using funds in an
individual retirement account at American Savings to purchase common stock
should contact the conversion center as soon as possible for assistance. In
addition, federal laws and regulations require that officers, directors and 10%
shareholders who use self-directed individual retirement account funds to
purchase shares of common stock in the subscription offering, make purchases for
the exclusive benefit of individual retirement accounts.
Certificates representing shares of common stock purchased, and any refund
due, will be mailed to purchasers at the address specified on the properly
completed order forms or to the last address of the persons appearing on the
records of American Savings as soon as practicable following the sale of all
shares of common stock. Any certificates returned as undeliverable will be
disposed of as required by applicable law. Purchasers may not be able to sell
the shares of common stock which they purchased until certificates for the
common stock are available and delivered to them, even though trading of the
common stock may have begun.
To ensure that each purchaser receives a prospectus at least 48 hours
before the end of the offering as required by Rule 15c2-8 under the Securities
Exchange Act of 1934, as amended, no prospectus will be mailed any later than
five days before that date or hand delivered any later than two days before that
date. Execution of the order form will confirm receipt or delivery under Rule
15c2-8. Order forms will only be distributed with a prospectus. By executing
and returning the regulatory mandated certification form, you will be certifying
that you received this prospectus and acknowledging that the common stock is not
a deposit account and is not insured or guaranteed by any federal or state
governmental agency. You will also be acknowledging that you received
disclosure concerning the risks involved in this Offering. The certification
form could be used as support to show that you understand the nature of this
investment.
Stock Pricing and Number of Shares to be Issued
The plan of conversion requires that the aggregate purchase price of the
securities sold in connection with the conversion be based upon an estimated pro
forma value of American Financial and American Savings as converted, as
determined by an independent appraisal. American Savings and American Financial
have retained FinPro, which is experienced in the evaluation and appraisal of
business entities, to prepare an appraisal of the pro forma market value of
American Financial and American Savings as converted, as well as a business
plan. FinPro will receive a fee expected to total approximately $50,000 for its
appraisal services and assistance in the preparation of a business plan, plus
reasonable out-of-pocket expenses incurred in connection with the appraisal.
American Savings has agreed to indemnify FinPro, its directors, officers, agents
and employees under certain circumstances against liabilities and expenses,
including legal fees, arising out of, related to, or based upon the conversion,
except where FinPro's liability results from its own negligence or willful
misconduct.
FinPro has prepared an appraisal of the estimated pro forma market value of
American Financial and American Savings as converted taking into account the
formation of American Financial as the holding company for American Savings. For
its analysis, FinPro undertook substantial investigations to learn about
American Savings' business and operations. Management supplied financial
information, including annual financial statements, information on the
composition of assets and liabilities, and other financial schedules. In
addition to this
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information, FinPro reviewed American Savings' conversion application as filed
with the State of Connecticut Department of Banking and American Financial's
registration statement as filed with the Securities and Exchange Commission.
Furthermore, FinPro visited American Savings' facilities and had discussions
with American Savings' management and its conversion counsel, Muldoon, Murphy &
Faucette LLP. FinPro did not perform a detailed individual analysis of the
separate components of American Financial's or American Savings' assets and
liabilities.
FinPro's analysis utilized three selected valuation procedures, the
Price/Book method, the Price/Earnings method, and Price/Assets method, all of
which are described in its report. FinPro placed the greatest emphasis on the
Price/Earnings and Price/Book methods in estimating pro forma market value. In
applying these procedures, FinPro reviewed, among other factors, the economic
make-up of American Savings' primary market area, American Savings' financial
performance and condition in relation to publicly traded institutions that
FinPro deemed comparable to American Savings, the specific terms of the offering
of American Financial's common stock, the pro forma impact of the additional
capital raised in the conversion, conditions of securities markets in general,
and the market for thrift institution common stock in particular. FinPro's
analysis provides an approximation of the pro forma market value of American
Financial and American Savings as converted based on the valuation methods
applied and the assumptions outlined in its report. Included in its report were
certain assumptions as to the pro forma earnings of American Financial after the
conversion that were utilized in determining the appraised value. These
assumptions included estimated expenses and an assumed after-tax rate of return
on the net conversion proceeds as described under "Pro Forma Data," purchases by
the employee stock ownership plan of an amount equal to 8% of the common stock
sold in the conversion and purchases in the open market by the stock-based
incentive plan of a number of shares equal to 4% of the common stock sold in the
conversion at the $10.00 purchase price. See "Pro Forma Data" for additional
information concerning these assumptions. The use of different assumptions may
yield different results.
On the basis of the foregoing, FinPro has advised American Financial and
American Savings that, in its opinion, as of August 3, 1999, the estimated pro
forma market value of American Financial and American Savings, as converted and,
therefore, the common stock was within the valuation range of $267.3 million to
$361.7 million with a midpoint of $314.5 million. After reviewing the
methodology and the assumptions used by FinPro in the preparation of the
appraisal, the Board of Directors established the estimated valuation range
which is equal to the valuation range of $267.3 million to $361.7 million with
a midpoint of $314.5 million. Assuming that the shares are sold at $10.00 per
share in the conversion, the estimated number of shares would be between
26,732,500 and 36,167,500 with a midpoint of 31,450,000. The purchase price of
$10.00 was determined by discussion among the Boards of Directors of American
Savings and American Financial and Sandler O'Neill, taking into account, among
other factors, the requirement under the Connecticut conversion regulations that
the common stock be offered in a manner that will achieve the widest
distribution of the stock, and desired liquidity in the common stock after the
conversion. Since the outcome of the offering relates in large measure to market
conditions at the time of sale, it is not possible to determine the exact number
of shares that will be issued by American Financial at this time. The estimated
valuation range may be amended, with the approval of the Connecticut Banking
Commissioner and the Federal Deposit Insurance Corporation, if necessitated by
developments following the date of the appraisal in, among other things, market
conditions, the financial condition or operating results of American Savings,
regulatory guidelines or national or local economic conditions. FinPro's
appraisal report is filed as an exhibit to the registration statement that
American Financial has filed with the Securities and Exchange Commission. See
"Where You Can Find More Information."
If, upon completion of the subscription offering, at least the minimum
number of shares are subscribed for, FinPro, after taking into account factors
similar to those involved in its prior appraisal, will determine its estimate of
the pro forma market value of American Financial and American Savings as
converted, as of the close of the subscription offering.
No shares will be sold unless FinPro confirms that, to the best of its
knowledge and judgment, nothing of a material nature has occurred that would
cause it to conclude that the actual total purchase price on an aggregate basis
was materially incompatible with its estimate of the total pro forma market
value of American Financial and American Savings as converted at the time of the
sale. If, however, the facts do not justify that statement, the
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offering may be canceled, a new estimated valuation range and price per share
set and new subscription, direct community and syndicated community offerings
held. Under those circumstances, subscribers would have the right to modify or
rescind their subscriptions and to have their subscription funds returned
promptly with interest and holds on funds authorized for withdrawal from deposit
accounts would be released or reduced.
Depending upon market or financial conditions following the commencement of
the subscription and direct community offerings, the total number of shares to
be sold in the conversion may be increased or decreased without a resolicitation
of subscribers, provided that the product of the total number of shares times
the price per share is not below the minimum of the estimated valuation range or
more than 15% above the maximum of the estimated valuation range. Based on a
purchase price of $10.00 per share and the FinPro estimate of the pro forma
market value of the common stock ranging from a minimum of $267.3 million to a
maximum, as increased by 15%, of $415.9 million, the number of shares of common
stock expected to be sold is between a minimum of 26,732,500 shares and a
maximum, as adjusted by 15%, of 41,592,625 shares. The actual number of shares
issued between this range will depend on a number of factors and shall be
determined by American Savings and American Financial. The Federal Deposit
Insurance Corporation must also approve the actual number of shares issued.
If market or financial conditions change so as to cause the aggregate
purchase price of the shares to be below the minimum of the estimated valuation
range or more than 15% above the maximum of the estimated valuation range, if
the plan of conversion is not terminated by American Financial and American
Savings after consultation with the Connecticut Banking Commissioner and Federal
Deposit Insurance Corporation, purchasers will be resolicited, in which case
they will need to reconfirm, rescind, or modify their subscriptions. Any change
of more than 15% above the estimated valuation range must be approved by the
Connecticut Banking Commissioner and Federal Deposit Insurance Corporation. If
the number of shares issued in the conversion is increased due to an increase of
up to 15% in the estimated valuation range to reflect changes in market or
financial conditions, persons who subscribed for the maximum number of shares
will not be given the opportunity to subscribe for an adjusted maximum number of
shares. See "--Limitations on Purchases of Shares."
An increase in the number of shares to be issued in the conversion as a
result of an increase in the estimated pro forma market value would decrease
both a subscriber's ownership interest and American Financial's pro forma net
earnings and stockholders' equity on a per share basis while increasing pro
forma net earnings and stockholders' equity on an aggregate basis. A decrease
in the number of shares to be issued in the conversion would increase both a
subscriber's ownership interest and American Financial's pro forma net earnings
and stockholders' equity on a per share basis while decreasing pro forma net
earnings and stockholder's equity on an aggregate basis. For a presentation of
the effects of such changes, see "Pro Forma Data."
The number of shares to be issued and outstanding as a result of the sale
of common stock in the conversion will be increased by a number of shares equal
to 8% of the common stock sold in the conversion to fund American Savings
Charitable Foundation. Assuming the sale of shares at the maximum of the
estimated valuation range, American Financial will issue 2,893,400 shares of its
common stock from authorized but unissued shares to American Savings Charitable
Foundation immediately following the completion of the conversion. In that
event, American Financial will have total shares of common stock outstanding of
39,060,900 shares. Of that amount, American Savings Charitable Foundation will
own 7.4%. Funding American Savings Charitable Foundation with authorized but
unissued shares will have the effect of diluting the ownership and voting
interests of persons purchasing shares in the conversion by 7.4% since a greater
number of shares will be outstanding upon completion of the conversion than
would be if American Savings Charitable Foundation were not established. See
"Pro Forma Data."
In formulating its appraisal, FinPro relied upon the truthfulness, accuracy
and completeness of all documents American Savings furnished to it. FinPro also
considered financial and other information from regulatory agencies, other
financial institutions, and other public sources, as appropriate. While FinPro
believes this information to be reliable, FinPro does not guarantee the accuracy
or completeness of the information and did not independently verify the
financial statements and other data provided by American Savings and American
Financial or independently value the assets or liabilities of American Financial
and American Savings. The appraisal is not
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intended to be, and must not be interpreted as, a recommendation of any kind as
to the advisability of purchasing shares of common stock. Moreover, because the
appraisal must be based on many factors which change periodically, there is no
assurance that purchasers of shares in the conversion will be able to sell
shares after the conversion at prices at or above the purchase price.
Copies of the appraisal report of FinPro including any amendments thereto,
and the detailed memorandum of the appraiser setting forth the method and
assumptions for such appraisal are available for inspection at the main office
of American Savings and the other locations specified under "Where You Can Find
More Information."
Limitations on Purchases of Shares
The plan of conversion provides for certain limitations to be placed upon
the purchase of common stock by eligible subscribers and others in the
conversion. Each subscriber must subscribe for a minimum of 25 shares. The plan
of conversion provides for the following purchase limitations:
1. The maximum purchase in the subscription offering by any person or
group of persons through a single deposit account or similarly titled
deposit accounts is $500,000, which equals 50,000 shares, so long as
the share equivalent of such dollar amount does not exceed one-half of
one percent (0.50%) of the total number of shares offered for sale in
the conversion;
2. No person, related persons or persons acting together may purchase
more than $500,000, which equals 50,000 shares, in the direct
community offering;
3. The employee stock ownership plan may purchase, in the aggregate, up
to 5% of the shares of common stock sold in the conversion;
4. Directors and officers of American Savings and American Financial and
their associates, in the aggregate, may not purchase more than 30% of
the total number of shares offered for sale in the conversion;
5. Persons purchasing shares of common stock in the syndicated community
offering, together with associates of and persons acting in concert
with such persons, may purchase up to $500,000 of common stock subject
to the overall maximum purchase limitation described below; and
6. The maximum number of shares of common stock which may be subscribed
for or purchased in all categories of the conversion by any person,
together with associates of and groups of persons acting in concert
with such persons, except for the employee stock ownership plan, shall
not exceed 1.0% of the shares of common stock sold in the conversion.
For purposes of the plan of conversion, directors and officers are not deemed to
be acting in concert solely by reason of their being directors or officers of
American Savings or American Financial. Pro rata reductions within each
subscription rights category will be made in accordance with the procedures
outlined in the plan of conversion.
Subject to any required regulatory approval and the requirements of
applicable laws and regulations, but without further approval of the corporators
or subscribers for common stock, unless required by the Connecticut Banking
Commissioner or the Federal Deposit Insurance Corporation, both the individual
amount permitted to be subscribed for and the overall maximum purchase
limitation may be increased to up to a maximum of 5% of the common stock to be
issued at the sole discretion of American Financial and American Savings. If
such amount is increased, subscribers for the maximum amount will be, and
certain other large subscribers in the sole discretion of American Savings may
be, given the opportunity to increase their subscriptions up to the then
applicable limit. American Savings and American Financial do not intend to
increase the maximum purchase limitation unless market conditions warrant that
an increase in the maximum purchase limitation is necessary to sell a number of
shares in excess of the minimum of the estimated valuation range.
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The plan of conversion defines "acting in concert" to include a combination
or pooling of voting or other interests in the securities of an issuer for a
common purpose under any contract, understanding, relationship, agreement or
other arrangement, whether written or otherwise. In general, a person who acts
in concert with another party shall also be deemed to be acting in concert with
any person who is also acting in concert with that other party. American
Financial and American Savings may presume that certain persons are acting in
concert based upon, among other things, joint account relationships and the fact
that persons may have filed joint Schedules 13D with the Securities and Exchange
Commission with respect to other companies.
The plan of conversion defines "associate," when used to indicate a
relationship with any person, to mean any corporation or organization other than
American Financial, American Savings or a majority-owned subsidiary of American
Savings of which a person is an officer or partner or is, directly or
indirectly, the beneficial owner of 10% or more of any class of equity
securities; any trust or other estate in which a person has a substantial
beneficial interest or as to which a person serves as trustee or in a similar
fiduciary capacity; and any relative or spouse of a person, or any relative of a
spouse, who either has the same home as a person or who is a director or officer
of American Savings or any of its parents or subsidiaries. The term "associate,"
however, does not include, for purposes of the stock purchase limitations in the
conversion, any stock benefit plan of American Savings in which such person has
a substantial beneficial interest or serves as a trustee or in a similar
fiduciary capacity, and, for purposes of the total shares that may be held by
officers and directors of American Financial and American Savings, does not
include any tax-qualified employee stock benefit plan of American Savings. For
example, a corporation of which a person serves as an officer would be an
associate of a person and, therefore, all shares purchased by a corporation
would be included with the number of shares which a person could purchase
individually under the above limitations.
The plan of conversion defines "officer" to mean the Chairman of the Board,
President, Vice President, Secretary, Treasurer or principal financial officer,
Comptroller or principal accounting officer, and any other person performing
similar functions of American Savings or American Financial.
Common stock purchased in the conversion will be freely transferable,
except for shares purchased by directors and officers of American Savings and
American Financial and by NASD members. See "--Restrictions on Transferability
by Directors and Officers and NASD Members."
Restrictions on Repurchase of Stock
Under the Connecticut conversion regulations, savings banks and their
holding companies may not for a period of three years from the date of an
institution's mutual-to-stock conversion repurchase any of its common stock from
any person, except for: (1) a repurchase, on a pro rata basis pursuant to an
offer approved by the Connecticut Banking Commissioner, made to all
stockholders, or (2) a repurchase in the open market by a tax-qualified or non-
tax-qualified stock benefit plan in an amount reasonable and appropriate to fund
such plans. Furthermore, repurchases of any common stock are prohibited if they
would cause American Savings' regulatory capital to be reduced below the amount
required for the liquidation account or if the repurchases would cause American
Savings to become "undercapitalized" within the meaning of the Federal Deposit
Insurance Corporation prompt corrective action regulation. Repurchases are
generally prohibited during the first year following conversion. However, if
approval is obtained to repurchase common stock during the first year after
conversion, then such repurchase may not be greater than 5% of the capital stock
issued. At this time, American Financial has no intention to repurchase stock.
Restrictions on Transferability by Directors and Officers and NASD Members
Shares of common stock purchased by directors and officers of American
Financial and American Savings, and their associates, may not be sold for a
period of one year following the conversion, except upon the death of the
stockholder or unless approved by the Connecticut Banking Commissioner. Any
stock purchased after the conversion is free of this restriction. Accordingly,
shares of common stock issued by American Financial to directors and officers of
American Financial and American Savings, and their associates, shall bear a
legend giving
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appropriate notice of the restriction and, in addition, American Financial will
give appropriate instructions to the transfer agent for American Financial's
common stock with respect to the restriction on transfers. Any shares issued to
directors and officers of American Financial and American Savings, and their
associates, as a stock dividend, stock split or otherwise with respect to
restricted common stock shall also be restricted.
Purchases of outstanding shares of common stock of American Financial by
directors and officers of American Financial and American Savings, or any person
who was an officer or director of American Financial and American Savings after
adoption of the plan of conversion, and their associates during the three-year
period following the conversion may be made only through a broker or dealer
registered with the Securities and Exchange Commission or the State of
Connecticut Department of Banking, except with the prior written approval of the
Connecticut Banking Commissioner. This restriction does not apply, however, to
negotiated transactions involving more than 1% of American Financial's
outstanding common stock or to the purchase of stock under the stock-based
incentive plan.
American Financial has filed with the Securities and Exchange Commission a
registration statement under the Securities Act of 1933, as amended, for the
registration of the common stock to be issued in the conversion. This
registration does not cover the resale of the shares. Shares of common stock
purchased by persons who are not affiliates of American Financial may be resold
without registration. Shares purchased by an affiliate of American Financial
will have resale restrictions under Rule 144 of the Securities Act, as amended.
If American Financial meets the current public information requirements of Rule
144, each affiliate of American Financial who complies with the other conditions
of Rule 144, including those that require the affiliate's sale to be aggregated
with those of certain other persons, would be able to sell in the public market,
without registration, a number of shares not to exceed, in any three-month
period, the greater of 1% of the outstanding shares of American Financial or the
average weekly volume of trading in the shares during the preceding four
calendar weeks. Provision may be made in the future by American Financial to
permit affiliates to have their shares registered for sale under the Securities
Act of 1933, as amended, under certain circumstances.
Under guidelines of the National Association of Securities Dealers, Inc.,
members of that organization and their associates face certain restrictions on
the transfer of securities purchased with subscription rights and to certain
reporting requirements upon purchase of the securities.
Interpretation, Amendment and Termination
To the extent permitted by law, all interpretations of the plan of
conversion by American Savings will be final; however, such interpretations have
no binding effect on the Connecticut Banking Commissioner or the Federal Deposit
Insurance Corporation. The plan of conversion provides that, if deemed
necessary or desirable by the Board of Directors, the plan of conversion may be
substantively amended by the Board of Directors as a result of comments from
regulatory authorities or otherwise, without the further approval of American
Savings' corporators unless required by the Connecticut Banking Commissioner or
the Federal Deposit Insurance Corporation.
Completion of the conversion requires the sale of all shares of the common
stock within 24 months following approval of the plan of conversion by American
Savings' Board of Directors. If this condition is not satisfied, the plan of
conversion will be terminated and American Savings will continue its business in
the mutual form of organization. The plan of conversion may be terminated by
the Board of Directors at any time.
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RESTRICTIONS ON ACQUISITION OF
AMERICAN FINANCIAL AND AMERICAN SAVINGS
General
American Savings' plan of conversion provides for the conversion of
American Savings from the mutual to the stock form of organization and, in
connection therewith, the adoption of a new stock Certificate of Incorporation
and Bylaws by American Savings' corporators. The plan of conversion also
provides for the concurrent formation of a holding company. See "The
Conversion--General." As described below and elsewhere herein, certain
provisions in American Financial's Certificate of Incorporation and Bylaws and
in its management remuneration provided for in the conversion, together with
provisions of Delaware corporate law, may have anti-takeover effects. In
addition, American Savings' Certificate of Incorporation and Bylaws and
management remuneration provided for in the conversion may also have "anti-
takeover" effects. Finally, regulatory restrictions may make it difficult for
persons or companies to acquire control of either American Financial or American
Savings.
Restrictions in American Financial's Certificate of Incorporation and Bylaws
General. The following discussion is a general summary of the material
provisions of American Financial's Certificate of Incorporation and Bylaws and
other statutory and regulatory provisions relating to stock ownership and
transfers, the Board of Directors and business combinations, which might be
deemed to have a potential anti-takeover effect. These provisions may have the
effect of discouraging a future takeover attempt which is not approved by the
Board of Directors but which individual stockholders may deem to be in their
best interests. As a result, stockholders who might desire to participate in
such a transaction may not have an opportunity to do so. Such provisions will
also render the removal of the current Board of Directors or management of
American Financial more difficult. The following summary is general and
reference should be made to the Certificate of Incorporation and Bylaws. See
"Where You Can Find More Information" as to how to obtain a copy of these
documents.
Limitation on Voting Rights. The Certificate of Incorporation of American
Financial provides that in no event shall any record owner of any outstanding
common stock which is beneficially owned, directly or indirectly, by a person
who beneficially owns in excess of 10% of the then outstanding shares of common
stock be entitled or permitted to any vote in respect of the shares held in
excess of such 10% limit. Additionally, the Certificate of Incorporation
provides that in no event shall any record owner of any outstanding common stock
which is beneficially owned, directly or indirectly, by a person who
beneficially owns in excess of 5% of the then outstanding shares of common
stock, be entitled to vote in respect of the shares held in excess of such 5%
limit unless such beneficial owner owns, controls or holds such shares of common
stock in the ordinary course of business and not with the purpose nor with the
effect of changing or influencing control of American Financial. Beneficial
ownership is determined by Rule 13d-3 of the General Rules and Regulations of
the Securities Exchange Act of 1934, as amended, and includes shares
beneficially owned by that person or any of his affiliates, shares which that
person or his affiliates have the right to acquire under any agreement,
arrangement or understanding or upon the exercise of conversion rights, exchange
rights, warrants or options or otherwise and shares as to which that person and
his affiliates have sole or shared voting or investment power. Beneficial
ownership does not include shares under a publicly solicited revocable proxy or
shares that are not otherwise deemed to be beneficially owned by such person and
his affiliates. No director or officer (or any affiliate thereof) of American
Financial shall, solely by reason of any or all of such directors or officers
acting in their capacities as such, be deemed to beneficially own any shares
beneficially owned by any other director or officer (or affiliate thereof) nor
will the employee stock ownership plan or any similar plan of American Financial
or American Savings or any director with respect thereto (solely by reason of
such director's capacity) be deemed to beneficially own any shares held under
any such plan. The Certificate of Incorporation of American Financial further
provides that the provisions limiting voting rights may only be amended upon the
vote of the holders of at least 80% of the voting power of all then outstanding
shares of capital stock entitled to vote thereon (after giving effect to the
provision limiting voting rights).
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Board of Directors. The Board of Directors of American Financial is
divided into three classes, each of which shall contain approximately one-third
of the whole number of the members of the Board. Each class shall serve a
staggered term, with approximately one-third of the total number of Directors
being elected each year. American Financial's Certificate of Incorporation and
Bylaws provide that the size of the Board shall be determined by a majority of
the whole Board of Directors. The Certificate of Incorporation and the Bylaws
provide that any vacancy occurring in the Board, including a vacancy created by
an increase in the number of Directors or resulting from death, resignation,
retirement, disqualification, removal from office or other cause, shall be
filled for the remainder of the unexpired term exclusively by a majority vote of
the Directors then in office. The classified Board is intended to provide for
continuity of the Board of Directors and to make it more difficult and time
consuming for a stockholder group to fully use its voting power to gain control
of the Board of Directors without the consent of the incumbent Board of
Directors of American Financial. Directors may be removed by the shareholders
only for cause by the affirmative vote of the holders of at least 80% of the
voting power of all then outstanding shares of capital stock entitled to vote
thereon.
In the absence of these provisions, the vote of the holders of a majority
of the shares could remove the entire Board, with or without cause, and replace
it with persons of such holders choice.
Cumulative Voting, Special Meetings and Action by Written Consent. The
Certificate of Incorporation does not provide for cumulative voting for any
purpose. Moreover, special meetings of stockholders of American Financial may
be called only by a resolution adopted by a majority of the whole Board of
Directors of American Financial. The Certificate of Incorporation also provides
that any action required or permitted to be taken by the stockholders of
American Financial may be taken only at an annual or special meeting and
prohibits stockholder action by written consent in lieu of a meeting.
Authorized Shares. The Certificate of Incorporation authorizes the
issuance of 120,000,000 shares of common stock and 10,000,000 shares of
preferred stock. The shares of common stock and preferred stock were authorized
in an amount greater than that to be issued in the conversion to provide
American Financial's Board of Directors with as much flexibility as possible to
effect, among other transactions, financings, acquisitions, stock dividends,
stock splits and employee stock options. However, these additional authorized
shares may also be used by the Board of Directors consistent with its fiduciary
duty to deter future attempts to gain control of American Financial. The Board
of Directors also has sole authority to determine the terms of any one or more
series of preferred stock, including voting rights, conversion rates, and
liquidation preferences. As a result of the ability to fix voting rights for a
series of preferred stock, the Board has the power to the extent consistent with
its fiduciary duty to issue a series of preferred stock to persons friendly to
management to attempt to block a post-tender offer merger or other transaction
by which a third party seeks control, and thereby assist management to retain
its position. American Financial's Board currently has no plans for the
issuance of additional shares, other than the issuance of shares in the
conversion, including shares contributed to American Savings Charitable
Foundation, and the issuance of additional shares upon exercise of stock
options.
Stockholder Vote Required to Approve Business Combinations with Interested
Stockholders. The Certificate of Incorporation requires the approval of the
holders of at least 80% of American Financial's outstanding shares of voting
stock entitled to vote to approve certain "Business Combinations" with an
"Interested Stockholder," and related transactions. Under Delaware law, absent
this provision, business combinations, including mergers, consolidations and
sales of all or substantially all of the assets of a corporation must be
approved by the vote of the holders of only a majority of the outstanding shares
of common stock of American Financial and any other affected class of stock.
Under the Certificate of Incorporation, the approval of the holders of at least
80% of the shares of capital stock entitled to vote is required for any business
combination involving an Interested Stockholder (as defined below) except (1) in
cases where the proposed transaction has been approved by a majority of those
members of American Financial's Board of Directors who are unaffiliated with the
Interested Stockholder and were directors before the time when the Interested
Stockholder became an Interested Stockholder or (2) if the proposed transaction
meets certain conditions which are designed to afford the stockholders a fair
price in consideration for their shares. In each such case, where stockholder
approval is required, the approval of only a majority of the outstanding shares
of voting stock is sufficient. The term "Interested Stockholder" is defined to
include, among
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others, any individual, a group acting in concert, corporation, partnership,
association or other entity (other than American Financial or its subsidiary)
who or which is the beneficial owner, directly or indirectly, of 10% or more of
the outstanding shares of voting stock of American Financial.
This provision of the Certificate of Incorporation applies to any "Business
Combination," which is defined to include:
1. any merger or consolidation of American Financial or any of its
subsidiaries with any Interested Stockholder or affiliate of an
Interested Stockholder or any corporation which is, or after such
merger or consolidation would be, an Affiliate of an Interested
Stockholder;
2. any sale, lease, exchange, mortgage, pledge, transfer, or other
disposition to or with any Interested Stockholder or Affiliate of 25%
or more of the assets of American Financial or combined assets of
American Financial and its subsidiary;
3. the issuance or transfer to any Interested Stockholder or its
affiliate by American Financial (or any subsidiary) of any securities
of American Financial (or any subsidiary) in exchange for any cash,
securities or other property the value of which equals or exceeds 25%
of the fair market value of the common stock of American Financial;
4. the adoption of any plan for the liquidation or dissolution of
American Financial proposed by or on behalf of any Interested
Stockholder or affiliate thereof; and
5. any reclassification of securities, recapitalization, merger or
consolidation of American Financial with any of its subsidiaries which
has the effect of increasing the proportionate share of common stock
or any class of equity or convertible securities of American Financial
or subsidiary owned directly or indirectly, by an Interested
Stockholder or affiliate thereof.
The directors and executive officers of American Savings are purchasing
approximately 0.85% of the shares of the common stock to be sold in the
conversion based on the maximum of the estimated valuation range. In addition,
the employee stock ownership plan intends to purchase 8% of the common stock
issued in connection with the conversion, including shares issued to American
Savings Charitable Foundation. Additionally, if stockholders approve the
proposed stock-based incentive plan, American Financial expects to acquire 4% of
the common stock issued in connection with the conversion, including shares
issued to American Savings Charitable Foundation, and expects to issue options
to purchase up to 10% of the common stock issued in connection with the
conversion, including shares issued to American Savings Charitable Foundation,
to directors and executive officers. As a result, directors, executive officers
and employees may control the voting of approximately 21.4% of American
Financial's common stock on a diluted basis at the maximum of the estimated
valuation range, thereby enabling them to prevent the approval of the
transactions requiring the approval of at least 80% of American Financial's
outstanding shares of voting stock described herein above. Furthermore, the
ability of directors, executive officers and employees to prevent the approval
of transactions requiring the approval of at least 80% of the outstanding shares
of voting stock of American Financial will be enhanced by the regulatory
condition imposed on American Savings Charitable Foundation that any shares held
by it must be voted in the same ratio as all other shares of American Financial
common stock voted on each and every proposal considered by stockholders.
Evaluation of Offers. The Certificate of Incorporation of American
Financial further provides that the Board of Directors of American Financial,
when evaluating an offer, to (1) make a tender or exchange offer for any equity
security of American Financial, (2) merge or consolidate American Financial with
another corporation or entity or (3) purchase or otherwise acquire all or
substantially all of the properties and assets of American Financial, may, in
connection with the exercise of its judgment in determining what is in the best
interest of American Financial and the stockholders of American Financial, give
consideration to those factors that directors of any subsidiary (including
American Savings) may consider in evaluating any action that may result in a
change or potential change of control of such subsidiary, and the social and
economic effects of acceptance of such offer on:
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American Financial's present and future customers and employees and those of its
subsidiaries (including American Savings); the communities in which American
Financial and American Savings operate or are located; the ability of American
Financial to fulfill its corporate objectives as a savings and loan holding
company; and the ability of American Savings to fulfill the objectives of a
stock savings bank under applicable statutes and regulations. By having these
standards in the Certificate of Incorporation of American Financial, the Board
of Directors may be in a stronger position to oppose such a transaction if the
Board concludes that the transaction would not be in the best interest of
American Financial, even if the price offered is significantly greater than the
then market price of any equity security of American Financial.
Amendment of Certificate of Incorporation and Bylaws. Amendments to
American Financial's Certificate of Incorporation must be approved by a majority
of its Board of Directors and also by a majority of the outstanding shares of
its voting stock, provided, however, that an affirmative vote of the holders of
at least 80% of the outstanding voting stock entitled to vote (after giving
effect to the provision limiting voting rights) is required to amend or repeal
specific provisions of the Certificate of Incorporation, including the provision
limiting voting rights, the provisions relating to approval of certain business
combinations, calling special meetings, the number and classification of
directors, director and officer indemnification by American Financial and
amendment of American Financial's Bylaws and Certificate of Incorporation.
American Financial's Bylaws may be amended by a majority of the whole Board
of Directors, or by a vote of the holders of at least 80% (after giving effect
to the provision limiting voting rights) of the total votes eligible to be voted
at a duly constituted meeting of stockholders.
Bylaw Provisions. The Bylaws of American Financial also require a
stockholder who intends to nominate a candidate for election to the Board of
Directors, or to raise new business at an annual stockholder meeting to give at
least 90 days' advance notice to the Secretary of American Financial. The
notice provision requires a stockholder who desires to raise new business to
provide information to American Financial concerning the nature of the new
business, the stockholder and the stockholder's interest in the business matter.
Similarly, a stockholder wishing to nominate any person for election as a
director must provide American Financial with information concerning the nominee
and the proposing stockholder.
Anti-Takeover Effects of American Financial's Certificate of Incorporation and
Bylaws and Management Remuneration Adopted in Conversion
The provisions described above are intended to reduce American Financial's
vulnerability to takeover attempts and other transactions which have not been
negotiated with and approved by members of its Board of Directors. Provisions
of the stock-based incentive plan provide for accelerated benefits to
participants if a change in control of American Financial or American Savings
occurs or a tender or exchange offer for their stock is made. See "Management
of American Savings--Benefits--Stock-Based Incentive Plan." American Financial
and American Savings have also entered into agreements with key officers and
intends to establish the Severance Compensation Plan which will provide such
officers and eligible employees with additional payments and benefits on the
officer's termination in connection with a change in control of American
Financial or American Savings. See "Management of American Savings--Executive
Compensation--Employment Agreements," and "Benefits--Employee Severance
Compensation Plan." The foregoing provisions and limitations may make it more
difficult for companies or persons to acquire control of American Financial.
Additionally, the provisions could deter offers to acquire the outstanding
shares of American Financial which might be viewed by stockholders to be in
their best interests.
American Financial's Board of Directors believes that the provisions of the
Certificate of Incorporation and Bylaws are in the best interest of American
Financial and its stockholders. An unsolicited non-negotiated takeover proposal
can seriously disrupt the business and management of a corporation and cause it
great expense. Accordingly, the Board of Directors believes it is in the best
interests of American Financial and its stockholders to encourage potential
acquirors to negotiate directly with management and that these provisions will
encourage such negotiations and discourage non-negotiated takeover attempts.
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Delaware Corporate Law
The State of Delaware has a statute designed to provide Delaware
corporations with additional protection against hostile takeovers. The Delaware
takeover statute is intended to discourage certain takeover practices by
impeding the ability of a hostile acquiror to engage in certain transactions
with the target company.
In general, the statute provides that a "Person" who owns 15% or more of
the outstanding voting stock of a Delaware corporation (an Interested
Stockholder) may not consummate a merger or other business combination
transaction with such corporation at any time during the three-year period
following the date such "Person" became an Interested Stockholder. The term
"business combination" is defined broadly to cover a wide range of corporate
transactions including mergers, sales of assets, issuances of stock,
transactions with subsidiaries and the receipt of disproportionate financial
benefits.
The statute exempts the following transactions from the requirements of the
statute:
1. any business combination if, before the date a person became an
Interested Stockholder, the board of directors approved either the
business combination or the transaction which resulted in the
stockholder becoming an Interested Stockholder;
2. any business combination involving a person who acquired at least 85%
of the outstanding voting stock in the transaction in which he became
an Interested Stockholder, excluding, for purposes of determining the
number of shares outstanding, shares owned by the corporation's
directors who are also officers and specific employee stock plans;
3. any business combination with an Interested Stockholder that is
approved by the board of directors and by a two-thirds vote of the
outstanding voting stock not owned by the Interested Stockholder; and
4. certain business combinations that are proposed after the corporation
had received other acquisition proposals and which are approved or not
opposed by a majority of certain continuing members of the board of
directors.
A corporation may exempt itself from the requirements of the statute by
adopting an amendment to its certificate of incorporation or bylaws electing not
to be governed by Section 203. At the present time, the Board of Directors does
not intend to propose any such amendment.
Restrictions in American Savings' New Certificate of Incorporation and Bylaws
Although the Board of Directors of American Savings is not aware of any
effort that might be made to obtain control of American Savings after the
conversion, the Board of Directors believes that it is appropriate to adopt
provisions permitted by Connecticut law to protect the interests of the
converted bank and its stockholders from any hostile takeover. Such provisions
may, indirectly, inhibit a change in control of American Financial, as American
Savings' sole stockholder. See "Risk Factors--Anti-takeover provisions and
statutory provisions could make takeover attempts more difficult to achieve and
may decrease the market price of the common stock."
American Savings' stock Certificate of Incorporation will contain a
provision whereby the acquisition of beneficial ownership of more than 5% or 10%
of the issued and outstanding shares of any class of equity securities of
American Savings by any person (i.e., any individual, corporation, group acting
in concert, trust, partnership, joint stock company or similar organization),
either directly or through an affiliate thereof, will be prohibited for a period
of five years following the date of completion of the conversion without the
prior written approval of the Board of Directors of American Savings and, in the
case of the 10% limit, the additional approval of the Connecticut Banking
Commissioner. If shares are acquired in violation of this provision of American
Savings' stock Certificate of Incorporation, all shares beneficially owned by
any person in excess of the 5% or 10% limits
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shall be considered "excess shares" and shall not be counted as shares entitled
to vote and shall not be voted by any person or counted as voting shares in
connection with any matters submitted to the stockholders for a vote. These
limitations shall not apply to any transaction in which American Savings forms a
holding company without a change in the respective beneficial ownership
interests of its stockholders other than by the exercise of any dissenter or
appraisal rights. If holders of revocable proxies for more than 10% of the
shares of the common stock of American Financial seek, among other things, to
elect one-third or more of American Financial's Board of Directors, to cause
American Financial's stockholders to approve the acquisition or corporate
reorganization of American Financial or to exert a continuing influence on a
material aspect of the business operations of American Financial, which actions
could indirectly result in a change in control of American Savings, the Board of
Directors of American Savings will be able to assert this provision of American
Savings' stock Certificate of Incorporation against such holders. Although the
Board of Directors of American Savings is not currently able to determine when
and if it would assert this provision of American Savings' stock Certificate of
Incorporation, the Board, in exercising its fiduciary duty, may assert this
provision if it were deemed to be in the best interests of American Savings,
American Financial and its stockholders. It is unclear, however, whether this
provision, if asserted, would be successful against such persons in a proxy
contest which could result in a change in control of American Savings indirectly
through a change in control of American Financial.
In addition, stockholders will not be permitted to cumulate their votes in
the election of Directors. Furthermore, American Savings' Bylaws provide for
the election of three classes of directors to staggered terms. The staggered
terms of the Board of Directors could have an anti-takeover effect by making it
more difficult for a majority of shares to force an immediate change in the
Board of Directors since only one-third of the Board is elected each year. The
purpose of these provisions is to assure stability and continuity of management
of American Savings in the years immediately following the conversion.
Finally, the stock Certificate of Incorporation provides for the issuance
of shares of preferred stock on such terms, including conversion and voting
rights, as may be determined by American Savings' Board of Directors without
stockholder approval. Although American Savings has no arrangements,
understandings or plans at the present time for the issuance or use of the
shares of undesignated preferred stock proposed to be authorized, the Board
believes that the availability of such shares will provide American Savings with
increased flexibility in structuring possible future financings and acquisitions
and in meeting other corporate needs which may arise. If a proposed merger,
tender offer or other attempt to gain control of American Savings occurs of
which management does not approve, the Board can authorize the issuance of one
or more series of preferred stock with rights and preferences which could impede
the completion of such a transaction. An effect of the possible issuance of
such preferred stock, therefore, may be to deter a future takeover attempt. The
Board does not intend to issue any preferred stock except on terms which the
Board deems to be in the best interest of American Savings and its then existing
stockholders.
Regulatory Restrictions
Connecticut Conversion Regulations. Regulations issued by the Connecticut
Banking Commissioner provide that for a period of three years following the date
of the completion of the conversion (unless a longer period is specified in the
converting institution's plan of conversion), no person, acting singly or
together with associates in a group of persons acting in concert, shall directly
or indirectly offer to acquire or acquire the beneficial ownership of more than
ten percent (10%) of any class of any equity security of American Financial
without the prior written approval of the Connecticut Banking Commissioner.
Where any person, directly or indirectly, acquires beneficial ownership of more
than ten percent (10%) of any class of any equity security of American Financial
without the prior written approval of the Connecticut Banking Commissioner, the
securities beneficially owned by such person in excess of ten percent (10%)
shall not be voted by any person or counted as voting shares in connection with
any matter submitted to the stockholders for a vote, and shall not be counted as
outstanding for purposes of determining the affirmative vote necessary to
approve any matter submitted to the stockholders for a vote.
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Change in Bank Control Act. The acquisition of ten percent (10%) or more
of the common stock outstanding may trigger the provisions of the Change in Bank
Control Act. The Federal Deposit Insurance Corporation has also adopted a
regulation under the Change in Bank Control Act which generally requires persons
who at any time intend to acquire control of a Federal Deposit Insurance
Corporation-insured state-chartered non-member bank, including a converted
savings bank such as American Savings, to provide 60 days prior written notice
and certain financial and other information to the Federal Deposit Insurance
Corporation.
The 60-day notice period does not commence until the information is deemed
to be substantially complete. Control for the purpose of this Act exists in
situations in which the acquiring party has voting control of at least twenty-
five percent (25%) of any class of American Savings' voting stock or the power
to direct the management or policies of American Savings. However, under
Federal Deposit Insurance Corporation regulations, control is presumed to exist
where the acquiring party has voting control of at least ten percent (10%) of
any class of American Savings' voting securities if American Savings has a class
of voting securities which is registered under Section 12 of the Exchange Act,
or the acquiring party would be the largest holder of a class of voting shares
of American Savings. The statute and underlying regulations authorize the
Federal Deposit Insurance Corporation to disapprove a proposed acquisition on
certain specified grounds.
Federal Reserve Board Regulations. If American Savings does not maintain
its qualification as a qualified thrift lender, attempts to acquire control of
American Savings trigger the regulations of the Federal Reserve Board under the
Change in Bank Control Act.
Connecticut Banking Law. 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. 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. Additionally, an out-of-state company which already
directly or indirectly controls voting power of 25% or more of the voting stock
of any bank or any bank holding company may not also acquire direct or indirect
ownership or control of more than 10% of the voting stock of another Connecticut
bank or Connecticut bank holding company unless such bank or holding company has
been in existence for at least five years and the Connecticut Banking
Commissioner approves the acquisition. These statutory restrictions are in
addition to the regulatory restrictions discussed above under "--Regulatory
Restrictions--Connecticut Conversion Regulations."
Prior approval of the Connecticut Banking Commissioner is also required
before any action is taken that causes any Connecticut stock bank to organize a
holding company to acquire the shares of the Connecticut stock bank. The
Connecticut Banking Commissioner will approve such a plan of acquisition,
following approval by a majority vote of the boards of directors of the acquiror
and the acquiree and a two-thirds approval of the stockholders of the acquiree,
provided the Connecticut Banking Commissioner finds that the terms of such plan
of acquisition are reasonable and in accordance with the law and sound public
policy. Any such company shall engage directly or indirectly only in such
activities as are now or may hereafter be proper activities for holding
companies under Connecticut law.
DESCRIPTION OF AMERICAN FINANCIAL STOCK
General
American Financial is authorized to issue 120,000,000 shares of common
stock having a par value of $.01 per share and 10,000,000 shares of preferred
stock having a par value of $.01 per share. American Financial currently expects
to issue up to 44,920,035 shares of common stock at the maximum of the estimated
valuation range, as adjusted by 15% and including shares issued to American
Savings Charitable Foundation. American Financial will not issue any shares of
preferred stock in the conversion. Each share of American Financial's common
stock will have the same relative rights as, and will be identical in all
respects with, each other share of common
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stock. Upon payment of the purchase price for the common stock, as required by
the plan of conversion, all stock will be duly authorized, fully paid and
nonassessable.
The common stock of American Financial will represent nonwithdrawable
capital, will not be an account of any type, and will not be insured by the
Federal Deposit Insurance Corporation or any other government agency.
Common Stock
Dividends. American Financial can pay dividends out of statutory surplus
or from certain net profits if, as and when declared by its Board of Directors.
The payment of dividends by American Financial is limited by law and applicable
regulation. See "Dividend Policy" and "Regulation and Supervision." The holders
of common stock of American Financial will be entitled to receive and share
equally in dividends as may be declared by the Board of Directors of American
Financial out of funds legally available therefor. If American Financial issues
preferred stock, the holders of preferred stock may have a priority over the
holders of the common stock with respect to dividends.
Voting Rights. After the conversion, the holders of common stock of
American Financial will possess exclusive voting rights in American Financial.
They will elect American Financial's Board of Directors and act on other matters
as are required to be presented to them under Delaware law or as are otherwise
presented to them by the Board of Directors. Except as discussed in
"Restrictions on Acquisition of American Financial and American Savings," each
holder of common stock will be entitled to one vote per share and will not have
any right to cumulate votes in the election of directors. If American Financial
issues preferred stock, holders of American Financial preferred stock may also
possess voting rights. Certain matters require a vote of 80% of the outstanding
shares entitled to vote. See "Restrictions on Acquisition of American Financial
and American Savings."
As a Connecticut mutual savings bank, corporate powers and control of
American Savings are currently vested in its corporators, who elect American
Savings' directors, and its Board of Directors, who elect the officers of
American Savings and who fill any vacancies on the Board of Directors. After the
conversion, voting rights will be vested exclusively in American Financial,
which will own all of the outstanding capital stock of American Savings, and
will be voted at the direction of American Financial's Board of Directors.
Consequently, the holders of the common stock of American Financial will not
have direct control of American Savings.
Liquidation. If there is any liquidation, dissolution or winding up of
American Savings, American Financial, as the holder of American Savings' capital
stock, would be entitled to receive all of American Savings' assets available
for distribution after payment or provision for payment of all debts and
liabilities of American Savings, including all deposit accounts and accrued
interest, and after distribution of the balance in the special liquidation
account to eligible account holders and supplemental eligible account holders.
Upon liquidation, dissolution or winding up of American Financial, the holders
of its common stock would be entitled to receive all of the assets of American
Financial available for distribution after payment or provision for payment of
all its debts and liabilities. If American Financial issues preferred stock, the
preferred stock holders may have a priority over the holders of the common stock
upon liquidation or dissolution.
Indemnification and Limit on Liability. American Financial's Certificate
of Incorporation contains provisions which limit the liability of and indemnity
of its directors, officers and employees. Such provisions provide that each
person who was or is made a party or is threatened to be made a party to or is
otherwise involved in any action, suit or proceeding, whether civil, criminal,
administrative or investigative, by reason of the fact that he or she is or was
a director or officer of American Financial shall be indemnified and held
harmless by American Financial to the fullest extent authorized by the Delaware
General Corporation Law against all expense, liability and loss reasonably
incurred. Under certain circumstances, the right to indemnification shall
include the right to be paid by American Financial the expenses incurred in
defending any such proceeding in advance of its final disposition. In addition,
a director of American Financial shall not be personally liable to American
Financial or its stockholders for monetary damages except for liability for any
breach of the duty of loyalty, for acts or omissions not in good
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faith or which involve intentional misconduct or knowing violation of the law,
under Section 174 of the Delaware General Corporation Law, or for any
transaction from which the director derived an improper personal benefit.
Preemptive Rights; Redemption. Holders of the common stock of American
Financial will not be entitled to preemptive rights with respect to any shares
that may be issued. The common stock cannot be redeemed.
Preferred Stock
American Financial will not issue any preferred stock in the conversion and
it has no current plans to issue any preferred stock after the conversion.
Preferred stock may be issued with designations, powers, preferences and rights
as the Board of Directors may from time to time determine. The Board of
Directors can, without stockholder approval, issue preferred stock with voting,
dividend, liquidation and conversion rights that could dilute the voting
strength of the holders of the common stock and may assist management in
impeding an unfriendly takeover or attempted change in control.
Restrictions on Acquisition
Acquisitions of American Financial are restricted by provisions in its
Certificate of Incorporation and Bylaws and by rules and regulations of various
regulatory agencies. See "Regulation and Supervision" and "Restrictions on
Acquisition of American Financial and American Savings."
DESCRIPTION OF AMERICAN SAVINGS STOCK
General
If the holding company form of organization is not utilized in connection
with the conversion, American Savings may offer shares of its common stock in
connection with the conversion. The following is a discussion of its stock.
The stock Certificate of Incorporation of American Savings, to be effective
upon the conversion, authorizes the issuance of stock consisting of 120,000,000
shares of common stock, par value $1.00 per share, and 10,000,000 shares of
preferred stock, par value $1.00 per share, which preferred stock may be issued
in series and classes having such rights, preferences, privileges and
restrictions as the Board of Directors may determine. Each share of common
stock of American Savings will have the same relative rights as, and will be
identical in all respects with, each other share of common stock. After the
conversion, the Board of Directors will be authorized to approve the issuance of
common stock up to the amount authorized by the stock Certificate of
Incorporation without the approval of American Savings' stockholders. Assuming
that the holding company form of organization is utilized, all of the issued and
outstanding common stock of American Savings will be held by American Financial.
American Savings stock will represent non-withdrawable capital, will not be an
account of an insurable type and will not be insured by the Federal Deposit
Insurance Corporation.
Common Stock
Dividends. The holders of American Savings' common stock will be entitled
to receive and to share equally in such dividends as may be declared by the
Board of Directors of American Savings out of its legally available funds. See
"Dividend Policy" for certain restrictions on the payment of dividends and
"Federal and State Taxation of Income--Federal Income Taxation" for a discussion
of the consequences of the payment of cash dividends from income appropriated to
bad debt reserves.
Voting Rights. Immediately after the conversion, the holders of American
Savings' common stock will possess exclusive voting rights in American Savings.
Each holder of shares of common stock will be entitled to one vote for each
share held. Shareholders shall not be entitled to cumulate their votes for the
election of directors. See
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"Restrictions on Acquisition of American Financial and American Savings--Anti-
Takeover Effects of American Financial's Certificate of Incorporation and Bylaws
and Management Remuneration Adopted in Conversion."
Liquidation. In the event of any liquidation, dissolution, or winding up
of American Savings, the holders of common stock will be entitled to receive,
after payment of all American Savings' debts and liabilities (including all
deposit accounts and accrued interest thereon), and distribution of the balance
in the liquidation account to eligible account holders and supplemental eligible
account holders, all assets of American Savings available for distribution in
cash or in kind. If additional preferred stock is issued after the conversion,
the holders thereof may also have priority over the holders of common stock in
the event of liquidation or dissolution.
Preemptive Rights; Redemption. Holders of American Savings' common stock
will not be entitled to preemptive rights with respect to any shares of American
Savings which may be issued. Upon receipt by American Savings of the full
specified purchase price therefor, the common stock will be fully paid and non-
assessable.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the common stock is American Stock
Transfer & Trust Company, New York, New York.
REGISTRATION REQUIREMENTS
American Financial has registered the common stock with the Securities and
Exchange Commission under Section 12(g) of the Securities Exchange Act of 1934,
as amended, and will not deregister its common stock for a period of at least
three years following the conversion. As a result of registration, the proxy and
tender offer rules, insider trading reporting and restrictions, annual and
periodic reporting and other requirements of that statute will apply.
LEGAL AND TAX OPINIONS
The legality of the common stock has been passed upon for American
Financial by Muldoon, Murphy & Faucette LLP, Washington, D.C. The federal tax
consequences of the conversion have been opined upon by Muldoon, Murphy &
Faucette LLP and the State of Connecticut tax consequences of the conversion
have been opined upon by KPMG LLP, Hartford, Connecticut. Muldoon, Murphy &
Faucette LLP and KPMG LLP have consented to the references to their opinions in
this prospectus. Certain legal matters will be passed upon for Sandler O'Neill
by Tyler Cooper & Alcorn, LLP, Hartford, Connecticut.
EXPERTS
The financial statements of American Savings as of December 31, 1998 and
1997, and for each of the years in the three-year period ended December 31, 1998
are included in this prospectus and in the registration statement in reliance
upon the report of KPMG LLP, Hartford, Connecticut, independent certified public
accountants, included elsewhere in this prospectus and upon the authority of
said firm as experts in accounting and auditing.
FinPro has consented to the summary in this prospectus of its report to
American Savings setting forth its opinion as to the estimated pro forma market
value of American Financial and American Savings, as converted, and its letter
with respect to subscription rights, and to the use of its name and statements
with respect to it appearing in this prospectus.
WHERE YOU CAN FIND MORE INFORMATION
American Financial has filed with the Securities and Exchange Commission a
Registration Statement on Form S-1 (File No. 333-84463) under the Securities Act
of 1933, as amended, with respect to the common stock offered in the conversion.
This prospectus does not contain all the information contained in the
registration
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statement, certain parts of which are omitted as permitted by the rules and
regulations of the Securities and Exchange Commission. This information may be
inspected at the public reference facilities maintained by the Securities and
Exchange Commission at 450 Fifth Street, NW, Room 1024, Washington, D.C. 20549
and at its regional offices at 500 West Madison Street, Suite 1400, Chicago,
Illinois 60661; and 7 World Trade Center, Suite 1300, New York, New York 10048.
Copies may be obtained at prescribed rates from the Public Reference Room of the
Securities and Exchange Commission at 450 Fifth Street, NW, Washington, D.C.
20549. The public may obtain information on the operation of the Public
Reference Room by calling the Securities and Exchange Commission at 1-800-SEC-
0330. The registration statement also is available through the Securities and
Exchange Commission's World Wide Web site on the Internet at http://www.sec.gov.
American Savings has filed an application for approval of conversion with
the Connecticut Banking Commissioner and a notice of intent to convert with the
Federal Deposit Insurance Corporation. This prospectus omits certain
information contained in that application and notice. The conversion
application may be examined at the Office of the Connecticut Banking
Commissioner, State of Connecticut Department of Banking, 260 Constitution
Plaza, Hartford, Connecticut 06103. The notice of intent to convert may be
examined at the Federal Deposit Insurance Corporation's offices at 15 Braintree
Hill Office Park, Suite 100, Braintree, Massachusetts 02184.
American Financial has filed with the Office of Thrift Supervision an
application to become the holding company for American Savings. This prospectus
omits certain information contained in that application. The application may be
inspected, without charge, at the offices of the Office of Thrift Supervision,
1700 G Street, NW, Washington, D.C. 20552 and at the offices of the Regional
Director of the Office of Thrift Supervision at the Northeast Regional Office of
the Office of Thrift Supervision, 10 Exchange Place, 18/th/ Floor, Jersey City,
New Jersey 07302.
A copy of the plan of conversion, as amended, American Financial's
Certificate of Incorporation and Bylaws and American Savings' stock Certificate
of Incorporation and Bylaws are available without charge from American Savings
by contacting the conversion center at (860) 612-2733. Copies of these
documents may also be obtained by calling Sheri C. Pasqualoni at (860) 827-2585.
A copy of FinPro's appraisal report is available for inspection at the
Bank's administrative offices located at 102 West Main Street, New Britain,
Connecticut.
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INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
AMERICAN SAVINGS BANK
<TABLE>
<CAPTION>
Page
----
<S> <C>
Independent Auditors' Report....................................................................... F-2
Consolidated Balance Sheets as of May 31, 1999 (unaudited) and December 31, 1998 and 1997.......... F-3
Consolidated Statements of Income for the Five Months Ended May 31, 1999 and 1998 (unaudited) and
for the Years Ended December 31, 1998, 1997 and 1996.......................................... 32
Consolidated Statements of Equity for the Five Months Ended May 31, 1999 (unaudited) and
for the Years Ended December 31, 1998, 1997 and 1996.......................................... F-4
Consolidated Statements of Cash Flows for the Five Months Ended May 31, 1999 and 1998
(unaudited), and for the Years Ended December 31,1998, 1997 and 1996.......................... F-5
Notes to Consolidated Financial Statements......................................................... F-6
</TABLE>
* * *
All schedules are omitted as the required information either is not
applicable or is included in the Consolidated Financial Statements or related
Notes.
Separate financial statements for American Financial have not been included
in this prospectus because American Financial, which has engaged only in
organizational activities to date, has no significant assets, contingent or
other liabilities, revenues or expenses.
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
American Savings Bank:
We have audited the accompanying consolidated balance sheets of American Savings
Bank and subsidiaries as of December 31, 1998 and 1997, and the related
consolidated statements of income (which are included on page 34 of the
prospectus), equity and cash flows for each of the years in the three-year
period ended December 31, 1998. These consolidated financial statements are the
responsibility of the Bank's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the 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 Savings
Bank and subsidiaries as of December 31, 1998 and 1997, and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 1998, in conformity with generally accepted accounting
principles.
/s/ KPMG LLP
February 17, 1999,
except for Note 17 which is as of June 28, 1999
F-2
<PAGE>
AMERICAN SAVINGS BANK
Consolidated Balance Sheets
<TABLE>
<CAPTION>
May 31, December 31, December 31,
Assets 1999 1998 1997
--------------- --------------- ---------------
(unaudited)
<S> <C> <C> <C>
Cash and due from banks (note 2):
Non-interest bearing $ 17,474,392 20,119,389 16,266,038
Interest bearing 5,289,975 5,002,554 4,089
--------------- --------------- ---------------
22,764,367 25,121,943 16,270,127
Federal funds sold 31,600,000 30,700,000 23,800,000
Investment securities available for sale (amortized cost of
$307,351,434 at May 31, 1999, $350,991,177 at December 31, 1998,
and $372,387,846 at December 31, 1997) (note 3) 370,389,723 417,673,315 432,031,801
Mortgage-backed securities available for sale (amortized cost of
$204,708,039 at May 31, 1999, $170,389,698 at December 31, 1998,
and $131,709,845 at December 31, 1997) (note 3) 205,868,171 172,855,177 132,816,950
Loans, less allowance for loan losses of $7,972,660 at May 31, 1999,
$7,625,659 at December 31, 1998, and $6,276,984 at December 31, 1997
(notes 4 and 5) 941,251,086 907,254,369 837,683,438
Real estate owned 617,329 719,951 738,953
Accrued interest and dividends receivable 11,316,578 11,259,693 11,822,451
Federal Home Loan Bank stock 10,434,100 9,396,900 8,371,200
Bank premises and equipment, net (note 6) 13,449,464 12,883,480 9,153,506
Other assets 2,018,620 2,585,737 2,573,504
--------------- --------------- ---------------
$ 1,609,709,438 1,590,450,565 1,475,261,930
=============== =============== ===============
Liabilities and Equity
Deposits (note 7) $ 1,151,648,094 1,143,753,883 1,096,397,633
Mortgagors' escrow deposits 8,274,380 10,652,730 10,887,100
Advances from Federal Home Loan Bank (note 8) 129,743,750 120,243,750 80,243,750
Deferred income tax liability (note 11) 26,135,148 26,831,306 25,187,101
Accrued interest payable on deposits 1,340,418 661,405 698,225
Funds held under loan servicing agreements 951,090 1,183,543 853,740
Other liabilities 5,588,194 6,140,278 2,853,380
--------------- --------------- ---------------
1,323,681,074 1,309,466,895 1,217,120,929
--------------- --------------- ---------------
Commitments and contingencies (notes 12 and 13)
Equity (notes 9, 14 and 17):
Undivided profits 249,122,517 241,223,784 223,209,142
Accumulated other comprehensive income 36,905,847 39,759,886 34,931,859
--------------- --------------- ---------------
286,028,364 280,983,670 258,141,001
--------------- --------------- ---------------
$ 1,609,709,438 1,590,450,565 1,475,261,930
=============== =============== ===============
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE>
AMERICAN SAVINGS BANK
Consolidated Statements of Equity
<TABLE>
<CAPTION>
Accumulated
other
Undivided comprehensive Total
profits income Equity
------------- ------------- -------------
<S> <C> <C> <C>
Balance, December 31, 1995 $ 189,219,364 21,582,085 210,801,449
Comprehensive income:
Net income 15,729,996 __ 15,729,996
Other comprehensive income, net of tax:
Net unrealized gains on available-for-sale securities
net of reclassification adjustment -- 3,632,304 3,632,304
-------------
Total comprehensive income 19,362,300
------------- ------------ -------------
Balance, December 31, 1996 204,949,360 25,214,389 230,163,749
Comprehensive income:
Net income 18,259,782 -- 18,259,782
Other comprehensive income, net of tax:
Net unrealized gains on available-for-sale securities
net of reclassification adjustment -- 9,717,470 9,717,470
-------------
Total comprehensive income 27,977,252
------------- ------------ -------------
Balance, December 31, 1997 223,209,142 34,931,859 258,141,001
------------- ------------ -------------
Comprehensive income:
Net income 18,014,642 -- 18,014,642
Other comprehensive income, net of tax:
Net unrealized gains on available-for-sale securities
net of reclassification adjustment (note 14) -- 4,828,027 4,828,027
-------------
Total comprehensive income 22,842,669
------------- ------------ -------------
Balance, December 31, 1998 241,223,784 39,759,886 280,983,670
------------- ------------ -------------
Comprehensive income:
Net income 7,898,733 -- 7,898,733
Other comprehensive loss, net of tax:
Net unrealized loss on available-for-sale securities
net of reclassification adjustment (Note 14) -- (2,854,039) (2,854,039)
-------------
Total comprehensive income 5,044,694
------------- ------------ -------------
Balance, May 31, 1999 $ 249,122,517 36,905,847 286,028,364
============= ============ =============
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
AMERICAN SAVINGS BANK
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
Five months ended May 31, Year ended December 31,
----------------------------- ---------------------------------------------
1999 1998 1998 1997 1996
------------- ------------ ------------- ------------ -----------
<S> <C> <C> <C> <C> <C>
Operating activities:
Net income $ 7,898,733 9,016,111 18,014,642 18,259,782 15,729,996
Adjustments to reconcile net income
to net cash (used) provided by
operating activities:
Provision for loan losses 800,000 1,000,000 2,400,000 2,154,500 2,250,000
Depreciation and amortization
of bank premises and equipment 689,636 619,621 1,480,605 1,119,419 946,013
Amortization of premiums (676,666) (863,303) (2,126,302) (2,591,280) (1,519,159)
(Increase) decrease in accrued
interest and dividends receivable (56,885) 413,420 562,758 (1,869,301) 7,478
Gain on sale/contribution of investment
securities available for sale (2,797,133) (4,196,180) (6,695,933) (4,655,255) (3,950,256)
Deferred income taxes 1,398,999 (513,926) (1,924,325) (799,068) (233,452)
Decrease in prepaid income taxes -- -- -- 358,820 662,601
Decrease (increase) in other assets 567,117 495,135 (12,233) (107,166) (373,762)
Increase (decrease) in other liabilities (253,841) 1,107,747 3,579,881 (1,392,103) 620,935
Loans originated for sale (10,441,521) (6,461,987) (13,474,627) (6,327,280) (16,838,332)
Sale of loans, originated for sale 10,496,355 6,465,391 13,458,025 6,332,857 16,810,912
Increase in net deferred loan
origination costs (884,817) (142,817) (605,424) (444,621) (698,852)
Net (gain) loss on sale of loans (54,834) (3,404) 16,602 (5,577) 27,420
Net gain on disposition of real estate owned (172,021) (162,095) (550,130) (209,051) (309,749)
------------- ------------ ------------- ------------ -----------
Net cash (used) provided by
operating activities 6,513,122 6,773,713 14,123,539 9,824,676 13,131,793
------------- ------------ ------------- ------------ -----------
Investing activities:
Principal paydowns on mortgage-backed
securities 23,079,484 16,570,112 42,335,133 17,827,942 20,353,347
Investment and mortgage-backed securities
available for sale:
Purchases (204,157,650) (198,898,145) (404,046,130) (402,040,164) (321,219,202)
Proceeds from sales 5,324,995 4,327,500 6,862,438 5,838,168 4,145,403
Proceeds from maturities 188,548,375 169,088,636 346,387,620 382,750,000 242,620,000
Purchases of Federal Home Loan Bank stock (1,037,200) (1,025,700) (1,025,700) -- --
Net increase in loans (35,267,951) (25,043,004) (74,243,586) (94,709,195) (72,210,403)
Net increase in bank premises and equipment (1,255,620) (900,803) (5,210,579) (2,244,768) (3,457,412)
Proceeds from the sales of real estate owned 1,779,008 1,870,307 3,447,201 3,403,021 3,100,215
------------- ------------ ------------- ------------ -----------
Net cash used by investing activities (22,986,559) (34,011,097) (85,493,603) (89,174,996) (126,668,052)
------------- ------------ ------------- ------------ -----------
Financing activities:
Increase in demand deposits, regular
savings, NOW and money management accounts 15,843,327 29,779,551 39,491,360 2,017,306 11,572,162
(Decrease) increase in certificates of deposit,
retirement accounts, and IRA passbook accounts (7,949,116) (1,983,516) 7,864,890 18,821,849 10,522,308
(Decrease) increase in mortgagors' escrow deposits (2,378,350) (2,985,438) (234,370) 5,609,843 1,036,079
Advances from the Federal Home Loan Bank 9,500,000 -- 40,000,000 30,000,000 50,000,000
------------- ------------ ------------- ------------ -----------
Net cash provided by financing activities 15,015,861 24,810,597 87,121,880 56,448,998 73,130,549
------------- ------------ ------------- ------------ -----------
Increase (decrease) in cash and cash equivalents (1,457,576) (2,426,787) 15,751,816 (22,901,322) (40,405,710)
Cash and cash equivalents at beginning of period 55,821,943 40,070,127 40,070,127 62,971,449 103,377,159
------------- ------------ ------------- ------------ -----------
Cash and cash equivalents at end of period $ 54,364,367 37,643,340 55,821,943 40,070,127 62,971,449
============= ============ ============= ============ ===========
Supplemental information:
Cash paid during the period:
Interest on deposits and other borrowings $ 21,657,317 22,495,325 53,898,357 52,331,864 49,138,276
Income taxes 2,210,000 2,596,000 9,890,000 8,295,000 8,270,000
Transfers of loans to real estate owned 1,356,051 2,328,097 2,878,069 2,856,195 1,941,322
Contribution of securities to charitable
foundation -- 2,103,775 3,632,413 4,329,584 --
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
AMERICAN SAVINGS BANK
Notes to Consolidated Financial Statements
May 31, 1999 and 1998 (unaudited) and December 31, 1998, 1997 and 1996
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
American Savings Bank (the Bank) is a state-chartered mutual savings bank
whose deposits are insured up to specified limits by the Bank Insurance
Fund administered by the Federal Deposit Insurance Corporation (the FDIC).
The Bank provides a full range of banking and other financial services to
individual customers located primarily in Connecticut. The Bank is subject
to competition from other financial institutions. The Bank also is subject
to the regulations of certain state and federal agencies and undergoes
periodic examinations by those regulatory authorities. As discussed in Note
17, the Bank has adopted a Plan of Conversion pursuant to which the Bank
will convert to a state-chartered stock bank.
(a) BASIS OF PRESENTATION
The consolidated financial statements have been prepared in conformity
with generally accepted accounting principles, and include the
accounts of the Bank and its subsidiaries, American Investment
Services, Inc. and American Savings Bank Mortgage Servicing Company.
All significant intercompany transactions have been eliminated in
consolidation. In preparing the consolidated financial statements,
management is required to make estimates and assumptions that affect
the reported amounts of assets and liabilities as of the date of the
balance sheet and revenues and expenses for the period. Actual results
could differ from those estimates.
Material estimates that are particularly susceptible to changes in the
near-term relate to the determination of the allowance for loan losses
and the valuation of real estate owned. In connection with real estate
owned, management obtains independent appraisals for significant
properties to determine the market value of the property.
While management uses 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 Bank's allowance for loan losses.
Such agencies may require the Bank to recognize additions to the
allowance based on their judgments about information available to them
at the time of their examinations.
(b) UNAUDITED INTERIM FINANCIAL STATEMENTS
The consolidated financial statements and related notes as of May 31,
1999 and for the five months ended May 31, 1999 and 1998 are
unaudited. All adjustments, consisting of only normal recurring
adjustments, which in the opinion of management are necessary for fair
presentation of financial position, results of operations and cash
flows, have been made. The results of operations for the five months
ended May 31, 1999 are not necessarily indicative of the results which
may be expected for a full year.
F-6
<PAGE>
AMERICAN SAVINGS BANK
Notes to Consolidated Financial Statements
May 31, 1999 and 1998 (unaudited) and December 31, 1998, 1997 and 1996
(c) INVESTMENT AND MORTGAGE-BACKED SECURITIES
The Bank classifies 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
securities. Trading securities are bought and held principally for the
purpose of selling them in the near term. Held to maturity securities
are those securities which the Bank 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.
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 as a component of equity (accumulated other comprehensive
income) 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 interest 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
Interest on loans is credited to income based on the rate applied to
principal amounts outstanding. Interest on loans is not accrued when,
in the judgment of management, the collectibility of the principal or
interest becomes doubtful. The Bank's policy is to discontinue the
accrual of interest when principal or interest payments are delinquent
90 days or more. Once the accrual of interest on a loan is
discontinued, all interest previously accrued is reversed against
current period interest income if management determines that interest
is uncollectible. Loans are removed from nonaccrual status when they
become less than 90 days past due and when concern no longer exists as
to the collectibility of principal and interest.
Certain direct loan origination costs, net of loan origination fees,
are deferred and recognized in interest income over the life of the
related loan as an adjustment to the related loan's yield.
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 existing loan portfolio. Loan losses are charged against the
allowance when management believes the collectibility of the principal
balance outstanding is unlikely.
F-7
<PAGE>
AMERICAN SAVINGS BANK
Notes to Consolidated Financial Statements
May 31, 1999 and 1998 (unaudited) and December 31, 1998, 1997 and 1996
Impaired loans are those for which it is probable that the Bank will
be unable to collect all amounts due according to the 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 Bank 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.
(e) LOANS HELD FOR SALE AND SERVICING
Loans held for sale are carried at the lower of aggregate cost or
market value. Any adjustment to reduce the carrying amount to market
value results in a charge to earnings. Gains on the sale of loans are
recognized on the date the transaction is settled.
When the Bank acquires mortgage servicing rights either through the
purchase or origination of mortgage loans (originated mortgage loan
servicing rights) and sells or securitizes those loans with servicing
rights retained, it allocates the total cost of the mortgage loans to
the mortgage servicing rights and the loans (without the mortgage
servicing rights) based on their relative fair values. Capitalized
mortgage servicing rights are amortized 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 a level-yield
method. Capitalized mortgage servicing rights are periodically
evaluated for impairment. If impairment is identified, the amount of
impairment is charged to earnings with the establishment of a
valuation allowance against the mortgage servicing rights.
(f) REAL ESTATE OWNED
Real estate owned primarily consists of properties acquired through
foreclosure or deeded to the Bank 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 (FHLB) of Boston, 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.
F-8
<PAGE>
AMERICAN SAVINGS BANK
Notes to Consolidated Financial Statements
May 31, 1999 and 1998 (unaudited) and December 31, 1998, 1997 and 1996
(h) BANK PREMISES AND EQUIPMENT
Bank premises and equipment are stated at cost less accumulated
depreciation and amortization. Depreciation and amortization are
computed on the straight-line and declining-balance methods 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 or the life
of the asset, whichever is shorter. The cost of maintenance and
repairs is charged to income as incurred, whereas significant renewals
are capitalized. The cost and accumulated depreciation relating to
premises and equipment retired or otherwise disposed of are eliminated
from accounts and any resulting gains and losses are credited or
charged to income.
(i) INCOME TAXES
The Bank accounts for deferred income taxes using the asset and
liability method. Under the asset and liability method, deferred tax
assets and liabilities are established for the temporary differences
between the financial reporting basis and the tax basis of the Bank's
assets and liabilities at enacted tax rates expected to be in effect
when such amounts 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 change during the year in the amount of deferred
tax assets and liabilities. 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) EMPLOYEE BENEFIT PLANS
401k Plan
The Bank has a 401(k) savings plan available to employees who have
completed one year of service and worked at least 1,000 hours for that
year. Each participant elects a pre-tax deduction up to 15% of base
pay. Employee contributions of 1% to 6% are matched by the Bank at a
rate of 50% of employee contributions.
F-9
<PAGE>
AMERICAN SAVINGS BANK
Notes to Consolidated Financial Statements
May 31, 1999 and 1998 (unaudited) and December 31, 1998, 1997 and 1996
Pension Plan
The Bank has a non-contributory defined benefit plan covering
substantially all employees meeting certain age and length of service
requirements. 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 Bank's funding policy is to
contribute annually the maximum amount that can be deducted for
federal income tax purposes.
Other Postretirement Benefits
The Bank sponsors a master health care plan and life insurance plan
for substantially all retirees and employees. The cost of providing
retiree health care and other postretirement benefits is recognized
over the period the employee renders service to the Bank.
(k) FAIR VALUE OF FINANCIAL INSTRUMENTS
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
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.
(l) CONSOLIDATED STATEMENTS OF CASH FLOWS
For purposes of this financial statement, the Bank defines cash and
due from banks and federal funds sold as cash equivalents.
F-10
<PAGE>
AMERICAN SAVINGS BANK
Notes to Consolidated Financial Statements
May 31, 1999 and 1998 (unaudited) and December 31, 1998, 1997 and 1996
(m) TRUST ASSETS
Approximately $112,043,000, $108,571,000 and $94,898,000 of assets
were held by the Bank at May 31, 1999, and December 31, 1998 and 1997,
respectively, in a fiduciary or agency capacity for customers. These
assets are not included in the accompanying consolidated financial
statements, since they are not owned by the Bank.
(n) COMPREHENSIVE INCOME
SFAS No. 130, "Reporting Comprehensive Income," establishes standards
for the reporting and display of comprehensive income and its
components. Comprehensive income includes net income and any changes
in equity from sources that bypass the income statement (such as
changes in net unrealized gains and losses on securities available for
sale). SFAS No. 130 affects financial statement disclosures only and
has no effect on the Bank's financial position or results of
operations.
(o) 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-orientated financial institution, substantially all of the
Bank'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 these community-banking
operations, which constitutes that Bank's only operating segment for
financial reporting purposes under SFAS No. 131.
(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 May 31, 1999 and December
31, 1998, the Bank maintained cash and liquid assets of approximately
$1,000,000 in satisfaction of these regulatory requirements.
F-11
<PAGE>
AMERICAN SAVINGS BANK
Notes to Consolidated Financial Statements
May 31, 1999 and 1998 (unaudited) and December 31, 1998, 1997 and 1996
(3) INVESTMENT AND MORTGAGE-BACKED SECURITIES
The Bank classified all investment and mortgage-backed securities as
available for sale as of May 31, 1999, and December 31, 1998 and 1997. The
amortized cost, gross unrealized gains, gross unrealized losses, and
estimated fair values of investment and mortgage-backed securities at
May 31, 1999 and December 31, 1998 and 1997 are as follows:
<TABLE>
<CAPTION>
MAY 31, 1999
------------------------------------------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
----------------- ----------------- ----------------- -----------------
<S> <C> <C> <C> <C>
Available for sale
Investments:
U.S. Treasury notes $ 10,041,905 292,470 -- 10,334,375
U.S. Government agencies 55,520,989 -- (335,769) 55,185,220
Corporate bonds and notes 185,108,862 198,151 (1,552,651) 183,754,362
Other bonds and notes 43,699,276 -- (84,213) 43,615,063
Marketable equity securities 12,980,402 64,553,883 (33,582) 77,500,703
----------------- ----------------- ----------------- -----------------
307,351,434 65,044,504 (2,006,215) 370,389,723
----------------- ----------------- ----------------- -----------------
Mortgage-backed securities:
Freddie Mac 154,981,529 1,456,171 (637,174) 155,800,526
Fannie Mae 49,726,510 407,389 (66,254) 50,067,645
----------------- ----------------- ----------------- -----------------
204,708,039 1,863,560 (703,428) 205,868,171
----------------- ----------------- ----------------- -----------------
Total available for sale $ 512,059,473 66,908,064 (2,709,643) 576,257,894
================= ================= ================= =================
</TABLE>
At May 31, 1999, the net unrealized gain on securities available for sale
of $64,198,421, net of income tax of $27,292,574, is shown as accumulated
other comprehensive income.
F-12
<PAGE>
AMERICAN SAVINGS BANK
Notes to Consolidated Financial Statements
May 31, 1999 and 1998 (unaudited) and December 31, 1998, 1997 and 1996
<TABLE>
<CAPTION>
DECEMBER 31, 1998
-----------------------------------------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
----------------- ----------------- ---------------- -----------------
<S> <C> <C> <C> <C>
Available for sale
Investments:
U.S. Treasury notes $ 27,048,233 631,454 -- 27,679,687
U.S. Government agencies 78,025,274 128,930 -- 78,154,204
Corporate bonds and notes 138,257,777 467,587 -- 138,725,364
Other bonds and notes 55,633,277 373,237 (323,826) 55,682,688
Marketable equity securities 12,026,616 65,599,491 (194,735) 77,431,372
Auction market preferred
stocks 40,000,000 -- -- 40,000,000
----------------- ----------------- ---------------- -----------------
350,991,177 67,200,699 (518,561) 417,673,315
----------------- ----------------- ---------------- -----------------
Mortgage-backed securities:
Freddie Mac 132,294,166 2,128,509 (16,941) 134,405,734
Fannie Mae 38,095,532 353,911 -- 38,449,443
----------------- ----------------- ---------------- -----------------
170,389,698 2,482,420 (16,941) 172,855,177
----------------- ----------------- ---------------- -----------------
Total available for sale $ 521,380,875 69,683,119 (535,502) 590,528,492
================= ================= ================ =================
</TABLE>
At December 31, 1998, the net unrealized gain on securities available for
sale of $69,147,617, net of income taxes of $29,387,731, is shown as
accumulated other comprehensive income.
F-13
<PAGE>
AMERICAN SAVINGS BANK
Notes to Consolidated Financial Statements
May 31, 1999 and 1998 (unaudited) and December 31, 1998, 1997 and 1996
<TABLE>
<CAPTION>
DECEMBER 31, 1997
--------------------------------------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
----------------- ----------------- ---------------- -----------------
<S> <C> <C> <C> <C>
Available for sale
Investments:
U.S. Treasury notes $ 50,473,364 401,532 (77,240) 50,797,656
U.S. Treasury bills 29,070,857 21,537 (249) 29,092,145
U.S. Government agencies 168,210,180 116,934 (10,218) 168,316,896
Corporate bonds and notes 114,659,737 168,077 -- 114,827,814
Other bonds and notes 1,303,156 188,665 (36,972) 1,454,849
Marketable equity securities 8,670,552 58,899,400 (27,511) 67,542,441
----------------- ----------------- ---------------- -----------------
372,387,846 59,796,145 (152,190) 432,031,801
----------------- ----------------- ---------------- -----------------
Mortgage-backed securities:
Freddie Mac 90,964,203 1,057,675 (44,990) 91,976,888
Fannie Mae 40,745,642 189,213 (94,793) 40,840,062
----------------- ----------------- ---------------- -----------------
131,709,845 1,246,888 (139,783) 132,816,950
----------------- ----------------- ---------------- -----------------
Total available for sale $ 504,097,691 61,043,033 (291,973) 564,848,751
================= ================= ================ =================
</TABLE>
At December 31, 1997, the net unrealized gain on securities available for
sale of $60,751,060, net of income taxes of $25,819,201, is shown as
accumulated other comprehensive income.
F-14
<PAGE>
AMERICAN SAVINGS BANK
Notes to Consolidated Financial Statements
May 31, 1999 and 1998 (unaudited) and December 31, 1998, 1997 and 1996
The amortized cost and fair value of debt securities at May 31, 1999 and
December 31, 1998, 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>
MAY 31, 1999 DECEMBER 31, 1998
------------------------------- ----------------------------
AMORTIZED FAIR AMORTIZED FAIR
COST VALUE COST VALUE
-------------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Available for sale:
Due in one year or less $ 152,268,547 152,146,514 212,329,557 212,647,397
Due after one year through five years 130,608,248 129,169,757 75,133,858 75,463,606
Due after five years through ten years 11,494,237 11,572,749 11,501,146 12,130,940
-------------- ----------- ----------- -----------
294,371,032 292,889,020 298,964,561 300,241,943
Mortgage-backed securities 204,708,039 205,868,171 170,389,698 172,855,177
-------------- ----------- ----------- -----------
$ 499,079,071 498,757,191 469,354,259 473,097,120
============== =========== =========== ===========
</TABLE>
A security with an amortized cost and fair value of $5,000,000 at May 31,
1999 was pledged to secure public deposits. A security with an amortized
cost of $2,004,972 and a fair value of $2,012,820 at December 31, 1998 was
pledged to secure public deposits.
There were no sales of mortgage-backed securities during the five month
periods ended May 31, 1999 and 1998 and during the years ended December 31,
1998, 1997 and 1996. Proceeds from sales of investment securities available
for sale were $5,324,995 and $4,327,500 for the five months ended May 31,
1999 and 1998, respectively. Gross realized gains on these sales were
$2,797,133 and $2,142,454 for the five months ended May 31, 1999 and 1998,
respectively, and there were no realized losses. In addition, during the
five months ended May 31, 1998, investment securities with an amortized
cost of $50,049 and fair value of $2,103,775 were contributed to the
American Savings Bank Foundation, Inc. (the "Foundation"), resulting in
recognition of a gain of $2,053,726. There were no contributions of
securities to the Foundation during the five months ended May 31, 1999.
Proceeds from sales of investment securities available for sale for the
year ended December 31, 1998, were $6,862,438. Gross realized gains on
these sales were $3,148,740 and there were no realized losses. In addition,
during the year ended December 31, 1998, investment securities with an
amortized cost of $85,220 and fair value of $3,632,413 were contributed to
the Foundation, resulting in recognition of a gain of $3,547,193.
F-15
<PAGE>
AMERICAN SAVINGS BANK
Notes to Consolidated Financial Statements
May 31, 1999 and 1998 (unaudited) and December 31, 1998, 1997 and 1996
Proceeds from sales of investment securities available for sale for the
year ended December 31, 1997 were $5,838,168. Gross realized gains on these
sales were $508,342 and there were no realized losses. In addition, during
the year ended December 31 1997, investment securities with an amortized
cost of $182,671 and fair value of $4,329,584 were contributed to the
Foundation, resulting in recognition of a gain of $4,146,913.
Proceeds from sales of investment securities available for sale for the
year ended December 31, 1996, were $4,145,403. Gross realized gains on
these sales were $3,950,256 and there were no realized losses. No
securities were contributed to the Foundation during 1996.
(4) LOANS
The composition of the Bank's loan portfolio was as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
MAY 31, -----------------------------------------
1999 1998 1997
----------------- ------------------ ------------------
<S> <C> <C> <C>
Real estate mortgage loans:
One- to four - family $ 653,016,137 624,819,067 588,049,836
Residential construction 15,745,314 17,177,224 11,755,172
Multi - family 858,278 871,683 968,541
Commercial 339,321 350,858 1,094,243
----------------- ------------------ ------------------
Total real estate mortgage loans 669,959,050 643,218,832 601,867,792
----------------- ------------------ ------------------
Consumer loans:
Equity loans and lines of credit 255,985,101 243,101,875 216,814,029
Automobile 17,318,565 20,084,965 20,792,973
Other 3,542,070 6,940,213 3,556,909
----------------- ------------------ ------------------
Total consumer loans 276,845,736 270,127,053 241,163,911
----------------- ------------------ ------------------
Total loans 946,804,786 913,345,885 843,031,703
Net deferred loan origination costs 2,418,960 1,534,143 928,719
Allowance for loan losses (7,972,660) (7,625,659) (6,276,984)
----------------- ------------------ ------------------
$ 941,251,086 907,254,369 837,683,438
================= ================== ==================
</TABLE>
Loans on nonaccrual status amounted to $2,872,335 and $5,636,813 as of
May 31, 1999 and 1998, respectively, and $3,986,104, $6,874,077 and
$6,507,843 as of December 31, 1998, 1997 and 1996, respectively. If
interest on these loans had been recognized in accordance with their
original terms, such income would have approximated $116,862 and $229,648
for the five months ended May 31, 1999 and 1998, respectively, and
$180,225, $337,753 and $327,464 for the years ended December 31, 1998, 1997
and 1996, respectively.
F-16
<PAGE>
AMERICAN SAVINGS BANK
Notes to Consolidated Financial Statements
May 31, 1999 and 1998 (unaudited) and December 31, 1998, 1997 and 1996
The Bank's investment in impaired loans was $754,000, $1.3 million and $2.2
million at May 31, 1999 and December 31, 1998 and 1997, respectively. The
allowance for loan losses on these impaired loans was approximately
$200,000, $387,000 and $444,000 at May 31, 1999 and December 31, 1998 and
1997, respectively. There were no impaired loans without a related
allowance for losses. The average balance of impaired loans was $1.5
million and $2.2 million for the five month periods ended May 31, 1999 and
1998, respectively and $1.7 million, $1.5 million and $673,000 for the
years ended December 31, 1998, 1997 and 1996. The interest income
recognized on impaired loans was not significant.
Changes in the allowance for loan losses for the periods indicated were as
follows:
<TABLE>
<CAPTION>
FIVE MONTHS ENDED MAY 31, YEARS ENDED DECEMBER 31,
----------------------------- --------------------------------------------
1999 1998 1998 1997 1996
------------- --------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Balance at beginning of period $ 7,625,659 6,276,984 6,276,984 5,587,760 4,484,019
Provision for loan losses charged
to income 800,000 1,000,000 2,400,000 2,154,500 2,250,000
Loans charged-off (538,579) (723,949) (1,154,113) (1,540,093) (1,170,623)
Recoveries 85,580 94,706 102,788 74,817 24,364
------------- --------- ---------- ---------- ----------
Balance at end of period $ 7,972,660 6,647,741 7,625,659 6,276,984 5,587,760
============= ========= ========== ========== ==========
</TABLE>
The Bank uses forward commitments to sell residential first mortgage loans,
which are entered into for the purpose of reducing the market risk
associated with originating loans held for sale. Market risk may arise from
the possible inability of the Bank or the other party to fulfill the
contracts. At December 31, 1998, the Bank had forward commitments to sell
loans totaling $5.4 million at rates between 5.75% and 6.63%. The estimated
fair value of commitments to sell loans is considered insignificant at
December 31, 1998. At May 31, 1999 and December 31, 1997, the Bank did not
have any forward commitments to sell loans.
The Bank serviced loans for others totaling approximately $165,883,653,
$166,545,280, $175,145,840 and $179,677,617 at May 31, 1999, and December
31, 1998, 1997 and 1996, respectively. Income from servicing loans for
others was $187,684 and $199,135 for the five months ended May 31, 1999 and
1998, respectively, and $479,488, $488,026 and $469,896 for the years ended
December 31, 1998, 1997 and 1996, respectively.
F-17
<PAGE>
AMERICAN SAVINGS BANK
Notes to Consolidated Financial Statements
May 31, 1999 and 1998 (unaudited) and December 31, 1998, 1997 and 1996
(5) CONCENTRATIONS OF CREDIT RISK
A significant amount of the Bank's mortgage loan receivables and
commitments are secured by residential real estate located in the Greater
Hartford area and surrounding communities in Connecticut. The Bank'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 Bank'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.
(6) BANK PREMISES AND EQUIPMENT
Bank premises and equipment consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
MAY 31, --------------------------------------
1999 1998 1997
---------------- ---------------- -----------------
<S> <C> <C> <C>
Premises $ 9,253,674 7,774,566 7,065,594
Construction in progress 2,032,967 2,552,327 382,715
Furniture and equipment 7,421,155 7,125,283 6,046,315
Leasehold improvements 2,708,757 2,708,757 1,469,298
---------------- ---------------- -----------------
21,416,553 20,160,933 14,963,922
Less accumulated depreciation and amortization (7,967,089) (7,277,453) (5,810,416)
---------------- ---------------- -----------------
Net bank premises and equipment $ 13,449,464 12,883,480 9,153,506
================ ================ =================
</TABLE>
Total depreciation and amortization expense amounted to $689,636 and
$619,621 for the five months ended May 31, 1999 and 1998, respectively, and
$1,480,605, $1,119,419 and $946,013 for the years ended December 31, 1998,
1997 and 1996, respectively.
(7) DEPOSITS
A summary of deposit balances, by type, is as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
MAY 31, -------------------------------------------
1999 1998 1997
------------------ ------------------ -------------------
<S> <C> <C> <C>
Regular and other savings $ 204,637,520 193,005,355 181,361,422
NOW accounts 72,122,639 68,214,612 52,336,914
Money market accounts 66,277,030 63,386,320 60,614,510
Demand deposit accounts 25,731,266 28,318,841 19,120,922
Certificates of deposit 607,464,761 615,519,988 602,237,134
Retirement accounts 175,414,878 175,308,767 180,726,731
------------------ ------------------ -------------------
Total $ 1,151,648,094 1,143,753,883 1,096,397,633
================== ================== ===================
</TABLE>
F-18
<PAGE>
AMERICAN SAVINGS BANK
Notes to Consolidated Financial Statements
May 31, 1999 and 1998 (unaudited) and December 31, 1998, 1997 and 1996
A summary of certificates of deposit and retirement accounts by maturity is
as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
MAY 31, -------------------------------------------
1999 1998 1997
------------------ ------------------ -------------------
<S> <C> <C> <C>
1 - 12 months $ 565,491,044 575,119,169 505,871,057
13 - 24 months 179,919,160 171,544,653 181,686,550
25 - 36 months 16,154,538 19,524,300 69,811,780
37 - 48 months 14,938,301 8,581,290 15,708,798
48 months and thereafter 5,594,104 15,009,007 9,114,845
------------------ ------------------ -------------------
Total $ 782,097,147 789,778,419 782,193,030
================== ================== ===================
</TABLE>
Certificates of deposit and retirement accounts of $100,000 or more totaled
$79,553,750, $80,075,274, $70,547,573 and $66,766,495 at May 31, 1999 and
December 31, 1998, 1997 and 1996, respectively. Interest paid on
certificates of deposit of $100,000 or more amounted to approximately
$1,516,318 and $1,632,797 for the five months ended May 31, 1999 and 1998,
respectively, and $3,764,182, $3,472,279 and $3,403,527 for the years ended
December 31, 1998, 1997 and 1996, respectively.
Interest expense on deposits, by account type, is summarized as follows:
<TABLE>
<CAPTION>
FIVE MONTHS
ENDED MAY 31, YEARS ENDED DECEMBER 31,
----------------------------- ------------------------------------------
1999 1998 1998 1997 1996
------------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Regular and other savings $ 1,711,304 1,602,648 3,960,992 3,870,985 3,983,444
NOW accounts 378,487 303,972 784,920 711,875 569,412
Money market accounts 722,579 691,968 1,678,206 1,694,398 1,756,731
Certificates of deposit 12,616,356 13,417,374 32,178,088 32,379,742 32,084,603
Retirement accounts 3,969,697 4,271,804 10,220,394 10,464,033 10,594,935
------------- ---------- ---------- ---------- ----------
$ 19,398,423 20,287,766 48,822,600 49,121,033 48,989,125
============= ========== ========== ========== ==========
</TABLE>
F-19
<PAGE>
AMERICAN SAVINGS BANK
Notes to Consolidated Financial Statements
May 31, 1999 and 1998 (unaudited) and December 31, 1998, 1997 and 1996
(8) ADVANCES FROM FEDERAL HOME LOAN BANK
Advances from the Federal Home Loan Bank of Boston (the FHLB) by maturity
is as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
MAY 31, -------------------------------------
1999 1998 1997
----------------- ---------------- -----------------
<S> <C> <C> <C>
6.06% due December 27, 1999 $ 5,300,000 5,300,000 5,300,000
5.28% due May 5, 2000 1,500,000 -- --
4.96% due December 4, 2000 10,000,000 10,000,000 --
5.10% due December 4, 2001 20,000,000 20,000,000 --
6.05% due December 15, 2001 10,000,000 10,000,000 10,000,000
6.28% due December 26, 2001 10,000,000 10,000,000 10,000,000
5.60% due May 6, 2002 2,000,000 -- --
6.09% due June 15, 2002 2,000,000 2,000,000 2,000,000
6.01% due November 14, 2002 10,000,000 10,000,000 10,000,000
5.14% due December 4, 2002 10,000,000 10,000,000 --
6.09% due December 16, 2002 8,000,000 8,000,000 8,000,000
6.47% due December 26, 2003 25,000,000 25,000,000 25,000,000
5.81% due May 5, 2004 6,000,000 -- --
6.51% due December 27, 2004 5,000,000 5,000,000 5,000,000
6.55% due December 27, 2005 1,000,000 1,000,000 1,000,000
6.54% due December 27, 2005 3,700,000 3,700,000 3,700,000
4.00% due December 3, 2008 243,750 243,750 243,750
----------------- ---------------- -----------------
$ 129,743,750 120,243,750 80,243,750
================= ================ =================
</TABLE>
Sufficient qualified collateral (principally mortgage loans and securities
including FHLB stock) is required to be maintained against the FHLB
advances. However, no specific assets of the Bank are required to be
segregated to provide the required collateral. As a member of the FHLB, the
Bank has access to a preapproved line of credit for up to 2% of its total
assets and the capacity to borrow up to 30% of its total assets.
(9) REGULATORY MATTERS
The Bank is subject to various regulatory capital requirements administered
by the federal banking agencies. Failure to meet minimum capital
requirements can initiate certain mandatory and possibly additional
discretionary actions by regulators that, if undertaken, could have a
direct material effect on the Bank's consolidated financial statements.
Under capital adequacy guidelines and the regulatory framework for prompt
corrective action, the Bank must meet specific capital guidelines that
involve quantitative measures of the Bank's assets, liabilities and certain
off-balance-sheet items as calculated under regulatory accounting
practices. The Bank's capital amounts and classification are also subject
to qualitative judgments by the regulators about components, risk
weightings, and other factors.
F-20
<PAGE>
AMERICAN SAVINGS BANK
Notes to Consolidated Financial Statements
May 31, 1999 and 1998 (unaudited) and December 31, 1998, 1997 and 1996
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 I Capital to risk-weighted assets,
and of Tier I Capital to average assets. Management believes that, as of
May 31, 1999 and December 31, 1998 and 1997, the Bank met all capital
adequacy requirements to which it was subject.
As of May 31, 1999 and December 31, 1998, the most recent notifications
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 I risk-
based and Tier I leverage ratios as set forth in the following table. There
have been no conditions or events since those notifications that management
believes have changed the Bank's capital category.
The following is a summary of the Bank's actual capital amounts and ratios
as of May 31, 1999 and December 31, 1998 and 1997, compared to the required
amounts and ratios for minimum capital adequacy and for classification as a
well-capitalized institution:
<TABLE>
<CAPTION>
TO BE WELL
CAPITALIZED UNDER
FOR CAPITAL PROMPT CORRECTIVE
ACTUAL ADEQUACY PURPOSES ACTION PROVISIONS
------------------------- ------------------------ ------------------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
------------------------- ------------------------ ------------------------
<S> <C> <C> <C> <C> <C> <C>
As of May 31, 1999:
Total Capital (to Risk
Weighted Assets) $ 286,129,653 29.6% $ 77,434,150 8.0% $ 96,792,688 10.0%
Tier I Capital (to Risk
Weighted Assets) 249,122,517 26.5 37,555,696 4.0 56,333,544 6.0
Tier I Capital (to
Average Assets) 249,122,517 15.5 64,380,378 4.0 80,475,472 5.0
As of December 31, 1998:
Total Capital (to Risk
Weighted Assets) $ 278,281,584 29.2% $ 76,256,635 8.0% $ 95,320,794 10.0%
Tier I Capital (to Risk
Weighted Assets) 241,223,784 26.1 36,951,032 4.0 55,426,548 6.0
Tier I Capital (to
Average Assets) 241,223,784 16.4 59,011,560 4.0 73,764,450 5.0
As of December 31, 1997:
Total Capital (to Risk
Weighted Assets) $ 229,486,126 30.3% $ 60,597,336 8.0% $ 75,746,670 10.0%
Tier I Capital (to Risk
Weighted Assets) 223,209,142 29.5 30,298,668 4.0 45,448,002 6.0
Tier I Capital (to
Average Assets) 223,209,142 16.0 55,971,200 4.0 69,964,000 5.0
</TABLE>
F-21
<PAGE>
AMERICAN SAVINGS BANK
Notes to Consolidated Financial Statements
May 31, 1999 and 1998 (unaudited) and December 31, 1998, 1997 and 1996
(10) BENEFIT PLANS
Pension Plan
The following table sets forth changes in benefit obligation, changes in
plan assets and the funded status of the Bank's pension plan for the
periods indicated. The table also provides a reconciliation of the plan's
funded status and the amounts recognized in the Bank's consolidated balance
sheets:
<TABLE>
<CAPTION>
DECEMBER 31,
MAY 31, -------------------------------------
1999 1998 1997
----------------- ---------------- ----------------
<S> <C> <C> <C>
Change in benefit obligation:
Benefit obligation at beginning of period $ 10,685,049 9,502,589 8,504,882
Service cost 197,849 436,176 368,188
Interest cost 281,810 662,826 602,478
Amendments 74,467 76,257 234,872
Actuarial (gain) loss (747,177) 544,197 288,968
Benefits paid (169,832) (536,996) (496,799)
----------------- ---------------- ----------------
Benefit obligation at end of period 10,322,166 10,685,049 9,502,589
----------------- ---------------- ----------------
Change in plan assets:
Fair value of plan assets at beginning of period 10,086,249 10,293,472 8,877,276
Actual return on plan assets (71,404) 329,773 1,703,506
Employer contribution (4,857) -- 209,489
Benefits paid (169,832) (536,996) (496,799)
----------------- ---------------- ----------------
Fair value of plan assets at end of period 9,840,156 10,086,249 10,293,472
----------------- ---------------- ----------------
Funded status (482,010) (598,800) 790,883
Unrecognized transition asset (318,859) (370,288) (493,717)
Unrecognized prior service cost 787,467 743,172 731,881
Unrecognized net actuarial loss (gain) 759,323 1,068,538 (44,491)
----------------- ---------------- ----------------
Net amount recognized $ 745,921 842,622 984,556
================= ================ ================
Amounts recognized in other assets/liabilities in the
consolidated balance sheets:
Prepaid benefit cost $ 1,119,162 1,146,783 1,154,164
Accrued benefit liability (711,610) (623,744) (281,853)
Intangible asset 338,369 319,583 112,245
----------------- ---------------- ----------------
Net amount recognized $ 745,921 842,622 984,556
================= ================ ================
</TABLE>
F-22
<PAGE>
AMERICAN SAVINGS BANK
Notes to Consolidated Financial Statements
May 31, 1999 and 1998 (unaudited) and December 31, 1998, 1997 and 1996
The pension plan information includes information for a supplemental
benefit equalization plan (the supplemental plan) that provides additional
benefits to certain employees. As of May 31, 1999, the benefit obligation
of the supplemental plan was $851,277 and there were no plan assets.
The components of net periodic pension cost for the periods indicated were
as follows:
<TABLE>
<CAPTION>
FIVE MONTHS YEAR ENDED
ENDED MAY 31, DECEMBER 31,
-----------------------------------------------------------------------
1999 1998 1998 1997 1996
----------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Service cost $ 197,849 181,740 436,176 368,188 337,211
Interest cost 281,810 276,178 662,826 602,478 571,955
Expected return on plan
assets (368,021) (376,233) (902,958) (777,994) (716,001)
Amortization and deferral (19,794) (22,546) (54,110) (74,104) (76,014)
----------- -------- -------- -------- --------
Net periodic pension cost $ 91,844 59,139 141,934 118,568 117,151
=========== ======== ======== ======== ========
</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,
MAY 31, ---------------------------
1999 1998 1997
------------- ------------ ------------
<S> <C> <C> <C>
Discount rate 7.0% 6.5% 7.0%
Rate of increase in compensation levels 4.5 4.5 5.0
Long-term rate of return on assets 9.0 9.0 9.0
</TABLE>
Savings Plan
Contributions made by the Bank to a 401(k) savings plan maintained for
employees meeting certain eligibility requirements amounted to $78,032 and
$71,995 for the five month periods ended May 31, 1999 and 1998,
respectively, and $529,013, $452,416 and $434,126 for the years ended
December 31, 1998, 1997 and 1996, respectively, and are included in
salaries and employee benefits expenses.
Other Postretirement Benefit Plan
The Bank 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 Bank.
F-23
<PAGE>
AMERICAN SAVINGS BANK
Notes to Consolidated Financial Statements
May 31, 1999 and 1998 (unaudited) and December 31, 1998, 1997 and 1996
The following table presents changes in 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
amount recognized in the Bank's consolidated balance sheets:
<TABLE>
<CAPTION>
DECEMBER 31,
MAY 31, ---------------------------------------
1999 1998 1997
----------------- ----------------- -----------------
<S> <C> <C> <C>
Change in benefit obligation:
Benefit obligation at beginning of period $ 1,088,399 908,585 709,626
Service cost 15,206 30,920 25,154
Interest cost 28,725 66,732 57,541
Actuarial loss (72,229) 136,957 165,549
Benefits paid (23,517) (54,795) (49,285)
----------------- ----------------- -----------------
Benefit obligation at end of period 1,036,584 1,088,399 908,585
----------------- ----------------- -----------------
Change in plan assets:
Fair value of plan assets at beginning of
period -- -- --
Employer contribution 23,517 54,795 49,285
Benefits paid (23,517) (54,795) (49,285)
----------------- ----------------- -----------------
Fair value of plan assets at end of period -- -- --
----------------- ----------------- -----------------
Funded status (1,036,584) (1,088,399) (908,585)
Unrecognized net actuarial loss 123,291 197,838 60,881
Unrecognized prior service cost 57,634 61,666 71,346
----------------- ----------------- -----------------
Accrued benefit cost recognized in other
liabilities $ (855,659) (828,895) (776,358)
================= ================= =================
</TABLE>
Periodic postretirement benefit cost includes the following components for
the periods indicated:
<TABLE>
<CAPTION>
FIVE MONTHS YEAR ENDED
ENDED MAY 31, DECEMBER 31,
----------------------------------- -----------------------------------------------
1999 1998 1998 1997 1996
----------------------------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Service cost $ 15,206 12,884 30,920 25,154 21,544
Interest cost 28,725 27,805 66,732 57,541 49,553
Recognized net actuarial loss 2,318 -- -- -- --
Amortization 4,032 4,033 9,680 7,022 962
--------------- ---------------- ------------- ------------- -------------
Postretirement benefit cost $ 50,281 44,722 107,332 89,717 72,059
=============== ================ ============= ============= =============
</TABLE>
F-24
<PAGE>
AMERICAN SAVINGS BANK
Notes to Consolidated Financial Statements
May 31, 1999 and 1998 (unaudited) and December 31, 1998, 1997 and 1996
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
9.2% for May 31, 1999, and 9.7% and 10.3% for December 31, 1998 and 1997,
respectively. The rate was assumed to decrease gradually to 5% by the year
2010 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 $34,961 at May 31, 1999 and $38,292 at December 31, 1998 and
increase the periodic postretirement benefit cost by $1,893 for the five
months ended May 31, 1999 and $3,915 for the year ended December 31, 1998.
A decrease of 1% in the assumed health care cost trend rate would decrease
the postretirement benefit obligation by $30,118 at May 31, 1999 and
$30,844 at December 31, 1998 and increase the postretirement benefit cost
by $1,496 for the five months ended May 31, 1999 and $3,097 for the year
ended December 31, 1998.
The weighted-average discount rate used in determining the accumulated
postretirement benefit obligation was 7.0% for May 31, 1999, and 6.5% and
7.0% for December 31, 1998 and 1997, respectively.
(11) INCOME TAXES
The components of income tax expense are summarized as follows:
<TABLE>
<CAPTION>
FIVE MONTHS YEAR ENDED
ENDED MAY 31, December 31,
--------------------------- ------------------------------------------
1999 1998 1998 1997 1996
------------ --------- ---------- --------- ---------
<S> <C> <C> <C> <C> <C>
Current tax benefit (expense):
Federal $ 2,799,001 3,720,151 8,510,454 6,752,741 6,931,779
State -- 1,065,775 2,479,871 2,139,071 1,928,444
------------ --------- ---------- --------- ---------
Total current 2,799,001 4,785,926 10,990,325 8,891,812 8,860,223
------------ --------- ---------- --------- ---------
Deferred tax benefit (expense):
Federal 1,398,999 (502,151) (1,846,454) (526,741) (147,040)
State -- (11,775) (77,871) (272,327) (86,412)
------------ --------- ---------- --------- ---------
Total deferred 1,398,999 (513,926) (1,924,325) (799,068) (233,452)
------------ --------- ---------- --------- ---------
Total income tax expense $ 4,198,000 4,272,000 9,066,000 8,092,744 8,626,771
============ ========= ========== ========= =========
</TABLE>
F-25
<PAGE>
AMERICAN SAVINGS BANK
Notes to Consolidated Financial Statements
May 31, 1999 and 1998 (unaudited) and December 31, 1998, 1997 and 1996
The effective tax rate for each period set forth below differs from the
statutory federal income tax rate. The reasons for these differences in the
effective tax rate follow:
<TABLE>
<CAPTION>
FIVE MONTHS ENDED MAY 31,
-----------------------------------------------------
1999 1998
------------------------ ------------------------
AMOUNT % AMOUNT %
------------ ----- ------------- -----
<S> <C> <C> <C> <C>
Statutory federal income tax $ 4,233,857 35.00% $ 4,650,839 35.00%
Increase (decrease) resulting from:
State income taxes, net of
federal income tax benefit -- -- 685,100 5.47
Dividend received deduction (233,485) (1.93) (134,101) (1.01)
Appreciated value of
donated securities -- -- (718,804) (5.41)
Other 197,628 1.63 (211,034) (1.93)
------------ ----- ------------- -----
Effective combined federal
and state tax amount and rate 4,198,000 34.70% 4,272,000 32.12%
============ ===== ============= =====
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------------------------------------------------
1998 1997 1996
------------------------- ------------------------- ----------------------
AMOUNT % AMOUNT % AMOUNT %
------------- ------ ------------ ------ --------- ------
<S> <C> <C> <C> <C> <C> <C>
Statutory federal income tax rate $ 9,478,225 35.00% $ 9,223,384 35.00% 8,524,868 35.00%
Increase (decrease) in tax rates
resulting from:
State income taxes, net of
federal income tax benefit 1,561,300 5.77 1,213,384 4.60 1,197,321 4.92
Dividend received deduction (332,500) (1.23) (454,567) (1.72) (1,059,698) (4.35)
Appreciated value of
donated securities (1,289,888) (4.76) (1,451,420) (5.51) -- --
Other (351,137) (1.30) (438,037) (1.66) (35,721) (.15)
------------- ------ ------------ ------ --------- ------
Effective combined federal
and state tax amount
and rate 9,066,000 33.48% 8,092,744 30.71% 8,626,770 35.42%
============= ====== ============ ====== ========= ======
</TABLE>
F-26
<PAGE>
AMERICAN SAVINGS BANK
Notes to Consolidated Financial Statements
May 31, 1999 and 1998 (unaudited) and December 31, 1998, 1997 and 1996
The tax effects of temporary differences that give rise to deferred tax assets
and liabilities are presented below:
<TABLE>
<CAPTION>
DECEMBER 31,
MAY 31, -----------------------------
1999 1998 1997
-------------- ----------- -----------
<S> <C> <C> <C>
Deferred tax assets:
Allowance for loan losses $ 2,857,964 3,237,714 2,818,560
Postretirement benefits other than pensions 303,186 341,229 326,812
Other 314,822 1,753,493 589,573
-------------- ----------- -----------
Total gross deferred tax assets 3,475,972 5,332,436 3,734,945
-------------- ----------- -----------
Less state valuation allowance -- (175,000) --
-------------- ----------- -----------
Deferred tax asset after valuation allowance 3,475,972 5,157,436 3,734,945
Deferred tax liabilities:
Net unrealized gains on securities available for sale (27,292,574) (29,387,731) (25,819,201)
Deferral of loan origination fees (840,882) (736,705) (935,443)
Bank premises and equipment, principally due to
differences in depreciation (539,454) (651,743) (729,735)
Excess of tax bad debt reserve over base year (631,576) (797,754) (972,659)
Retirement plan (265,250) (356,203) (405,391)
Prepaid insurance (41,384) (58,606) (59,617)
-------------- ----------- -----------
Total gross deferred tax liabilities (29,611,120) (31,988,742) (28,922,046)
-------------- ----------- -----------
Net deferred tax liability $ (26,135,148) (26,831,306) (25,187,101)
============== =========== ===========
</TABLE>
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.
The Bank only recognizes a deferred tax asset when, based upon available
evidence. Management believes the associated tax benefits will more likely
than not be realized. As of December 31, 1998, the Bank recorded a
valuation allowance of $175,000 against its state deferred tax asset in
connection with the creation of a Connecticut passive investment company
pursuant to legislation enacted earlier in the year. Under this
legislation, Connecticut passive investment companies are not subject to
the Connecticut Corporate Business Tax and dividends paid by the passive
investment company to the Bank are exempt from the Connecticut Corporate
Business Tax. Accordingly, the Bank expects to report no Connecticut income
tax beginning in 1999. During 1999, the deferred tax assets that the
valuation allowance was established against were written off upon the
transfer to the passive investment company.
F-27
<PAGE>
AMERICAN SAVINGS BANK
Notes to Consolidated Financial Statements
May 31, 1999 and 1998 (unaudited) and December 31, 1998, 1997 and 1996
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 Bank's base-year tax bad debt reserve was $24.6 million and
the related unrecognized deferred tax liability was approximately $10.3
million at May 31, 1999 and December 31, 1998. A deferred tax liability has
not been recognized for the base-year tax bad debt reserve, since the Bank
does not expect that the reserve will become taxable in the foreseeable
future.
(12) FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK
The Bank 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 Bank to credit risk in excess of the
amount recognized in the balance sheet.
The Bank's exposure to credit loss in the event of nonperformance by the
other party to commitment to extend credits, if such commitments are
fulfilled, is represented by the contractual amount of those instruments.
The Bank 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,
MAY 31, --------------------------------------
1999 1998 1997
----------------- ----------------- -----------------
<S> <C> <C> <C>
Approved real estate loan commitments:
Fixed rate $ 8,900,950 15,431,400 9,233,500
Variable rate 58,405,665 32,767,525 16,393,053
Approved consumer loan commitments 6,426,050 5,563,748 3,808,150
Unused portion of home equity lines of credit 170,001,263 139,970,684 112,792,615
Unused portion of construction loans 9,639,562 6,705,952 4,864,488
Unused checking overdraft lines of credit 873,276 854,484 774,551
</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 Bank evaluates each
customer's creditworthiness on a case-by-case basis. The amount of
collateral obtained, if deemed necessary, by the Bank upon extension of
credit is based on management's credit evaluation of the counterparty.
Collateral obtained is primarily residential property located in
Connecticut. Interest rates on approved mortgage loan commitments and
equity lines of credit are a combination of fixed and variable.
F-28
<PAGE>
AMERICAN SAVINGS BANK
Notes to Consolidated Financial Statements
May 31, 1999 and 1998 (unaudited) and December 31, 1998, 1997 and 1996
(13) LEASES
Rental expense amounted to $191,926 and $149,408 for the five months ended
May 31, 1999 and 1998, respectively, and $396,154, $335,176 and $304,657
for the years ended December 31, 1998, 1997 and 1996, respectively.
Future minimum payments, by year and in the aggregate, under noncancelable
operating leases for branch office premises with initial or remaining terms
of one year or more consisted of the following at May 31, 1999 and
December 31, 1998:
MAY 31, DECEMBER 31,
1999 1998
---------- ------------
1999 $ 271,385 465,231
2000 393,323 393,323
2001 325,410 325,410
2002 289,859 289,859
2003 252,850 252,850
Thereafter 1,337,625 1,337,625
---------- ---------
$2,870,452 3,064,298
========== =========
The branch office leases include options to renew for periods ranging from
5 to 20 years.
(14) OTHER COMPREHENSIVE INCOME
The following tables summarize components of other comprehensive income and
the related tax effects for the five month period ended May 31, 1999 and
the year ended December 31, 1998:
<TABLE>
<CAPTION>
FIVE MONTHS ENDED MAY 31, 1999
BEFORE INCOME TAX
TAX (EXPENSE) NET-OF-TAX
AMOUNT OR BENEFIT AMOUNT
----------------- ----------------- -----------------
<S> <C> <C> <C>
Unrealized loss on available for sale securities:
Unrealized holding losses arising during the period $ (2,152,063) 911,039 (1,241,024)
Reclassification adjustment for gains
realized during the period (2,797,133) 1,184,118 (1,613,015)
----------------- ----------------- -----------------
Other comprehensive loss $ (4,949,196) 2,095,157 (2,854,039)
================= ================= =================
</TABLE>
F-29
<PAGE>
AMERICAN SAVINGS BANK
Notes to Consolidated Financial Statements
May 31, 1999 and 1998 (unaudited) and December 31, 1998, 1997 and 1996
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1998
BEFORE INCOME TAX
TAX (EXPENSE) NET-OF-TAX
AMOUNT OR BENEFIT AMOUNT
----------------- ----------------- -----------------
<S> <C> <C> <C>
Unrealized gain on available for sale securities:
Unrealized holding gains arising during the period $ 15,092,490 (6,630,681) 8,461,809
Reclassification adjustment for gains
realized during the period (6,695,933) 3,062,151 (3,633,782)
----------------- ----------------- -----------------
Other comprehensive income $ 8,396,557 (3,568,530) 4,828,027
================= ================= =================
</TABLE>
For the five months ended May 31, 1998 and the years ended December 31,
1997 and 1996, other comprehensive income was attributable to unrealized
gains on available for sale securities. For these periods, other
comprehensive income before income taxes was $4,060,262, $16,899,499 and
$6,317,050, respectively. For the same three periods the related income tax
benefit was $1,752,611, $7,182,029 and $2,684,746, respectively.
(15) FOUNDATION
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 and Connecticut tax law. The Bank makes annual
contributions to the Foundation subject to the determination of its Board
of Directors. In order to maintain Internal Revenue Code compliance, assets
of the Foundation cannot be returned to the Bank or directed for use of, or
for the benefit of, the Bank. No contribution was made during the five-
month period ended May 31, 1999. In 1998, the Bank contributed $3,632,413
to the Foundation, of which $2,316,000 was for the 1998 contribution and
$1,316,413 representing a Board designated contribution for 1999. In 1997,
the Bank contributed $2,305,000 to the Foundation. The Bank's contribution
to the Foundation in 1998 and 1997 was made primarily in the form of
investment securities.
(16) FAIR VALUE OF FINANCIAL INSTRUMENTS
The methods used to estimate fair values for the Bank's financial
instruments are set forth below.
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.
F-30
<PAGE>
AMERICAN SAVINGS BANK
Notes to Consolidated Financial Statements
May 31, 1999 and 1998 (unaudited) and December 31, 1998, 1997 and 1996
The fair values of deposits with no stated maturity, such as demand
deposits, regular savings, and money management accounts, are assumed to
equal the amount payable on demand. Fair values of certificates of deposit
are estimated using a discounted cash flow calculation that applies
interest rates currently being offered on certificates to a schedule of
aggregate expected monthly maturities of certificates of deposit.
Fair values of advances from the FHLB are estimated using a discounted cash
flow technique that applies interest rates currently being offered on
advances to a schedule of aggregated monthly maturities FHLB advances by
period to maturity.
The fair values of the Bank's commitments to extend credit approximate
their carrying amounts, which are insignificant, at May 31, 1999, and
December 31, 1998 and 1997.
The following are the carrying amounts and estimated fair values as of the
Bank financial assets and liabilities, none of which were held for trading
purposes:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------------------------------------------
MAY 31, 1999 1998 1997
------------------------------- ---------------------------- ----------------------------
CARRYING ESTIMATED CARRYING ESTIMATED CARRYING ESTIMATED
AMOUNTS FAIR VALUES AMOUNTS FAIR VALUES AMOUNTS FAIR VALUES
---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Cash and due from
banks $ 22,764,367 22,764,367 25,121,943 25,121,943 16,270,127 16,270,127
Federal funds sold 31,600,000 31,600,000 30,700,000 30,700,000 23,800,000 23,800,000
Investment securities
available for sale 370,389,723 370,389,723 417,673,315 417,673,315 432,031,801 432,031,801
Mortgage-backed
securities
available for sale 205,868,171 205,868,171 172,855,177 172,855,177 132,816,950 132,816,950
Federal Home Loan
Bank stock 10,434,100 10,434,100 9,396,900 9,396,900 8,371,200 8,371,200
Loans, net 941,251,086 941,911,971 907,254,369 917,606,527 837,683,438 842,189,724
Accrued interest
and dividends
receivable 11,316,578 11,316,578 11,259,693 11,259,693 11,822,451 11,822,451
Regular savings 204,637,520 204,637,520 193,005,355 193,005,355 181,361,442 181,361,442
NOW, money market,
and demand deposits 164,130,935 164,130,935 159,919,773 159,919,773 132,072,346 132,072,346
Certificates of
deposit and
retirement accounts 782,879,639 787,465,742 790,828,755 797,529,985 782,963,865 786,030,086
Mortgagors' escrow
deposits 8,274,380 8,274,380 10,652,730 10,652,730 10,887,100 10,887,100
Advance from FHLB 129,743,750 129,098,400 120,243,750 122,583,548 80,243,750 80,813,977
Accrued interest
payable on deposits 1,340,418 1,340,418 661,405 661,405 698,225 698,225
</TABLE>
F-31
<PAGE>
AMERICAN SAVINGS BANK
Notes to Consolidated Financial Statements
May 31, 1999 and 1998 (unaudited) and December 31, 1998, 1997 and 1996
(17) CONVERSION OF STOCK FORM OF OWNERSHIP
On May 24, 1999, the Board of Directors of the Bank adopted a Plan of Conversion
(the Plan), pursuant to which the Bank will convert from a state-chartered
mutual bank to a state-chartered stock bank. All of the outstanding common stock
of the Bank will be sold to a holding company (the Company) which will issue and
sell its stock pursuant to the Plan. All of the stock of the Company to be
issued in the conversion is being offered to eligible and supplemental eligible
account holders, employee benefit plans of the Bank and certain other eligible
subscribers in a subscription offering pursuant to subscription rights in order
of priority as set forth in the Plan. The Bank plans to establish an Employee
Stock Ownership Plan ("ESOP") for the benefit of eligible employees, to become
effective upon the conversion. The ESOP may borrow the proceeds necessary to
fund the purchase of up to 8% of the common stock issued provided, however, that
the ESOP may not purchase in the conversion more than 5% of the common stock
sold. The Bank expects to make annual contributions adequate to fund the
repayment of any indebtedness of the ESOP.
The Bank's Plan provides for the establishment of an additional charitable
foundation (the New Foundation) in connection with the conversion. The New
Foundation will be funded with a contribution of common shares by the Company
equal up to 8% of the total shares of common stock to be issued in the
conversion. This contribution will result in the recognition of expense, equal
to the fair value of the shares contributed, in the period in which the
contribution is made. The New Foundation will be dedicated to charitable
purposes within the Bank's local community, including community development
activities.
Effective upon the conversion, the Company intends to enter into employment
agreements with certain executives. The agreements will include, among other
things, provisions for minimum annual compensation and certain lump-sum
severance payments in the event of a "change in control".
Conversion costs will be deferred and deducted from the proceeds of the shares
sold in the conversion. If the conversion is not completed, all costs incurred
will be charged to expense. The Bank had incurred no conversion costs as of
May 31, 1999.
The deposit accounts of the Bank's depositors will continue to be insured by the
FDIC and will not be affected by the conversion. The Plan provides for the
establishment, upon the completion of the conversion, of a special "liquidation
account" for the benefit of eligible account holders and supplemental eligible
account holders (if any) in an amount equal to the surplus of the Bank as of the
date of its latest balance sheet contained in the final prospectus used in
connection with the conversion. Account holders who continue to maintain deposit
accounts at the Bank would be entitled, on a complete liquidation of the Bank
after the conversion, to an interest in the liquidation account prior to any
payment to the stockholders of the Bank. Upon completion of the conversion, the
Bank's surplus will be substantially restricted with respect to payment of
dividends to stockholders due to the liquidation account.
Subsequent to the offering, the Company and the Bank may not declare or pay
dividends on, nor 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.
F-32
<PAGE>
You should rely only on the information contained in this prospectus. Neither
American Financial nor American Savings has authorized anyone to provide you
with different information. This prospectus does not constitute an offer to sell
or a solicitation of an offer to buy any of the securities offered by this
prospectus to any person or in any jurisdiction in which an offer or
solicitation is not authorized or in which the person making an offer or
solicitation is not qualified to do so, or to any person to whom it is unlawful
to make an offer or solicitation in those jurisdictions. Neither the delivery of
this prospectus nor any sale hereunder shall under any circumstances imply that
there has been no change in the affairs of American Financial or American
Savings since any of the dates as of which information is furnished in this
prospectus or since the date of this prospectus.
[Logo for American Financial Holdings, Inc.]
(Proposed Holding Company for American Savings Bank)
36,167,500 Shares of Common Stock
________
Prospectus
________
SANDLER O'NEILL & PARTNERS, L.P.
October 12, 1999
DEALER PROSPECTUS DELIVERY OBLIGATION
Until November 15, 1999, all dealers that buy, sell or trade these securities,
whether or not participating in this offering, may be required to deliver a
prospectus. This is in addition to the dealers' obligation to deliver a
prospectus when acting as underwriters and with respect to their unsold
allotments or subscriptions.
