SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------------
FORM 10-KSB
(Mark One):
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [FEE REQUIRED] For the fiscal year ended June 30,
1996, OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED] For the transition period from
to .
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Commission File Number: 0-22812
PEOPLES SAVINGS FINANCIAL CORPORATION
-------------------------------------
(Exact name of registrant as specified in its charter)
Pennsylvania 25-1720517
- --------------------------------------------- ------------------
(State or other jurisdiction of incorporation I.R.S. Employer
or organization) Identification No.
173 Main Street, Ridgway, Pennsylvania 15853
- -------------------------------------- -----------
(Address of principal executive offices (Zip Code)
Registrant's telephone number, including area code: (814) 773-3195
--------------
Securities registered pursuant to Section 12(b) of the Act: None
----
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $0.10 per share
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(Title of Class)
Check whether the issuer: (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days. YES X NO
--- ---
Check if there is no disclosure of delinquent filers in response to Item
405 of Regulation S-B is not contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. |X|
State issuer's revenues for its most recent fiscal year. $3.5 million.
The aggregate market value of the voting stock held by non-affiliates of
the Registrant, based upon the last sale price of such stock on September 5,
1996 which was $8,814,321 (349,082 shares at $25.25 per share).
As of June 30, 1996, there were issued and outstanding 452,966 shares of
the registrant's Common Stock.
Transitional Small Business Disclosure Format (check one) YES NO X
--- ---
DOCUMENTS INCORPORATED BY REFERENCE
1. Portions of Annual Report to Stockholders for the Fiscal Year
ended June 30, 1996. (Parts I, II and IV)
2. Portions of Proxy Statement for the 1996 Annual Meeting of
stockholders. (Part III)
<PAGE>
PART I
Item 1. Description of Business
- --------------------------------
The Corporation
Peoples Savings Financial Corporation ("PSFC" or the "Corporation") is a
bank holding company incorporated under the laws of the State of Pennsylvania in
September 1993. The Corporation was organized for the purpose of acquiring all
of the capital of Peoples Savings Bank, a Pennsylvania chartered savings bank
("Peoples Savings" or the "Bank"), pursuant to the conversion of the Bank from a
Pennsylvania chartered mutual savings bank to a Pennsylvania chartered stock
savings bank (the "Conversion"). Effective January 14, 1994, the Corporation
completed its initial public offering and sold 452,966 shares of common stock
for $10 per share, primarily to depositors of the Bank. The expenses associated
with the conversion were charged to paid-in capital while $2.8 million of the
net proceeds of $4.2 million from the public offering was used to purchase all
of the issued and outstanding stock of the Bank issued pursuant to the
Conversion with the remaining $1.4 million being retained by the Company. This
transaction was accounted for in a manner similar to a pooling of interests,
consequently no goodwill or other tangibles were recorded as a result of this
transaction.
Since the primary activities of the Corporation are those of the Bank,
much of the discussion herein pertains to the Bank, however, comparisons to
total assets, liabilities, etc. are based on the Corporation's consolidated
numbers. At June 30, 1996, the Corporation had total consolidated assets,
liabilities and stockholders' equity of approximately $45.0 million, $36.0
million and $9.0 million, respectively.
The Bank
Peoples Savings, a wholly owned subsidiary of the Corporation, was
chartered by the State of Pennsylvania in 1891. The Bank converted from a
Pennsylvania chartered savings and loan association to a Pennsylvania chartered
mutual savings bank in June 1993. On January 14, 1994, the Bank converted from a
Pennsylvania chartered mutual savings bank to a Pennsylvania chartered capital
stock savings bank. The powers of a Pennsylvania state-chartered mutual savings
bank are essentially the same as those of a Pennsylvania state-chartered capital
stock savings bank.
Peoples Savings has been a member of the Federal Home Loan Bank ("FHLB")
System since 1953. Its savings deposits are insured by the Savings Association
Insurance Fund ("SAIF") which is administered by the Federal Deposit Insurance
Corporation ("FDIC").
Peoples Savings conducts its main business through its office located at
173 Main Street, Ridgway, Pennsylvania and 2 branch offices located in Jefferson
and Clearfield Counties, Pennsylvania.
The Bank's main office telephone number is (814) 773-3195.
The principal business of Peoples Savings is the acceptance of savings
deposits from the general public and the origination of mortgage loans for the
purchase and refinancing of single-family homes located in its primary market
area, consisting of Elk, Jefferson and Clearfield Counties, Pennsylvania and for
the purchase of mortgage-backed and investment securities. The Bank also makes
home equity loans, loans secured by the deposits, automobile loans and personal
loans and invests in municipal obligations and other investment securities.
<PAGE>
Selected Financial and Other Data
The information contained in the table captioned "Financial Highlights"
contained in the Corporation's Annual Report to Stockholders for the Fiscal Year
Ended June 30, 1996 ("Annual Report"), is incorporated herein by reference.
Market Area/Competition
During its 102-year existence, Peoples Savings has focused on serving
its customers located in Elk, Jefferson and Clearfield Counties, Pennsylvania.
Peoples Savings conducts operations through its main office located at 173 Main
Street, Ridgway, Pennsylvania, and two additional offices located at 263 Main
Street, Brookville, Pennsylvania and 17 W. Long Avenue, DuBois, Pennsylvania.
The population of this primary market area is approximately 160,000. The economy
in Jefferson and Elk Counties consist primarily of manufacturing (primarily
consisting of glass containers, powdered metal and paper products), while the
economy in Clearfield consists primarily of retail businesses. Because nearly
all the assets and liabilities of the Bank are monetary in nature, interest
rates have a greater effect on the earnings of the Bank than local economic
conditions.
The Bank encounters strong competition both in the attraction of
deposits and in the origination of real estate and other loans. Its most direct
competition for deposits has historically come from commercial banks, other
savings associations, and finance companies in its market area. Based on
published figures, the Bank believes it was the second largest thrift
institution (out of three) and seventh financial institution (out of 8) on the
basis of total assets headquartered in Elk County and the communities of
Brookville and DuBois at June 30, 1996, its primary market area. The Bank's
primary market area includes branches of several commercial banks which are
substantially larger than the Bank in terms of state-wide deposits. The Bank
competes for savings by offering depositors a high level of personal service and
convenient office locations. The competition for real estate and other loans
comes principally from commercial banks, credit unions, mortgage banking
companies and other savings associations.
The Bank competes for loans primarily through the interest rates and
loan fees it charges and the efficiency and quality of services it provides
borrowers, real estate brokers and builders. Factors which affect competition
include the general and local economic conditions, current interest rate levels
and volatility in the mortgage markets.
Lending Activities
General. Currently, the principal lending activity of Peoples Savings is
the origination of mortgage loans for the purpose of financing or refinancing
one- to four-family residential properties.
-2-
<PAGE>
Analysis of Loan Portfolio. The following table sets forth the composition of
the Bank's net loans receivable portfolio by type of loan at the dates
indicated.
<TABLE>
<CAPTION>
At June 30,
1996 1995
-------------------------- ---------------------------
Amount Percent Amount Percent
------ ------- ------ -------
(Dollars in Thousands)
Type of Loan
Real Estate Loans:
<S> <C> <C> <C> <C>
Construction........................ $ 1,848 5.54% $ 591 1.97%
1-4 family.......................... 27,155 81.45 25,299 84.13
Commercial.......................... 1,750 5.25 1,379 4.58
Consumer Loans:
Savings account..................... 481 1.44 411 1.37
Home equity......................... 1,523 4.57 1,745 5.80
Automobiles ........................ 391 1.17 445 1.48
Other............................... 193 0.58 203 0.67
------- ----- ------ -------
Total loans........................... 33,341 100.00% 30,073 100.00%
====== =======
Less:
Loans in process.................... (897) (428)
Deferred loan origination fees and costs (90) (63)
Allowance for possible loan losses.. (227) (208)
------- --------
Total loans, net.................... $ 32,127 $ 29,374
======= ========
</TABLE>
-3-
<PAGE>
Loan Maturity Tables. The following table sets forth the maturity of the
Bank's loan portfolio at June 30, 1996. The table does not include prepayments
or scheduled principal repayments. Prepayments and scheduled principal
repayments on loans totaled $7.6 million and $5.0 million for the two years
ended June 30, 1996 and 1995, respectively. Adjustable-rate mortgage loans are
shown as maturing based on contractual maturities.
<TABLE>
<CAPTION>
1-4 Family
Residential Commercial
Real Estate Real Estate Construction Consumer Total
----------- ----------- ------------ -------- -----
(In Thousands)
<S> <C> <C> <C> <C> <C>
Non-performing............ $ 339 $ 92 $ -- $ 4 $ 435
Amounts Due:
Within 3 months........... 3 101 -- 11 115
3 months to 1 year........ 45 123 -- 47 215
Total due within 1 year... 48 224 -- 58 330
After 1 year:
1 to 3 years............ 463 -- -- 536 999
3 to 5 years............ 735 46 -- 954 1,735
5 to 10 years........... 6,115 521 -- 592 7,228
10 to 20 years.......... 19,455 867 1,848 444 22,614
Over 20 years........... -- -- -- -- --
------- -------- -------- -------- --------
Total due after one year.. 26,768 1,434 1,848 2,526 32,576
------- -------- -------- -------- --------
Total amount due.......... 27,155 1,750 1,848 2,588 33,341
------- -------- -------- -------- --------
Less:
Allowance for loan losses. 131 15 -- 81 227
Loans in process.......... -- -- 879 18 897
Deferred loan fees........ 90 -- -- -- 90
------- -------- ------- ------- --------
Loans receivable, net... $ 26,934 $ 1,735 $ 969 $ 2,489 $ 32,127
======= ======= ======= ======= ========
</TABLE>
-4-
<PAGE>
The following table sets forth the dollar amount of all loans due after
June 30, 1997, which have pre-determined interest rates and which have floating
or adjustable interest rates.
Floating or
Fixed Rates Adjustable Rates Total
----------- ---------------- -----
(In Thousands)
One-to-four family......... $ 20,412 $ 6,689 $ 27,101
Commercial................. 901 583 1,484
Construction............... 1,848 -- 1,848
Consumer................... 2,530 -- 2,530
------- ------- -------
Total.................... $ 25,691 $ 7,272 $ 32,963
======= ======= =======
Residential Real Estate Loans. The Bank's primary lending activity
consists of the origination of one- to four-family, owner-occupied, residential
mortgage loans secured by property located in the Bank's primary market area.
The majority of the Bank's residential mortgage loans consist of loans secured
by owner-occupied, single-family residences. At June 30, 1996, the Bank had
$27.2 million, or 81.4%, of its loan portfolio, invested in loans secured by
one-to four-family residences.
The Bank generally originates 15- and 20-year fixed-rate mortgage and
20-year adjustable rate mortgage loans for retention in the Bank's loan
portfolio. The Bank's adjustable rate ("ARM") mortgage loans adjust yearly based
upon the National Average Mortgage Contract Rate for the purchase of previously
occupied homes. Adjustable-rate mortgage loans have a limit on increases in
rates to one percent per year and 5.0% to 6.0% over the life of the loan. The
Bank's fixed-rate mortgage loans are amortized on a monthly basis with principal
and interest due each month. Residential real estate loans often remain
outstanding for significantly shorter periods than their contractual terms
because borrowers may refinance or prepay loans at their option.
Peoples Savings's residential first mortgage loans customarily include
due-on-sale clauses, which are provisions giving the Bank the right to declare a
loan immediately due and payable in the event, among other things, that the
borrower sells or otherwise disposes of the real property serving as security
for the loan. Due-on-sale clauses are an important means of adjusting the rates
on the Bank's fixed-rate mortgage portfolio, and the Bank has generally
exercised its rights under these clauses.
Regulations limit the amount which a savings bank may lend in
relationship to the appraised value of the real estate securing the loan, as
determined by an appraisal at the time of loan origination. The Bank's lending
policies generally limit the maximum loan-to-value ratio to 80% of the lesser of
the appraised value or the purchase price of the property to serve as security
for the residential loan. The Bank does not require private mortgage insurance.
Flood hazard insurance (if required), and fire and casualty insurance
are required by the Bank on all properties securing real estate loans.
Construction. The Bank only makes construction loans on homes for which
it also makes the permanent loan at the completion of the construction phase.
The construction loans provide for payment of interest only for terms of up to
one year at adjustable or fixed rates. The Bank makes construction loans
primarily to private individuals. At June 30, 1996, the Bank had $1.8 million,
or 5.5% of its loan portfolio, invested in residential construction loans.
-5-
<PAGE>
Commercial Real Estate Loans. In order to enhance yields on its assets,
the Bank originates permanent loans secured by commercial real estate. These
loans are originated in amounts up to 75% of the appraised value of the
property. At June 30, 1996, the Bank had 18 loans secured by commercial
properties with aggregate balances of approximately $1.7 million or 5.2% of
Peoples Savings' loan portfolio at June 30, 1996. At June 30, 1996, the Bank's
two largest commercial real estate loans consisted of a $267,000 10-year
mortgage loan with a 25-year amortization period secured by a nursing home
located in the Pittsburgh, Pennsylvania area and a $338,000 loan secured by a
health care facility located in Johnsonburg, Pennsylvania. The remaining
commercial real estate loans are secured primarily by office buildings, small
retail and commercial establishments and vacant land for development which are
located in the Bank's primary market area.
Loans secured by commercial real estate generally involve a greater
degree of risk than residential mortgage loans and carry larger loan balances.
This increased credit risk is a result of several factors, including the
concentration of principal in a limited number of loans and borrowers, the
effects of general economic conditions on income producing properties and the
increased difficulty of evaluating and monitoring these types of loans.
Furthermore, the repayment of loans secured by commercial real estate is
typically dependent upon the successful operation of the related real estate
project. If the cash flow from the project is reduced, the borrower's ability to
repay the loan may be impaired.
Consumer Loans. The Bank views consumer lending as an important
component of its business operations because consumer loans generally have
shorter terms and higher yields, thus reducing exposure to changes in interest
rates. In addition, the Bank believes that offering consumer loans helps to
expand and create stronger ties to its customer base. Consequently, the Bank
intends to continue its strategy of consumer lending.
Consumer lending is a desired growth area for the Bank because consumer
loans serve to enhance the yield and interest rate sensitivity of the Bank's
overall loan portfolio. However, in recent years, the Bank has not realized any
growth in its consumer loan portfolio primarily due to a high degree of
competition for such loans in the Bank's market area.
Consumer loans entail greater credit risk than do residential mortgage
loans, particularly in the case of consumer loans which are unsecured or secured
by assets that depreciate rapidly, such as automobiles. In such cases,
repossessed collateral for a defaulted consumer loan may not provide an adequate
source of repayment for the outstanding loan and the remaining deficiency often
does not warrant further substantial collection efforts against the borrower. In
particular, amounts realizable on the sale of repossessed automobiles may be
significantly reduced based upon the condition of the automobiles and the lack
of demand for used automobiles. Further, consumer loan collections are dependent
on the borrower's continuing financial stability, and therefore are more likely
to be adversely affected by job loss, divorce, illness or personal bankruptcy.
Finally, the application of various Federal and state laws, including Federal
and state bankruptcy and insolvency laws, may limit the amount which can be
recovered in the event of default. The Bank adds a general provision on a
regular basis to its consumer loan loss allowance, based on general economic
conditions and prior loss experience. See "Non-Performing Assets" for
information regarding the Bank's loan loss experience and reserve policy.
As of June 30, 1996, consumer loans totalled $2.6 million or 7.8% of the
Bank's total net loan portfolio and consisted of loans secured with deposits
held at the Bank, home equity loans, auto loans and personal installment loans.
-6-
<PAGE>
Loan Solicitation and Processing. Loan originations are derived from a
number of sources such as realtors, depositors, borrowers and walk-in customers.
Upon receipt of a loan application, a credit report is obtained and
employers may be contacted to verify specific information relating to the loan
applicant's employment, income, and credit standing. In the case of a real
estate loan, an appraisal of the real estate intended to secure the proposed
loan is undertaken by an appraiser approved by the Bank. Each real estate loan
application file is submitted to the Board of Trustees for review and approval.
In the case of a consumer loan, loan officers are required to follow the
Bank's underwriting standards and guidelines and are granted approval authority
up to $10,000. Consumer loan requests of $10,000 or more must also be approved
by the Managing Officer. Individual lending limits are established from time to
time by the Board of Trustees of the Bank. Consumer loans over $20,000 must be
approved by the Board of Trustees.
The underwriting standards employed by the Bank for consumer loans
include a determination of the applicant's payment history on other debts and an
assessment of ability to meet existing obligations and payments on the proposed
loan. In addition, the stability of the applicant's, monthly income from primary
employment is considered during the underwriting process. Creditworthiness of
the applicant is of primary consideration, however, the underwriting process
also includes a comparison of the value of the security in relation to the
proposed loan amount.
Loan applicants are promptly notified of the credit decision by
telephone or letter. If the loan is approved in writing, the loan commitment
specifies the terms and conditions of the proposed loan including the amount of
the loan, interest rate, amortization term, a brief description of the required
collateral, and required insurance coverage. The borrower must provide proof of
fire, flood (if applicable) and casualty insurance on the property serving as
collateral, which insurance must be maintained during the full term of the loan.
Originations, Purchases and Sales. The Bank originates loans for its own
portfolio and does not sell loans in the secondary market. The loans originated
by the Bank do not meet secondary market underwriting guidelines. The Bank's
deposits have historically exceeded loan demand in its primary market area.
Accordingly, the Bank has been an active purchaser of mortgage-backed
securities. See "-- Mortgage-Backed Securities and Investment Activities --
Mortgage-Backed Securities Portfolio." The Bank has not purchased individual
loans during the past three years. The following tables set forth the Bank's
gross loan originations and principal repayments for the periods indicated.
-7-
<PAGE>
<TABLE>
<CAPTION>
Year Ended June 30,
-------------------------------
1996 1995
-------------- ----------------
(In Thousands)
Total loans receivable at beginning
<S> <C> <C>
of period............................................. $ 30,073 $26,604
Loans originated:
1 to 4 family residential............................. 7,007 4,426
Construction loans.................................... 2,123 1,927
Commercial real estate loans.......................... 538 80
Consumer loans........................................ 979 1,295
------ -------
Total loans originated.................................. 10,647 7,728
Total loans sold........................................ -- --
Loan principal repayments............................... 4,554 4,259
------ -------
Net loan activity....................................... 6,093 3,469
------ -------
Total gross loans receivable at end of period........... $ 33,341 $30,073
========= ======
</TABLE>
Loan Commitments. The Bank issues standby loan origination commitments
to qualified borrowers primarily for residential real estate loans. Such
commitments are made on specified terms and conditions and are made for periods
of up to 30 days, during which time the interest rate may be locked-in. At June
30, 1996, the Bank had $1.4 million in commitments to originate loans.
Loan origination and commitment fees are volatile sources of income.
Such fees vary with the volume and type of loans and commitments made and
purchased and with competitive conditions in the mortgage markets, which in turn
respond to the demand and availability of money.
Loans-to-One Borrower. Under the HOLA, a savings association may not
make a loan or extend credit to a single or related group of borrowers in excess
of 15% of the association's unimpaired capital and surplus. An additional amount
may be lent, equal to 10% of unimpaired capital and surplus, if such loan is
secured by readily-marketable collateral, which is defined to include certain
securities and bullion, but generally does not include real estate.
At June 30, 1996 the Bank's loans-to-one borrower limit was
approximately $1.2 million and its five largest aggregate lending relationships
had balances ranging from $266,000 to $383,000. At June 30, 1996, all of these
loans were current.
-8-
<PAGE>
Non-performing Assets
Delinquencies and Asset Classification. The Bank's collection procedures
provide that when a loan is 15 days past due, a late charge is added and the
borrower is contacted by mail or telephone and payment is requested. If the
delinquency continues, subsequent efforts are made to contact the delinquent
borrower. Loans delinquent 60 days or more are considered problem loans and are
placed on the Bank's loan watch list. Additional late charges may be added and,
if the loan continues in a delinquent status for 90 days or more, the Bank
generally initiates foreclosure proceedings unless other repayment arrangements
are made. Each delinquent loan is reviewed on a case by case basis.
Loans are reviewed on a regular basis and are generally placed on a
non-accrual status when the loan becomes 90 days delinquent and, in the opinion
of management, the collection of additional interest is doubtful. Interest
accrued and unpaid at the time a loan is placed on non-accrual status is charged
against interest income. Subsequent payments are either applied to the
outstanding principal balance or recorded as interest income, depending on the
assessment of the ultimate collectibility of the loan.
The following table sets forth information regarding loans which are 90
days or more delinquent. The Bank does not accrue interest on loans more than 90
days past due.
<TABLE>
<CAPTION>
At June 30,
------------------------------------
1996 1995
------------------ -----------------
(Dollars in Thousands)
Loans accounted for on a non-accrual basis:
Mortgage loans:
Permanent loans secured by 1-4
<S> <C> <C>
dwelling units........................ $ 339 $ 128
Non-mortgage loans:
Consumer................................ 4 16
Commercial real estate.................. 92 --
------- -------
Total non-accrual loans(1)................ 435 144
Real estate owned......................... -- --
Other non-performing assets............... -- --
------- -------
Total non-performing assets............... $ 435 $ 144
======= =====
Total non-accrual loans to net loans...... 1.35% 0.49%
======= =====
Total non-accrual loans to total assets... 0.97% 0.33%
======= =====
Total non-performing assets to total assets 0.97% 0.33%
======= =====
</TABLE>
- --------------------
(1) During the periods indicated, the Bank had $8 of mortgage loans which were
contractually past due 90 days or more and accruing interest.
-9-
<PAGE>
Contractual interest income due for loans accounted for on a non-accrual
basis under the original terms of such loans was $43,000 and $12,000 for the
years ended June 30, 1996 and 1995, respectively. Interest income recognized on
these loans amounted to $27,000 and $11,000 for these respective periods. The
Bank did not include any interest income on non-accrual loans during the periods
indicated. It is the Bank's general policy to accrue interest only on loans less
than 90 days delinquent. Once loans are 90 days delinquent, the Bank reverses
previously accrued but unpaid interest.
The Bank has a classification system for problem assets which covers all
problem assets. Under this classification system, problem assets of insured
institutions are classified as "substandard," "doubtful," or "loss." An asset is
considered "substandard" if it is inadequately protected by the current net
worth and paying capacity of the obligor or of the collateral pledged, if any.
"Substandard" assets include those characterized by the "distinct possibility"
that the insured institution will sustain "some loss" if the deficiencies are
not corrected. Assets classified as "doubtful" have all of the weaknesses
inherent in those classified "substandard," with the added characteristic that
the weaknesses present make "collection or liquidation in full," on the basis of
currently existing facts, conditions and values, "highly questionable and
improbable." Assets classified as "loss" are those considered "uncollectible"
and of such little value that their continuance as assets without the
establishment of a specific loss reserve is not warranted. Assets designated
"special mention" by management are assets included on the Bank's internal
watchlist because of potential weakness but which do not currently warrant
classification in one of the aforementioned categories.
When the Bank classifies problem assets as either substandard or
doubtful, it may establish general allowances for loan losses in an amount
deemed prudent by management. General allowances represent loss allowances which
have been established to recognize the inherent risk associated with lending
activities, but which, unlike specific allowances, have not been allocated to
particular problem assets. When the Bank classifies problem assets as "loss," it
is required either to establish a specific allowance for losses equal to 100% of
that portion of the asset so classified or to charge-off such amount.
Management's evaluation of the classification of assets and the adequacy of the
reserve for loan losses is reviewed by regulatory agencies as part of their
periodic examinations. A portion of general loss allowances established to cover
possible losses related to assets classified as substandard or doubtful may be
included in determining an institution's regulatory capital, while specific
valuation allowances for loan losses generally do not qualify as regulatory
capital.
As of June 30, 1996, the Bank had total classified assets of $657,000 of
which none were designated special mention, $632,000 were classified
substandard, none were classified doubtful and $25,000 were classified loss.
In addition, at June 30, 1996, the Bank had $592,000 in residential
mortgage loans and $65,000 in consumer loans which were 60 days or more
delinquent.
Real Estate Owned. Real estate acquired by the Bank as a result of
foreclosure or by deed-in- lieu of foreclosure is classified as real estate
owned until it is sold. When property is acquired it is recorded at the lower of
the cost or fair value less estimated costs to sell.
Real estate acquired by the Bank as a result of foreclosure or by deed
in lieu of foreclosure is classified as foreclosed real estate until such time
as it is sold. When foreclosed real estate is acquired, it is recorded at the
lower of the unpaid principal balance of the related loan or its fair value. Any
additional write-down of foreclosed real estate is charged to the allowance for
loan losses if permanent impairment exists.
-10-
<PAGE>
The Bank had no REO at June 30, 1996.
Allowance for Loan Losses and Real Estate Owned. It is management's
policy to provide for losses on both specifically identified and unidentified
loans in its loan portfolio. A provision for loan losses is charged to
operations based on management's evaluation of the potential losses that may be
incurred in the Bank's loan portfolio after management has evaluated a number of
factors, including, historical experience, the volume and type of lending
conducted by the Bank, industry standards, the amount of non-performing assets,
current general economic conditions as they relate to the Bank's loan portfolio
and other factors related to the collectibility of the Bank's loan portfolio.
Such evaluation, which includes a review of all loans of which full
collectibility of interest and principal may not be reasonably assured,
considers, among other matters, the estimated net realizable value of the
underlying collateral. During the years ended June 30, 1996 and 1995, the Bank
charged $24,000 to the provision for losses on loans.
When foreclosed real estate is acquired, it is recorded at the lower of
(a) cost or (b) fair value less estimated costs to sell. Valuations are
periodically performed by management and subsequent charges to income are taken
when it is determined that the carrying value of the property exceeds the fair
value less estimated costs to sell.
Management will continue to review the entire loan portfolio to
determine the extent, if any, to which further additional loan loss provisions
may be deemed necessary. There can be no assurance that the allowance for loan
losses will be adequate to cover losses which may in fact be realized in the
future and that additional provisions for possible loan losses will not be
required.
-11-
<PAGE>
Analysis of the Allowance for Loan Losses. The following table sets
forth information with respect to the Bank's allowance for loan losses at the
dates indicated:
At June 30,
-----------------------------
1996 1995
------------- --------------
(Dollars in Thousands)
Total loans outstanding............................ $33,341 $30,073
======= ======
Average loans outstanding.......................... $30,956 $28,306
======= ======
Allowance balances (at beginning of period)........ $ 208 $ 184
Provision:
Residential...................................... 24 24
Consumer......................................... -- --
Charge-offs:
Residential...................................... -- --
Consumer......................................... (6) (3)
Recoveries:
Residential...................................... -- --
Consumer......................................... 1 3
------ -----
Allowance balance (at end of period)............... $ 227 $ 208
====== =====
Allowance for loan losses as a percent of
total loans outstanding.......................... 0.68% 0.78%
Net loans charged off as a percent of
average loans outstanding........................ -0.02% -0.01%
-12-
<PAGE>
The distribution of the Bank's allowance for loan losses at the dates
indicated are summarized as follows:
<TABLE>
<CAPTION>
At June 30,
-----------------------------------------------------
1996 1995
-------------------------- -------------------------
Percent of Percent of
Loans in Each Loans in Each
Category to Category to
Amount Total Loans Amount Total Loans
------ ----------- ------ -----------
(Dollars in Thousands)
<S> <C> <C> <C> <C>
Residential real estate ..... $ 131 91.56% $ 123 91.89%
Commercial real estate....... 15 5.25 -- 4.59
Consumer..................... 81 3.19 85 3.52
---- ----- ---- -------
Total........................ $ 227 100.00% $ 208 100.00%
==== ====== ==== ======
</TABLE>
Mortgage-Backed Securities and Investment Activities
Mortgage-Backed Securities Portfolio. At June 30, 1996, the carrying
value of mortgage-backed securities totaled $7.5 million, or 16.6%, of total
assets which consisted of Federal Home Loan Mortgage Corporation ("FHLMC"),
Federal National Mortgage Association ("FNMA") and Government Mutual Mortgage
Association ("GNMA") pass through securities and collateralized mortgage
obligations. The market value of such securities totaled approximately $7.4
million at June 30, 1996.
Mortgage-backed securities represent a participation interest in a pool
of mortgages, the principal and interest payments on which are passed from the
mortgage originators, through intermediaries (generally quasi-governmental
agencies) that pool and repackage the participation interests in the form of
securities, to investors such as the Bank. Such quasi-governmental agencies
guarantee the payment of principal and interest to investors. The underlying
pool of mortgages can be composed of either fixed rate mortgages or ARM loans.
Mortgage-backed securities are generally referred to as mortgage participation
certificates or pass-through certificates. As a result, the interest rate risk
characteristics of the underlying pool of mortgages, i.e., fixed rate or
adjustable rate, as well as prepayment risk, are passed on to the certificate
holder. The life of a mortgage-backed pass-through security is equal to the life
of the underlying mortgages.
At June 30, 1996, the Bank had two collateralized mortgage obligations
("CMOs") totalling $270,000, secured by GNMA certificates. These variable rate
CMOs had an original cost of $1.6 million but much of the principal has been
paid off due to the early prepayments of the underlying mortgages.
-13-
<PAGE>
The following table sets forth the Bank's gross mortgage-backed
securities purchases and principal repayments for the periods indicated.
Year Ended June 30,
------------------------
1996 1995
---- ----
(In Thousands)
Total mortgage-backed securities, net
at beginning of period.................... $ 9,634 $10,949
Mortgage-backed securities purchased........ -- --
Mortgage-backed securities principal
repayments................................ 2,168 1,315
------- ------
Net mortgage-backed securities activity..... (2,168) (1,315)
------- ------
Total mortgage-backed securities, net
at end of period.......................... $ 7,466 $ 9,634
======= =======
The following table sets forth the carrying value of the Bank's fixed
rate and variable rate mortgage-backed securities at the dates indicated.
At June 30,
--------------------------
1996 1995
---- ----
(In Thousands)
Mortgage-backed securities:
Fixed..................................... $ 3,743 $5,163
Variable.................................. 3,723 4,471
------- ------
Total mortgage-backed securities............ $ 7,466 $ 9,634
======= ======
-14-
<PAGE>
Investment Portfolio. The following table sets forth the carrying value
of the Bank's investment securities and FHLB stock at the dates indicated. At
June 30, 1996, the market value of the Bank's investment securities portfolio
was approximately $4.6 million.
At June 30,
--------------------------
1996 1995
---- ----
(In Thousands)
U.S. Government agency securities......... $ 2,797 $1,750
Municipal bonds........................... 897 1,549
FHLB stock................................ 359 346
Interest-bearing deposits in other
financial institutions.................. 627 402
------ ------
Total investment securities............. $ 4,680 $ 4,047
====== ======
-15-
<PAGE>
Investment Portfolio Maturities. The following table sets forth certain
information regarding the carrying values, weighted average yields and
maturities of the Bank's investment securities portfolio at June 30, 1996.
<TABLE>
<CAPTION>
As of June 30, 1996
One Year or Less One to Five Years Five to Ten Years More than Ten Years Total Investment Securities
---------------- ----------------- ----------------- ------------------- ---------------------------
Carrying Average Carrying Average Carrying Average Carrying Average Carrying Average Market
Value Yield Value Yield Value Yield Value Yield Value Yield Value
------- ------- ------- ------- ------- ------- ------- ------- ------- ------- ------
(Dollars in Thousands)
U.S. Government
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
agency securities .......... $ -- --% $ 750 5.95% $2,047 7.02% $ -- --% $2,797 6.73% $2,754
Municipal bonds............... 370 4.46% 527 4.22% -- -- -- -- 897 4.32% 894
Interest-bearing deposits in
other financial institutions 627 5.37% -- -- -- -- -- -- 627 5.37% 627
FHLB Stock(2) ................ 359 6.34% -- -- -- -- -- -- 359 6.34% 359
------ ---- ------ ---- ------ ---- ---- ---- ------ ---- ------
Total ...................... $1,356 6.43% $1,277 5.24% $2,047 7.02% $ -- --% $4,680 6.06% $4,634
====== ==== ====== ==== ====== ==== ==== ==== ====== ==== ======
</TABLE>
- -------------------
(1) All securities are held to maturity in accordance with Statement of
Financial Accounting Standards No. 115, Accounting for Certain Investment,
in Debt and Equity Securities.
(2) Recorded at cost.
-16-
<PAGE>
Sources of Funds
General. Deposits are the major source of the Bank's funds for lending
and other investment purposes. In addition to deposits, Peoples Savings derives
funds from amortization and prepayment of loans, maturities of investment
securities and operations. Scheduled loan principal repayments are a relatively
stable source of funds, while deposit inflows and outflows and loan prepayments
are significantly influenced by general interest rates and market conditions.
Borrowings may be used on a short-term basis to compensate for reductions in the
availability of funds from other sources or on a longer term basis for general
business purposes.
Deposits. Consumer and commercial deposits are attracted principally
from within the Bank's primary market area through the offering of a broad
selection of deposit instruments including NOW, passbook savings, money market
deposit, term certificate accounts and individual retirement accounts. Deposit
account terms vary according to the minimum balance required, the time periods
the funds must remain on deposit and the interest rate, among other factors. The
Bank regularly evaluates the internal cost of funds, surveys rates offered by
competing institutions, reviews the Bank's cash flow requirements for lending
and liquidity and executes rate changes when deemed appropriate. The Bank does
not obtain funds through brokers, nor does it actively solicit funds outside of
the Commonwealth of Pennsylvania.
Jumbo certificates of deposit with principal amounts of $100,000 or more
constituted $2.4 million, or 6.6% of the Bank's total deposit portfolio at June
30, 1996. The Bank's jumbo deposits include deposits from various business
entities, individuals and local governments and authorities. See "--Jumbo
Certificates of Deposit."
-17-
<PAGE>
Deposits in the Bank as of June 30, 1996 were represented by various
types of savings programs described below.
<TABLE>
<CAPTION>
Balance as of
Minimum June 30, Percentage of
Category Term Interest Rate(1) Balance Amount 1996 Total Deposits
- -------- ---- ---------------- -------------- ---- --------------
(In Thousands)
<S> <C> <C> <C> <C> <C>
Now Accounts None 2.25% $200 $2,498 6.96%
Regular Savings None 2.50 50 5,884 16.39%
Money Market Accounts None (2) (2) 1,546 4.31%
Certificates of Deposit:
Fixed Term, Fixed Rate 1-3 Months 2.75% 500 4,006 11.16%
Fixed Term, Fixed Rate 4-6 Months 4.50% 500 3,956 11.02%
Fixed Term, Fixed Rate 7-12 Months 4.75% 500 4,774 13.30%
Fixed Term, Fixed Rate 13-24 Months 4.85% 500 5,992 16.69%
Fixed Term, Fixed Rate 25-36 Months 5.00% 500 1,880 5.24%
Fixed Term, Fixed Rate 36-48 Months 5.05% 500 2,291 6.38%
Fixed Term, Fixed Rate 49-120 Months 5.15% 500 683 1.90%
Jumbo Certificates 100,000 2,355 6.56%
-------- ------
35,865 99.91%
Accrued interest on deposits 33 0.09%
------- ------
Total $ 35,898 100.00%
======= ======
</TABLE>
- ----------------------
(1) Interest rates as of June 30, 1996.
(2) Under $1,000: 2.75%; over $1,000: 3.00%
The following table sets forth the time deposits in the Bank classified
by interest rate as of the dates indicated.
June 30,
------------------------
1996 1995
---- ----
(In Thousands)
Interest Rate
4.00% or less............................... $ 210 $ 1,328
4.01-6.00%.................................. 16,761 15,150
6.01-8.00%.................................. 8,966 9,217
8.01-10.00%................................. -- 117
------- ------
25,937 25,812
Accrued interest on certificate accounts.... 26 31
------- -------
Total....................................... $ 25,963 $25,843
======= ======
-18-
<PAGE>
The following table sets forth the amount and maturities of time
deposits at June 30, 1996.
<TABLE>
<CAPTION>
After
June 30, June 30, June 30, June 30,
Interest Rate 1997 1998 1999 2000 Total
- ------------- ------ ------ ------ ------ ------
(Dollars in Thousands)
<C> <C> <C> <C> <C> <C> <C>
2.00 - 4.00%.................. $ 210 $ -- $ -- $ -- $ 210
4.01 - 6.00%.................. 10,686 3,964 1,715 396 16,761
6.01 - 8.00%.................. 3,143 2,227 165 3,431 8,966
8.01 - 10.00%................. -- -- -- -- --
------- ------- ------ ------ ------
Total $ 14,039 $ 6,191 $ 1,880 $ 3,827 $ 25,937
======= ======= ====== ======
Accrued Interest on
certificate accounts........ 26
------
Total $ 25,963
======
</TABLE>
The following table indicates the amount of the Bank's certificates of
deposit of $100,000 or more by time remaining until maturity as of June 30,
1996.
Certificates
of Deposits
Maturity Period (In Thousands)
- ---------------
Within three months..................................... $ 534
Three through six months................................ 104
Six through twelve months............................... 665
Over twelve months...................................... 1,053
---------
$ 2,356
=========
The following table sets forth the savings activities of the Bank for
the periods indicated:
Year Ended June 30
----------------------------
1996 1995
(In Thousands)
Net increase (decrease)
before interest credited............... $ 693 $(3,454)
Interest credited........................ 1,761 1,590
------ ------
Net increase (decrease) in
savings deposits....................... $ 2,454 (1,864)
====== ======
-19-
<PAGE>
In the unlikely event of liquidation of the Bank after the Conversion,
depositors will be entitled to full payment of their deposit accounts prior to
any payment being made to the stockholders of the Bank. Substantially all of the
Bank's depositors are residents of Pennsylvania.
Borrowings. Deposits are the primary source of funds of the Bank's
lending and investment activities and for its general business purposes. The
Bank may obtain advances from the FHLB of Pittsburgh to supplement its supply of
lendable funds, although the Bank has not generally utilized this funding
source. Advances from the FHLB of Pittsburgh would typically be secured by a
pledge of the Bank's stock in the FHLB of Pittsburgh and a portion of the Bank's
first mortgage loans and certain other assets. The Bank, if the need arises, may
also access the Federal Reserve Bank discount window to supplement its supply of
lendable funds and to meet deposit withdrawal requirements. For the years ended
June 30, 1996 and 1995, Peoples Savings had no advances outstanding from the
FHLB of Pittsburgh or borrowings of any other kind.
Personnel. As of June 30, 1996 the Bank had 14 full-time and 3 part-time
employees. None of the Bank's employees are represented by a collective
bargaining group. The Bank believes its relationship with its employees to be
good.
Regulation
Set forth below is a brief description of certain laws which relate to
the regulation and supervision of the Bank and the Corporation. The description
does not purport to be complete and is qualified in its entirety by reference to
applicable laws and regulations.
Regulation of the Corporation
General. The Corporation, as a bank holding company, is subject to
regulation and supervision by the Board of Governors of the Federal Reserve
System ("FRB") and by the Pennsylvania Department (the "Department"). This
regulation is generally intended to ensure that the Corporation limits its
activities to those allowed by law and that it operates in a safe and sound
manner without endangering the financial health of its subsidiary banks. The
Corporation will be required to file annually a report of its operations with,
and is subject to examination by, the FRB and the Department.
BHCA Activities and Other Limitations. The Bank Holding Company Act of
1956, as amended ("BHCA"), prohibits a bank holding company from acquiring
direct or indirect ownership or control of more than 5% of the voting shares of
any bank, or increasing such ownership or control of any bank, without prior
approval of the FRB. In determining whether to authorize a bank holding company
(or a company that will become a bank holding company) to acquire control of a
bank, the FRB takes into consideration the financial and managerial resources of
the bank holding company, as well as those of the bank to be acquired, and
considers whether the acquisition is likely to have anti-competitive effects or
other adverse effects. The BHCA also generally prohibits a bank holding company
from acquiring any bank located outside of the state in which the operations of
the existing bank subsidiaries of the bank holding company are principally
conducted unless specifically authorized by applicable state law. No approval
under the BHCA is required, however, for a bank holding company already owning
or controlling 50% or more of the voting shares of a bank to acquire additional
shares of such bank.
The BHCA also prohibits a bank holding company, with certain exceptions,
from acquiring more than 5% of the voting shares of any company that is not a
bank and from engaging in any business other than banking or managing or
controlling banks. Under the BHCA, the FRB is authorized to approve the
-20-
<PAGE>
ownership of shares by a bank holding company in any company, the activities of
which the FRB has determined to be so closely related to banking or to managing
or controlling banks as to be a proper incident thereto. In making such
determinations, the FRB is required to weigh expected benefits to the public,
such as greater convenience, increased competition or gains in efficiency,
against the possible adverse effects, such as undue concentration of resources,
decreased or unfair competition, conflicts of interest or unsound banking
practices.
The FRB has by regulation determined that certain activities are closely
related to banking within the meaning of the BHCA. These activities include
those of operating a mortgage company, a finance company, a credit card company,
a factoring company, a trust company or a savings association; performing
certain data processing operations; providing limited securities brokerage
services; acting as an investment or financial advisor; leasing personal
property on a full-payout (and, to a limited extent, less than full-payout),
non-operating basis; providing tax planning and preparation services; operating
a collection agency; and providing certain courier services. The FRB also has
determined that certain other activities, including real estate brokerage and
syndication, land development, property management and underwriting of life
insurance not related to credit transactions, are not closely related to banking
and a proper incident thereto.
Regulatory Capital Requirements. The FRB has adopted capital adequacy
guidelines pursuant to which it assesses the adequacy of capital in examining
and supervising a bank holding company and in analyzing applications to it under
the BHCA. The FRB capital adequacy guidelines generally require bank holding
companies to maintain total capital equal to 8% of total risk-adjusted assets,
with at least one-half of that amount consisting of Tier I or core capital and
up to one-half of that amount consisting of Tier II or supplementary capital.
Tier I capital for bank holding companies generally consists of the sum of
common stockholders' equity and perpetual preferred stock (subject in the case
of the latter to limitations on the kind and amount of such preferred stock
which may be included as Tier I capital), less goodwill. Tier II capital
generally consists of hybrid capital instruments; perpetual preferred stock
which is not eligible to be included as Tier I capital; term subordinated debt
and intermediate-term preferred stock; and, subject to limitations, general
allowances for loan losses. Assets are adjusted under the risk- based guidelines
to take into account different risk characteristics, with the categories ranging
from 0% (requiring no additional capital) for assets such as cash to 100% for
the bulk of assets which are typically held by a bank holding company, including
multi-family residential and commercial real estate loans, commercial business
loans and consumer loans. Single-family residential first mortgage loans which
are not 90 days or more past-due or non-performing and which have been made in
accordance with prudent underwriting standards are assigned a 50% level in the
risk-weighing system, as are certain privately- issued mortgage-backed
securities representing indirect ownership loans. Off-balance sheet items also
are adjusted to take into account certain risk characteristics. The FRB has
indicated that bank holding companies anticipating significant growth will be
expected to maintain capital ratios in excess of the required minimums.
In addition to the risk-based capital requirements, the FRB requires
bank holding companies to maintain a minimum leverage capital ratio of Tier I
capital to total assets of 3.0%. Total assets for this purpose does not include
goodwill and any other intangible assets and investments that the FRB determines
should be deducted from Tier I capital. The FRB has announced that the 3.0% Tier
I leverage capital ratio requirement is the minimum for the top-rated bank
holding companies without any supervisory, financial or operational weaknesses
or deficiencies or those which are not experiencing or anticipating significant
growth. Other bank holding companies will be expected to maintain Tier I
leverage capital ratios of at least 4.0% to 5.0% or more, depending on their
overall condition.
-21-
<PAGE>
At June 30, 1996, the Corporation was in compliance with the
above-described FRB regulatory capital requirements.
Commitments to Affiliated Depository Institutions. Under FRB policy, the
Corporation will be expected to act as a source of financial strength to the
Bank and to commit resources to support the Bank in circumstances when it might
not do so absent such policy. The enforceability and precise scope of this
policy is unclear, however, in light of recent judicial precedent, however,
should the Bank require the support of additional capital resources, it should
be anticipated that Corporation will be required to respond with any such
resources available to it.
Federal Securities Law. The Corporation is subject to the information,
proxy solicitation, insider trading restrictions and other requirements under
the Securities Exchange Act of 1934, as amended ("Exchange Act"). Furthermore,
shares owned by an affiliate of the Corporation are subject to the resale
restrictions of Rule 144 under the Securities Act of 1993, as amended.
Regulation of the Bank
General. As a Pennsylvania chartered, SAIF-insured savings bank, Peoples
Savings is subject to extensive regulation and examination by the Department,
the FDIC, which insures its deposits to the maximum extent permitted by law, and
to a much less or extent, by the FRB. The federal and state laws and regulations
which are applicable to banks regulate, among other things, the scope of their
business, their investments, the reserves required to be kept against deposits,
the timing of the availability of deposited funds and the nature and amount of
and collateral for certain loans. The laws and regulations governing the Bank
generally have been promulgated to protect depositors and not for the purpose of
protecting stockholders. The regulatory structure also gives the regulatory
authorities extensive discretion in connection with their supervisory and
enforcement activities and examination policies, including policies with respect
to the classification of assets and the establishment of adequate loan loss
reserves for regulatory purposes. Any change in such regulation, whether by the
Department, the FDIC or the United States Congress could have a material adverse
impact on the Corporation, the Bank and their operations.
Pennsylvania Savings Bank Law. The Pennsylvania Banking Code ("Banking
Code") contains detailed provisions governing the organization, location of
offices, rights and responsibilities of trustees, officers, employees and
members, as well as corporate powers, savings and investment operations and
other aspects of the Bank and its affairs. The Banking Code delegates extensive
rule-making power and administrative discretion to the Department so that the
supervision and regulation of state chartered associations may be flexible and
readily responsive to changes in economic conditions and in savings and lending
practices.
One of the purposes of the Banking Code is to provide savings banks with
the opportunity to be fully competitive with each other and with other financial
institutions existing under other state, federal and foreign laws. To this end,
the Banking Code provides state-chartered savings banks with all of the powers
enjoyed by federal savings and loan associations, subject to regulation by the
Department. The Federal Deposit Insurance Corporation Act ("FDIA"), however,
prohibits state chartered institutions from making new investments, loans, or
becoming involved in activities as principal and equity investments which are
not permitted for national banks unless (1) the FDIC determines the activity or
investment does not pose a significant risk of loss to the SAIF and (2) the
savings bank meets the fully phased-in capital requirements. Accordingly, the
ability of the Banking Code to provide additional operating authority to the
Bank is limited by the FDIA.
-22-
<PAGE>
The Department generally examines each savings bank not less frequently
than once every two years. The Banking Code permits the Department to accept the
examinations and reports of the FDIC in lieu of the Department's examination.
The present practice is for the Department to conduct individual examinations.
The Department may order any savings bank to discontinue any violation of law or
unsafe or unsound business practice and may direct any trustee, officer,
attorney or employee of a savings bank engaged in an objectionable activity,
after the Department has ordered the activity to be terminated, to show cause at
a hearing before the Department why such person should not be removed.
Interstate Acquisitions. The Commonwealth of Pennsylvania has enacted
legislation regarding the acquisition of commercial banks, bank holding
companies, savings banks and savings and loan associations located in
Pennsylvania by institutions located outside of Pennsylvania. The statute
dealing with savings institutions authorizes (i) a savings bank, savings and
loan association or holding company thereof located in another state (a "foreign
institution") to acquire the voting stock of, merge or consolidate with, or
purchase assets and assume liabilities of, a Pennsylvania-chartered savings bank
and (ii) the establishment of branches in Pennsylvania by foreign institutions,
in each case subject to certain conditions including (A) reciprocal legislation
in the state in which the foreign institution seeking entry into Pennsylvania is
located permitting comparable entry by Pennsylvania savings institutions and (B)
approval by the Department. Pennsylvania law also provides for nationwide
branching by Pennsylvania- chartered savings banks and savings and loan
associations, subject to the Department's approval and certain other conditions.
On September 29, 1994, the United States Congress enacted the
Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 (the
"Interstate Banking Law"), which amended various federal banking laws to provide
for nationwide interstate banking, interstate bank mergers and interstate
branching. The Interstate Banking Law will allow, effective September 29, 1995,
the acquisition by a bank holding company of a bank located in another state.
Interstate bank mergers and branch purchase and assumption transactions
will be allowed effective June 1, 1997, however, states may "opt-out" of the
merger and purchase and assumption provisions by enacting laws that specifically
prohibit such interstate transactions. States may, in the alternative, enact
legislation to allow interstate merger and purchase and assumption transactions
prior to June 1, 1997. Pursuant to the Interstate Banking Law, states may also
enact legislation to allow for de novo interstate branching by out of state
banks.
Pennsylvania has enacted "opt-in" legislation authorizing full
interstate branching for state-chartered financial institutions prior to June 1,
1997. This legislation allows out-of-state banks to branch into Pennsylvania
either by buying an existing bank or converting it into a branch or by setting
up a de novo branch. The law requires reciprocity from the other state until
June 1, 1997. The legislation also allows state-chartered banks the same rights
as federally chartered banks to branch into other states that allow interstate
branching.
Insurance of Deposit Accounts. The Bank's deposit accounts are insured
by the SAIF to a maximum of $100,000 for each insured member (as defined by law
and regulation). Regardless of an institution's capital level, insurance of
deposits may be terminated by the FDIC upon a finding that the institution has
engaged in unsafe or unsound practices, is in an unsafe or unsound condition to
continue operations or has violated any applicable law, regulation, rule, order
or condition imposed by the FDIC or the institution's primary regulator. The
management of the Bank is unaware of any practice, condition or violation that
might lead to termination of its deposit insurance.
-23-
<PAGE>
The Bank pays deposit insurance premiums to the FDIC based on a
risk-based assessment system established by the FDIC for all insured
institutions. Under applicable regulations, institutions are assigned to one of
three capital groups based on the level of an institution's capital (i.e., "well
capitalized," "adequately capitalized" and "undercapitalized"). These three
groups are then divided into three subgroups which reflect varying levels of
supervisory concern, from those which are considered to be healthy to those
which are considered to be of substantial supervisory concern. The matrix so
created results in nine assessment risk classifications, with rates ranging from
.23% for well capitalized, healthy institutions to .31% for undercapitalized
institutions with substantial supervisory concerns. The Bank paid approximately
$83,000 in federal deposit insurance premiums for year ended June 30, 1996.
Regulatory Capital Requirements. The FDIC has promulgated regulations
and adopted a statement of policy prescribing the capital adequacy requirements
for state-chartered banks, some of which, like the Bank, are not members of the
Federal Reserve System. At June 30, 1996, the Bank exceeded all regulatory
capital requirements and is classified as "well capitalized."
The FDIC's capital regulations establish a minimum 3.0% Tier I leverage
capital requirement for the most highly-rated state-chartered, non-member banks,
with an additional cushion of at least 100 to 200 basis points for all other
state-chartered, non-member banks, which effectively will increase the minimum
Tier I leverage ratio for such other banks to 4.0% to 5.0% or more. Under the
FDIC's regulation, the highest-rated banks are those that the FDIC determines
are not anticipating or experiencing significant growth and have well
diversified risk, including no undue interest rate risk exposure, excellent
asset quality, high liquidity, good earnings and, in general, which are
considered a strong banking organization, rated composite 1 under the Uniform
Financial Institutions Rating System. Leverage or core capital is defined as the
sum of common stockholders' equity (including retained earnings), noncumulative
perpetual preferred stock and related surplus, and minority interests in
consolidated subsidiaries, minus all intangible assets other than certain
qualifying supervisory goodwill, and certain purchased mortgage servicing rights
and purchased credit and relationships.
The FDIC also requires that savings banks meet a risk-based capital
standard. The risk-based capital standard for savings banks requires the
maintenance of total capital (which is defined as Tier I capital and
supplementary (Tier 2) capital) to risk weighted assets of 8%. In determining
the amount of risk-weighted assets, all assets, plus certain off balance sheet
assets, are multiplied by a risk-weight of 0% to 100%, based on the risks the
FDIC believes are inherent in the type of asset or item.
The components of Tier I capital are equivalent to those discussed above
under the 3% leverage standard. The components of supplementary (Tier 2) capital
include certain perpetual preferred stock, certain mandatory convertible
securities, certain subordinated debt and intermediate preferred stock and
general allowances for loan and lease losses. Allowance for loan and lease
losses includable in supplementary capital is limited to a maximum of 1.25% of
risk-weighted assets. Overall, the amount of capital counted toward
supplementary capital cannot exceed 100% of core capital.
A bank which has less than the minimum leverage capital requirement is
subject to various capital plan and activities restriction requirements. The
FDIC's regulation also provides that any insured depository institution with a
ratio of Tier I capital to total assets that is less than 2.0% is deemed to be
operating in an unsafe or unsound condition pursuant to Section 8(a) of the FDIA
and could be subject to potential termination of deposit insurance.
-24-
<PAGE>
The Bank is also subject to more stringent Department guidelines.
Although not adopted in regulation form, the Department utilizes capital
standards requiring a minimum of 6.5% leverage capital and 10% risk-based
capital. The components of leverage and risk-based capital are substantially the
same as those defined by the FDIC.
The Bank was in compliance in both the FDIC and Pennsylvania capital
requirements at June 30, 1996.
Community Reinvestment. Under the Community Reinvestment Act ("CRA"), as
implemented by FDIC regulations, a savings association 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 CRA 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 CRA. The CRA
requires the FDIC, in connection with its examination of a savings bank, 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 certain applications by
such institution, and to provide a written evaluation of an institution's CRA
performance utilizing a four tiered descriptive rating system in lieu. The Bank
received a "satisfactory" rating in its last CRA examination in May 31, 1994.
Transactions With Affiliates. Generally, restrictions on transactions
with affiliates require that transactions between a savings association or its
subsidiaries and its affiliates be on terms as favorable to the Bank as
transactions with non-affiliates. In addition, certain of these transactions are
restricted to a percentage of the Bank's capital. Affiliates of the Bank include
the Holding Company and any company which would be under common control with the
Bank.
The Bank's authority to extend credit to executive officers, directors
and 10% shareholders, as well as entities such persons control are currently
governed by Sections 22(g) and 22(h) of the Federal Reserve Act and Regulation O
promulgated by the Federal Reserve Board. Among other things, these regulations
require such loans to be made on terms substantially similar to those offered to
unaffiliated individuals, place limits on the amount of loans the Bank may make
to such persons based, in part, on the Bank's capital position, and require
certain approval procedures to be followed.
Federal Home Loan Bank System. The Bank is a member of the FHLB of
Pittsburgh, which is one of 12 regional FHLBs that administers the home
financing credit function of savings associations. Each FHLB serves as a reserve
or central bank for its members within its assigned region. It is funded
primarily from proceeds derived from the sale of consolidated obligations of the
FHLB System. It makes loans to members (i.e., advances) in accordance with
policies and procedures established by the Board of Directors of the FHLB.
As a member, the Bank is required to purchase and maintain stock in the
FHLB of Pittsburgh in an amount equal to at least 1% of its aggregate unpaid
residential mortgage loans, home purchase contracts or similar obligations at
the beginning of each year. At June 30, 1996, the Bank had $359,000 in FHLB
stock, which was in compliance with this requirement.
As a result of the Financial Institutions Reform, Recovery and
Enforcement Act of 1989 ("FIRREA"), the FHLBs are required to provide funds for
the resolution of troubled savings associations and to contribute to affordable
housing programs through direct loans or interest subsidies on advances targeted
for community investment in low and moderate income housing projects. These
contributions
-25-
<PAGE>
have adversely affected the level of FHLB dividends paid and could continue to
do so in the future. For the year ended June 30, 1996, dividends paid by the
FHLB of Pittsburgh to the Bank totalled approximately $23,000.
Federal Reserve System. The FRB requires all depository institutions to
maintain non-interest bearing reserves at specified levels against their
transaction accounts (primarily checking, NOW and Super NOW checking accounts)
and non-personal time deposits. The balances maintained to meet the reserve
requirements imposed by the FRB may be used to satisfy the liquidity
requirements that are imposed by the Department. At June 30, 1996, the Bank met
its reserve requirements.
Savings associations have authority to borrow from the Federal Reserve
Bank "discount window," but Federal Reserve policy generally requires savings
associations to exhaust all sources before borrowing from the Federal Reserve
System. The Bank had no discount window borrowings at June 30, 1996.
Lender Liability. Section 107 of the Comprehensive Environmental
Response, Compensation and Liability Act ("CERCLA") generally imposes strict
liability on, among others, all prior and present "owners and operators" of
hazardous waste sites. However, the U.S. Congress created a safe harbor
provision for secured creditors by providing that the term "owner and operator"
does not include "a person, who, without participating in the management of a
vessel or facility, holds indicia of ownership primarily to protect his security
interest in the vessel or facility."
Since enactment, the secured creditors exemption had been the subject of
judicial interpretations which have left open the possibility that lenders could
be held liable for the cost of cleaning up contaminated property that they hold
merely as collateral. In 1990, the 11th Circuit interpreted the secured creditor
exemption to mean that "a secured creditor will be liable if its involvement
with the management of the facility is sufficiently broad to support the
inference that it could affect hazardous waste disposal decisions if it so
chose." United States v. Fleet Factors Corp. 901 F.2d 1550 (11th Cir.
1990).
In response to such uncertainty, in April 1992 the Environmental
Protection Agency ("EPA") promulgated a regulation which clarified when and how
secured creditors could be liable for cleanup costs under CERCLA. Generally, the
regulation protected a secured creditor that acquired full title to collateral
property through foreclosure, as long as the creditor did not participate in the
facility's management prior to foreclosure and undertook certain diligent
efforts to divest itself of the property. However, the U.S. Court of a Appeals
for the District of Columbia Circuit, in Chemical Manufacturers Association v.
Environmental Protection Agency, 15 F.3d 1100 (D.C. Cir. February 4, 1994), held
that the EPA lacked authority to issue the above regulation. The court ruled
that Congress meant for decisions on liability under CERCLA to be made by the
courts and not the executive branch. The U.S. Supreme Court, on January 17, 1995
denied writ of certiorari. Any further clarification at this time must come from
the U.S. Congress or the lower courts.
To the extent there is uncertainty in this area, all institutions making
loans secured by property with potential hazardous waste problems could be
subject to possible liability for the cleanup of such problem. However, in an
attempt to clarify when lenders will be subject to EPA enforcement actions when
they hold contaminated property as security for loans, the EPA issued guidelines
in September 1995. These guidelines, which generally track the earlier
invalidated regulation, took effect on December 6, 1995.
-26-
<PAGE>
Federal and State Taxation
Federal Taxation. The Bank has filed its tax return on a June 30,
year-end basis. Savings associations are subject to the provisions of the
Internal Revenue Code of 1986, as amended (the "Code"), in the same general
manner as other corporations. However, savings associations such as the Bank,
which meet certain definitional tests and other conditions prescribed by the
Code may benefit from certain favorable provisions regarding their deductions
from taxable income for annual additions to their bad debt reserve. For purposes
of the bad debt reserve deduction, loans are separated into "qualifying real
property loans," which generally are loans secured by interests in real
property, and nonqualifying real property loans, which are all other loans. The
bad debt reserve deduction with respect to nonqualifying loans must be based on
actual loss experience. The amount of the bad debt reserve deduction with
respect to qualifying real property loans may be based upon actual loss
experience (the "experience method") or a percentage of taxable income
determined without regard to such actual experience (the "percentage of taxable
income method"). The Bank has elected to use the percentage of taxable income
method for the year ended June 30, 1996. The Bank will review the most favorable
way to calculate the deduction attributable to an addition to its bad debt
reserve on an annual basis.
Under the experience method, the bad debt deduction may be based on (i)
a six-year moving average of actual losses on qualifying and non-qualifying
loans, or (ii) a fill-up to the institution's base year reserve amount, which is
the tax bad debt reserve determined as of December 31, 1987.
The percentage of specially computed taxable income that is used to
compute a savings association's bad debt reserve deduction under the percentage
of taxable income method (the "percentage bad debt deduction") is 8%. The
percentage of bad debt deduction thus computed is reduced by the amount
permitted as a deduction for non-qualifying loans under the experience method.
The availability of the percentage of taxable income method permits qualifying
savings associations to be taxed at a lower effective federal income tax rate
than that applicable to corporations generally (approximately 31.3% assuming the
maximum percentage bad debt deduction).
If a savings association's qualifying assets (generally, loans secured
by residential real estate or deposits, educational loans, cash and certain
government obligations) constitute less than 60% of its total assets, the
savings association may not deduct any addition to a bad debt reserve and
generally must include existing reserves in income over a four year period. As
of June 30, 1996, at least 60% of the Bank's assets were qualifying assets as
defined in the Code. No assurance can be given as to whether the Bank will meet
the 60% test for subsequent taxable years.
Earnings appropriated to the Bank's bad debt reserve and claimed as a
tax deduction will not be available for the payment of cash dividends or for
distribution to shareholders (including distributions made on dissolution or
liquidation), unless the Bank includes the amount in income, along with the
amount deemed necessary to pay the resulting federal income tax. As of June 30,
1996, the Bank had approximately $148,000 of accumulated earnings for which
federal income taxes have not been provided. If such amount is used for any
purpose other than bad debt losses, including a dividend distribution or a
distribution in liquidation, it will be subject to federal income tax at the
then current rate.
Generally, for taxable years beginning after 1986, the 1986 Act also
requires most corporations, including savings associations, to utilize the
accrual method of accounting for tax purposes. Further, for taxable years ending
after 1986, the 1986 Act disallows 100% of a savings association's interest
expense allocated to certain tax-exempt obligations acquired after August 7,
1986. Interest expense allocable to (i) tax-exempt obligations acquired after
August 7, 1986 which are not subject to this rule, and
-27-
<PAGE>
(ii) tax-exempt obligations issued after 1982 but before August 8, 1986, are
subject to the rule which applied prior to the 1986 Act disallowing the
deductibility of 20% of the interest expense. The 1986 Act also lowered the
maximum tax rate from 46% to 34% for corporations, including savings
associations, with a blended rate in 1987.
The Bank's federal income tax returns were last examined by the Internal
Revenue Service ("IRS") in January 1992.
State Taxation. The Corporation is subject to the Pennsylvania Corporate
Net Income Tax and Capital Stock and Franchise Tax. The Corporate Net Income Tax
rate for 1993 is 12.25% and is imposed on the Corporation's unconsolidated
taxable income for federal purposes with certain adjustments. In general, the
Capital Stock Tax is a property tax imposed at the rate of 1.275% of a
corporation's capital stock value, which is determined in accordance with a
fixed formula based upon average net income and net worth.
The Bank is taxed under the Pennsylvania Mutual Thrift Institutions Act
(enacted on December 13, 1988 and amended in July 1989) (the "MTIT"), as amended
to include thrift institutions having capital stock. Pursuant to the MTIT, the
Bank's tax rate is 11.5% in 1993 and thereafter. The MTIT exempts the Bank from
all other taxes imposed by the Commonwealth of Pennsylvania for state income tax
purposes and from all local taxation imposed by political subdivisions, except
taxes on real estate and real estate transfers. The MTIT is a tax upon net
earnings, determined in accordance with GAAP with certain adjustments. The MTIT,
in computing GAAP income, allows for the deduction of interest earned on state
and federal securities, while disallowing a percentage of a thrift's interest
expense deduction in the proportion of those securities to the overall
investment portfolio. Net operating losses, if any, thereafter can be carried
forward three years for MTIT purposes.
Subsidiary and Joint Venture Activity
In January 1994, the Corporation acquired all of the capital stock of
the Bank. As of June 30, 1996, the net book value of the Corporation's
investment in the Bank amounted to $7.6 million.
Item 2. Description of Property.
(a) Properties.
The Company owns no real property but utilizes the main office of the
Bank. The Bank operates from its office located in Ridgway, Pennsylvania, and
two additional offices located in Brookville and DuBois, Pennsylvania. The Bank
owns its offices in Ridgway and Brookville. The Bank holds a lease for the
DuBois branch office through December 31, 1995, with an option to renew for an
additional one-year period.
At June 30, 1996, the Bank had a total investment in its land, buildings
and improvements, and fixtures, furniture and equipment of $512,000, less
accumulated depreciation of $448,000, or a net carrying value of $64,000.
The Bank owns various bookkeeping and accounting equipment and is
on-line with an outside data processing company, Fiserv, Inc. See Note 7 of the
Notes to Consolidated Financial Statements.
-28-
<PAGE>
(b) Investment Policies.
See "Item 1. Business" above for a general description of the Bank's
investment policies and any regulatory or Board of Directors' percentage of
assets limitations regarding certain investments. All of the Bank's investment
policies are reviewed and approved by the Board of Directors of the Bank, and
such policies, subject to regulatory restrictions (if any), can be changed
without a vote of stockholders. The Bank's investments are primarily acquired to
produce income, and to a lesser extent, possible capital gain.
(1) Investments in Real Estate or Interests in Real Estate. See "Item 1.
Business -- Lending Activities," "Item 1. Business -- Regulation of the Bank,"
and "Item 2. Description of Property. (a)
Properties" above.
(2) Investments in Real Estate Mortgages. See "Item 1. Business --
Lending Activities" and "Item 1. Business -- Regulation of the Bank."
(3) Investments in Securities of or Interests in Persons Primarily
Engaged in Real Estate Activities. See "Item 1. Business -- Lending Activities,"
"Item 1. Business -- Regulation of the Bank," and "Item 1. Business --
Subsidiary Activity."
(c) Description of Real Estate and Operating Data.
Not Applicable.
Item 3. Legal Proceedings
- --------------------------
Neither the Corporation nor the Bank are engaged in any legal proceedings
of a material nature at the present time. From time to time the Bank is a party
to legal proceedings in the ordinary course of business wherein it enforces its
security interest in mortgage loans made by it.
Item 4. Submission of Matters to a Vote of Security Holders
- ------------------------------------------------------------
Not applicable.
PART II
Item 5. Market for Common Equity and Related Stockholder Matters
- -----------------------------------------------------------------
The information contained under the section captioned "Stock Market
Information" on page 1 of the Corporation's Annual Report is incorporated herein
by reference.
-29-
<PAGE>
Item 6. Management's Discussion and Analysis or Plan of Operation
- ------------------------------------------------------------------
Gap Analysis
As rates on sources of funds have become deregulated and subject to
competitive pressures, savings institutions have become increasingly concerned
with the extent to which they are able to match maturities of interest-earning
assets and interest-bearing liabilities. Such matching may be analyzed by
examining the extent to which such assets and liabilities are "interest rate
sensitive" and by monitoring an association's interest rate sensitivity "gap."
An asset or liability is said to be interest rate sensitive within a specific
time period if it will mature or reprice within that time period. The interest
rate sensitivity gap is defined as the excess of interest-earning assets
maturing or repricing within a specific time period over interest-bearing
liabilities maturing or repricing within that time period.
Generally, during a period of rising interest rates, a negative gap
within a given period of time would adversely affect net interest income, while
a positive gap within a given period of time would result in an increase in net
interest income; during a period of falling interest rates, a negative gap
within a given period of time would result in an increase in net interest income
while a positive gap within a given period of time would have the opposite
effect. At June 30, 1995, the Bank's one year cumulative interest sensitivity
gap as a percentage of total assets was a negative 14.1%. Accordingly, its net
interest income could be negatively affected during periods of rising interest
rates and positively affected during periods of falling interest rates.
Certain shortcomings are inherent in the method of gap analysis. For
example, although certain assets and liabilities may have similar maturities or
periods of repricing, they may react in different degrees to changes in market
interest rates. Also, the interest rates on certain types of assets and
liabilities may fluctuate in advance of changes in market interest rates, while
interest rates on other types may lag behind changes in market rates.
Additionally, certain assets, such as adjustable-rate mortgage loans, have
features which restrict changes in interest rates on a short-term basis over the
life of the asset. Further, in the event of a change in interest rates,
prepayment levels and decay rates on core deposits may deviate significantly
from those assumed in calculating the table.
The Bank's analysis of its interest-rate sensitivity, which is prepared
quarterly by the Bank, incorporates certain assumptions concerning the
amortization of loans and other interest-earning assets and the withdrawal of
deposits. These assumptions change over time based upon the current economic
outlook. Management believes that these assumptions, which have been prepared by
the Office of Thrift Supervision ("OTS"), the primary federal regulator of
savings associations, approximate actual experience. However, the interest-rate
sensitivity of the Bank's assets and liabilities illustrated in the table could
vary substantially if different assumptions were used or if actual experience
differs from the assumptions used. The Bank performs an interest rate
sensitivity analysis on a quarterly basis.
For further information regarding the interest rate sensitivity and
maturity distribution of certain assets, see Item 1. Business. "Lending
Activities -- Loan Maturity Tables."
The remaining information is contained in the section captioned
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" on page 5 of the Annual Report and is incorporated herein by
reference.
-30-
<PAGE>
Item 7. Financial Statements
- -----------------------------
The Corporation's consolidated financial statements as listed in Item 14
herein are incorporated herein by reference.
Item 8. Changes in and Disagreements with Accountants on Accounting and
- --------------------------------------------------------------------------------
Financial Disclosure
- --------------------
Not applicable.
PART III
Item 9. Directors and Executive Officers of the Registrant
- -----------------------------------------------------------
The information regarding executive officers and directors of the
Corporation contained under the section(s) captioned "Filing of Beneficial
Ownership Reports" and "Information With Respect to Nominees for Director;
Directors Whose Terms Continue and Executive Officers" on pages 4-8 of the
Corporation's definitive proxy statement for Corporation's 1996 Annual Meeting
of Stockholders filed with the Securities and Exchange Commission ("SEC") on
September 19, 1996 (the "Proxy Statement") is incorporated herein by reference.
Item 10. Executive Compensation
- --------------------------------
The information contained under the section captioned "Management
Remuneration and Other Information - Executive Compensation" on pages 9 to 11 in
the Proxy Statement is incorporated herein by reference.
Item 11. Security Ownership of Certain Beneficial Owners and Management
- ------------------------------------------------------------------------
(a) Security Ownership of Certain Beneficial Owners
Information required by this item is incorporated herein by
reference to the Section captioned "Voting Securities and
Principal Holders Thereof" on pages 2 and 3 of the Proxy
Statement.
(b) Security Ownership of Management
Information required by this item is incorporated herein by
reference to the section captioned "Information with Respect to
Nominees for Director; Directors Whose Terms Continue and
Executive Officers" on pages 4 to 6 of the Proxy Statement.
(c) Management of the Corporation knows of no arrangements, including
any pledge by any person of securities of the Corporation, the
operation of which may at a subsequent date result in a change in
control of the registrant.
Item 12. Certain Relationships and Related Transactions
- --------------------------------------------------------
The information required by this item is incorporated herein by
reference to the section captioned "Management Remuneration and Other
Information -- Certain Transactions With Management and
Others" on page 11 of the Proxy Statement.
-31-
<PAGE>
Item 13. Exhibits, List and Reports on Form 8-K
- ------------------------------------------------
1. Independent Auditors' Report*
2. Peoples Savings Financial Corporation*
(a) Consolidated Statements of Financial Condition at June 30,
1996 and 1995
(b) Consolidated Statements of Income for each of the years in
the two-year period ended June 30, 1996
(c) Consolidated Statements of Stockholders' Equity for each
of the years in the two-year period ended June 30, 1996
(d) Consolidated Statements of Cash Flows for each of the
years in the two-year period ended June 30, 1996
(e) Notes to Consolidated Financial Statements
3. Exhibits
3.1 Articles of Incorporation of Peoples Savings Financial
Corporation**
3.2 Bylaws of Peoples Savings Financial Corporation**
4 Specimen Stock Certificate**
10.1 1993 Stock Option Plan**
10.2 Management Stock Bonus Plan and Trust Agreement**
10.3 Employment Agreement with Glenn R. Pentz, Jr.***
13 Annual Report to Stockholders for Fiscal Year Ended June
30, 1996
21 Subsidiaries of the Corporation
27 Financial Data Schedule
4. Not applicable.
* Incorporated herein by reference to the Corporation's Annual Report.
** Incorporated herein by reference from the Exhibits to the Registration
Statement on Form S-1 of the Corporation (File No. 33-69266) initially
filed with the SEC on September 22, 1993.
*** Incorporated herein by reference from the Exhibits to the Corporation's
Annual Report on Form 10-K for the year ended June 30, 1995.
-32-
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
PEOPLES SAVINGS FINANCIAL CORPORATION
Date: September 24, 1996 By: /s/Norbert J. Pontzer
---------------------
Norbert J. Pontzer
President, Chief Executive Officer
and Chairman of the Board
(Duly Authorized Representative)
Pursuant to the requirement of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
By:/s/Norbert J. Pontzer By:/s/Glenn R. Pentz, Jr.
Norbert J. Pontzer Glenn R. Pentz, Jr.
President, Chief Executive Officer and Chief Financial Officer, Treasurer
Chairman of the Board and Secretary
(Principal Executive Officer) (Principal Accounting Officer)
Date: September 24, 1996 Date: September 24, 1996
By:/s/William L. Murnaghan By: /s/Roger M. Hasselman
William L. Murnaghan Roger M. Hasselman
Director Director
Date: September 24, 1996 Date: September 24, 1996
By:/s/Carl W. Gamarino By:
Carl W. Gamarino Paul A. Brazinski
Director Director
Date: September 24, 1996 Date: September , 1996
---
By:/s/Jane P. Weilacher
Jane P. Weilacher
Director
Date: September 24, 1996
EXHIBIT 21
SUBSIDIARIES OF THE CORPORATION
Parent
- ------
Peoples Savings Financial Corporation
Percentage State of
Subsidiaries Owned Incorporation
- ------------ ----- -------------
Peoples Savings Bank (a) 100% Pennsylvania
(a) The operations of this subsidiary are included in the consolidated
financial statements contained in the 1996 Annual Report to
Stockholders incorporated herein by reference.
EXHIBIT 13
Annual Report to Stockholders for Fiscal Year
Ended June 30, 1996
<PAGE>
PEOPLES SAVINGS FINANCIAL
CORPORATION
----------------------------------------------------------
1996 ANNUAL REPORT
<PAGE>
PEOPLES SAVINGS FINANCIAL CORPORATION
1996 ANNUAL REPORT
- --------------------------------------------------------------------------------
TABLE OF CONTENTS
- --------------------------------------------------------------------------------
Letter to Stockholders............................................... 1
Corporate Profile and Stock Market Information....................... 2
Financial Highlights................................................. 4
Management's Discussion and Analysis of
Financial Condition and Results of Operations...................... 5
Report of Independent Certified Public
Accountants Auditors............................................... 12
Consolidated Balance Sheet........................................... 13
Consolidated Statement of Income..................................... 14
Consolidated Statement of Change in Stockholders Equity.............. 15
Consolidated Statement of Cash Flows................................. 16
Notes to Consolidated Financial Statements........................... 17
Office Locations and Other Corporate Information..................... 34
<PAGE>
PEOPLES SAVINGS FINANCIAL CORPORATION
To Our Stockholders:
We are proud to present to you our second full year since becoming a public
company in January 1994. Peoples Savings Financial Corporation completed the
year profitably and in good financial condition despite rising interest rates
which prevailed during most of the year. Furthermore, we were pleased to see
single family mortgage loan originations continue to increase over the previous
year.
As we approach fiscal 1997, we retain our goal of providing personal service to
our customers and stockholders. As a community-based financial institution,
Peoples Savings Bank plays a special role in serving the lending needs of the
communities in our market area. At the same time, we will concentrate our
energies on achieving solid financial results and enhancing stockholder value.
Each member of your Board of Directors, and our employees, join me in thanking
your for your continued dedication, loyalty, and trust. Despite the
ever-changing economic challenges, you have our commitment that we will utilize
our very best efforts to continue producing profitable results of operations.
Sincerely,
/s/Norbert J. Pontzer
Norbert J. Pontzer
President
<PAGE>
PEOPLES SAVINGS FINANCIAL CORPORATION
Corporate Profile
Peoples Savings Financial Corporation (the "Company") is the parent company for
Peoples Savings Bank ("Peoples" or the "Bank"). The Company was formed as a
Pennsylvania corporation in September 1993 at the direction of the Bank to
acquire all of the capital stock that Peoples issued upon its conversion from
the mutual to stock form of ownership (the "Conversion"). The Company is a bank
holding company which, under existing laws, is restricted to activities
generally related to banking. At the present time, since the Company does not
conduct any active business, the Company does not intend to employ any persons
other than officers but utilizes the support staff and facilities of the Bank
from time to time.
Peoples is a Pennsylvania-chartered stock savings bank headquartered in Ridgway,
Pennsylvania, which was originally chartered in 1891 under the name "Peoples
Building and Loan Association." The Bank became a Pennsylvania-chartered mutual
savings bank in June 1993 under its current name, and a Pennsylvania-charted
stock savings bank in January 1994. Deposits have been federally insured since
1953 and are currently insured up to the maximum allowable by the Federal
Deposit Insurance Corporation (the "FDIC"). The Bank is a community oriented
savings institution offering a variety of financial services to meet the needs
of the communities that it serves. Peoples conducts its business from its main
office in Ridgway, Pennsylvania and two full service branch offices located in
Jefferson and Clearfield Counties, Pennsylvania.
Peoples Bank attracts deposits from the general public and uses such deposits,
together with borrowings and other funds, primarily to invest in mortgage-backed
and investment securities and to originate loans secured by first mortgages on
owner-occupied, one-to-four family residences in its market area. The Bank also
makes home equity loans, loans secured by deposits, automobile loans and
personal loans and invests in municipal obligations, mortgages-backed
securities, and other investments.
Stock Market Information
Since its issuance in January 1994, the Company's common stock has been traded
on an over the counter basis through brokers participating in the National Daily
Quotation Service ("pink sheets"). The following table reflects the stock price
as published by the National Daily Quotation Service.
HIGH LOW
---- ---
July 1, 1996 - August 31, 1996 $25.25 $25.00
April 1, 1996 - June 30, 1996 28.00 22.00
January 1, 1996 - March 31, 1996 23.00 21.00
September 30, 1995 - December 31, 1996 22.50 22.50
July 1, 1995 - August 31, 1995 20.25 19.00
April 1, 1995 - June 30, 1995 22.75 21.00
January 1, 1995 - March 31, 1995 23.25 18.50
September 1, 1994 - December 31, 1994 19.50 17.50
July 1, 1994 - August 31, 1994 18.00 16.50
April 1, 1994 - June 30, 1994 17.00 13.00
January 1, 1994 - March 31, 1994 -- --
Quotations reflect inter-dealer prices without retail mark-up, mark-down or
commission, and may not represent actual transactions. Trades in the Common
Stock have occurred infrequently and generally
2
<PAGE>
involve a relatively small number of shares. Because of the limited market
activity in the Common Stock, such transactions may not be representative of the
actual fair market value of the Common Stock at the time of such transaction due
to the infrequency of trades and the limited market for the Common Stock. The
number of shareholders of record of common stock as of the record date of August
15, 1996, was approximately 244. This does not reflect the number of persons or
entities who held stock in nominee or "street" name through various brokerage
firms. At August 15, 1996, there were 442,516 shares outstanding. No dividends
have been paid on the capital stock since its issuance.
The Company's ability to pay dividends to stockholders is dependent in part upon
the dividends it receives from the Bank. The Bank may not declare or pay a cash
dividend on any of its stock if the effect thereof would cause the Bank's
regulatory capital to be reduced below (1) the amount required for the
liquidation account established in connection with the Bank's conversion from
mutual to stock form, or (2) the regulatory capital requirements imposed by the
Pennsylvania Department of Banking ("Department") and the ("FDIC").
3
<PAGE>
Financial Highlights
The following tables set forth certain information concerning the
consolidated financial position and certain performance ratios of the Company at
the dates indicated:
<TABLE>
<CAPTION>
At June 30,
---------------------------------------------------------------
1996 1995 1994 1993 1992
------ ------ ------ ------ -----
(In Thousands)
<S> <C> <C> <C> <C> <C>
Assets...................................... $44,852 $43,624 $45,050 $43,015 $43,233
Loans receivable............................ 32,127 29,374 25,879 23,428 23,627
Mortgage-backed securities.................. 7,466 9,634 10,949 14,354 14,293
Investments (1)............................ 4,053 3,645 5,892 2,807 2,970
Cash and cash equivalents................... 742 515 1,864 2,035 1,856
Savings deposits............................ 35,865 35,171 37,035 39,079 39,498
Retained earnings........................... 8,912 8,345 7,966 3,875 3,449
</TABLE>
<TABLE>
<CAPTION>
Year Ended June 30,
---------------------------------------------------------------
1996 1995 1994 1993 1992
------ ------ ------ ------ -----
(In Thousands)
<S> <C> <C> <C> <C> <C>
Interest Income............................. $3,430 $3,254 3,092 3,261 3,822
Interest Expense............................ 1,778 1,600 1,627 1,839 2,553
Net Interest Income......................... 1,652 1,654 1,465 1,422 1,269
Provision for Loan Losses................... 24 24 24 18 15
Net Income.................................. 446 458 426 427 166
</TABLE>
- ------------------
(1) Includes FHLB stock.
<TABLE>
<CAPTION>
At or For the Year Ended June 30,
---------------------------------------------------------------
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
Return on average assets (net income divided
<S> <C> <C> <C> <C> <C>
by average total assets) ................. 1.00% 1.04% 0.95% 0.99% 0.38%
Return on average equity (net income divided
by average equity)........................ 5.17 5.62 7.86 11.65 4.93
Average equity to average assets ratio (average
equity divided by average total assets)... 19.30 18.47 12.05 8.49 7.89
Equity to assets at period end.............. 19.87 19.13 17.68 9.01 7.98
Net interest rate spread.................... 2.83 3.01 2.80 2.97 2.64
Net yield on average interest earning assets 3.79 3.79 3.35 3.34 3.01
Non-performing assets to total assets....... 0.97 0.33 0.83 0.65 1.03
Non-performing loans to total loans......... 1.34 0.49 1.45 1.19 1.66
Allowance for loan losses to non-performing
assets.................................... 52.30 144.52 48.94 62.27 40.22
Average interest earning assets to average
interest-bearing liabilities.............. 123.92 121.43 114.68 108.42 106.15
Net interest income after provision for possible
loan losses, to total other expenses...... 1.61 156.64 156.84 146.38 143.24
</TABLE>
4
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
General
The earnings of the Company depend primarily on its net interest income. Net
interest income is affected by the interest rates that the Bank receives from
its loans and investments and by the interest rates that the bank must pay for
its sources of funds. The difference between average rates of interest earned on
interest earning assets and the average rates paid on interest bearing
liabilities is the "interest rate spread". When interest earning assets equal or
exceed interest bearing liabilities, any positive interest rate spread will
produce net interest income.
To a lesser extent, the Bank receives income from service charges and other fees
and occasionally from sales of real estate owned. The Bank incurs expenses in
addition to interest expense in the form of salaries and benefits, deposit
insurance, property operations and maintenance, advertising and other related
business expenses.
The operations of the Bank are influenced significantly by local economic
conditions and by policies of financial institution regulatory agencies,
including the Department and the FDIC. The Bank's cost of funds and return on
loans and investments are influenced by interest rates on comparing investments
and general market interest rates. Lending activities are affected by the demand
for financing of real estate and other types of loans, which in turn is affected
by market interest rates and general economic conditions.
Management Strategy
The Bank's management strategy has been to maintain profitability and a strong
capital position through growth at a rate that does not exceed its ability to
generate earnings. The Bank's lending strategy has historically focused on the
origination for retention in its portfolio of traditional one- to four-family
mortgage loans and, to a lesser extent, consumer loans, including home equity
loans, share loans, automobile loans and personal loans. This focus, and the
application of prudent underwriting standards, is designed to reduce the risk of
loss on the Bank's loan portfolio. The Bank's lending activities have been
supplemented by the purchase of mortgage-backed securities.
Management has increased the interest rate sensitivity of the Bank's assets and
decreased the interest rate sensitivity of its liabilities, while maintaining
asset quality. This strategy has been accomplished by (i) originating
adjustable-rate mortgage loans and shorter-term consumer loans, (ii) emphasizing
the solicitation and retention of core deposits, (iii) purchasing for its own
portfolio adjustable-rate mortgage-backed securities, (iv) investing in short-
and intermediate-term investment and mortgage-backed securities, (v) adhering to
prudent underwriting and investment standards and (vi) managing deposit interest
rates.
The current strategy of management has been to purchase for its own portfolio
seven and 15-year Federal Home Loan Mortgage Corporation ("FHLMC")
mortgage-backed securities and one-year adjustable rate FHLMC, Federal National
Mortgage Association ("FNMA") and Government National Mortgage Association
("GNMA") mortgage-backed securities. To the extent the Bank is unable to invest
its funds in these securities, it will invest in shorter term high quality
investment securities or overnight funds.
Since the mid-1980s, the Bank has purchased AA and AAA tax-exempt municipal
bonds, with the intent to hold until maturity or until called. At June 30, 1996,
the Bank had $897,000 of obligations of states and political subdivisions, most
of which are rated AAA.
5
<PAGE>
The Bank attempts to manage the interest rates it pays on deposits, while
maintaining a stable deposit base and providing convenient and quality services
to its customers. Historically, the Bank has limited its borrowings and has
relied primarily upon savings deposits as its primary source of funds.
Changes in Financial Condition
The Company's total assets at June 30, 1996 and 1995 were $44.8 million and
$43.6 million, respectively, an increase of $1.4 million or 2.75% due primarily
to an increase in loans receivable, offset somewhat by a reduction in
mortgage-backed securities.
Mortgage-backed securities decreased to $7.5 million at June 30, 1996 from $9.6
million at June 30, 1995. Principal repayments of $2.1 million, or a 22%
decrease, was the direct result of management tailoring its interest-earning
assets to meet the increased local community loan demand.
Loans receivable increased $2.8 million or 9.37% from $29.3 million at June 30,
1995 to $32.1 million at June 30, 1996 due to an increase in the origination of
one- to four-family mortgage loans, due in part to what management believes to
be a growing local economy spurred by gradually increasing employment.
Deposits increased slightly by $.7 million or 1.99% from $35.2 million to $35.9
million.
Total stockholders' equity increased by $567,000 or 6.79% during the twelve
months ended June 30, 1996, as a result of net income of $446,000 and
recognition of shares in the Management Stock Bonus Plan and the Employee Stock
Ownership Plan amounting to $121,000.
Non-performing Assets
The following table sets forth information regarding non-performing assets at
June 30, 1996 and 1995, respectively.
<TABLE>
<CAPTION>
At June 30,
-----------------------------
1996 1995
---- ----
(Dollars in Thousands)
<S> <C> <C>
Total non-performing loans................... $ 435 $144
Real estate owned............................ -- --
Total non-performing assets.................. 435 144
Total non-performing loans to net loans...... 1.35% 0.49%
Total non-performing loans to total assets... 0.97% 0.33%
Total non-performing assets to total assets.. 0.97% 0.33%
</TABLE>
Nonperforming loans increased by $291,000 in fiscal 1996 due in part to the
addition of a loan secured by a commercial real estate property located in the
Company's market area. The aggregate outstanding balance of this commercial real
estate loan at June 30, 1996 was $92,000. Furthermore, the same individual had a
loan with the Bank secured by a single family residence with an outstanding
balance of $28,000. This loan also was classified as non-performing at June 30,
1996. The remaining increase in nonperforming loans during 1996 was due an
increase in delinquencies of loans secured by single family residential
properties. The delinquencies were due to the individual borrowers' economic
circumstances. See "--Comparison of Operating Results for the Years Ended June
30, 1996 and 1995 -- Provision for Possible Loan Losses."
6
<PAGE>
Average Balances
The following tables set forth for the periods indicated, information regarding
the average balances of interest-earning assets and interest-bearing
liabilities, the dollar amount of interest income earned on such assets and the
resultant yields, the dollar amount of interest expense paid on such liabilities
and the resultant rates. The tables also reflect the interest rate spread for
such periods, the net yield on interest-earning assets (i.e., net interest
income as a percentage of average interest-earning assets) and the ratio of
average interest-earning assets to average interest-bearing liabilities. Average
balances are based on month end balances. Management does not believe that the
use of month-end balances instead of daily average balances has caused any
material difference in the information presented.
<TABLE>
<CAPTION>
Year Ended June 30,
-------------------------------------------------------------------------- At June 30,
1996 1995 1996
----------------------------------- ---------------------------------- ----------
Average Average Average Average
Balance Interest Yield/Cost Balance Interest Yield/Cost Yield/Cost
------- -------- ---------- ------- -------- ---------- ----------
(Dollars in Thousands)
Interest-earning assets:
<S> <C> <C> <C> <C> <C> <C> <C>
Loans receivable(1)................... $31,026 $2,585 8.33% $28,306 $2,316 8.18% 8.53%
Mortgage-backed securities............ 8,421 578 6.86% 10,159 671 6.60% 5.54%
Investment securities(2).............. 4,085 267 6.54% 5,142 267 5.19% 5.92%
------ ----- ------ ------
Total interest-earning assets........ 43,532 3,430 7.88% 43,607 3,254 7.46% 7.75%
----- -----
Non-interest-earning assets............ 574 539
------ -------
Total assets......................... $44,106 $44,146
====== ======
Interest-bearing liabilities:
Interest-bearing demand deposits...... 3,624 97 2.68% 3,826 98 2.56% 2.03%
Certificates of deposit............... 25,515 1,495 5.86% 25,862 1,307 5.05% 5.52%
Savings deposits...................... 5,814 169 2.91% 6,076 185 3.04% 2.50%
Short-term borrowings................. 250 17 6.80% 146 10 6.85% --%
------ ----- ------ -----
Total interest-bearing liabilities... $35,203 $1,778 5.05% 35,910 1,600 4.45% 4.63%
----- -----
Non-interest bearing liabilities....... 77 83
------ --------
Total liabilities..................... 35,280 35,993
Stockholders equity.................... 8,826 8,153
------ -------
Total liabilities and stockholders'
equity.................... $44,106 $44,146
====== ======
Net interest income.................... $1,652 $1,654
===== =====
Interest rate spread(3)................ 2.83% 3.01% 3.12%
Net yield on interest-earning
assets(4)............................ 3.79% 3.79% 3.69%
Ratio of average interest-earning
assets to average interest-
bearing liabilities.................. 123.66% 121.43% 123.45%
</TABLE>
- ---------------------------------
(1) Average balances include non-accrual loans.
(2) Includes interest-bearing deposits in other financial institutions.
(3) Interest-rate spread represents the difference between the average yield on
interest-earning assets and the average cost of interest-bearing
liabilities.
(4) Net yield on interest-earning assets represents net interest income as a
percentage of average interest-earning assets.
7
<PAGE>
Rate/Volume Analysis
The table below sets forth certain information regarding changes in interest
income and interest expense of the Company for the periods indicated. For each
category of interest-earning assets and interest-bearing liabilities,
information is provided on changes attributable to (i) changes in volume
(changes in average volume multiplied by old rate); (ii) changes in rates
(changes in rate multiplied by old average volume). Changes which are not solely
attributable to rate or volume are allocated to changes in rate due to rate
sensitivity of interest-earning assets and interest-bearing liabilities.
<TABLE>
<CAPTION>
Year Ended June 30,
----------------------------------------------------------------
1996 vs. 1995 1995 vs. 1994
----------------------------- ------------------------------
Increase (Decrease) Increase (Decrease)
Due to Due to
----------------------------- ------------------------------
Volume Rate Net Volume Rate Net
------- ---- --- ------ ---- ---
(In Thousands)
Interest income:
<S> <C> <C> <C> <C> <C> <C>
Loans receivable.............. $ 223 $ 46 $ 269 $319 $(68) $251
Mortgage-backed securities.... (115) 22 (93) (125) 58 (67)
Investment securities......... (55) 55 -- (78) 56 (22)
---- --- --- --- -- ---
Total interest-earning assets $ 53 $ 123 $176 $116 $ 46 $162
===== === === === === ===
Interest expense:
Interest-bearing demand deposits$ (5) $ 4 $ (1) $ (6) $ 6 $ --
Certificates of deposit...... (18) 206 188 (92) 60 (32)
Savings deposits............. (8) (8) (16) (8) 3 (5)
Short-term borrowings........ 7 --- 7 -- 10 10
----- ----- ---- ---- --- ---
Total interest-bearing
liabilities................ $ (24) $ 202 $ 178 $(106) $79 $(27)
===== === === ===== == ===
Net change in interest income.. $ 77 $ (79) $ (2) $222 $(33) $189
===== === ==== === === ===
</TABLE>
Results of Operations
General. The earnings of the Company depend primarily on its level of net
interest income, which is the difference between interest earned on the
Company's interest-earning assets and the interest paid on interest-bearing
liabilities. Net interest income is a function of the Company's interest rate
spread, which is the difference between the average yield earned on
interest-earning assets and the average rate paid on interest-bearing
liabilities. The Company reported net income of $446,000 and $458,000 for the
years ended June 30, 1996 and 1995, respectively. In addition, during these
periods, the Company's average interest rate spread (the difference between the
weighted average yield on interest-earning assets and the weighted average rate
on interest-bearing liabilities) decreased from 3.01% during the period ended
June 30, 1995 to 2.83% for the year ended June 30, 1996. At June 30, 1996, the
Company's interest rate spread was a positive 3.12%
8
<PAGE>
Comparison of Operating Results for the years Ended June 30, 1996 and 1995.
Interest Income. Interest income totalled $3.4 million and $3.2 million for the
years ended June 30, 1996 and 1995, respectively. The $176,000, or 5.40%
increase in interest income in fiscal 1996 as compared to fiscal 1995 resulted
primarily from a 42 basis point (100 basis points equals 1.0%) increase in the
average yield of interest-earning assets from 7.46% to 7.88%. The increase in
the average yield on interest-earning assets was caused by a continued pattern
of rising interest rates during the year coupled with the replacement of
principal repayments on mortgage-backed securities with higher yielding home
mortgage loans, as well as the upward adjustment of 50 basis points on internal
rates of adjustable rate loans.
Interest Expense. Interest expense totalled $1.8 million and $1.6 million for
the years ended June 30, 1996 and 1995, respectively. The net increases in
interest expense for these periods of $177,000, or 11.08%, was primarily the
result of an increase in the average rates paid on deposits from 4.45% during
the year ended June 30, 1995 to 5.05% during the year ended June 30, 1996. This
increase was due to a general increase in market interest rates offset with a
decline in the average balance in interest-bearing liabilities from June 30,
1995 to June 30, 1996.
Net Interest Income. Net interest income totalled $1,652,000 and $1,654,000
during the years ended June 30, 1996 and 1995, respectively, as the yields
earned on the Company's average interest-earning assets increased at a slower
pace than the cost of interest-bearing liabilities, causing modest fluctuation
of the Company's average interest rate spread from 3.01% to 2.83% during the
fiscal years ended June 30, 1995 and 1996, respectively.
Provision for Possible Loan Losses. The Company maintains a reserve for possible
loan losses based on management's evaluation of the loan portfolio, historical
experience, the volume and type of lending conducted by the Company, industry
standards, the amount of non-performing assets, current general economic
conditions, particularly as they relate to the Company's loan portfolio, and
other factors related to the collectibility of the Company's loan portfolio. For
the years ended June 30, 1996 and 1995, the provision for estimated losses on
loans was $24,000. While asset quality has slightly declined during this period,
management believes that the underlying collateral supporting such loans
provides adequate coverage. The Company maintains a desirable level in its loan
loss provisions based upon the Company's review of the market, loan portfolio
and overall assessment of the adequacy of the valuation allowance. There can be
no assurances, however, that additional provisions will not be required in
future periods.
Non-Interest Income. The Company's sources of non-interest income include
primarily loan service fees and charges for deposit services. Non-interest
income totalled $61,000 and $40,000 for the years ended June 30, 1996 and 1995,
respectively. The largest single component of non-interest income during these
periods was service charges on deposits, which was $27,000 and $25,000 for the
years ended June 30, 1996 and 1995, respectively. Other income increased by
133.00%, or $20,000, from $15,000 to $35,000 for the years ended June 30, 1995
and 1996. This fluctuation was the result of increased commissions from consumer
lending for accidental death and life insurance from the Company's carrier.
Non-Interest Expense. The principle components of the Company's non-interest
expense have been, and continue to be, compensation and employee benefits. Other
components of non-interest expense include occupancy and equipment, examination,
data processing, federal deposit insurance premiums, marketing and professional
service,s telephone, supplies and insurance and real estate owned. Non-interest
expense totalled $1,010,000 and $1,040,000 for the years ended June 30, 1996 and
1995, respectively. Non-interest expense decreased $30,000 or 2.88% from fiscal
1995 to 1996 primarily as a result of $13,000 in principal payments on
mortgage-backed securities which had been previously written-off due to the
inability to collect payments from the instrument's trustee, coupled with a
$12,000 credit to the Bank's checking account as resolution for prior years'
erroneous charges. These repayments are included in other expenses.
9
<PAGE>
Provision for Income Taxes. Provision for income taxes increased by $63,000 or
37.1%, from $171,000 for the year ended June 30, 1995 to $234,000 for the year
ended June 30, 1996. The fluctuation was the result of increased pretax earnings
during the period.
Liquidity and Capital Resources
General. Liquidity refers to the Bank's ability to generate sufficient cash to
meet the funding needs of current loan demand, savings deposit withdrawals, and
to pay operating expenses. The Bank has historically maintained a level of
liquid assets in excess of regulatory requirements. Maintaining a high level of
liquid assets tends to decrease earnings, as liquid assets tend to have a lower
yield than other assets with longer terms (e.g. loans). The Bank adjusts
liquidity as appropriate to meet its asset/liability objectives.
The Bank's primary sources of funds are deposits, amortization and prepayment of
loans and mortgage-backed securities, maturities of investment securities and
funds provided from operations. While scheduled loan and mortgage-backed
securities repayments are a relatively predictable source of funds, deposit
flows and loan and mortgage-backed securities prepayments are greatly influenced
by general interest rates, economic conditions and competition. In addition, the
Bank invests excess funds in overnight deposits which provide liquidity to meet
lending requirements.
The primary activity of the Bank is originating mortgage loans and purchasing
mortgage-backed securities. During the years ended June 30, 1996 and 1995, the
Bank originated loans in the amounts of $10.6 and $7.7 million, respectively.
The Bank also purchases mortgage-backed securities to invest excess liquidity
and to supplement local loan demand. The Bank did not purchase any
mortgage-backed securities during fiscal 1996 or 1995. Other investment
activities include investment in tax-exempt municipal bonds and FHLB of
Pittsburgh stock.
The Bank has other sources of liquidity if a need for additional funds arises,
such as FHLB of Pittsburgh advances. Additional sources of liquidity can be
found in the Bank's balance sheet, such as investment securities and
unencumbered mortgage-backed securities that are readily marketable. Management
believes that the Bank has adequate resources to fund all of its commitments.
The Company's ability to pay dividends to stockholders is primarily dependent
upon the dividends it receives from the Bank. The Bank may not declare or pay a
cash dividend on any of its stock if the effect thereof would cause the Bank's
regulatory capital to be reduced below (1) the amount required for the
liquidation account established in connection with the Bank's conversion from
mutual to stock form, or (2) the regulatory capital requirements imposed by the
Department and the FDIC.
Regulatory Capital Requirements. As a condition of deposit insurance, current
FDIC regulations require that the Bank calculate and maintain a minimum
regulatory capital level on a quarterly basis and satisfy such requirement at
the calculation date and throughout the ensuing quarter.
At June 30, 1996, the Bank's Tier I risk-based and total risk-based capital
ratios were 38.5% and 39.6%, respectively, compared with 37.4% and 38.4% at June
30, 1995. Current regulations require Tier I risk-based capital of 4% and total
risk-based capital of 8% risk-based assets. The Bank's leverage ratio was 17.8%
at the end of fiscal 1996 compared with 17.4% at the end of fiscal 1995.
10
<PAGE>
Impact of Inflation and Changing Prices
The financial statements and related data have been prepared in accordance with
generally accepted accounting principles which require the measurement of
financial position and operating results in terms of historical dollars, without
consideration for changes in the relative purchasing power of money over time
caused by inflation.
Unlike industrial companies, nearly all of the assets and liabilities of a
financial institution are monetary in nature. As a result, interest rates have a
more significant impact on a financial institution's performance than general
levels of inflation. Interest rates do not necessarily move in the same
direction or in the same magnitude as the price of goods and services, since
such goods and services are affected by inflation. In the current interest rate
environment, liquidity and the maturity structure of the Bank's assets and
liabilities are critical to the maintenance of acceptable performance levels.
Recent Developments
Currently, the Bank pays an insurance premium to the FDIC equal to .23% of its
total deposits. In August 1995, the FDIC announced that it will lower the
insurance premium for members of the Bank Insurance Fund ("BIF"), primarily
commercial banks, to a range of between 0.04% and 0.31% of deposits, with the
result that most commercial banks will pay the lowest rate of 0.04%. This
reduction in insurance premiums for BIF members could place Savings Association
Insurance Fund ("SAIF") members, primarily savings associations such as the
Bank, at a material competitive disadvantage to BIF members and, for the reasons
set forth below, could have a material adverse effect on the results of
operations and financial condition of the Bank in future periods.
The disparity in insurance premiums between those required for the Bank and BIF
members could allow BIF members to attract and retain deposits at a lower
effective cost than that possible for the Bank and put competitive pressure on
the Bank to raise its interest rates paid on deposits thus increasing its cost
of funds and possibly reducing net interest income. The resultant competitive
disadvantage could result in the Bank losing deposits to BIF members who have a
lower cost of funds and are therefore able to pay higher rates of interest on
deposits. Although the Bank has other sources of funds, these other sources may
have higher costs than those of deposits.
Several alternatives to mitigate the effect of the BIF/SAIF insurance premium
disparity have recently been proposed by the U.S. Congress, federal regulators,
industry lobbyists and the Administration. One plan that has gained support of
several sponsors would require all SAIF member institutions, including the Bank,
to pay a one-time fee of up to 85 basis points on the amount of deposits held by
the member institution to recapitalize the SAIF. If this proposal is enacted by
Congress, the effect would be to immediately reduce the capital of the SAIF-
member institutions by the amount of the fee, and such amount would be
immediately charged to earnings, unless the institutions are permitted to
amortize the expense of the fee over a period of years. If the proposed
assessment of $.85 per $100 of assessable deposits was effected based on
deposits as of March 31, 1995, the Bank's pro rata share would amount to
approximately $300,000 before taxes.
Management of the Bank is unable to predict whether this proposal or any similar
proposal will be enacted or whether ongoing SAIF premiums will be reduced to a
level equal to that of BIF premiums.
11
<PAGE>
[S.R. SNODGRASS, A.C. LETTERHEAD]
REPORT OF INDEPENDENT AUDITORS
------------------------------
Board of Directors and Stockholders
Peoples Savings Financial Corporation
We have audited the accompanying consolidated balance sheet of Peoples Savings
Financial Corporation and Subsidiary as of June 30, 1996 and 1995, and the
related consolidated statements of income, changes in stockholders' equity, and
cash flows for the years then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with 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 Peoples Savings
Financial Corporation and Subsidiary as of June 30, 1996 and 1995, and the
results of their operations and their cash flows for the years then ended in
conformity with generally accepted accounting principles.
As explained in the notes to the financial statements, effective July 1, 1995,
the Company changed its method of accounting for the impairment of loans and the
related allowance for loan losses, and effective July 1, 1994, changed its
method of accounting for investment securities.
Wexford, PA
July 15, 1996
12
<PAGE>
PEOPLES SAVINGS FINANCIAL CORPORATION
CONSOLIDATED BALANCE SHEET
<TABLE>
June 30,
1996 1995
--------------- --------------
ASSETS
<S> <C> <C>
Cash and due from banks $ 115,026 $ 113,607
Interest - bearing deposits with other institutions 627,318 401,730
Investment securities (market value of $3,648,567
and $3,288,247) 3,694,375 3,298,437
Mortgage - backed securities (market value of $7,415,043
and $9,665,770) 7,466,452 9,633,899
Loans receivable (net of allowance for loan losses
of $227,171 and $207,815) 32,126,518 29,374,441
Accrued interest receivable 278,533 280,754
Premises and equipment 64,001 63,902
Federal Home Loan Bank stock, at cost 358,900 346,400
Other assets 121,346 110,569
--------------- --------------
TOTAL ASSETS $ 44,852,469 $ 43,623,739
=============== ===============
LIABILITIES
Deposits $ 35,864,622 $ 35,171,323
Accrued interest payable and other liabilities 75,766 107,514
--------------- --------------
TOTAL LIABILITIES 35,940,388 35,278,837
--------------- --------------
STOCKHOLDERS' EQUITY
Preferred stock, no par value, 1,000,000 shares
authorized; none issued - -
Common stock, $.10 par value; 2,000,000 shares authorized,
452,966 issued 45,297 45,297
Additional paid - in capital 4,222,897 4,180,857
Retained earnings - substantially restricted 5,205,770 4,759,903
Unallocated shares held by Employee Stock Ownership Plan (ESOP) (254,790) (288,762)
Unallocated shares held by Management Stock Bonus Plan (MSBP) (113,230) (158,530)
Treasury stock (10,450 shares, at cost) (193,863) (193,863)
--------------- --------------
TOTAL STOCKHOLDERS' EQUITY 8,912,081 8,344,902
--------------- --------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 44,852,469 $ 43,623,739
=============== ==============
</TABLE>
See accompanying notes to the consolidated financial statements.
13
<PAGE>
PEOPLES SAVINGS FINANCIAL CORPORATION
CONSOLIDATED STATEMENT OF INCOME
<TABLE>
<CAPTION>
Year Ended June 30,
1996 1995
---- ----
INTEREST INCOME
<S> <C> <C>
Loans receivable $ 2,584,661 $ 2,315,598
Mortgage - backed securities 578,468 671,044
Investment securities:
Taxable 162,478 132,498
Exempt from federal income tax 56,119 89,276
Interest - bearing deposits with other institutions 47,932 45,531
---------- ----------
Total interest income 3,429,658 3,253,947
---------- ----------
INTEREST EXPENSE
Deposits 1,760,789 1,590,059
Other 16,763 10,203
---------- ----------
Total interest expense 1,777,552 1,600,262
---------- ----------
NET INTEREST INCOME 1,652,106 1,653,685
Provision for loan losses 24,000 24,000
---------- ----------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 1,628,106 1,629,685
---------- ----------
NONINTEREST INCOME
Service charges on deposit accounts 26,897 24,605
Other income 34,580 15,109
---------- ----------
Total noninterest income 61,477 39,714
---------- ----------
NONINTEREST EXPENSE
Compensation and employee benefits 458,826 476,557
Occupancy and equipment 59,673 55,030
Deposit insurance premiums 82,954 83,898
Professional fees 84,955 84,548
Data processing charges 102,083 94,357
Other expenses 221,036 246,039
---------- ----------
Total noninterest expense 1,009,527 1,040,429
---------- ----------
Income before income taxes 680,056 628,970
Income taxes 234,189 170,755
---------- ----------
NET INCOME $ 445,867 $ 458,215
========== ==========
EARNINGS PER SHARE
Primary $ 1.01 $ 1.04
Fully Diluted $ 1.01 $ 1.04
</TABLE>
See accompanying notes to the consolidated financial statements.
14
<PAGE>
PEOPLES SAVINGS FINANCIAL CORPORATION
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Retained Unallocated Unallocated
Additional Earnings - Shares Shares
Common Paid - In Substantially Held by Held by Treasury
Stock Capital Restricted ESOP MSBP Stock Total
----- ------- ---------- ---- ---- ----- -----
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, June 30, 1994 $ 45,297 $ 4,146,225 $ 4,301,688 $(322,920) $ (203,830) $ - $ 7,966,460
Release of earned
ESOP shares 34,632 34,158 68,790
Accrued
compensation
expense for MSBP 45,300 45,300
Purchase of treasury
stock (193,863) (193,863)
Net income 458,215 458,215
-------- ----------- ----------- --------- ---------- ---------- ---------------
Balance, June 30, 1995 45,297 4,180,857 4,759,903 (288,762) (158,530) (193,863) 8,344,902
Release of earned
ESOP shares 42,040 33,972 76,012
Accrued
compensation
expense for MSBP 45,300 45,300
Net income 445,867 445,867
-------- ----------- ----------- --------- ---------- ---------- ---------------
Balance, June 30, 1996 $ 45,297 $ 4,222,897 $ 5,205,770 $(254,790) $ (113,230) $ (193,863) $ 8,912,081
======== =========== =========== ========= ========== ========== ===============
</TABLE>
See accompanying notes to the consolidated financial statements.
15
<PAGE>
PEOPLES SAVINGS FINANCIAL CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended June 30,
1996 1995
---- ----
OPERATING ACTIVITIES
<S> <C> <C>
Net income $ 445,867 $ 458,215
Adjustments to reconcile net income to net cash provided
by operating activities:
Provision for loan losses 24,000 24,000
Provision for depreciation 12,839 12,120
Amortization of discounts and premiums 52,742 26,896
Decrease in accrued interest receivable 2,221 2,777
Increase (decrease) in accrued interest payable (4,156) 2,433
Amortization of ESOP and MSBP unearned compensation 121,312 114,090
Other, net (38,369) 56,956
---------- ---------------
Net cash provided by operating activities 616,456 697,487
---------- ---------------
INVESTING ACTIVITIES
Proceeds from the maturities of investment securities 2,650,000 3,113,176
Purchases of investment securities (3,047,047) (870,000)
Principal repayments on mortgage - backed securities 2,142,943 1,291,122
Increase in loans receivable, net (2,803,206) (3,510,607)
Increase in Federal Home Loan Bank stock (12,500) (8,300)
Purchases of premises and equipment (12,938) (3,200)
---------- ---------------
Net cash provided by (used for) investing activities (1,082,748) 12,191
---------- ---------------
FINANCING ACTIVITIES
Increase (decrease) in deposits, net 693,299 (1,864,069)
Purchase of treasury stock - (193,863)
---------- ---------------
Net cash provided by (used for) financing activities 693,299 (2,057,932)
---------- ---------------
Increase (decrease) in cash and cash equivalents 227,007 (1,348,254)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 515,337 1,863,591
---------- ---------------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 742,344 $ 515,337
========== ===============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the period for:
Interest on deposits and borrowings $1,781,708 $ 1,597,829
Income taxes 237,925 121,295
</TABLE>
See accompanying notes to the consolidated financial statements.
16
<PAGE>
PEOPLES SAVINGS FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Peoples Savings Financial Corporation (the "Company") is a Pennsylvania
corporation organized to become the holding company of Peoples Savings Bank
(the "Bank"). The Bank is a state - chartered bank located in Pennsylvania. The
Company's principal sources of revenue emanate from its portfolio of residential
real estate and consumer loans, as well as, interest earnings on investment and
mortgage - backed securities and a variety of deposit services provided to its
customers through three locations. The Company is supervised by the Board of
Governors of the Federal Reserve System, while the Bank is subject to regulation
and supervision by the FDIC and the Pennsylvania Department of Banking.
The consolidated financial statements include the accounts of the Company and
its wholly - owned subsidiary, the Bank. All intercompany transactions have
been eliminated in consolidation. The investment in subsidiary on the parent
company financial statements is carried at the parent company's equity in the
underlying net assets.
The financial statements have been prepared in conformity with generally
accepted accounting principles. In preparing the 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
significantly from those estimates. The major accounting policies and practices
are summarized below.
Investment Securities and Mortgage - Backed Securities
Effective July 1, 1994, the Company adopted Statement of Financial Accounting
Standards No. 115, Accounting for Certain Investments in Debt and Equity
Securities. In adopting Statement No. 115, the Company has classified all
investment securities as Held to Maturity.
Debt securities acquired with the intent to hold to maturity are stated at cost
adjusted for amortization of premium and accretion of discount, which are
computed using a level yield method and recognized as adjustments of interest
income. Interest on securities is recognized as income when earned.
Loans Receivable
Loans are stated at the principal amount outstanding net of deferred loan fees
and the allowance for loan losses. Interest income on mortgage and consumer
loans is recognized on the accrual method. Loan fees which represent an
adjustment to interest yield are deferred and amortized over the life of the
loan.
Loans on which accrued interest has been discontinued are designated as
nonaccrual loans. Accrual of interest on loans is generally discontinued when
it is determined that a reasonable doubt exists as to the collectibility of
additional interest. When a loan is placed on nonaccrual status, all interest
previously accrued but not collected is reversed against current period income.
Loans are returned to accrual status when past due interest is collected and
the collection of principal is probable.
Loan origination and commitment fees and certain direct loan origination costs
are being deferred and the net amount amortized as an adjustment to the related
loan's yield. These amounts are being amortized over the contractual life of
the related loans.
17
<PAGE>
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Allowance for Loan Losses
Effective July 1, 1995, the Company adopted Statement of Financial Accounting
Standards No. 114, Accounting by Creditors for Impairment of a Loan, as amended
by Statement No. 118, Accounting by Creditors for Impairment of a Loan - Income
Recognition and Disclosures. These statements prescribe recognition criteria for
loan impairment, generally related to commercial loans, and measurement methods
for certain impaired loans and all loans whose terms are modified in trouble
debt restructurings subsequent to the adoption of these Statements. A loan is
considered impaired when it is probable that the borrower will not repay the
loan according to the original contractual terms of the loan agreement.
Management has determined that first mortgage loans on one - to - four family
properties and all consumer loans are large groups of smaller - balance
homogenous loans are to be collectively evaluated. Accordingly, such loans are
outside the scope of Statement Nos. 114 and 118.
Management considers an insignificant delay, which is defined as 90 days by the
Company, will not cause a loan to be classified as impaired. A loan is not
impaired during a period of delay in payment if the Company expects to collect
all amounts due including interest accrued at the contractual interest rate for
the period of delay. All loans identified as impaired are evaluated
independently by management.
Under this Standard, the Company estimates credit losses on impaired loans based
on the present value of expected cash flows or the fair value of the underlying
collateral if the loan repayment is expected to come from the sale or operation
of such collateral. Statement No. 118 amends Statement No. 114 to permit a
creditor to use existing methods for recognizing interest income on impaired
loans eliminating the income recognition provisions of Statement No. 114. Prior
to 1995, the credit losses related to these loans were estimated based on
undiscounted cash flows or the fair value of the underlying collateral. The
adoption of the Statements did not have a material effect on the Company's
financial position or results of operations.
Impaired loans, or portions thereof, are charged - off when it is determined
that a realized loss has occurred. Until such time, an allowance for loan
losses is maintained for estimated losses.
Cash receipts on impaired loans are applied first to accrued interest
receivable, unless otherwise required by the loan terms, except when an
impaired loan is also a nonaccrual loan, in which case the portion of the
receipts related to interest is recognized as income.
The allowance for loan losses represents the amount which management estimates
is adequate to provide for potential losses in its loan portfolio. The
allowance method is used in providing for loan losses. Accordingly, all loan
losses are charged to the allowance and all recoveries are credited to it. The
allowance for loan losses is established through a provision for loan losses
charged to operations. The provision for loan losses is based on management's
periodic evaluation of individual loans, economic factors, past loan loss
experience, changes in the composition and volume of the portfolio, and other
relevant factors. The estimates used in determining the adequacy of the
allowance for loan losses, including the amounts and timing of future cash flows
expected on impaired loans, are particularly susceptible to change in the near
term.
Premises and Equipment
Premises and equipment are stated at cost less accumulated depreciation.
Depreciation is calculated using an accelerated method over the useful lives of
the related assets. Expenditures for maintenance and repairs are charged to
operations as incurred. Costs of major additions and improvements are
capitalized.
18
<PAGE>
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Income Taxes
The Company and the Bank file a consolidated federal income tax return. Deferred
tax assets and liabilities are reflected at currently enacted income tax rates
applicable to the period in which the deferred tax assets or liabilities are
expected to be realized or settled. As changes in tax laws or rates are enacted,
deferred tax assets and liabilities are adjusted through the provision for
income taxes.
Earnings Per Share
Earnings per share for the years ended June 30, 1996 and 1995 have been
calculated based upon the weighted average number of issued and outstanding
common shares, including common stock equivalents, if such items have a dilutive
effect. For purposes of primary computations, the number of shares used were
440,740 and 439,732 for the years ended June 30, 1996 and 1995 respectively. For
purposes of the fully diluted computations, the number of shares used were
442,646 and 441,512 respectively.
Shares outstanding for 1996 and 1995 do not include ESOP shares that were
purchased and unallocated during 1996 and 1995.
Cash Flow Information
Cash and cash equivalents include cash and due from banks and interest - bearing
deposits with other institutions.
Recent Accounting Pronouncements
During the second quarter of 1995, the Financial Accounting Standards Board
("FASB") issued Statement of Financial Accounting Standards Statement No. 121,
Accounting for the Impairment of Long - Lived Assets and for Long - Lived Assets
to be Disposed of, which becomes effective for the Company in fiscal year 1997.
This Statement requires impairment losses to be recorded on long - lived assets
used in operations when indicators of impairment are present. Impairment would
be considered when the undiscounted cash flows estimated to be generated by
those assets are less than the assets' carrying amount. Management does not
anticipate that implementation of this statement will have a material, if any,
effect on its consolidated financial condition or results of operations.
Statement of Financial Accounting Standards Statement No. 122, Accounting for
Mortgage Servicing Rights, was issued in May, 1995 and becomes effective for
fiscal year 1997. This statement allows enterprises engaged in mortgage banking
activities to recognize as separate assets the rights to service mortgage loans
originated for sale. Additionally, the Company must periodically assess its
capitalized mortgage servicing rights for impairment based on the fair value of
those rights. Presently, the Company does not participate in mortgage banking
activities and management does not anticipate that implementation will have a
material, if any, effect on its consolidated financial condition or results of
operations.
19
<PAGE>
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Recent Accounting Pronouncements (Continued)
In October, 1995, FASB issued Statement of Financial Accounting Standards
Statement No. 123, Accounting for Stock Based Compensation, requiring adoption
no later than fiscal years beginning after December 15, 1995. The new standard
defines a fair value method of accounting for stock options and similar equity
instruments. Pursuant to the new standard, companies are encouraged, but not
required, to adopt the fair value method of accounting for employee stock -
based transactions. Companies are also permitted to continue to account for such
transactions under Accounting Principles Board Opinion No. 25, but would be
required to disclose the pro forma effect on net income and earnings per share
in the notes to the consolidated financial statements, as if the Company had
applied the new accounting method. The Company will evaluate the options
provided for in Statement No. 123 for adoption in fiscal year 1997. Management
does not anticipate the implementation of this statement will have a material,
if any, effect on its consolidated financial condition or results of operation.
NOTE 2 - INVESTMENT SECURITIES
The amortized cost and estimated market values of investment securities are as
follows:
<TABLE>
<CAPTION>
1996
----------------------------------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
--------------- --------------- ---------------- ----------------
U. S. Government agency
<S> <C> <C> <C> <C>
securities $ 2,797,199 $ - $ (42,872) $ 2,754,327
Obligations of states and
political subdivisions 897,176 772 (3,708) 894,240
--------------- --------------- --------------- ---------------
Total $ 3,694,375 $ 772 $ (46,580) $ 3,648,567
=============== =============== =============== ===============
</TABLE>
<TABLE>
<CAPTION>
1995
---------------------------------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
--------------- --------------- --------------- ---------------
U. S. Government agency
<S> <C> <C> <C> <C>
securities $ 1,749,788 $ - $ (12,921) $ 1,736,867
Obligations of states and
political subdivisions 1,548,649 8,902 (6,171) 1,551,380
--------------- --------------- --------------- ---------------
Total $ 3,298,437 $ 8,902 $ (19,092) $ 3,288,247
=============== =============== =============== ===============
</TABLE>
20
<PAGE>
NOTE 2 - INVESTMENT SECURITIES (Continued)
The amortized cost and estimated market value of debt securities at June 30,
1996, by contractual maturity are shown below. Expected maturities will differ
from contractual maturities because borrowers may have the right to call or
prepay obligations with or without call or prepayment penalties.
Estimated
Amortized Market
Cost Value
----------- -----------
Due in one year or less $ 370,000 $ 370,745
Due after one year through five years 1,277,176 1,265,603
Due after five years through ten years 2,047,199 2,012,219
----------- -----------
Total $ 3,694,375 $ 3,648,567
=========== ===========
As of June 30, 1996, all of the Company's investments in obligations of states
and political subdivisions are within the Commonwealth of Pennsylvania. Although
the Company has a diversified investment portfolio, there is one investment,
amounting to $587,000 or 15.9% of the investment portfolio which is dependent
upon tax revenues of an individual municipality.
NOTE 3 - MORTGAGE - BACKED SECURITIES
The amortized cost and estimated market values of mortgage - backed securities
are as follows:
<TABLE>
<CAPTION>
1996
----------------------------------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
--------------- --------------- --------------- ---------------
Federal National Mortgage
<S> <C> <C> <C> <C>
Association securities $ 2,635,786 $ 9,243 $ (30,198) $ 2,614,831
Government National Mortgage
Association securities 1,915,675 54,456 - 1,970,131
Federal Home Loan Mortgage
Corporation securities 2,644,515 540 (86,324) 2,558,731
Collateralized mortgage
obligations 270,476 1,011 (137) 271,350
--------------- --------------- --------------- ---------------
Total $ 7,466,452 $ 65,250 $ (116,659) $ 7,415,043
=============== =============== =============== ===============
</TABLE>
21
<PAGE>
NOTE 3 - MORTGAGE - BACKED SECURITIES (Continued)
<TABLE>
<CAPTION>
1995
--------------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
---------- ---------- ---------- ----------
Federal National Mortgage
<S> <C> <C> <C> <C>
Association securities $3,405,211 $ 27,109 $ (16,055) $3,416,265
Government National Mortgage
Association securities 2,196,081 67,017 -- 2,263,098
Federal Home Loan Mortgage
Corporation securities 3,688,671 15,118 (59,833) 3,643,956
Collateralized mortgage
obligations 343,936 -- (1,485) 342,451
---------- ---------- ---------- ----------
Total $9,633,899 $ 109,244 $ (77,373) $9,665,770
========== ========== ========== ==========
</TABLE>
Mortgage - backed securities provide for periodic, generally monthly payments of
principal and interest and have contractual maturities ranging from one to
thirty - two years. However, due to expected repayment terms being significantly
less than the underlying mortgage loan pool contractual maturities, the
estimated lives of these securities could be significantly shorter.
NOTE 4 - LOANS RECEIVABLE
Loans receivable are comprised of the following:
<TABLE>
<CAPTION>
1996 1995
Mortgage loans:
<S> <C> <C>
1 - 4 family dwellings $ 29,002,826 $ 25,889,613
Commercial 1,750,204 1,378,955
--------------- ---------------
30,753,030 27,268,568
--------------- ---------------
Consumer loans:
Home equity 1,523,071 1,744,651
Automobile 391,168 445,030
Share loans 480,636 411,100
Other 192,932 203,906
--------------- ---------------
2,587,807 2,804,687
--------------- ---------------
Less:
Loans in process 897,410 428,390
Net deferred loan fees 89,738 62,609
Allowance for loan losses 227,171 207,815
--------------- ---------------
1,214,319 698,814
--------------- ---------------
Total $ 32,126,518 $ 29,374,441
=============== ===============
</TABLE>
22
<PAGE>
NOTE 4 - LOANS RECEIVABLE (Continued)
In the normal course of business, loans are extended to directors and executive
officers and their associates. In management's opinion, all of these loans are
on substantially the same terms and conditions as loans to other individuals and
businesses of comparable creditworthiness. A summary of loan activity for those
directors, executive officers, and their associates with loan balances in excess
of $60,000 for the year ended June 30, 1996 is as follows:
<TABLE>
<CAPTION>
Balance Amounts Balance
1995 Additions Collected 1996
---- --------- --------- ----
<S> <C> <C> <C> <C>
$ 356,743 $ 141,389 $ 28,172 $ 469,960
</TABLE>
The Bank is a party to financial instruments with off - balance - sheet risk, in
the normal course of business, to meet the financing needs of its customers.
These financial instruments include commitments to extend credit amounting to
$1,375,110 and $1,135,163, at June 30, 1996 and 1995, respectively. Commitments
to extend credit are agreements to lend to a customer as long as there is no
violation of any condition established in the loan agreement. These commitments
are comprised of the undisbursed portion of construction loans and residential
loan originations. The Bank's exposure to credit loss from nonperformance by the
other party to these financial instruments is represented by the contractual
amount. The Bank uses the same credit policies in making commitments and
conditional obligations as it does for on - balance - sheet instruments.
Generally, collateral, usually in the form of real estate, is required to
support financial instruments with credit risk.
The Bank's loan portfolio is predominantly made up of one to four family unit
first mortgage loans in the Elk, Clearfield, and Jefferson County areas. These
loans are typically secured by first lien positions on the respective real
estate properties and are subject to the Bank's loan underwriting policies. In
general, the Bank's loan portfolio performance is dependent upon the local
economic conditions.
NOTE 5 - ALLOWANCE FOR LOAN LOSSES
Activity in the allowance for loan losses for the years ended June 30, 1996 and
1995 is summarized as follows:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Balance, beginning of period $ 207,815 $ 183,503
Add:
Provisions charged to operations 24,000 24,000
Loan recoveries 1,226 2,760
--------------- ---------------
233,041 210,263
Less loans charged off 5,870 2,448
--------------- ---------------
Balance, end of period $ 227,171 $ 207,815
=============== ===============
</TABLE>
23
<PAGE>
NOTE 6 - ACCRUED INTEREST RECEIVABLE
Accrued interest receivable consists of the following:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Investment securities $ 41,123 $ 45,227
Mortgage - backed securities 50,208 54,523
Loans receivable 187,202 181,004
--------------- ---------------
Total $ 278,533 $ 280,754
=============== ===============
</TABLE>
NOTE 7 - PREMISES AND EQUIPMENT
Premises and equipment consist of the following:
<TABLE>
<CAPTION>
1996 1995
--------------- ---------------
<S> <C> <C>
Land $ 29,500 $ 29,500
Building and improvements 217,620 217,620
Furniture and equipment 264,653 251,715
--------------- ---------------
511,773 498,835
Less accumulated depreciation 447,772 434,933
--------------- ---------------
Total $ 64,001 $ 63,902
=============== ===============
</TABLE>
Depreciation expense for the years ended June 30, 1996 and 1995 was $12,839 and
$12,120, respectively.
NOTE 8 - FEDERAL HOME LOAN BANK STOCK
The Bank is a member of the Federal Home Loan Bank System. As a member, the Bank
maintains an investment in the capital stock of the Federal Home Loan Bank of
Pittsburgh in an amount not less than 1% of its outstanding home loans or 1/20
of its outstanding notes payable, if any, to the Federal Home Loan Bank of
Pittsburgh, whichever is greater, as calculated December 31 of each year.
24
<PAGE>
NOTE 9 - DEPOSITS
Deposit accounts are summarized as follows:
1996 1995
--------------------- -------------------------
Percent of Percent of
Amount Portfolio Amount Portfolio
------ --------- ------ ---------
NOW accounts $ 2,497,778 7.0 % $ 2,101,586 6.0 %
Savings accounts 5,883,799 16.4 5,823,301 16.6
Money market accounts 1,546,184 4.3 1,434,216 4.0
------------ ----- ------------- -----
9,927,761 27.7 9,359,103 26.6
------------ ----- ------------- -----
Savings certificates:
4.00% or less 209,688 0.6 1,328,570 3.8
4.01 - 6.00% 17,017,001 47.4 15,149,645 43.1
6.01 - 8.00% 8,710,172 24.3 9,216,991 26.2
8.01 - 10.00% - - 117,014 0.3
------------ ----- ------------- -----
25,936,861 72.3 25,812,220 73.4
------------ ----- ------------- -----
Total $ 35,864,622 100.0 % $ 35,171,323 100.0 %
============ ===== ============= =====
The maturities of savings certificates at June 30, 1996, are as follows:
Within one year $ 13,735,238
Beyond one year but within two years 6,213,290
Beyond two years but within three years 1,879,863
Beyond three years 4,108,470
------------
Total $ 25,936,861
============
Savings certificates with balances of $100,000 or more amounted to $2,355,348
and $1,676,893 on June 30, 1996 and 1995, respectively. The Bank does not have
any brokered deposits.
Interest expense by deposit category for the years ended June 30, 1996 and 1995
is as follows:
1996 1995
----------- ------------
NOW and money market accounts $ 96,970 $ 98,623
Savings accounts 168,981 184,743
Savings certificates 1,494,838 1,306,693
----------- ------------
Total $ 1,760,789 $ 1,590,059
=========== ============
NOTE 10 - UNUSED LINES OF CREDIT
The Bank has a line of credit, with a borrowing limit of approximately $3.2
million, with the Federal Home Loan Bank of Pittsburgh. This credit line is
subject to annual renewal and incurs no service charges. At June 30, 1996 and
1995, there were no outstanding borrowings on this line of credit.
25
<PAGE>
NOTE 11 - CONTINGENT LIABILITIES - SAVINGS ASSOCIATION INSURANCE FUND
RECAPITALIZATION
In November, 1995, the U.S. Senate and the U.S. House of Representatives
included provisions in the Balanced Budget Act of 1995 (the "Act") which would,
among other things, recapitalize the Savings Association Insurance Fund ("SAIF")
of the Federal Deposit Insurance Corporation ("FDIC") by a one - time charge of
SAIF - insured institutions of approximately 85 cents for every one hundred
dollars of accessible deposits, and an eventual merger of the SAIF with the Bank
Insurance Fund administered by the FDIC. The Act was vetoed by the President in
December, 1995 for reasons unrelated to the recapitalization of the SAIF. The
Company currently is unable to predict the likelihood of legislation effecting
these changes. If an assessment of 85 cents per one hundred dollars of
accessible deposits was effected based on deposits as of March 31, 1995, as
proposed, the Company's pro rata share would amount to approximately $300,000.
NOTE 12 - INCOME TAXES
The provision for income taxes consists of:
1996 1995
--------------- ---------------
Currently payable:
Federal $ 189,130 $ 122,573
State 45,194 59,490
234,324 182,063
Deferred (135) (11,308)
--------------- ---------------
Total $ 234,189 $ 170,755
=============== ===============
The following temporary differences gave rise to the net deferred tax asset at
June 30, 1996 and 1995:
1996 1995
--------------- ---------------
Deferred tax assets:
Allowance for loan losses $ 77,238 $ 70,657
Deferred loan origination fees, net 6,503 12,275
Deferred compensation 43,652 29,358
Other, net 8,224 3,101
--------------- ---------------
Total gross deferred tax assets 135,617 115,391
--------------- ---------------
Deferred tax liabilities:
Tax reserve for loan losses 37,150 21,883
Premises and equipment 4,824 -
--------------- ---------------
Total gross deferred tax liabilities 41,974 21,883
--------------- ---------------
Net deferred tax asset $ 93,643 $ 93,508
=============== ===============
26
<PAGE>
NOTE 12 - INCOME TAXES (Continued)
The reconciliation between the actual provision for income taxes and the amount
of income taxes which would have been provided at statutory rates for the years
ended June 30, 1996 and 1995 is as follows:
<TABLE>
<CAPTION>
1996 1995
------------------------ ---------------------
Amount Percent Amount Percent
------ ------- ------ -------
<S> <C> <C> <C> <C>
Provision at statutory rate $ 231,219 34.0 % $ 213,850 34.0 %
State income tax expense, net of
federal tax benefit 29,828 4.4 39,263 6.2
Tax exempt interest (19,080) (2.8) (30,354) (4.8)
Other, net (7,778) (1.2) (52,004) (8.3)
---------- ---- ----------- ----
Total $ 234,189 34.4 % $ 170,755 27.1 %
========== ==== =========== ====
</TABLE>
Savings banks that meet certain definitional tests and other conditions
prescribed by the Internal Revenue Code of 1986, are permitted to deduct, within
certain limitations, a bad debt deduction computed as a percentage of taxable
income before such deduction. This applicable percentage was 8% for the years
ended June 30, 1996 and 1995.
So long as the Bank continues to qualify, and is not limited, it will be able to
take such deductions; however, should amounts previously claimed as bad debt
deductions be used for any purpose other than to absorb bad debts (which is not
anticipated), tax liabilities will be incurred at the rate then in effect.
NOTE 13 - RETAINED EARNINGS - SUBSTANTIALLY RESTRICTED
The Bank is subject to the risk - based capital rules. These guidelines include
a common framework for defining elements of capital and a system for relating
capital to risk. The minimum total risk - based capital requirement is 8% which
at least half must be Tier I capital. The Tier I and total risk - based capital
positions of the Bank as of June 30, 1996, as calculated by management, amounted
to 38.5% and 39.6% respectively. Additionally, the general regulatory guidelines
establish a minimum ratio of leverage capital to adjusted total assets of 3.00%
for top rated financial institutions with less highly rated institutions, or
those with higher levels of risk required to maintain ratios of 100 to 200 basis
points above the minimum level. The Bank's ratio under these guidelines, as
calculated by management, as of June 30, 1996 is 17.8%.
As a result of the special treatment accorded the Bank under income tax
regulations, approximately $147,823 of retained earnings at June 30, 1996,
represents allocations of income to bad debt deductions for tax purposes only.
Should amounts previously claimed as a bad debt deduction be used for any other
purpose than to absorb bad debts (which is not anticipated), tax liabilities
will be incurred at the rate then in effect.
NOTE 14 - EMPLOYEE BENEFITS
Employee Savings Plan
The Bank maintains a 401(k) Retirement Savings Plan for substantially all
employees. Employees are eligible for admittance to the plan after one year of
employment and full vesting occurs after five years of participation in the
Plan. For employees participating in the Plan, the Bank makes matching
contributions to the plan of up to 2% of the participant's eligible
compensation. The total 401(k) Retirement Savings Plan expense for the years
ending June 30, 1996 and 1995 was $5,808 and $6,153 respectively.
27
<PAGE>
NOTE 14 - EMPLOYEE BENEFITS (Continued)
Management Stock Bonus Plan (MSBP)
In 1994, the Board of Directors adopted a MSBP for certain officers and
employees which was approved by stockholders at a special meeting held on March
31, 1994. The objective of this Plan is to enable the Company and the Bank to
retain its corporate officers, key employees, and directors who have the
experience and ability necessary to manage these entities. Directors, officers,
and key employees who are selected by members of a Board appointed committee are
eligible to receive benefits under the MSBP. The non - employee directors of the
Company and the Bank serve as trustees for the MSBP, which has the
responsibility to invest all funds contributed by the Bank to the Trust created
for the MSBP.
On January 14, 1994, the Trust purchased with funds contributed by the Bank,
22,648 shares of the common stock issued in the Company's conversion and
reorganization to stock form, of which 18,342 shares were issued to directors
and 4,306 shares were issued to officers. Directors, officers, and key employees
who terminate their association with the Company shall forfeit the right to any
shares which were awarded but not earned.
The Company granted a total of 22,648 shares of common stock on the conversion
date of which no shares became immediately vested under the plan. These shares
vest over a five year period beginning January 14, 1994. A total of 4,402 and
4,527 shares were vested in 1996 and 1995 respectively. The MSBP shares
purchased in the conversion initially will be excluded from stockholder's
equity. The Company recognizes compensation expense in the amount of fair value
of the common stock at the grant date, pro rata over the years during which the
shares are payable and recorded as an addition to stockholders' equity. Net
compensation expense attributable to the MSBPs amounted to $45,300 in 1996 and
1995.
Employee Stock Ownership Plan (ESOP)
The Company has an ESOP for the benefit of employees who meet the eligibility
requirements which include having completed six months service with the Company
and having attained age twenty - one. The ESOP Trust purchased 33,972 shares of
common stock in the initial public offering with proceeds from a loan from the
Company. The Bank makes cash contributions to the ESOP on an annual basis
sufficient to enable the ESOP to make the required loan payments to the Company.
The loan bears interest at the prime rate plus one percent, adjustable
quarterly. Interest payable quarterly and principal payable in equal annual
installments over ten years. The loan is secured by the shares of the stock
purchased.
As the debt is repaid, shares are released from collateral and allocated to
qualified employees based on the proportion of debt service paid in the year.
Accordingly, the shares pledged as collateral are reported as unallocated ESOP
shares in the consolidated balance sheet. As shares are released from
collateral, the Company reports compensation expense equal to the current market
price of the shares, and the shares become outstanding for earnings per share
computations. Dividends on allocated ESOP shares are recorded as a reduction of
retained earnings; dividends on unallocated ESOP shares are recorded as a
reduction of debt.
Compensation expense for the ESOP was $76,012 and $68,790 for the years ended
June 30, 1996 and 1995.
28
<PAGE>
NOTE 14 - EMPLOYEE BENEFITS (Continued)
Employee Stock Ownership Plan (ESOP) (Continued)
The following table presents the components of the ESOP shares.
1996 1995
--------------- ---------------
Allocated shares 6,794 3,397
Shares released for allocation 1,699 1,699
Shares distributed (754) -
Unreleased shares 25,479 28,876
Total ESOP shares 33,218 33,972
--------------- ---------------
Fair value of unreleased shares $ 560,538 $ 635,272
=============== ===============
NOTE 15 - STOCK OPTION PLAN
In October 1993, the Board of Directors adopted a Stock Option Plan for the
directors, officers, and employees which was approved by stockholders at a
special meeting held on March 31, 1994. An aggregate of 45,297 shares of
authorized but unissued common stock of the Company were reserved for future
issuance under the plan. The stock options typically have expiration terms
ranging between one and ten years subject to certain extensions and early
terminations. The per share exercise price of a stock option shall be, at a
minimum, equal to the fair value of a share of common stock on the date the
option is granted. Proceeds from the exercise of the stock options are credited
to common stock for the aggregate par value and the excess is credited to
additional paid - in capital.
On January 14, 1994, upon conversion, qualified stock options were granted for
the purchase of 45,297 shares exercisable at the market price of $10 per share
at a rate of one fifth per year beginning January 14, 1995. All options expire
ten years from the date of grant. At June 30, 1996 and 1995, the initial stock
options granted remain outstanding with none being exercised.
NOTE 16 - FAIR VALUE DISCLOSURE OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards No. 107, Disclosures About Fair
Value of Financial Instruments, requires the Company to disclose the estimated
fair value of its financial instruments.
Financial instruments are defined as cash, evidence of an ownership interest in
an entity, or a contract which creates an obligation or right to receive or
deliver cash or another financial instrument from/to a second entity on
potentially favorable or unfavorable terms.
Fair value is defined as the amount at which a financial instrument could be
exchanged in a current transaction between willing parties other than in a
forced or liquidation sale. If a quoted market price is available for a
financial instrument, the estimated fair value would be calculated based upon
the market price per trading unit of the instrument.
29
<PAGE>
NOTE 16 - FAIR VALUE DISCLOSURE OF FINANCIAL INSTRUMENTS (Continued)
If no readily available market exists, the fair value estimates for financial
instruments would be based upon management's judgment regarding current economic
conditions, interest rate risk, expected cash flows, futureestimated losses, and
other factors, as determined through various option pricing formulas or
simulation modeling. As many of these assumptions result from judgments made by
management based upon estimates which are inherently uncertain, the resulting
estimated fair values may not be indicative of the amount realizable in the sale
of a particular financial instrument. In addition, changes in the assumptions on
which the estimated fair values are based may have a significant impact on the
resulting estimated fair values.
As certain assets and liabilities such as deferred tax assets and premises and
equipment are not considered financial instruments, the estimated fair value of
financial instruments would not represent the full value of the Company.
The Company employed simulation modeling in determining the estimated fair value
of financial instruments for which quoted market prices were not available,
based upon the following assumptions:
Cash and Due From Banks, Interest - bearing Deposits with Other Institutions,
Accrued Interest Receivable, Federal Home Loan Bank Stock, and Accrued Interest
Payable
The fair value is equal to the current carrying value.
Investment and Mortgage - backed Securities
The fair value of investment securities held to maturity and mortgage - backed
securities is equal to the available quoted market price. If no quoted market
price is available, fair value is estimated using the quoted market price for
similar securities.
Loans Receivable and Deposits
The fair value of loans is estimated by discounting the future cash flows using
a simulation model which estimates future cash flows and constructs discount
rates that consider reinvestment opportunities, operating expenses, non -
interest income, credit quality, and prepayment risk. Demand, savings, and money
market deposit accounts are valued at the amount payable on demand as of year
end. Fair value for time deposits are estimated using a discounted cash flow
calculation that applies contractual costs currently being offered in the
existing portfolio to current market rates being offered for deposits of similar
remaining maturities.
30
<PAGE>
NOTE 16 - FAIR VALUE DISCLOSURE OF FINANCIAL INSTRUMENTS (Continued)
Commitments to Extend Credit
These financial instruments are generally not subject to sale and estimated fair
values are not readily available. The carrying value, represented by the net
deferred fee arising from the unrecognized commitment, and the fair value,
determined by discounting the remaining contractual fee over the term of the
commitment using fees currently charged to enter into similar agreements with
similar credit risk, are not considered material for disclosure.
The estimated fair values at June 30, 1996 of the Company's financial
instruments are as follows:
<TABLE>
<CAPTION>
Carrying Fair
Value Value
--------------- ---------------
Financial assets:
<S> <C> <C>
Cash and due from banks $ 115,026 $ 115,026
Interest - bearing deposits with other institutions 627,318 627,318
Investment securities 3,694,375 3,648,567
Mortgage - backed securities 7,466,452 7,415,043
Loans receivable 32,126,518 32,682,000
Accrued interest receivable 278,533 278,533
Federal Home Loan Bank stock, at cost 358,900 358,900
--------------- ---------------
$ 44,667,122 $ 45,125,387
=============== ===============
Financial liabilities:
Deposits $ 35,864,622 $ 35,752,000
Accrued interest payable 32,903 32,903
--------------- ---------------
$ 35,897,525 $ 35,789,903
=============== ===============
</TABLE>
31
<PAGE>
NOTE 17 - PARENT COMPANY
The Company's balance sheet as of June 30, 1996 and 1995 and related statements
of income and cash flows for the year ended June 30, 1996 and 1995 are as
follows:
CONDENSED BALANCE SHEET
June 30,
1996 1995
----------- -----------
ASSETS
Cash on deposit in subsidiary bank $ 884,485 $ 848,947
Investment in subsidiary 7,649,170 7,127,907
Loan receivable from ESOP 271,776 305,748
Other assets 124,515 67,476
----------- -----------
Total assets $ 8,929,946 $ 8,350,078
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Other liabilities $ 17,865 $ 5,176
Stockholders' equity 8,912,081 8,344,902
----------- -----------
Total liabilities and stockholders' equity $ 8,929,946 $ 8,350,078
=========== ===========
CONDENSED STATEMENT OF INCOME
Year Ended June 30,
1996 1995
----------- -----------
Undistributed earnings of subsidiary $ 441,991 $ 447,283
Interest on loan to ESOP 24,757 36,520
----------- -----------
466,748 483,803
Expenses 14,483 12,673
----------- -----------
Income before income taxes 452,265 471,130
Income tax expense 6,398 12,915
----------- -----------
Net income $ 445,867 $ 458,215
=========== ===========
32
<PAGE>
NOTE 17 - PARENT COMPANY (Continued)
<TABLE>
<CAPTION>
CONDENSED STATEMENT OF CASH FLOWS
Year Ended June 30,
1996 1995
--------------- ---------------
OPERATING ACTIVITIES:
<S> <C> <C>
Net income $ 445,867 $ 458,215
Adjustment to reconcile income to net cash used:
Undistributed earnings of subsidiary (441,991) (447,283)
Decrease (increase) in other assets (2,310) 4,697
--------------- ---------------
Net cash provided by operating activities 1,566 15,629
--------------- ---------------
INVESTING ACTIVITIES:
Payments from ESOP 33,972 33,972
--------------- ---------------
Net cash provided by investing activities 33,972 33,972
--------------- ---------------
FINANCING ACTIVITIES:
Purchase of treasury stock - (193,863)
--------------- ---------------
Net cash used for financing activities - (193,863)
--------------- ---------------
Increase (decrease) in cash and cash equivalents 35,538 (144,262)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 848,947 993,209
--------------- ---------------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 884,485 $ 848,947
=============== ===============
</TABLE>
33
<PAGE>
Corporate Office
Peoples Savings Financial Corporation and Peoples Savings Bank
173 Main Street
Ridgway, PA 15853
(814) 773-3195
Branch Offices - Peoples Savings Bank
263 Main Street 17 W. Long Avenue
Brookville, PA 15825 DuBois, PA 15801
Board of Directors of Peoples Savings Financial Corporation
and Board of Trustees of Peoples Savings Bank
Norbert J. Pontzer Roger M. Hasselman
Chairman of the Board
Paul A. Brazinski William L. Murnaghan
Carl W. Gamarino Jane P. Weilacher
Executive Officers
Norbert J. Pontzer William L. Murnaghan
President, Chief Executive Officer Senior Vice President
and Chairman of the Board
Glenn R. Pentz
Chief Financial Officer, Treasurer
and Corporate Secretary
Corporate Counsel Special Counsel
Pontzer & Roof Malizia, Spidi, Sloane & Fisch, P.C.
9 South Mill Avenue, No. 4 One Franklin Square
Ridgway, PA 15853 1301 K Street, N.W., Suite 700 East
Washington, D.C. 20005
Independent Auditors Transfer Agent and Registrar
S.R. Snodgrass A.C. Registrar and Transfer Company
101 Bradford Road 10 Commerce Drive
Wexford, PA 15090 Cranford, NJ 07016
Form 10-KSB
Peoples Savings Financial Corporation's Annual Report for the year ended
June 30, 1996 filed with the Securities and Exchange Commission on Form
10-KSB, excluding exhibits, is available without charge upon written
request. For a copy of the Form 10-KSB or any other investor
information, please write or call the Corporate Secretary at the
Company's Corporate Office in Ridgway, Pennsylvania. The Annual Meeting
of Stockholders will be held on October 17, 1996 at 9:30 a.m. at the
Company's main office located at 173 Main Street, Ridgway, Pennsylvania.
- 34 -
<TABLE> <S> <C>
<ARTICLE> 9
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JUN-30-1995
<PERIOD-END> JUN-30-1996
<CASH> 742
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 0
<INVESTMENTS-CARRYING> 11,160
<INVESTMENTS-MARKET> 0
<LOANS> 33,354
<ALLOWANCE> 227
<TOTAL-ASSETS> 44,852
<DEPOSITS> 35,865
<SHORT-TERM> 0
<LIABILITIES-OTHER> 76
<LONG-TERM> 0
0
0
<COMMON> 46
<OTHER-SE> 8,866
<TOTAL-LIABILITIES-AND-EQUITY> 44,852
<INTEREST-LOAN> 2,585
<INTEREST-INVEST> 797
<INTEREST-OTHER> 48
<INTEREST-TOTAL> 3,430
<INTEREST-DEPOSIT> 1,761
<INTEREST-EXPENSE> 1,778
<INTEREST-INCOME-NET> 1,652
<LOAN-LOSSES> 24
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 1,010
<INCOME-PRETAX> 680
<INCOME-PRE-EXTRAORDINARY> 680
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 446
<EPS-PRIMARY> 1.01
<EPS-DILUTED> 1.01
<YIELD-ACTUAL> 3.79
<LOANS-NON> 435
<LOANS-PAST> 8
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 208
<CHARGE-OFFS> 6
<RECOVERIES> 1
<ALLOWANCE-CLOSE> 227
<ALLOWANCE-DOMESTIC> 227
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
