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,
1997, 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
---------------------------------------
(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. $3.47 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 in August,
1997 (as reported by the OTC Bulletin Board), which was $8,087,496 (336,979
shares at $24.00 per share).
As of June 30, 1997, there were issued and outstanding 442,516 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, 1997. (Parts I, II and IV)
2. Portions of Proxy Statement for the 1997 Annual Meeting of stockholders.
(Part III)
<PAGE>
PART I
Item 1. Description of Business
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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. Since the primary activities of the Corporation are those of
Peoples Savings Bank ("Peoples Savings" or the "Bank"), its wholly owned
subsidiary, much of the discussion herein pertains to the Bank, however,
comparisons to total assets, liabilities, etc. are based on the Corporation's
consolidated numbers.
The Bank
Peoples Savings, a wholly owned subsidiary of the Corporation, was
chartered by the State of Pennsylvania in 1891. 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.
Market Area/Competition
Peoples Savings focuses 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, 1997, 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.
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<PAGE>
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.
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,
------------------------------------------------------------------------
1997 1996
------------------------------------ --------------------------------
Amount Percent Amount Percent
------ ------- ------ -------
(Dollars in Thousands)
<S> <C> <C> <C> <C>
Type of Loan
Real Estate Loans:
Construction................................ $ 1,124 3.39% $ 1,848 5.54%
1-4 family.................................. 28,400 85.76 27,155 81.45
Commercial.................................. 1,195 3.61 1,750 5.25
Consumer Loans:
Savings account............................. 489 1.48 481 1.44
Home equity................................. 1,359 4.10 1,523 4.57
Automobiles ................................ 324 0.98 391 1.17
Other....................................... 224 0.68 193 0.58
---------- -------- ------- -------
Total loans................................... 33,115 100.00% 33,341 100.00%
========== ======== ======= =======
Less:
Loans in process............................ (828) (897)
Deferred loan origination fees and costs.... (88) (90)
Allowance for possible loan losses.......... (251) (227)
---------- -------
Total loans, net............................ $ 31,948 $ 32,127
========== =======
</TABLE>
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<PAGE>
Loan Maturity Tables. The following table sets forth the maturity of
the Bank's loan portfolio at June 30, 1997. The table does not include
prepayments or scheduled principal repayments. Prepayments and scheduled
principal repayments on loans totaled $7.3 million and $7.4 million for the two
years ended June 30, 1997 and 1996, 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................. $ 735 $ - $ - $ 110 $ 845
Amounts Due:
Within 3 months................ 8 40 - 16 64
3 months to 1 year............. 20 - - 31 51
1 to 3 years................. 370 44 - 443 857
3 to 5 years................. 877 32 - 985 1,894
5 to 15 years................ 17,010 751 625 811 19,197
Over 15 years................ 9,380 328 499 - 10,207
--------- -------- --------- ------ --------
Total amount due............... 28,400 1,195 1,124 2,396 33,115
--------- -------- --------- ------ --------
Less:
Allowance for loan losses...... 170 - - 81 251
Loans in process............... (13) - 828 13 828
Deferred loan fees............. 88 - - - 88
--------- -------- --------- ------ -------
Loans receivable, net........ $ 28,155 $ 1,195 $ 296 $ 2,302 $ 31,948
========= ======== ========= ====== =======
</TABLE>
The following table sets forth the dollar amount of all loans due after
June 30, 1998, which have pre-determined interest rates and which have floating
or adjustable interest rates.
<TABLE>
<CAPTION>
Floating or
Fixed Rates Adjustable Rates Total
----------- ---------------- -----
(In Thousands)
<S> <C> <C> <C>
One-to-four family............... $ 23,008 $ 5,364 $ 28,372
Commercial....................... 819 336 1,155
Construction..................... 960 164 1,124
Consumer......................... 2,349 - 2,349
----------- ---------- ---------
Total.......................... $ 27,136 $ 5,862 $ 33,000
=========== ========== =========
</TABLE>
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.
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<PAGE>
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.
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, 1997, the Bank's two largest commercial real estate loans
consisted of a $227,000 commercial/residential property located in St. Mary's,
Pennsylvania and a $328,000 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
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<PAGE>
and create stronger ties to its customer base. Consumer loans consist of loans
secured with deposits held at the Bank, home equity loans, auto loans and
personal installment loans.
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.
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 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
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<PAGE>
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.
<TABLE>
<CAPTION>
Year Ended June 30,
-------------------------------------
1997 1996
----------- ----------
(In Thousands)
<S> <C> <C>
Total loans receivable at beginning
of period......................................................... $ 33,341 $ 30,073
Loans originated:
1 to 4 family residential......................................... 4,844 7,007
Construction loans................................................ 1,264 2,123
Commercial real estate loans...................................... 100 538
Consumer loans.................................................... 827 979
------- ------
Total loans originated.............................................. 7,035 10,647
Total loans sold.................................................... -- --
Loan principal repayments........................................... 7,261 7,379
------- ------
Net loan activity................................................... (226) 3,268
------- ------
Total gross loans receivable at end of period....................... $ 33,115 $33,341
======= ======
</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, 1997, the Bank had $2.3 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, 1997 the Bank's loans-to-one borrower limit was
approximately $1.3 million and its five largest aggregate lending relationships
had balances ranging from $449,000 to $259,000. At June 30, 1997, all but one of
these lending relationships were current. See "-Non-performing Assets-
Delinquencies and Asset Classification."
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
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<PAGE>
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,
-----------------------------------
1997 1996
--------- ---------
(Dollars in Thousands)
<S> <C> <C>
Loans accounted for on a non-accrual basis:
Real estate loans:
1-4 family........................................ $ 735 $ 339
Commercial........................................ -- 92
Non-mortgage loans:
Consumer.......................................... 110 4
------- -------
Total non-accrual loans............................. 845(1) 435
Real estate owned................................... 29 --
Other non-performing assets......................... -- --
------- -------
Total non-performing assets......................... $ 874 $ 435
======= =======
Total non-accrual loans to net loans................ 2.64% 1.35%
======= =======
Total non-accrual loans to total assets............. 1.88% 0.97%
======= =======
Total non-performing assets to total assets......... 1.95% 0.97%
======= =======
</TABLE>
- ----------------
(1) At June 30, 1997, $449,000 of the $845,000 of non-accrual loans at the
Company consisted of a single lending relationship involving six loans
secured by residential real estate, a constructed single-family home,
and two automobiles. The borrowers filed for bankruptcy in fiscal 1997.
Although there can be no assurances, the Company does not expect any
material losses regarding such loans.
Contractual interest income due for loans accounted for on a
non-accrual basis under the original terms of such loans was $77,000 and $43,000
for the years ended June 30, 1997 and 1996, respectively. Interest income
recognized on these loans amounted to $27,000 and $27,000 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.
In addition, at June 30, 1997, the Bank had $420,000 in residential
mortgage loans and $6,000 in consumer loans which were 60 to 90 days delinquent.
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<PAGE>
At June 30, 1997, there were no loans considered impaired.
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, 1997, the Bank had total classified assets of $637,000
of which $616,000 were classified substandard, none were classified doubtful,
and $21,000 were classified loss. Furthermore, June 30, 1997, the Bank had no
loans designated as special mention.
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.
The Bank had $29,000 of REO at June 30, 1997, consisting of two
residential real estate properties.
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,
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<PAGE>
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, 1997 and 1996, 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.
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:
<TABLE>
<CAPTION>
At June 30,
-----------------------------------
1997 1996
------------ -----------
<S> <C> <C>
Total loans outstanding....................................... $ 32,199 $ 33,341
====== =======
Average loans outstanding..................................... $ 32,294 $ 30,956
====== =======
Allowance balances (at beginning of period)................... $ 227 $ 208
Provision:
Real estate................................................. 24 24
Consumer.................................................... -- --
Charge-offs:
Real estate................................................. -- --
Consumer.................................................... (1) (6)
Recoveries:
Real estate................................................. -- --
Consumer.................................................... 1 1
-------- -------
Allowance balance (at end of period).......................... $ 251 $ 227
======== =======
Allowance for loan losses as a percent of 0.78% 0.68%
total loans outstanding.....................................
Net loans charged off as a percent of
average loans outstanding................................... -- (0.02)%
</TABLE>
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<PAGE>
The distribution of the Bank's allowance for loan losses at the dates
indicated are summarized as follows:
<TABLE>
<CAPTION>
At June 30,
------------------------------------------------------------------------------
1997 1996
-------------------------------------- -------------------------------------
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 ............ $ 170 93.25 $ 131 91.56%
Commercial real estate.............. -- 3.61 15 5.25
Consumer............................ 81 3.14 81 3.19
------ ------ ---- ------
Total............................... $ 251 100.00% $ 227 100.00%
====== ====== ==== ======
</TABLE>
Mortgage-Backed Securities and Investment Activities
Mortgage-Backed Securities Portfolio. At June 30, 1997, the carrying
value of mortgage-backed securities totaled $6.1 million, or 13.7%, 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 $6.1
million at June 30, 1997.
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, 1997, the Bank had two collateralized mortgage obligations
("CMOs") totalling $215,000, 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.
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<PAGE>
The following table sets forth the carrying value of the Bank's fixed
rate and variable rate mortgage-backed securities at the dates indicated.
<TABLE>
<CAPTION>
At June 30,
-------------------------------
1997 1996
----------- ---------
(In Thousands)
<S> <C> <C>
Mortgage-backed securities:
Fixed.............................................. $ 2,970 $ 3,743
Variable........................................... 3,153 3,723
-------- -------
Total mortgage-backed securities..................... $ 6,123 $ 7,466
======== =======
</TABLE>
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, 1997, the market value of the Bank's investment securities portfolio
was approximately $6.1 million.
<TABLE>
<CAPTION>
At June 30,
----------------------------------
1997 1996
--------- -------
(In Thousands)
<S> <C> <C>
U.S. Government agency securities.................. $ 2,299 $ 2,797
Municipal bonds.................................... 526 897
FHLB stock......................................... 361 359
Certificate of deposit............................. 100 --
Interest-bearing deposits in other financial
institutions..................................... 2,804 627
-------- ------
Total investment securities...................... $ 6,090 $ 4,680
======== ======
</TABLE>
-11-
<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 portfolio at June 30, 1997.
<TABLE>
<CAPTION>
As of June 30, 1997
------------------------------------------------------------------------------------------------------
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)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. Government agency
securities ................ $ -- --% $2,049 6.64% $ 250 7.00% $ -- --% $ 2,299 6.68% $ 2,284
Obligations of states and
political subdivisions .... -- -- 526 4.22 -- -- -- -- 526 4.22 527
Mortgage-backed securities .. -- -- 604 6.11 -- -- 5,519 7.20 6,123 7.09 6,105
Interest-bearing deposits in
other financial
institutions............... 2,804 5.41 -- -- -- -- -- -- 2,804 5.41 2,804
Certificate of Deposit ...... 100 5.61 -- -- -- -- -- -- 100 5.61 100
FHLB Stock (1) .............. 361 6.76 -- -- -- -- -- -- 361 6.76 361
------ ---- ----- ---- ------ ---- ----- ---- ------ ---- ------
Total ..................... $ 3,265 5.57 $3,179 6.14%$ 250 7.00% $5,519 7.20% $12,213 6.48% $12,181
====== ==== ===== ==== ====== ==== ===== ==== ====== ==== ======
</TABLE>
- ---------------
(1) Recorded at cost.
-12-
<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 $2.7 million, or 7.6% of the Bank's total deposit portfolio at
June 30, 1997. The Bank's jumbo deposits include deposits from various business
entities, individuals and local governments and authorities. See "--Jumbo
Certificates of Deposit."
-13-
<PAGE>
Deposits in the Bank as of June 30, 1997 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 1997 Total Deposits
- -------- ---- ---------------- -------------- ---- --------------
(In Thousands)
<S> <C> <C> <C> <C> <C>
Now Accounts None 2.25% $200 $ 3,354 9.57%
Regular Savings None 2.50 50 5,232 14.93
Money Market Accounts None (2) (2) 1,631 4.66
Certificates of Deposit:
Fixed Term, Fixed Rate 6 months 5.10% 500 2,711 7.74
Fixed Term, Fixed Rate 12 months 5.20% - 5.45% 500 3,396 9.69
Fixed Term, Fixed Rate 18 months 5.25% - 5.50% 500 2,227 6.36
Fixed Term, Fixed Rate 30 months 5.30% - 5.55% 500 4,066 11.61
Fixed Term, Fixed Rate 36 months 5.65% - 5.90% 500 1,147 3.27
Fixed Term, Fixed Rate 48 months 5.70% - 5.95% 500 767 2.19
Fixed Term, Fixed Rate 60 months 6.10% - 6.35% 500 7,475 21.34
Fixed Term, Fixed Rate 96 months 8.00% 500 293 0.84
Jumbo Certificates 100,000 2,677 7.64
------ -------
34,976 99.84
Accrued interest on deposits 56 0.16
------ -------
Total $35,032 100.00%
====== ======
</TABLE>
- ----------------------
(1) Interest rates as of June 30, 1997.
(2) Under $1,000: 2.75%; over $1,000: 3.00%
The following table sets forth the amount and maturities of time
deposits at June 30, 1997.
<TABLE>
<CAPTION>
After
June 30, June 30, June 30, June 30,
Interest Rate 1998 1999 2000 2001 Total
- ------------- ------ ------ ------ ------ ------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
2.00 - 4.00%................... $ 86 $ -- $ -- $ -- $ 86
4.01 - 6.00%................... 11,666 3,135 1,002 1,524 17,327
6.01 - 8.00%................... 2,516 320 2,685 1,825 7,346
------- -------- ------ ------ -------
Total $ 14,268 $ 3,455 $ 3,687 $ 3,349 $ 24,759
======= ======= ====== ====== =======
Accrued Interest on
certificate accounts......... 27
Total $ 24,786
=======
</TABLE>
-14-
<PAGE>
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,
1997.
Certificates
of Deposits
-----------
Maturity Period (In Thousands)
Within three months............................ $ 555
Three through six months....................... 309
Six through twelve months...................... 747
Over twelve months............................. 1,066
-------
$ 2,677
========
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. At June 30, 1997,
Peoples Savings had $500,000 in advances outstanding from the FHLB of
Pittsburgh.
The following table presents information regarding FHLB advances as of
June 30:
<TABLE>
<CAPTION>
1997 1996
------------------ -------------------
(In Thousands)
<S> <C> <C>
FHLB Advances:
Ending Balance......................................... $500 $ --
Average balance during the year........................ 931 250
Maximum month-end balance during the year.............. 1,550 500
Average interest rate during the year.................. 5.59% 6.80%
Weighted average rate at year end...................... 5.75% --
</TABLE>
Personnel. As of June 30, 1997 the Bank had 13 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.
- 15 -
<PAGE>
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
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
-16-
<PAGE>
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.
At June 30, 1997, 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
-17-
<PAGE>
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.
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.
-18-
<PAGE>
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). The FDIC has the authority, should it initiate proceedings to
terminate an institution's deposit insurance, to suspend the insurance of any
such institution without tangible capital. However, if a savings association has
positive capital when it includes qualifying intangible assets, the FDIC cannot
suspend deposit insurance unless capital declines materially, the institution
fails to enter into and remain in compliance with an approved capital plan or
the institution is operating in an unsafe or unsound manner.
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 FDIC
may also prohibit an insured depository institution from engaging in any
activity the FDIC determines to pose a serious threat to the SAIF. The
management of the Bank is unaware of any practice, condition, or violation that
might lead to termination of its deposit insurance.
Effective September 30, 1996, federal law was revised to mandate a
one-time special assessment on SAIF members such as the Bank of approximately
.657% of deposits held on March 31, 1995. The Bank recorded a $235,000 pre-tax
expense for this assessment at September 30, 1996, and such assessment was paid
on November 12, 1996. Beginning January 1, 1997, deposit insurance assessments
for a significant portion of SAIF members are expected to be reduced to
approximately .064% of deposits on an annual basis through the end of 1999.
During this same period, BIF members are expected to be assessed approximately
0.013% of deposits. Thereafter, assessments for BIF and SAIF members should be
the same and the SAIF and BIF may be merged. It is expected that these
continuing assessments for both SAIF and BIF members will be used to repay
outstanding Financing Corporation bond obligations.
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, 1997, 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
-19-
<PAGE>
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.
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, 1997.
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.
-20-
<PAGE>
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, 1997, the Bank had $361,000 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 have adversely affected the level of FHLB dividends paid and could
continue to do so in the future. For the year ended June 30, 1997, 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, 1997, 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, 1997.
Subsidiary and Joint Venture Activity
In January 1994, the Corporation acquired all of the capital stock of
the Bank, a Pennsylvania- chartered stock savings bank. As of June 30, 1997, the
net book value of the Corporation's investment in the Bank amounted to $8.3
million.
-21-
<PAGE>
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, 1997, with an option to renew for an
additional one-year period.
At June 30, 1997, the Bank had a total investment in its land,
buildings and improvements, and fixtures, furniture and equipment of $515,000,
less accumulated depreciation of $455,000, or a net carrying value of $60,000.
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.
(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.
Item 4. Submission of Matters to a Vote of Security Holders
- ------------------------------------------------------------
Not applicable.
-22-
<PAGE>
PART II
Item 5. Market for Common Equity and Related Stockholder Matters
- -----------------------------------------------------------------
The information contained under the section captioned "Stock Market
Information" on page 2 of the Corporation's Annual Report is incorporated herein
by reference.
Item 6. Management's Discussion and Analysis or Plan of Operation
- ------------------------------------------------------------------
The information is contained in the section captioned "Management's
Discussion and Analysis of Financial Condition and Results of Operations" on
page 4 of the Annual Report and is incorporated herein by reference.
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 "Section 16(a) Beneficial
Ownership Reporting Compliance" and "Information With Respect to Nominees for
Director; Directors Whose Terms Continue and Executive Officers" on pages 4-7 of
the Corporation's definitive proxy statement for Corporation's 1997 Annual
Meeting of Stockholders filed with the Securities and Exchange Commission
("SEC") on September 25, 1997 (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.
-23-
<PAGE>
(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 5 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 12 of the Proxy Statement.
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, 1997 and 1996
(b) Consolidated Statements of Income for each of the
years in the two-year period ended June 30, 1997
(c) Consolidated Statements of Stockholders' Equity for
each of the years in the two-year period ended June
30, 1997
(d) Consolidated Statements of Cash Flows for each of the
years in the two-year period ended June 30, 1997
(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.***
-24-
<PAGE>
13 Annual Report to Stockholders for Fiscal Year Ended
June 30, 1997
21 Subsidiaries of the Corporation (See "Item 1.
Description of Business - Subsidiary and Joint
Venture Activity.")
27 Financial Data Schedule (included in electronic
filing only)
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-KSB for the year ended June 30, 1995.
-25-
<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 18, 1997 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.
<TABLE>
<CAPTION>
<S> <C>
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 18, 1997 Date: September 18, 1997
By:/s/William L. Murnaghan By: /s/Roger M. Hasselman
William L. Murnaghan Roger M. Hasselman
Director Director
Date: September 18, 1997 Date: September 18, 1997
By:/s/Carl W. Gamarino By: /s/Paul A. Brazinski
Carl W. Gamarino Paul A. Brazinski
Director Director
Date: September 18, 1997 Date: September 18, 1997
By:/s/Jane P. Weilacher
Jane P. Weilacher
Director
Date: September 18, 1997
</TABLE>
EXHIBIT 13
<PAGE>
PEOPLES SAVINGS FINANCIAL
CORPORATION
-----------------------------------------------------------------------
1997 ANNUAL REPORT
<PAGE>
PEOPLES SAVINGS FINANCIAL CORPORATION
1997 ANNUAL REPORT
- --------------------------------------------------------------------------------
TABLE OF CONTENTS
- --------------------------------------------------------------------------------
Letter to Stockholders...................................................... 1
Corporate Profile and Stock Market Information.............................. 2
Financial Highlights........................................................ 3
Management's Discussion and Analysis of
Financial Condition and Results of Operations............................. 4
Report of Independent Certified Public
Accountants Auditors...................................................... 11
Consolidated Balance Sheet.................................................. 12
Consolidated Statement of Income............................................ 13
Consolidated Statement of Change in Stockholders Equity..................... 14
Consolidated Statement of Cash Flows........................................ 15
Notes to Consolidated Financial Statements.................................. 16
Office Locations and Other Corporate Information............................ 34
<PAGE>
PEOPLES SAVINGS FINANCIAL CORPORATION
To Our Stockholders:
Peoples Savings Financial Corporation completed the year profitably and in good
financial condition despite a one-time charge due to Congressional action. In
1996, we finally had some significant progress with banking legislation that now
allows our Bank to compete on a more equal footing with commercial bank
competitors. The disparity in FDIC deposit insurance was resolved with a special
assessment to our Bank and all other thrifts. The special assessment cost
$235,000 before taxes, resulting in an after tax reduction of approximately
$155,000 in income. The special assessment reduced earnings per share by $0.34.
Beginning with the fourth quarter 1996 our cost for deposit insurance has been
reduced by approximately 72%. Additionally, legislation was passed that put
thrifts on an equal footing with commercial banks in the treatment of bad debts
for tax purposes.
As we approach fiscal 1998, 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 is a bank holding
company which, under existing laws, is restricted to activities generally
related to banking. At the present time, the Company does not conduct any active
business,
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 is a community oriented savings
institution and conducts its business from its main office in Ridgway,
Pennsylvania and two full service branch offices located in Jefferson and
Clearfield Counties, Pennsylvania.
Peoples 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, 1997 - August 31, 1997 ....... $ 24.25 $ 21.75
April 1, 1997 - June 30, 1997 ........ 23.50 21.50
January 1, 1997 - March 31, 1997 ..... 23.50 20.25
October 1, 1996 - December 31, 1997 .. 23.00 21.25
July 1, 1996 - September 30, 1996 .... 25.25 24.25
April 1, 1996 - June 30, 1996 ........ 28.00 21.00
January 1, 1996 - March 31, 1996 ..... 23.00 21.00
September 30, 1995 - December 31, 1996 22.50 22.50
July 1, 1995 - September 30, 1995 .... 26.25 19.00
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 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 September 10, 1997, 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
September 10, 1997, there were 442,516 shares outstanding. Dividends of $.40 per
share were paid during fiscal 1997. For a discussion of the limitations on the
Company's ability to pay dividends, see "Management's Discussion and Analysis of
Financial Condition and Results of Operation-Liquidity and Capital
Requirements."
- 2 -
<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,
--------------------------------------------------------------------------
1997 1996 1995 1994 1993
------ ------ ------ ------ -----
(In Thousands)
<S> <C> <C> <C> <C> <C>
Assets.............................................. $44,835 $44,852 $43,624 $45,050 $43,015
Loans receivable.................................... 31,948 32,127 29,374 25,879 23,428
Mortgage-backed securities.......................... 6,123 7,466 9,634 10,949 14,354
Investments (1).................................... 2,825 4,053 3,645 5,892 2,807
Cash and cash equivalents........................... 117 742 515 1,864 2,035
Savings deposits.................................... 34,976 35,865 35,171 37,035 39,079
Other borrowings.................................... 500 - - - -
Total stockholders' equity/retained earnings........ 9,184 8,912 8,345 7,966 3,875
</TABLE>
<TABLE>
<CAPTION>
Year Ended June 30,
--------------------------------------------------------------------------
1997 1996 1995 1994 1993
------ ------ ------ ------ -----
(In Thousands)
<S> <C> <C> <C> <C> <C>
Interest Income..................................... $3,430 $3,430 $3,254 $3,092 $3,261
Interest Expense.................................... 1,694 1,778 1,600 1,627 1,839
Net Interest Income................................. 1,736 1,652 1,654 1,465 1,422
Provision for Loan Losses........................... 24 24 24 24 18
Net Income.......................................... 301 446 458 426 427
</TABLE>
The table below sets forth certain performance ratios of the Company
for the periods indicated:
<TABLE>
<CAPTION>
At or For the Year Ended June 30,
---------------------------------------------------------------------------
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Return on average assets (net income divided
by average total assets) ......................... 0.67% 1.00% 1.04% 0.95% 0.99%
Return on average equity (net income divided
by average equity)................................ 3.33 5.17 5.62 7.86 11.65
Average equity to average assets ratio (average
equity divided by average total assets)........... 20.09 19.30 18.47 12.05 8.49
Equity to assets at period end...................... 20.49 19.87 19.13 17.68 9.01
Net interest rate spread............................ 2.96 2.83 3.01 2.80 2.97
Net yield on average interest earning assets........ 3.89 3.79 3.79 3.35 3.34
Non-performing assets to total assets............... 1.95 0.97 0.33 0.83 0.65
Non-performing loans to total loans................. 2.64 1.34 0.49 1.45 1.19
Allowance for loan losses to non-performing assets.. 29.70 52.30 144.52 48.94 62.27
Average interest earning assets to average
interest-bearing liabilities...................... 124.38 123.66 121.43 114.68 108.42
Net interest income after provision for possible
loan losses, to total other expenses.............. 135.82 161.27 156.64 156.84 146.38
</TABLE>
- --------------
(1) Includes Federal Home Loan Bank ("FHLB") stock.
- 3 -
<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 Pennsylvania Department of Banking ("Department") and the Federal
Deposit Insurance Corporation ("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
five- to seven-year Federal Home Loan Bank ("FHLB") notes and 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.
- 4 -
<PAGE>
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, 1997,
the Bank had $527,000 of obligations of states and political subdivisions, most
of which are rated AAA.
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
Total assets at June 30, 1997 amounted to $44,835,000, a decrease of $18,000,
compared to $44,852,000 at June 30, 1996. Total cash and cash equivalents
increased by $2,278,000 to $3,021,000 at June 30, 1997 from $742,000 at June 30,
1996. This increase was funded by maturity of investment securities, principal
repayments on mortgage-backed securities and loans. Management is presently
developing an investment strategy in coordination with its liquidity
requirements for these funds. Investment securities decreased $870,000, from
$3,694,000 at June 30, 1996 to $2,824,000 at June 30, 1997, due to maturities.
Mortgage-backed securities principal repayments of $1,343,000 resulted in an
18.0% decrease, from $7,466,000 at June 30, 1996 to $6,123,000 at June 30, 1997.
Net loans receivable decreased from $32,127,000 at June 30, 1996 to $31,948,000
at June 30, 1997, or approximately $179,000. The net decrease was primarily
attributable to a decrease in commercial real estate of $555,000 due to the
early payoff of a participation loan, and a decrease of $192,000 in consumer
loans and consumer lines of credit, offset somewhat by an increase of
one-to-four family mortgages of $521,000.
Deposits decreased $889,000 or 2.5%, to $34,976,000 at June 30, 1997 from
35,865,000 at June 30, 1996. Certificates of deposit and savings accounts
declined $1,178,000 and $652,000, respectively, which was offset somewhat by an
increase in NOW accounts and money market accounts of $940,000. Advances from
the FHLB increased by $500,000 as a result of the decline in deposits.
Stockholders' equity increased $272,000 or 3.0%, to $9,184,000 at June 30, 1997.
The increase was the result of net retained income of $133,000 and recognition
of shares in the Management Stock Bonus Plan and the Employee Stock Ownership
Plan amounting to $139,000. Through June 30, 1997, the Company initiated the
payment of dividends of $.40 per share, while maintaining capital ratios well in
excess of regulatory guidelines. Future dividend policies will be determined by
the Board of Directors in light of the earnings and financial condition of the
Company, including applicable governmental regulations and policies.
Non-performing Assets
Nonperforming loans increased by $410,000 in fiscal 1997. At June 30, 1997,
$449,000 of the $845,000 of non-accrual loans at the Company consisted of a
single lending relationship involving six loans secured by residential real
estate, a constructed single-family home, and two automobiles. The borrowers
filed for bankruptcy in fiscal 1997. Although there can be no assurances, the
Company does not expect any material losses regarding such loans. The remaining
increase in nonperforming loans during 1997 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, 1997 and 1996 -- Provision for
Possible Loan Losses."
- 5 -
<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,
------------------------------------------------------------------ --------------------
1997 1996 1997
----------------------------------- ------------------------------ --------------------
Average Average Average Average
Balance Interest Yield/Cost Balance Interest Yield/Cost Balance Yield/Cost
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans receivable(1)..................... $32,294 $2,630 8.14% $31,026 $2,585 8.33% $32,199 8.02%
Mortgage-backed securities.............. 6,737 456 6.77 8,421 578 6.86 6,123 7.09
Investment securities(2)................ 5,561 344 6.19 4,085 267 6.54 6,090 5.87
------ ------ ------ ----- ------
Total interest-earning assets.......... 44,592 3,430 7.69 43,532 3,430 7.88 44,412 7.60
----- -----
Non-interest-earning assets.............. 386 574 423
------- ------ -------
Total assets........................... $44,978 $44,106 $44,835
====== ====== ======
Interest-bearing liabilities:
Interest-bearing demand deposits........ $ 4,451 113 2.54 $3,624 97 2.68 $ 4,984 2.44
Certificates of deposit................. 25,062 1,392 5.55 25,515 1,495 5.86 24,760 5.63
Savings deposits........................ 5,407 137 2.53 5,814 169 2.91 5,232 2.50
Short-term borrowings................... 931 52 5.59 250 17 6.80 500 5.75
------- ------ ------ ----- -------
Total interest-bearing liabilities..... 35,851 1,694 4.73 35,203 1,778 5.05 35,476 4.72
Non-interest bearing liabilities......... 89 77 174
------- ------ -------
Total liabilities....................... 35,940 35,280 35,650
Stockholders equity...................... 9,038 8,826 9,185
------ ------ ------
Total liabilities and stockholders' equity $44,978 $44,106 $44,835
====== ====== ======
Net interest income...................... $1,736 $1,652
===== =====
Interest rate spread(3).................. 2.96 2.83 2.88
==== ==== ====
Net yield on interest-earning assets(4).. 3.89 3.79 3.67
==== ==== ====
Ratio of average interest-earning assets to
average interest-bearing liabilities... 124.38 123.66 125.19
====== ====== ======
</TABLE>
- ---------------------------------
(1) Average balances include non-accrual loans.
(2) Includes interest-bearing deposits in other financial institutions and FHLB
stock.
(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.
- 6 -
<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,
---------------------------------------------------------------------------
1997 vs. 1996 1996 vs. 1995
----------------------------------- ----------------------------------
Increase (Decrease) Increase (Decrease)
Due to Due to
----------------------------------- ----------------------------------
Volume Rate Net Volume Rate Net
------ ---- --- ------ ---- ---
(In Thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest income:
Loans receivable..................... $ 106 $ (61) $ 45 $ 223 $ 46 $ 269
Mortgage-backed securities........... (116) (6) (122) (115) 22 (93)
Investment securities................ 96 (19) 77 (55) 55 --
----- ----- ---- ---- ----- -----
Total interest-earning assets....... 86 (86) - 53 123 176
----- ----- ---- ---- ----- -----
Interest expense:
Interest-bearing demand deposits.... 22 (6) 16 (5) 4 (1)
Certificates of deposit............. (27) (76) (103) (18) 206 188
Savings deposits.................... (12) (20) (32) (8) (8) (16)
Short-term borrowings............... 46 (11) 35 7 -- 7
----- ----- ---- ---- ----- ----
Total interest-bearing
liabilities....................... 29 (113) (84) (24) 202 178
----- ----- ---- ---- ----- -----
Net change in interest income......... $ 57 $ 27 $ 84 $ 77 $ (79) $ (2)
===== ====== ==== ==== ===== =====
</TABLE>
- 7 -
<PAGE>
Comparison of Operating Results for the Years Ended June 30, 1997 and 1996.
Net Income. Primarily as a result of a one time charge to SAIF-insured
institutions, net income for the year ended June 30, 1997 declined 32.5%, to
$301,000 or $.68 per share, from $446,000 or $1.01 per share for the same period
ended 1996.
Net Interest Income. Net interest income increased $84,000 or 5.1%, to
$1,736,000 for the year ended June 30, 1997 compared to $1,652,000 for the year
ended June 30, 1996 primarily due to a decrease in interest expense. 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) increased from 2.83% for
the year ended June 30, 1996 to 2.96% for the same period ended June 30, 1997.
At June 30, 1997, the Company's interest rate spread was a positive 2.88%.
Interest Income. Interest income remained relatively stable during fiscal years
1996 and 1997, totalling $3,430,000 for both years. Increases to interest income
were primarily concentrated in loans of $45,000 or 1.7% and investment
securities of $87,000 or 53.5%. These increases, which were due to an increase
in the average principal balances of $1,268,000 or 4.1%, and $612,000 or 18.7%,
respectively, were funded by a decrease in the average principal balance of
mortgage-backed securities of $1,684,000 or 20.0% and an increase in average
interest-bearing liabilities of $648,000 or 1.8%. In addition, the yield on
interest-earning assets decreased from 7.9% for the year ended June 30, 1996 to
7.7% for the same period ended June 30, 1997. This decrease was the result of
the maturity of higher yielding securities and a slight decline in rates.
Interest Expense. Interest expense decreased from $1,777,000 for the year ended
June 30, 1996 to $1,694,000 for the same period ended June 30, 1997. Interest on
deposits declined by $119,000 or 6.8%. Such decrease was offset somewhat by an
increase of $36,000 or $212.5% in other interest expense. The overall decline is
primarily due to the decreasing principal average balances of certificates of
deposit, $453,000 or 1.8%, and savings deposits, $407,000 or 7.0%. Counteracting
this decline was an increase in the average principal balance of
interest-bearing demand deposits of $827,000 or 22.8%. Furthermore, the yields
on certificates of deposit and savings deposits decreased by 31 and 38 basis
points, respectively. There was an increase in interest expense on advances from
FHLB of $36,000 or 212.5% which is the result of an increase in the average
principal balance of $681,000 offset by a decrease in the cost of borrowed
funds. The cost to borrow funds declined from 5.0% as of June 30, 1996 compared
to 4.7% as of June 30, 1997, or 6.4%.
Provision for Loan Losses. Based upon management's continuing evaluation of the
adequacy of the allowance for loan losses which encompasses the overall risk
characteristics of the various portfolio segments, past experience with losses,
the impact of economic conditions on borrowers, and other relevant factors, the
provision for loan losses was $24,000 for the years ended June 30, 1997 and
1996. 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 it 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.
Noninterest Income. Noninterest income which is comprised principally of service
charges on deposit accounts and loan service fees decreased $17,000 or 28.1% to
$44,000 for the year ended June 30, 1997 from $61,000 for the same period ended
1996. Other income declined $20,000 or 57.0% due to a
- 8 -
<PAGE>
decline in commissions from consumer lending for accidental death and life
insurance from the Company's carrier coupled with other smaller dollar decreases
in other income accounts.
Noninterest Expense. Noninterest expense increased $251,000 or 24.9% to
$1,261,000 for the year ended June 30, 1997 from $1,010,000 as of June 30, 1996.
This increase is largely attributed to a one time charge of $235,000 in federal
insurance premiums. On September 30, 1996, the President signed into law
legislation which included the recapitalization of the Savings Association
Insurance Fund ("SAIF") of the FDIC by a one time charge to SAIF-insured
institutions of 65.7 basis points per one hundred dollars of insurable deposits.
Compensation and benefits increased $33,000 or 7.1%, primarily due to an
increase in employee stock ownership plan expenses from the distribution of
additional shares. Other noninterest expense increased by $16,000 or 7.2%
through the year ended June 30, 1997 as compared to the same period ended June
30, 1996. For fiscal year ended 1996, other interest expense included $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.
Income Taxes. Income tax expense decreased $39,000 or 16.8% for the year ended
June 30, 1997 to $195,000 from $234,000 for the same period ended June 30, 1996.
The decrease was the result of a decline in pretax earnings during the period.
Possible Year 2000 Computer Program Problems
A great deal of information has been disseminated about the global computer
crash that may occur in the year 2000. Many computer programs that can only
distinguish the final two digits of the year entered (a common programming
practice in earlier years) are expected to read entries for the year 2000 as the
year 1900 and compute payment, interest or delinquency based on the wrong date
or are expected to be unable to compute payment, interest or delinquency. Rapid
and accurate data processing is essential to the operation of the Bank. Data
processing is also essential to most other financial institutions and many other
companies.
All of the material data processing of the Bank that could be affected by
this problem is provided by a third party service bureau. The service bureau of
the Bank has advised the Bank that it expects to resolve this potential problem
before the year 2000. However, if the service bureau is unable to resolve this
potential problem in time, the Bank would likely experience significant data
processing delays, mistakes or failures. These delays, mistakes or failures
could have a significant adverse impact on the financial condition and results
of operation of the Bank.
Liquidity and Capital Requirements
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
- 9 -
<PAGE>
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, 1997 and 1996, the
Bank originated loans in the amounts of $7.0 and $10.6 million, respectively.
The Bank also purchases mortgage-backed securities and FHLB notes to invest
excess liquidity and to supplement local loan demand. The Bank did not purchase
any mortgage-backed securities during fiscal 1997 or 1996. 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, 1997, the Bank's Tier I risk-based and total risk-based capital
ratios were 43.3% and 44.5%, respectively. 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 20.5% at the end of fiscal 1997.
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.
- 10 -
<PAGE>
[SNODGRASS 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, 1997 and 1996, 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, 1997 and 1996, 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 consolidated 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.
/s/ S.R. Snodgrass, A.C.
Wexford, PA
July 25, 1997
S.R. Snodgrass, A.C.
101 Bradford Road Wexford, PA 15090-6909 Phone: 412-934-0344 Facsimile:
412-934-0345
- 11 -
<PAGE>
PEOPLES SAVINGS FINANCIAL CORPORATION
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
June 30,
1997 1996
------------- -------------
ASSETS
<S> <C> <C>
Cash and due from banks $ 116,612 $ 115,026
Interest-bearing deposits with other institutions 2,904,240 627,318
Investment securities (market value of $2,811,553
and $3,648,567) 2,824,595 3,694,375
Mortgage-backed securities (market value of $6,104,940
and $7,415,043) 6,123,442 7,466,452
Loans receivable (net of allowance for loan losses
of $250,865 and $227,171) 31,947,791 32,126,518
Accrued interest receivable 290,147 278,533
Premises and equipment 60,407 64,001
Federal Home Loan Bank stock 361,100 358,900
Other assets 206,248 121,346
------------ ------------
TOTAL ASSETS $ 44,834,582 $ 44,852,469
============ ============
LIABILITIES
Deposits $ 34,975,539 $ 35,864,622
Advance from Federal Home Loan Bank 500,000 --
Accrued interest payable and other liabilities 174,869 75,766
------------ ------------
TOTAL LIABILITIES 35,650,408 35,940,388
------------ ------------
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 4,275,914 4,222,897
Retained earnings - substantially restricted 5,338,997 5,205,770
Unallocated shares held by Employee Stock Ownership Plan (ESOP) (214,241) (254,790)
Unallocated shares held by Management Stock Bonus Plan (MSBP) (67,930) (113,230)
Treasury stock (10,450 shares, at cost) (193,863) (193,863)
------------ ------------
TOTAL STOCKHOLDERS' EQUITY 9,184,174 8,912,081
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 44,834,582 $ 44,852,469
============ ============
</TABLE>
See accompanying notes to the consolidated financial statements.
- 12 -
<PAGE>
PEOPLES SAVINGS FINANCIAL CORPORATION
CONSOLIDATED STATEMENT OF INCOME
<TABLE>
<CAPTION>
Year Ended June 30,
1997 1996
---------- ----------
INTEREST INCOME
<S> <C> <C>
Loans receivable $2,629,735 $2,584,661
Mortgage-backed securities 456,571 578,468
Investment securities:
Taxable 249,433 162,478
Exempt from federal income tax 26,547 56,119
Interest-bearing deposits with other institutions 67,986 47,932
---------- ----------
Total interest income 3,430,272 3,429,658
---------- ----------
INTEREST EXPENSE
Deposits 1,641,614 1,760,789
Advance from Federal Home Loan Bank 52,390 16,763
Total interest expense 1,694,004 1,777,552
---------- ----------
NET INTEREST INCOME 1,736,268 1,652,106
Provision for loan losses 24,000 24,000
---------- ----------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 1,712,268 1,628,106
---------- ----------
NONINTEREST INCOME
Service charges on deposit accounts 29,317 26,897
Other income 14,866 34,580
---------- ----------
Total noninterest income 44,183 61,477
---------- ----------
NONINTEREST EXPENSE
Compensation and employee benefits 491,463 458,826
Occupancy and equipment 45,543 59,673
Deposit insurance premiums 272,034 82,954
Professional fees 110,704 84,955
Data processing charges 103,913 102,083
Other expenses 237,054 221,036
---------- ----------
Total noninterest expense 1,260,711 1,009,527
---------- ----------
Income before income taxes 495,740 680,056
Income taxes 194,718 234,189
---------- ----------
NET INCOME $ 301,022 $ 445,867
========== ==========
EARNINGS PER SHARE
Primary $ 0.68 $ 1.01
Fully Diluted $ 0.68 $ 1.01
</TABLE>
See accompanying notes to the consolidated financial statements.
- 13 -
<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, 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
Release of earned
ESOP shares 53,017 40,549 93,566
Accrued
compensation
expense for MSBP 45,300 45,300
Cash dividends declared
($.40 per share) (167,795) (167,795)
Net income 301,022 301,022
-------- ---------- ---------- ---------- ---------- ---------- -----------
Balance, June 30, 1997 $ 45,297 $4,275,914 $5,338,997 $ (214,241) $ (67,930) $ (193,863) $ 9,184,174
======== ========== ========== ========== ========== ========== ===========
</TABLE>
See accompanying notes to the consolidated financial statements.
- 14 -
<PAGE>
PEOPLES SAVINGS FINANCIAL CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended June 30,
1997 1996
----------- -----------
OPERATING ACTIVITIES
<S> <C> <C>
Net income $ 301,022 $ 445,867
Adjustments to reconcile net income to net cash provided
by operating activities:
Provision for loan losses 24,000 24,000
Provision for depreciation 7,257 12,839
Amortization of discounts and premiums 1,966 52,742
Decrease (increase) in accrued interest receivable (11,614) 2,221
Increase (decrease) in accrued interest payable 23,358 (4,156)
Amortization of ESOP and MSBP unearned compensation 138,866 121,312
Other, net (93,375) (38,369)
----------- -----------
Net cash provided by operating activities 391,480 616,456
----------- -----------
INVESTING ACTIVITIES
Proceeds from the maturities of investment securities 1,620,000 2,650,000
Purchases of investment securities (749,750) (3,047,047)
Principal repayments on mortgage-backed securities 1,320,674 2,142,943
Decrease (increase) in loans receivable, net 174,627 (2,803,206)
Increase in Federal Home Loan Bank stock (2,200) (12,500)
Purchases of premises and equipment (3,663) (12,938)
----------- -----------
Net cash provided by (used for) investing activities 2,359,688 (1,082,748)
----------- -----------
FINANCING ACTIVITIES
Increase (decrease) in deposits, net (889,083) 693,299
Increase in advance from Federal Home Loan Bank 500,000 --
Cash dividends paid (83,577) --
----------- -----------
Net cash provided by (used for) financing activities (472,660) 693,299
----------- -----------
Increase in cash and cash equivalents 2,278,508 227,007
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 742,344 515,337
----------- -----------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 3,020,852 $ 742,344
=========== ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the period for:
Interest on deposits and borrowings $ 1,670,646 $ 1,781,708
Income taxes 250,512 237,925
</TABLE>
See accompanying notes to the consolidated financial statements.
-15-
<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 as the holding company of Peoples Savings Bank (the
"Bank"). The Bank is a state-chartered bank located in Pennsylvania. The
Company and its subsidiary derive substantially all their income from banking
and bank-related services which include interest earnings on 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
----------------------------------------------------
Debt securities, including mortgage-backed securities acquired with the
intent and ability 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.
Common stock of the Federal Home Loan Bank (FHLB) represents an ownership in
an institution which is wholly-owned by other financial institutions. This
equity security is accounted for at cost and reported separately on the
accompanying balance sheet.
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.
- 16 -
<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. Under this Standard, the Company estimates
credit losses on impaired loans based on the present value of expected cash
flows or fair value of the underlying collateral if the loan repayment is
expected to come from the sale or operation of such collateral. 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.
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. The
adoption of these statement did not have a material effect on the Company's
financial position or results of operations.
Impaired loans are commercial and commercial real estate loans for which it
is probable that the Company will not be able to collect all amounts due
according to the contractual terms of the loan agreement. The Company
individually evaluates such loans for impairment and does not aggregate by
loans by major risk classifications. The definition of "impaired loans" is
not the same as the definition of "nonaccrual loans," although the two
categories overlap. The Company may choose to place a loan on nonaccrual
status due to payment delinquency or uncertain collectibility, while not
classifying the loan as impaired if the loan is not a commercial or
commercial real estate loan. Factors considered by management in determining
impairment include payment status and collateral value. The amount of
impairment for these types of impaired loans is determined by the difference
between the present value of the expected cash flows related to the loan,
using the original interest rate, and its recorded value, or as a practical
expedient in the case of collateralized loans the difference between the fair
value of the collateral and the recorded amount of the loans. When
foreclosure is probable, impairment is measured based on the fair value of
the collateral.
Mortgage loans on one-to-four family properties and all consumer loans are
large groups of smaller balance homogeneous loans and are measured for
impairment collectively. Loans that experience insignificant payment delays,
which are defined as 90 days or less, generally are not classified as
impaired. Management determines the significance of payment delays on a
case-by-case basis, taking into consideration all of the circumstances
surrounding the loan and the borrower, including the length of the delay, the
borrower's prior payment record, and the amount of shortfall in relation to
the principal and interest owed.
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
changes 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.
- 17 -
<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, 1997 and 1996 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 445,364 and 440,740 for the years ended June 30, 1997 and 1996
respectively. For purposes of the fully diluted computations, the number of
shares used were 444,906 and 442,646 respectively.
Shares outstanding for 1997 and 1996 do not include ESOP shares that were
purchased and unallocated during 1997 and 1996.
Cash and Cash Equivalents
-------------------------
Cash and cash equivalents include cash and due from banks and
interest-bearing deposits with other institutions.
Recent Accounting Pronouncements
--------------------------------
In June 1996, the Financial Accounting Standards Board issued Statement of
Accounting Standards No. 125, "Accounting for Transfers and Servicing of
Financial Assets and Extinguishment of Liabilities," which provides
accounting and reporting standards for transfers and servicing of financial
assets and extinguishment of liabilities. This statement applies
prospectively in fiscal years beginning after December 31, 1996, and
establishes new standards that focus on control, whereas, after a transfer of
financial assets, an entity recognizes the financial and servicing assets it
controls and the liabilities it has incurred, derecognizes financial assets
when control has been surrendered, and derecognizes liabilities when
extinguished.
In December 1996, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 127, "Deferral of the Effective Date of
Certain Provisions of FASB Statement No. 125." Statement 127 defers for one
year the effective date of certain portions of Statement No. 125 that address
secured borrowings and collateral for all transactions. Additionally,
Statement No. 127 defers for one year the effective date of transfers of
financial assets that are part of repurchase agreements, securities lending,
and similar transactions. The Company does not expect the adoption of
Statements 125 and 127 to have a material impact on the Company's
consolidated financial condition or results of operations.
In February 1997 the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 128, "Earnings Per Share," effective for
financial statements issued for periods ending after December 15, 1997. The
new standard specifies the computation, presentation, and disclosure
requirements for earnings per share for entities with publicly held common
stock. The Company does not anticipate adoption to have a material impact on
presentation and disclosure for earnings per share.
- 18 -
<PAGE>
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Recent Accounting Pronouncements (Continued)
--------------------------------------------
In July 1997 the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130, "Reporting Comprehensive Income".
Statement No. 130 is effective for fiscal years beginning after December 15,
1997. This statement establishes standards for reporting and presentation of
comprehensive income and its components (revenues, expenses, gains and
losses) in a full set of general purpose financial statements. It requires
that all items that are required to be recognized under accounting standards
as components of comprehensive income be reported in a financial statement
that is presented with the same prominence as other financial statements.
Statement No. 130 requires that companies (i) classify items of other
comprehensive income by their nature in a financial statement and (ii)
display the accumulated balance of other comprehensive income separately from
retained earnings and additional paid-in capital in the stockholders' equity
section of the balance sheet. Reclassification of financial statements for
earlier periods provided for comprehensive purposes is required.
NOTE 2 - INVESTMENT SECURITIES
The amortized cost and estimated market values of investment securities are
as follows:
<TABLE>
<CAPTION>
1997
----------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
---------- ----------- ----------- ------------
U. S. Government agency
<S> <C> <C> <C> <C>
securities $2,298,161 $ 3,572 $ (17,365) $2,284,368
Obligations of states and
political subdivisions 526,434 751 -- 527,185
---------- ---------- ---------- ----------
Total $2,824,595 $ 4,323 $ (17,365) $2,811,553
========== ========== ========== ==========
</TABLE>
<TABLE>
<CAPTION>
1996
---------------------------------------------------
Gross Gross
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>
- 19 -
<PAGE>
NOTE 2 - INVESTMENT SECURITIES (Continued)
The amortized cost and estimated market value of debt securities at June 30,
1997, 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.
<TABLE>
<CAPTION>
Estimated
Amortized Market
Cost Value
----------- ----------
<S> <C> <C>
Due in one year or less $ -- $ --
Due after one year through five years 2,574,595 2,566,683
Due after five years through ten years 250,000 244,870
---------- ----------
Total $2,824,595 $2,811,553
========== ==========
</TABLE>
As of June 30, 1997 and 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 $526,000 or 18.6% and $587,000 or 15.9%
at June 30, 1997 and 1996, respectively, 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>
1997
--------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
---------- ---------- ----------- ----------
Federal National Mortgage
<S> <C> <C> <C> <C>
Association securities $2,268,550 $ 8,950 $ (19,117) $2,258,383
Government National Mortgage
Association securities 1,452,824 41,037 -- 1,493,861
Federal Home Loan Mortgage
Corporation securities 2,187,136 1,396 (50,581) 2,137,951
Collateralized mortgage
obligations 214,932 -- (187) 214,745
---------- ---------- ---------- ----------
Total $6,123,442 $ 51,383 $ (69,885) $6,104,940
========== ========== ========== ==========
</TABLE>
- 20 -
<PAGE>
NOTE 3 - MORTGAGE - BACKED SECURITIES (Continued)
<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>
The amortized cost and estimated market value of mortgage-backed securities
at June 30, 1997, by contractual maturity are shown below. Mortgage-backed
securities provide for periodic, generally monthly payments of principal and
interest and have contractual maturities ranging from three to thirty-one
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.
<TABLE>
<CAPTION>
Estimated
Amortized Market
Cost Value
---------- -----------
<S> <C> <C>
Due in one year or less $ -- $ --
Due after one year through five years 604,178 585,500
Due after five years through ten years -- --
Due after ten years 5,519,264 5,519,440
---------- ----------
Total $6,123,442 $6,104,940
========== ==========
</TABLE>
- 21 -
<PAGE>
NOTE 4 - LOANS RECEIVABLE
Loans receivable are comprised of the following:
<TABLE>
<CAPTION>
1997 1996
------------- -------------
Mortgage loans:
<S> <C> <C>
1 - 4 family dwellings $ 29,524,341 $ 29,002,826
Commercial 1,194,880 1,750,204
------------- -------------
30,719,221 30,753,030
------------- -------------
Consumer loans:
Home equity 1,358,869 1,523,071
Automobile 324,179 391,168
Share loans 489,415 480,636
Other 223,658 192,932
------------- -------------
2,396,121 2,587,807
------------- -------------
Less:
Loans in process 828,394 897,410
Net deferred loan fees 88,292 89,738
Allowance for loan losses 250,865 227,171
------------- -------------
1,167,551 1,214,319
------------- -------------
Total $ 31,947,791 $ 32,126,518
============= =============
</TABLE>
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, 1997 is
as follows:
<TABLE>
<CAPTION>
Balance Balance
June 30, Amounts June 30,
1996 Additions Collected 1997
----------- ---------- --------- ---------
<S> <C> <C> <C> <C>
$ 469,960 $ 49,148 $ 158,550 $ 360,558
</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
$2,347,000 and $1,375,000, at June 30, 1997 and 1996, 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.
- 22 -
<PAGE>
NOTE 5 - ALLOWANCE FOR LOAN LOSSES
Activity in the allowance for loan losses for the years ended June 30, 1997
and 1996 is summarized as follows:
<TABLE>
<CAPTION>
1997 1996
------------- ------------
<S> <C> <C>
Balance, beginning of period $ 227,171 $ 207,815
Add:
Provisions charged to operations 24,000 24,000
Loan recoveries 541 1,226
------------- ------------
251,712 233,041
Less loans charged off 847 5,870
------------- ------------
Balance, end of period $ 250,865 $ 227,171
============= ============
</TABLE>
NOTE 6 - ACCRUED INTEREST RECEIVABLE
Accrued interest receivable consists of the following:
<TABLE>
<CAPTION>
1997 1996
------------- ------------
<S> <C> <C>
Investment securities $ 60,431 $ 41,123
Mortgage-backed securities 35,790 50,208
Loans receivable 193,926 187,202
------------- ------------
Total $ 290,147 $ 278,533
============= ============
</TABLE>
NOTE 7 - PREMISES AND EQUIPMENT
Premises and equipment consist of the following:
<TABLE>
<CAPTION>
1997 1996
------------- ------------
<S> <C> <C>
Land $ 29,500 $ 29,500
Building and improvements 217,620 217,620
Furniture and equipment 268,316 264,653
515,436 511,773
Less accumulated depreciation 455,029 447,772
------------- ------------
Total $ 60,407 $ 64,001
============= ============
</TABLE>
Depreciation expense for the years ended June 30, 1997 and 1996 was $7,257
and $12,839 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.
- 23 -
<PAGE>
NOTE 9 - DEPOSITS
Deposit accounts are summarized as follows:
<TABLE>
<CAPTION>
1997 1996
----------------------------- --------------------------------
Percent of Percent of
Amount Portfolio Amount Portfolio
------------- ---------- -------------- ------------
<S> <C> <C> <C> <C>
NOW accounts $ 3,353,222 9.6 % $ 2,497,778 7.0 %
Savings accounts 5,232,215 15.0 5,883,799 16.4
Money market accounts 1,630,908 4.7 1,546,184 4.3
------------- ----- -------------- -----
10,216,345 29.3 9,927,761 27.7
------------- ----- -------------- -----
Savings certificates:
4.00% or less 86,348 0.2 209,688 0.6
4.01 - 6.00% 17,327,014 49.5 17,017,001 47.4
6.01 - 8.00% 7,345,832 21.0 8,710,172 24.3
------------- ----- -------------- -----
24,759,194 70.7 25,936,861 72.3
------------- ----- -------------- -----
Total $ 34,975,539 100.0 % $ 35,864,622 100.0 %
============= ===== ============== =====
</TABLE>
The maturities of savings certificates at June 30, 1997, are as follows:
<TABLE>
<CAPTION>
<S> <C>
Within one year $ 14,309,261
Beyond one years but within three years 7,131,529
Beyond three years 3,318,404
------------
Total $ 24,759,194
============
</TABLE>
Savings certificates with balances of $100,000 or more amounted to $2,677,276
and $2,355,348 on June 30, 1997 and 1996, respectively. The Bank does not
have any brokered deposits.
Interest expense by deposit category for the years ended June 30, 1997 and
1996 is as follows:
<TABLE>
<CAPTION>
1997 1996
-------------- ------------
<S> <C> <C>
NOW and money market accounts $ 112,751 $ 96,970
Savings accounts 136,574 168,981
Savings certificates 1,392,289 1,494,838
-------------- ------------
Total $ 1,641,614 $ 1,760,789
============== ============
</TABLE>
NOTE 10 - SAVINGS ASSOCIATION INSURANCE FUNDS RECAPITALIZATION
On September 30, 1996, the President signed into law legislation which
included, among other things, recapitalization of the Savings Association
Insurance Fund ("SAIF") of the Federal Deposit Insurance Corporation by a one
time charge to SAIF-insured institutions of 65.7 basis points per one hundred
dollars of insurable deposits. The gross effect to the Company amounted to
$234,747, which is reflected in the financial results of the Company for the
year ended June 30, 1997.
- 24 -
<PAGE>
NOTE 11 - ADVANCE FROM FEDERAL HOME LOAN BANK
The scheduled maturities of advances outstanding are as follows:
<TABLE>
<CAPTION>
Interest June 30,
Maturity Rate 1997 1996
------------------ -------- ---------- ---------
<S> <C> <C> <C>
September 22, 1997 5.75 % $ 500,000 $ -
</TABLE>
FHLB stock, mortgage-backed securities and certain first mortgage loans with
a value in excess of 120% of outstanding advances are pledged to secure such
borrowings under a blanket floating agreement.
The Bank has a line of credit, with a borrowing limit of approximately $3.4
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, 1997 and
1996, there were no outstanding borrowings on this line of credit.
NOTE 12 - INCOME TAXES
The provision for income taxes consists of:
<TABLE>
<CAPTION>
1997 1996
------------- ------------
Currently payable:
<S> <C> <C>
Federal $ 157,964 $ 189,130
State 22,654 45,194
------------- ------------
180,618 234,324
Deferred 14,100 (135)
------------- ------------
Total $ 194,718 $ 234,189
============= ============
</TABLE>
The following temporary differences gave rise to the net deferred tax asset
at June 30, 1997 and 1996:
<TABLE>
<CAPTION>
1997 1996
------------- ------------
Deferred tax assets:
<S> <C> <C>
Allowance for loan losses $ 85,294 $ 77,238
Deferred loan origination fees, net 2,345 6,503
Deferred compensation 7,701 43,652
Other, net 21,820 8,224
------------- ------------
Total gross deferred tax assets 117,160 135,617
------------- ------------
Deferred tax liabilities:
Tax reserve for loan losses 32,671 37,150
Premises and equipment 4,946 4,824
------------- ------------
Total gross deferred tax liabilities 37,617 41,974
------------- ------------
Net deferred tax asset $ 79,543 $ 93,643
============= ============
</TABLE>
- 25 -
<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, 1997 and 1996 is as follows:
<TABLE>
<CAPTION>
1997 1996
---------------------- ------------------------
Amount Percent Amount Percent
--------- ------- ----------- ---------
<S> <C> <C> <C> <C>
Provision at statutory rate $ 168,552 34.0 % $ 231,219 34.0 %
State income tax expense, net of
federal tax benefit 14,951 2.9 29,828 4.4
Tax exempt interest (9,026) (1.8) (19,080) (2.8)
Other, net 20,241 2.7 (7,778) (1.2)
--------- ---- ---------- ----
Total $ 194,718 37.8 % $ 234,189 34.4 %
========= ==== ========== ====
</TABLE>
On August 20, 1996, the Small Business Job Protection Act (the "Act") was
signed into law. The Act eliminated the percentage of taxable income bad debt
deduction for thrift institutions for tax years beginning after December 31,
1995. The Act provides that bad debt reserves accumulated prior to 1988 be
exempt from recapture. Bad debt reserves accumulated after 1987 are subject
to recapture. The recapture tax will be paid in six equal installments
beginning after the 1998 tax year. At December 31, 1995, the Company had
$96,092 in bad debt reserves in excess of the base year. Subject to
prevailing corporate tax rates, the Company owes $32,671 in federal income
taxes which is reflected as a deferred tax liability.
No valuation allowance was established at June 30, 1997 and 1996, in view of
the Company's carryback to taxes paid in previous years, future anticipated
taxable income, which is evidenced by the Company's earning potential, and
deferred tax liabilities at June 30.
The Bank is subject to the Pennsylvania Mutual Thrift Institutions Tax which
is calculated at 11.5% of earnings based on generally accepted accounting
principles with certain adjustments.
NOTE 13 - RETAINED EARNINGS-SUBSTANTIALLY RESTRICTED
The Company and the Bank are subject to various regulatory capital
requirements administered by the federal banking agencies. Failure to meet
capital requirements can initiate certain mandatory, and possibly additional
discretionary actions by the regulators that, if undertaken, could have a
direct material effect on the financial statements. Under capital adequacy
guidelines and the regulatory framework for prompt corrective action, the
Company and the Bank must meet specific capital guidelines that involve
quantitative measures of the entity's assets, liabilities, and certain
off-balance sheet items as calculated under regulatory accounting practices.
The capital amounts and classification are also subject to qualitative
judgments by the regulators about components, risk weightings, and other
factors.
- 26 -
<PAGE>
NOTE 13 - RETAINED EARNINGS-SUBSTANTIALLY RESTRICTED (Continued)
Quantitative measures established by regulation to ensure capital adequacy
require the Company and the Bank to maintain minimum amounts and ratios of
Total and Tier I (as defined in the regulations) to risk-weighted assets (as
defined), and of Tier I capital to average assets (as defined). Management
believes, as of June 30, 1997, that the Company and the Bank meet all capital
adequacy requirements to which it is subject.
As of June 30, 1997, the most recent notification from the primary regulator
has categorized the Company as well capitalized under the regulatory
framework for prompt corrective action. To be categorized as well
capitalized, it must maintain minimum total risk-based, Tier I risk-based,
and Tier I leverage ratios at least 100 to 200 basis points above those
ratios set forth in the table. There have been no conditions or events since
that notification that management believes have changed the Company's
category.
The following table reflects the Company's ratios at June 30 (the Bank's
ratios do not significantly differ from the Company).
<TABLE>
<CAPTION>
1997 1996
---------------------------- --------------------------
<S> <C> <C> <C> <C>
Total Capital (to Risk
Weighted Assets)
Actual $ 9,435,039 44.5 % $ 9,139,252 43.8 %
For Capital Adequacy
Purposes 1,695,851 8.0 1,668,357 8.0
To Be Well Capitalized 2,119,814 10.0 2,085,446 10.0
Tier I Capital (to Risk
Weighted Assets)
Actual $ 9,184,174 43.3 % $ 8,912,081 42.7 %
For Capital Adequacy
Purposes 847,925 4.0 834,178 4.0
To Be Well Capitalized 1,271,888 6.0 1,251,267 6.0
Tier I Capital (to Average
Assets)
Actual $ 9,184,174 20.5 % $ 8,912,081 19.7 %
For Capital Adequacy
Purposes 1,791,920 4.0 1,806,556 4.0
To Be Well Capitalized 2,239,900 5.0 2,258,195 5.0
</TABLE>
Prior to the enactment of The Small Business Job Protection Act discussed in
Note 12, the Company accumulated approximately $103,800 of retained earnings
at June 30, 1997, which represents allocations of income to bad debt
deductions for tax purposes only. Since this amount represents the
accumulated bad debt reserves prior to 1988, no provision for federal income
tax has been made for such amount. If any portion of this amount is used
other than to absorb loan losses (which is not anticipated), the amount will
be subject to federal income tax at the current corporate rate.
- 27 -
<PAGE>
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, 1997 and 1996 was $5,531 and $5,808 respectively.
Management Stock Bonus Plan (MSBP)
----------------------------------
In 1994, the Board of Directors adopted a MSBP for certain officers,
directors, 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 4,530 shares were vested in both 1997 and 1996. 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 1997
and 1996.
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 $91,915 and $76,012 for the years ended
June 30, 1997 and 1996.
- 28 -
<PAGE>
NOTE 14 - EMPLOYEE BENEFITS (Continued)
Employee Stock Ownership Plan (ESOP) (Continued)
------------------------------------------------
The following table presents the components of the ESOP shares.
<TABLE>
<CAPTION>
1997 1996
-------------- ---------------
<S> <C> <C>
Allocated shares 10,849 6,794
Shares released for allocation 1,699 1,699
Shares distributed (1,295) (754)
Unreleased shares 21,424 25,479
-------------- --------------
Total ESOP shares 32,677 33,218
============== ==============
Fair value of unreleased shares $ 492,753 $ 560,538
============== ==============
</TABLE>
NOTE 15 - STOCK OPTION PLAN
The Company maintains a Stock Option Plan for the directors, officers, and
employees. 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, 1997 and 1996, the
initial stock options granted remain outstanding with none being exercised.
- 29 -
<PAGE>
NOTE 16 - FAIR VALUE DISCLOSURE OF FINANCIAL INSTRUMENTS
The estimated fair values of the Company's financial instruments are as
follows:
<TABLE>
<CAPTION>
1997 1996
------------------------------------ ------------------------------------
Carrying Fair Carrying Fair
Value Value Value Value
------------ -------------- --------------- ---------------
Financial assets:
<S> <C> <C> <C> <C>
Cash and due from banks $ 116,612 $ 116,612 $ 115,026 $ 115,026
Interest-bearing deposits
with other institutions 2,904,240 2,904,240 627,318 627,318
Investment securities 2,824,595 2,811,553 3,694,375 3,648,567
Mortgage-backed securities 6,123,442 6,104,940 7,466,452 7,415,043
Loans receivable 31,947,791 32,912,000 32,126,518 32,682,000
Accrued interest receivable 290,147 290,147 278,533 278,533
Federal Home Loan Bank
stock 361,100 361,100 358,900 358,900
------------ -------------- ------------- --------------
$ 44,567,927 $ 45,500,592 $ 44,667,122 $ 45,125,387
============ ============== ============= ==============
Financial liabilities:
Deposits $ 34,975,539 $ 34,797,000 $ 35,864,622 $ 35,752,000
Advance from Federal Home
Loan Bank 500,000 500,000 - -
Accrued interest payable 56,261 56,261 32,903 32,903
------------ -------------- ------------- --------------
$ 35,531,800 $ 35,353,261 $ 35,897,525 $ 35,784,903
============ ============== ============= ==============
</TABLE>
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.
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, future
estimated 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.
- 30 -
<PAGE>
NOTE 16 - FAIR VALUE DISCLOSURE OF FINANCIAL INSTRUMENTS (Continued)
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, Advance from
-----------------------------------------------------------------------------
Federal Home Loan Bank, 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.
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 contractual amounts of unfunded commitments are presented in
Note 4.
- 31 -
<PAGE>
NOTE 17 - PARENT COMPANY
The Company's balance sheet as of June 30, 1997 and 1996 and related
statements of income and cash flows for the years ended June 30, 1997 and
1996 are as follows:
CONDENSED BALANCE SHEET
<TABLE>
<CAPTION>
June 30,
1997 1996
----------- ------------
<S> <C> <C>
ASSETS
Cash on deposit in subsidiary bank $ 967,196 $ 884,485
Investment in subsidiary 8,039,402 7,649,170
Loan receivable from ESOP 214,241 271,776
Other assets 47,553 124,515
----------- ------------
Total assets $ 9,268,392 $ 8,929,946
=========== ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Other liabilities $ 84,218 $ 17,865
Stockholders' equity 9,184,174 8,912,081
----------- ------------
Total liabilities and stockholders' equity $ 9,268,392 $ 8,929,946
=========== ============
</TABLE>
CONDENSED STATEMENT OF INCOME
<TABLE>
<CAPTION>
Year Ended June 30,
1997 1996
----------- ------------
<S> <C> <C>
Undistributed earnings of subsidiary $ 287,397 $ 441,991
Interest on loan to ESOP 20,182 24,757
----------- ------------
307,579 466,748
Expenses 9,690 14,483
----------- ------------
Income before income taxes 297,889 452,265
Income tax expense (3,133) 6,398
----------- ------------
Net income $ 301,022 $ 445,867
============ ============
</TABLE>
- 32 -
<PAGE>
NOTE 17 - PARENT COMPANY (Continued)
CONDENSED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended June 30,
1997 1996
---------- ----------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income $ 301,022 $ 445,867
Adjustment to reconcile income to net cash used:
Undistributed earnings of subsidiary (287,397) (441,991)
Decrease (increase) in other assets 95,128 (2,310)
----------- ----------
Net cash provided by operating activities 108,753 1,566
----------- ----------
INVESTING ACTIVITIES:
Payments from ESOP 57,535 33,972
----------- ----------
Net cash provided by investing activities 57,535 33,972
----------- ----------
FINANCING ACTIVITIES:
Cash dividends paid (83,577) -
----------- ----------
Net cash used for financing activities (83,577) -
----------- ----------
Increase in cash and cash equivalents 82,711 35,538
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 884,485 848,947
----------- ----------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 967,196 $ 884,485
=========== ==========
</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 & Foradora 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, 1997 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 23, 1997 at 9:30 a.m. at the
Company's main office located at 173 Main Street, Ridgway,
Pennsylvania.
- 34 -
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