-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, PmChDdxOTSDZ9NQWHxE4I38PpXobzCnoiv4Kp3NnD0CcW9DBgDP7MV3bIle0wbqQ wnPO1PdoulN7n/4wB3QfNQ== 0000950109-96-001873.txt : 19960401 0000950109-96-001873.hdr.sgml : 19960401 ACCESSION NUMBER: 0000950109-96-001873 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 19951231 FILED AS OF DATE: 19960329 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: PEOPLES SAVINGS FINANCIAL CORP /CT/ CENTRAL INDEX KEY: 0000846801 STANDARD INDUSTRIAL CLASSIFICATION: SAVINGS INSTITUTION, FEDERALLY CHARTERED [6035] IRS NUMBER: 061259026 STATE OF INCORPORATION: CT FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 033-27219 FILM NUMBER: 96541560 BUSINESS ADDRESS: STREET 1: 123 BROAD ST STREET 2: BOX 2980 CITY: NEW BRITAIN STATE: CT ZIP: 06050 BUSINESS PHONE: 8602247771 10-K 1 FORM 10-K SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 --------------- FORM 10-K ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended Commission File Number December 31, 1995 34-0-18162 People's Savings Financial Corp. (Exact name of registrant as specified in its charter) Connecticut 06-1259026 (State or other jurisdiction of (I.R.S. employer incorporation or organization) identification no.) 123 Broad Street, New Britain, Connecticut 06053 (Address of principal executive offices) (Zip code) Registrant's telephone number, including area code: (203)224-7771 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 $1.00 per share (Title of class) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding twelve 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 ninety days. X Yes No ----- ----- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] Page 1 of 30 pages. The Exhibit Index is found at page 25. The aggregate market value of the voting stock held by non-affiliates of the registrant based on the closing sale price of such stock on February 29, 1996 was $35,339,335. Indicate the number of shares outstanding of each of the registrant's classes of common stock, as of the latest practicable date. Outstanding at Class February 29, 1996 ----- ----------------- Common Stock, par value $1.00 per share 1,924,363 ========= DOCUMENTS INCORPORATED BY REFERENCE Portions of the following documents are incorporated by reference in this Annual Report on Form 10-K as indicated herein. Part of Form 10-K Document into which incorporated -------- ----------------------- 1995 Annual Report to Shareholders I and II Proxy Statement for the 1996 Annual III Meeting of Stockholders (to be filed within 120 days of December 31, 1995) (the "Proxy Statement") 2 TABLE OF CONTENTS Page ---- PART I Item 1 - Business.............................................. 1 Item 2 - Properties............................................ 20 Item 3 - Legal Proceedings..................................... 20 Item 4 - Submission of Matters to a Vote of Security Holders............................................. 21 - Executive Officers of the Registrant.................. 21 PART II Item 5 - Market for Registrant's Common Equity and Related Stockholder Matters......................... 21 Item 6 - Selected Financial Data............................... 22 Item 7 - Management's Discussion and Analysis of Financial Condition and Results of Operations....... 22 Item 8 - Financial Statements and Supplementary Data........... 22 Item 9 - Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.............. 23 PART III Item 10 - Directors and Executive Officers of the Registrant.......................................... 23 Item 11 - Executive Compensation................................ 23 Item 12 - Security Ownership of Certain Beneficial Owner and Management...................................... 23 Item 13 - Certain Relationships and Related Transactions........ 23 PART IV Item 14 - Exhibits, Financial Statement Schedules and Reports on Form 8-K................................. 24 PART I Item 1 - Business The principal executive offices of People's Savings Financial Corp. (the "Company") and of The People's Savings Bank of New Britain (the "Bank") are located at 123 Broad Street, New Britain, Connecticut 06053. The telephone number of the Company and the Bank is (203)224-7771. The Company was organized as a corporation under the laws of the State of Connecticut on February 22, 1989, to operate principally as a bank holding company for the Bank. The Bank's shareholders approved the acquisition by the Company of all of the outstanding common stock of the Bank (the "Bank Common Stock") in exchange for shares of common stock of the Company (the "Company Common Stock"). The Bank is the sole subsidiary of the Company and its principal asset. As of December 31, 1995, the Company had total consolidated assets of $410.2 million, total consolidated deposits of $339.4 million, consolidated net loans of $236.8 million and consolidated shareholders' equity of $44.7 million. As of December 31, 1994, the Bank had total assets of $402.1 million, total deposits of $321.7 million, net loans of $226.3 million and shareholders' equity of $41.2 million. The Bank was originally organized in 1907 as a Connecticut-chartered mutual savings bank, and converted to a Connecticut-chartered capital stock savings bank on August 27, 1986. The Bank currently offers general banking services, including accepting deposits from the general public and lending or investing those funds and also offers trust services. In addition to its main office, the Bank operates seven banking branches located in New Britain, Southington, Newington, Rocky Hill, and Plainville, Connecticut. The Bank will open its eight branch in Meriden, CT in early spring 1996. Principal Market Area The Bank's principal market encompasses the City of New Britain and the Towns of Berlin, Newington, Southington, Rocky Hill, Plainville and Meriden. Although traditionally servicing the banking needs of New Britain's Polish community, the Bank has expanded its customer base over the past several years. The Bank intends to continue to focus its marketing efforts in the next several years on other segments of the New Britain community and upon residents of other towns in its market area. The City of New Britain is evolving from a primarily industrial economy to an industrial-commercial-service economy. The surrounding communities are largely residential but also have significant industrial and commercial activities. The transfer of several major manufacturing facilities to other areas of the country continues to affect adversely the New Britain area labor market. Lending and Investment Activities The Bank provides personalized financial services to its existing customers and intends to achieve growth by increasing its customer base in New Britain and by increasing its services to, and expanding its customer base in, the communities surrounding New Britain. The Bank's principal business consists of attracting deposits from the public and using such deposits, with other funds, to make various types of loans and investments. A substantial portion of the loans and investments originated over the last five years has been on a short-term or variable-rate basis, although origination of more traditional fixed-rate mortgage loans increased during the low interest rate environment in 1993. The Bank has originated more adjustable rate loans with the rise in interest rates during 1994 and 1995. During 1991 through 1995, maturities on both mortgages and investments were extended to take advantage of higher yields on longer maturities. Fixed rate mortgages and loans are originated with 8 to 30 year maturities, while maturities on some investments were extended to 5 to 7 years. The Bank sold the majority of the 30-year fixed rate mortgages which it originated during 1994 and 1995 in order to reduce the Bank's interest rate risk exposure. The Bank's activities in this regard will vary in degree from time to time depending upon investment opportunities, economic and rate conditions, liability strategy and the Bank's efforts to maintain an adequate net interest spread. Since the conversion to a capital stock savings bank, the Bank has regulated its efforts to increase future deposit growth based on its assessment of the profitability of the investment options then available for such funds. The Bank also seeks to expand existing and develop additional fee-based services. Current fee-based product lines include mortgage originations, selling and servicing mortgages (the income from which is not considered a significant part of the Bank's operations), checking accounts, and Savings Bank Life Insurance. During 1993, the Bank also added a Trust Department and an Investment Services Department to increase fee income. In November 1994, the Bank purchased the New Meriden Trust Co., a trust company with $179,000,000 in trust assets from the FDIC. In May, 1995 the Bank opened a trust office in Middletown, CT. Trust assets grew to $310 million at December 31, 1995. Average Balance Sheets; Analysis of Net Interest Income; and Analysis of Changes in Interest Income and Interest Expense The supplementary information required by Item I of "Guide 3. Statistical Disclosure by Bank Holding Companies" relating to average balance sheets; an analysis of net interest income; and an analysis of increases and decreases in interest income and expense in terms of changes in volume and interest rates appears on pages 19 and 20 of the Company's 1995 Annual Report to Shareholders under the caption "Management's Discussion and Analysis of Financial Condition and Results of Operations", and is incorporated by reference herein. Such information should be read in conjunction with the related financial statements and notes thereto incorporated by reference herein under Item 8. 2 Lending Activities The supplementary information required by Item III.A. of "Guide 3. Statistical Disclosure by Bank Holding Companies" relating to the composition of the loan portfolio appears on page 13 of the Company's 1995 Annual Report to Shareholders under the caption "Management's Discussion and Analysis of Financial Condition and Results of Operations", and is incorporated by reference herein. Such information should be read in conjunction with the related financial statements and notes thereto incorporated by reference herein under Item 8. The Bank's net loan portfolio totaled $236.8 million, excluding loans held for sale, as of December 31, 1995, representing 57.7% of total assets. The Bank's principal lending activity consists of the origination of mortgage loans on residential property. The Bank's consumer loans continue to be an important aspect of its lending activities, representing 13.6% of the Bank's total loan portfolio. In order to diversify its loan products the Bank established a commercial loan department to provide traditional commercial loans and Small Business Administration loans. The void resulting from industry consolidation and downsizing has created an opportunity for the Bank to respond to the credit needs of small and medium size business in a timely manner with practical and effective solutions. The Bank hired a team of experienced commercial lending officers to build a conservative, high-quality commercial loan portfolio. As of December 31, 1995, the commercial mortgage portfolio totaled approximately $5.9 million, representing 2.5% of the Bank's total loan portfolio. The lending activities of the Bank are heavily influenced by economic trends affecting the availability of funds and by general interest rate levels. In originating loans, the Bank must compete with other savings banks, savings and loan associations, commercial banks, mortgage companies, insurance companies and other financial intermediaries. Residential Mortgage Loans. The Bank actively solicits residential mortgage loan applications from existing customers, builders and Realtors. Almost all of the Bank's residential mortgage loans are made to borrowers who occupy the properties securing their loans. While the Bank is authorized to make loans secured by real estate located either within or outside the State of Connecticut, its policy is to concentrate on loans secured by properties located within Connecticut, particularly in its primary market area. The Bank originates residential real estate loans through all eight of its offices. The Bank's mortgage originations decreased by 25% from 1994 to 1995, primarily due to a sluggish real estate market and increased competition. As of December 31, 1995 residential mortgage loans were 80.6% of the Bank's total loans. For its own portfolio, the Bank originates adjustable-rate and selected fixed-rate first mortgage loans secured by residential properties. In 1993 and 1992 the Bank sold a significant number of its 30-year, 20-year and 15-year fixed-rate mortgage loans and in 1994 and 1995 sold some of its 30-year and 20-year fixed rate loans generated in those years. Points are charged on all residential mortgage loans unless the borrower elects to pay a higher interest rate to offset points. 3 During 1994 the Bank started offering adjustable-rate loans that are fixed for the first three, five or seven years and then adjust every year after the fixed period. In 1995 the Bank started offering adjustable-rate loans that are fixed for the first ten years and then adjust every year after the fixed period. Adjustable-rate mortgages carry an interest rate cap which limits the Bank's ability to vary the rate at the time of adjustment and over the life of the loan. The annual interest rate cap is 2% and the lifetime cap is 6%, although the Bank in the past had an adjustable rate mortgage loan program with an 8% lifetime cap. Interest rate caps limit both increases and decreases in rate. The Bank bases its adjustable-rate mortgages on indices that are best matched to the repricing of its liabilities. Fixed-rate first mortgage loans constituted approximately 37.3% of net loans as of December 31, 1995, down from 40.8% as of December 31, 1994. The volume of first mortgage loan originations since 1990 is shown in the following table: Year Ended Number of Total Loans December 31, Loans Originated ------------ ----- ---------- 1991 397 44,344,000 1992 795 81,485,000 1993 721 73,072,000 1994 432 47,237,000 1995 305 35,338,000 Despite the benefits of adjustable-rate mortgages to the Bank's asset/liability management program, they do pose potential additional risks, primarily because as interest rates rise, the underlying payments by the borrower rise, thereby increasing the potential for default. At the same time, the marketability of the underlying property may be adversely affected by higher interest rates. It is difficult to quantify the risks resulting from increased costs to the borrower as a result of periodic repricing of adjustable-rate mortgages. The risk associated with holding fixed rate mortgages in the Bank's loan portfolio is that during periods of rising interest rates, their value decreases and the initial positive spread over the Bank's cost of funds may become negative. The benefits of holding fixed rate mortgages include a larger initial positive spread, increased cash flows and the average life of the loans are usually shorter than the stated maturity. In its residential real estate lending, the Bank follows the underwriting requirements of Federal National Mortgage Association and Federal Home Loan Mortgage Corporation. The Bank lends up to 95% of the appraised value of owner-occupied property and up to 70% of the value of non-owner-occupied property. Under a special program for first time home buyers the Bank has lent up to 97% of the appraised value of the owner-occupied property. Residential borrowers are required to obtain private mortgage insurance covering any excess on loans with over 80% loan-to-value ratios. All conventional first mortgages include "due-on-sale" clauses, which give the lender the right to declare a loan immediately due and payable in the event the borrower sells or otherwise disposes of the real property that secures the loan. Loans Held for Sale. At December 31, 1995, loans held for sale totaled $927,000, with a market value of $927,000. 4 Commercial Loans. As of December 31, 1995, commercial and commercial real estate loans totaled $519,000, compared to $329,000 at December 31, 1994. Commercial loans constituted 0.2% of the Bank's total loans as of December 31, 1995. The Bank's commercial mortgage loans are directly originated and consist of loans made on multifamily homes (more than four units) and loans collateralized by non-residential properties. Commercial mortgage loans collateralized by non-residential properties as of December 31, 1995 totaled $5.9 million, compared to $4.2 million as of December 31, 1994. Commercial mortgage loans collateralized by non-residential properties constituted 2.5% of total loans as of December 31, 1995. Loans made on multifamily homes constituted 1.6% of total loans, or $3.9 million, as of December 31, 1995, compared to $3.9 million at December 31, 1994. The Bank lends up to 80% of the appraised value of commercial property. Generally, the size of commercial mortgage loans is less than $300,000, with the largest loan totaling $737,000. Construction Loans. As of December 31, 1995, residential construction loans totaled approximately $3.9 million, or 1.6% of the Bank's total loans, compared to $3.1 million, or 1.4% of total loans as of December 31, 1994. The Bank's limited construction loan investments are generally short-term (1-2 years) and are presently limited to residential properties in Connecticut. Construction loan applications are underwritten as if they were applications for permanent financing, obviating the need for a commitment for permanent financing at the close of the construction period. Consumer Loans. Connecticut savings banks are authorized by statute to invest their assets in secured and unsecured consumer loans without limitation. Connecticut savings banks may also invest their assets, without restriction as to a percentage of assets, in lines of credit, overdraft loans, and credit card outstandings. The Bank's consumer loans include home improvement loans, automobile and boat loans and loans to pay for medical or vacation expenses. In October of 1994 the Bank started offering its own MasterCard and Visa credit cards. The Bank originates both fixed and adjustable rate second mortgage loans for its own portfolio and offers a variable rate pre-approved consumer line of credit product secured by the equity in the consumer's home. The Bank also is authorized to make educational loans under the Connecticut Guaranteed Student Loan Program. The interest on loans in this program is partially subsidized and is fully guaranteed by the federal government. At December 31, 1995, the Bank had sold substantially all of its education loans to the Student Loan Marketing Association (Sallie Mae) prior to conversion of such loans to amortizing loans. Total consumer loans (excluding credit card loans) increased from $29.0 million at December 31, 1994 to $30.8 million at December 31, 1995. Although not classified as collateral loans, approximately 99% of the Bank's installment loans are secured by mortgages on real property or security interests in personal property. Collateral loans, secured by either regular savings accounts, marketable securities, or certificates of deposit, amounted to approximately $1.9 million at December 31, 1995 and December 31, 1994. Credit card loans totaled $1.3 million at December 31, 1995 as compared to $.5 million at December 31, 1994. Interest Rates. Interest rates charged by the Bank on its loans are primarily determined by the cost of funds to the Bank, competitors' rates and 5 comparable investment alternatives available to the Bank. Federal law preempts state usury limits on interest, origination fees and all related charges for federally related mortgage loans secured by first liens on residential real property, and no action has been taken by the Connecticut legislature (as permitted by Federal law) to reimpose such state limits. The supplementary information required by Item III.B. of "Guide 3. Statistical Disclosure by Bank Holding Companies" relating to maturities and sensitivities of loans to changes in interest rates appears on page 16 of the Company's 1995 Annual Report to Shareholders under the caption "Management's Discussion and Analysis of Financial Condition and Results of Operations", and is incorporated by reference herein. Such information should be read in conjunction with the related financial statements and notes thereto incorporated by reference herein under Item 8. Loan Commitments. The Bank's commitments to make mortgage loans on existing residential and commercial real property are made for periods of up to 120 days from the date of commitment. Such commitments are generally made at the market rate of interest prevailing at the time that the commitment is made to the customer. The rate on the commitment is guaranteed for a period of 60 days. Loan Origination Fees and Other Fees. In addition to interest earned on loans, the Bank receives loan origination fees for originating residential and commercial mortgage loans. These fees, commonly called "points", are paid by borrowers from their own funds and are not netted from the face amount of a mortgage loan. Loan origination fees and certain direct loan origination costs are deferred and the net amount amortized as an adjustment of the loan's yield over the life of the loan. Origination fees on loans sold by the Bank are taken into income currently. The Bank also receives other fees and charges relating to existing loans, which include primarily late charges. In connection with its mortgage loan origination activities, the Bank also receives application fees. These fees do not constitute a material source of income to the Bank. Risk Elements in the Loan Portfolio. The Bank's loans are regularly reviewed by management. If contractually due principal and interest payments on any loan are not received 15 days after the due date of the overdue payment, the Bank institutes monitored efforts to restore such loan to current status. Loans are classified as non-accrual and placed on a cash basis for purposes of income recognition when the collectibility of interest and principal becomes uncertain. All loans past due 90 days are treated as non-accrual loans. Generally, payments received are recorded as principal only after the interest is brought current. Continued unsuccessful collection efforts lead to initiation of foreclosure or other legal proceedings. Properties carried as foreclosed real estate have either been acquired through foreclosure or by deed in lieu of foreclosure, and is carried at the lower of (1) carrying value of loan, including costs of foreclosure, or (2) estimated fair value of the real estate acquired less estimated cost to sell. At the time of foreclosure, the excess, if any, of the loan value over the estimated fair value of the property acquired is charged to the allowance for loan losses. Subsequent to the time of foreclosure, reductions in the carrying value of foreclosed properties due to further declines in fair value or losses on their sale are recognized through charges to foreclosed real estate expense. Costs relating to the subsequent development or improvement 6 of the property are capitalized; and holding costs are charged to foreclosed real estate expense in the period in which they are incurred. In May 1993, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards No. 114, "Accounting by Creditors for Impairment of a Loan" ("SFAS 114") which was later amended in October of 1994 by SFAS 118, "Accounting by Creditors for Impairment of a Loan-Income Recognition and Disclosures." SFAS 114 and SFAS 118, which the Bank adopted in 1995, requires creditors to evaluate the collectibility of both contractual interest and contractual principal of all loans when assessing the need for a loss accrual. When a loan is impaired, a creditor shall measure impairment based on the present value of the expected future cash flows discounted at the loan's effective interest rate, or the fair value of the collateral, less estimated selling costs, if the loan is collateral-dependent and foreclosure is probable. The creditor shall recognize an impairment by creating a valuation allowance. The adoption of these pronouncements did not have a material impact on the Bank's financial condition or results of operations. The supplementary information required by Item III.C. of "Guide 3. Statistical Disclosure by Bank Holding Companies" relating to the discussion and statistical disclosure of non-accrual, past due and restructured loans appears on pages 14 and 15 of the Company's 1995 Annual Report to Shareholders under the caption "Management's Discussion and Analysis of Financial Condition and Results of Operations", and is incorporated by reference herein. Such information should be read in conjunction with the related financial statements and notes thereto incorporated by reference herein under Item 8. The Company has not made loans to borrowers outside the United States. At December 31, 1995, there were no concentrations of loans exceeding 10% of total loans. A concentration of loans is defined as an amount loaned to multiple borrowers engaged in similar activities which would cause them to be similarly affected by economic or other conditions. Potential problem loans are not disclosed as non-accrual, 90 days past due, or restructured, but are loans which are monitored because of known information about possible credit problems of borrowers or because they are more than 30 days but less than 90 days past due. Management assesses the potential for loss on these loans when evaluating the adequacy of the allowance for loan losses on a regular basis. As of December 31, 1995, monitored loans not disclosed as non-accrual, 90 days past due, or restructured that were current totaled $168,000 ($57,000 residential real estate loans, and $110,000 commercial real estate loans); monitored loans 30 days delinquent totaled $3,117,000 ($2,673,000 residential real estate loans, $224,000 second mortgage loans, $171,000 commercial real estate loans, and $49,000 installment loans); and monitored loans 60 day's delinquent totaled $791,000 ($404,000 residential real estate loans, $369,000 second mortgage loans, and $18,000 installment loans). 7 Summary of Loan Loss Experience Management's determination as to the adequacy of the allowance for loan losses takes into account a variety of factors, including (a) management's analysis of individual loans and the overall risk characteristics of the loan portfolio, (b) past loan loss experience, (c) the results of the statutorily mandated examination of the loan portfolio by regulatory agencies and independent reviews and evaluations of loans by the Loan Committee of the Bank's Board of Directors, (d) current and expected economic conditions, and (e) other relevant factors. The supplementary information required by Items IV.A. and IV.B. of "Guide 3. Statistical Disclosure by Bank Holding Companies" relating to an analysis of the allowance for loan losses and an allocation for loan losses by loan category appears on pages 14 and 15 of the Company's 1995 Annual Report to Shareholders under the caption "Management's Discussion and Analysis of Financial Condition and Results of Operations", and is incorporated by reference herein. Such information should be read in conjunction with the related financial statements and notes thereto incorporated by reference herein under Item 8. Investment Activities Savings banks chartered in the State of Connecticut have authority to make a wide range of investments deemed to be prudent by their boards of directors. Subject to various restrictions, they may own commercial paper, bonds of government agencies (including states and municipalities), corporate bonds, mutual fund shares, debt and equity obligations issued by creditworthy entities (whether traded on public securities exchanges or placed privately for investment purposes) and interests in real estate located within or outside Connecticut without limitations as to use. It has been the Bank's practice to utilize a variety of investment vehicles to better match deposit maturities. In addition to providing for liquidity requirements, the Bank maintains investment portfolios to employ funds not currently required for its various lending activities. Having a portion of assets in short-term securities has proved beneficial to the Bank during periods of rapidly rising interest rates. During such periods, as short-term securities mature, the proceeds can be reinvested in securities at market rates. In a declining rate environment, loans are likely to have higher yields than debt securities. Management considers the overall rate-sensitivity of the Bank's earning assets when investing in securities. Because of the shortened maturity of its deposit base and increasing sensitivity to the interest rate cycle, the Bank has invested a substantial amount of its cash flow in short-term or interest-sensitive money market assets, including the use of federal funds, debt obligations with maturities no longer than 5 years of companies rated "A" or better, US Treasury obligations, and similar instruments. In addition to providing a match of rates on the interest rate cycle, such a shift of funds into money market instruments provides the Bank with the liquidity it deems necessary for normal operations. A majority of the Bank's investments in 1995, excluding mortgage-backed securities, were purchased with three to five year maturities, although some of the Bank's investments purchased in 1995 were purchased with maturities 8 greater than five years in order to obtain higher yields. Mortgage-based securities were purchased with fifteen and thirty year maturities. Mortgage- backed securities pay monthly principal and interest payments providing for a return of principal earlier than that of a regular bond with the same maturity. The supplementary information required by Item II.A. of "Guide 3. Statistical Disclosure by Bank Holding Companies" relating to the maturity and composition of the Bank's investment portfolio appears on pages 10 through 12 of the Company's 1995 Annual Report to Shareholders under the caption "Management's Discussion and Analysis of Financial Condition and Results of Operations", and is incorporated by reference herein. Such information should be read in conjunction with the related financial statements and notes thereto incorporated by reference herein under Item 8. At December 31, 1995, the Bank had invested approximately $15.6 million, or 3.8% of its assets, in marketable preferred and common stocks and mutual funds. This portion of the Bank's portfolio generates dividend income and also may produce capital gains and losses. Dividends received by the Bank are entitled to the 70% dividends-received deduction on federal income taxes. The Bank sold no equity securities during 1995. The Bank had net gains from the sale of equity securities of $779,000 in 1994. In the event of a decline in the market for equity securities, the value of the Bank's equity portfolio, and hence its capital, may be reduced. During the past five years, the largest amount that the Bank had invested at any one time in the equity securities of a single company was $730,000. The investment in this company was sold in 1994. See "Federal Reserve System Regulation" below for further discussion relating to this investment. In 1991, the Bank revised its investment strategy, hired new outside investment advisors and transferred $4.2 million in equity securities and $835,000 in cash to the trading account in order to create a balanced investment portfolio managed by professional investment advisors with investment objectives to match or outperform several investment indices. In February of 1995 the Bank liquidated it's trading account because of volatility in the investment markets and the uncertainty of earnings generated from this account. Net gains in this account in 1995 amounted to $49,000. The Federal Deposit Insurance Corporation Improvement Act of 1991, which is discussed in detail below under the caption "Regulation and Supervision", generally limits the equity investments of state non-member banks to investments which are permissible for a national bank. An insured state bank is also prohibited from engaging as principal in any type of activity that is not permissible for a national bank, unless the Federal Deposit Insurance Corporation (the "FDIC") determines that the activity would not pose a significant risk to the insurance fund and the bank is in compliance with applicable capital standards. As of December 19, 1992, a subsidiary of a state bank may not engage as principal in an activity which is not permissible for a subsidiary of a national bank, unless the same conditions are met. See "FDIC Regulation" below for further discussion relating to these investment and activities limitations. 9 Deposits and Other Sources of Funds Deposits. Deposits have traditionally been the Bank's major source of funds, and will continue to be a major source of funds in the foreseeable future. However, the Bank may rely on borrowings from the Federal Home Loan Bank in the future (if available) as long as interest rates are favorable. See "Borrowing" below. The Bank also derives funds from loan amortizations, loan prepayments, interest and dividend income and sales of assets deemed appropriate by Bank management. The Bank offers a wide variety of retail deposit accounts designed to attract both short- and long-term funds. Time deposits were the primary source of new funds for the Bank during 1995 due to customer preference, and represent the largest component of deposits (representing 61.6% of total deposits at December 31, 1995). Certificates of deposit currently offered by the Bank have maturities that range from 91 days to five years. The Bank also offers tax-deferred retirement savings programs (IRA accounts and Simplified Employee Pension Plans) and other types of plans for its customers. In determining the rate of interest to pay on deposits, the Bank considers its cash flow requirements, rates paid by competitors and the Bank's income and growth objectives. Management expects competition for deposits in the Bank's market area to continue for the foreseeable future. As of December 31, 1995, the aggregate amount of savings accounts at the Bank was $109.2 million and the interest rate paid on such accounts was 2.0%. The Bank's deposit marketing strategy includes continually monitoring rates to insure competitiveness while providing a high level of service at all of the branch offices. Branch employees participate in sales training programs. The Bank has been able to attract reasonable deposit growth without having to match the most competitive rates being offered in its market area. Substantially all of the Bank's depositors are residents of New Britain and the contiguous communities. The Bank plans to continue its marketing and service efforts in the other communities within its market area. Until recently, such efforts had been hampered by the lack of any Bank branches outside New Britain. The Bank does not solicit deposits outside Connecticut, nor does it solicit deposits through deposit brokers. The supplementary information required by Item V.A. of "Guide 3. Statistical Disclosure by Bank Holding Companies" relating to average amounts of, and average rates paid on, deposits appears on page 15 of the Company's 1995 Annual Report to Shareholders under the caption "Management's Discussion and Analysis of Financial Condition and Results of Operations", and is incorporated by reference herein. Such information should be read in conjunction with the related financial statements and notes thereto incorporated by reference herein under Item 8. The decrease in average savings deposits from 1994 to 1995 was due to customer preference and the rate structure of deposit products. The Bank believes that its high capital ratios and financial strength have attracted new deposit customers. The increase in average time deposits from 1994 to 1995 was the result of customer preference and the rate structure of deposit products. The overall increase in average rates paid on deposits from 1994 to 1995 is consistent with rising interest rates through 1994 and the beginning of 1995, even though rates decreased in the second half of 1995, because of 10 the normal time lag for the Bank's balance sheet to react to market interest rates. The supplementary information required by Item V.D. of "Guide 3. Statistical Disclosure by Bank Holding Companies" relating to the maturity distributions of time certificates of deposit issued in amounts of $100,000 or more appears on page 16 of the Company's 1995 Annual Report to Shareholders under the caption "Management's Discussion and Analysis of Financial Condition and Results of Operations", and is incorporated by reference herein. Such information should be read in conjunction with the related financial statements and notes thereto incorporated by reference herein under Item 8. Borrowing. The Bank has been a member of the Federal Home Loan Bank ("FHLB") of Boston since 1980, and as a member may borrow from the FHLB to secure additional funds. At December 31, 1995, the Bank had outstanding $19.0 million in loans from the FHLB of Boston, a decrease of $14.5 million from $33.5 million outstanding at December 31, 1994. The primary reason for the decrease was maturities of borrowings. Borrowing from the FHLB of Boston may be at interest rates and under terms and conditions which vary from time to time. The Bank also has access to a pre-approved line of credit with the FHLB of Boston of $8,042,000, and has sufficient qualified collateral to borrow up to an additional $222 million. This arrangement allows the Bank to obtain advances from the FHLB of Boston rather than relying on commercial bank lines of credit. The Bank's interest expense on advances was $1,253,000, $1,455,176, and $471,767, for the years ended December 31, 1995, 1994 and 1993, respectively. Competition The Bank's most direct competition for deposits has historically come from other thrift institutions and commercial banks located in its principal market area, many of which have greater resources than the Bank. There are numerous other banks, credit unions and financial institutions located in the City of New Britain and surrounding areas that also compete with the Bank. The Bank faces significant additional competition for investors' funds from short-term money market funds of securities firms and other financial institutions and from other corporate and government securities yielding higher interest rates than those paid by the Bank. This increased competition has, and is expected to continue to have, an effect on the Bank's cost of funds. However, the Bank has not experienced and does not expect to experience any substantial adverse effect on the stability of its deposit base as a result of increased competition. The Bank competes for deposits by offering depositors a high degree of personal service, convenient locations and hours, and other services. The Bank does not rely upon any individual or entity for a material portion of its deposits, nor does it obtain any deposits through deposit brokers. A substantial portion of the Bank's customer and deposit base traditionally has been and continues to be the large Polish community in New Britain. The Bank's competition for real estate loans comes principally from mortgage banking companies, other thrift institutions, commercial banks, insurance companies and other institutional lenders. The Bank competes for loan originations primarily through the interest rates and loan fees it charges and the efficiency and quality of services it provides borrowers, real 11 estate brokers and builders. Factors that affect competition include, among other things, the general availability of lendable funds and credit, general and local economic conditions, current interest rate levels, and volatility in the mortgage markets. Competition is expected to increase as a result of legislation adopted in recent years at the Federal and State of Connecticut levels which effectively provide, subject to minimal limitations, for full interestate banking and branching. As a result of this legislation and increasingly aggressive merger activity in the Company's market area, competition from larger institutions with resources much greater than the Company's, is expected to continue into the future. Certain legislative and regulatory proposals that could affect the Company and the Bank and the banking business in general are pending, or may be introduced, before the United States Congress, the Connecticut General Assembly, and various governmental agencies. These proposals include measures that may further alter the structure, regulation, powers, and competitive relationship of financial institutions and that may subject the Company and the Bank to increased regulation, disclosure, and reporting requirements. In addition, the various banking regulatory agencies frequently propose rules and regulations to implement and enforce existing legislation. It cannot be predicted whether or in what form any legislation or regulations will be enacted or the extent to which the business of the Company and the Bank will be affected thereby. Employees As of December 31, 1995, the Company and the Bank employed 132 employees, 113 of whom are full-time, including 31 officers. Management considers the Bank's relations with its employees to be good. The Bank's employees are not represented by any collective bargaining group. REGULATION AND SUPERVISION Connecticut Regulation As a state-chartered capital stock savings bank, the Bank is subject to applicable provisions of Connecticut law and the regulations adopted thereunder by the Connecticut Banking Commissioner (the "Commissioner"). The Commissioner administers Connecticut banking laws, which contain comprehensive provisions for the regulation of savings banks. The Bank derives its lending and investment powers from these laws, and is subject to periodic examination by and reporting to the Commissioner. Savings banks in Connecticut are empowered by statute to conduct a general banking business and to exercise all incidental powers necessary thereto. Subject to limitations expressed in the statutes, permissible activities include taking savings and time deposits, including NOW checking accounts, paying interest on such deposits and accounts, accepting demand deposits, making loans on residential and other real estate, making consumer 12 and commercial loans, exercising trust powers, investing, with certain limitations, in equity securities and debt obligations of banks and corporations, and issuing credit cards. In addition, savings banks may engage in certain other enumerated activities, including the establishment of an insurance department to sell life insurance and annuities. Connecticut savings banks, in general, have powers identical to those enjoyed by Connecticut commercial banks. The Bank is prohibited by Connecticut banking law from paying dividends, except from its net profits. Net profits are defined as the remainder of all earnings from current operations. The total of all dividends declared by the Bank in any calendar year may not, unless specifically approved by the Commissioner, exceed the total of its net profits of that year combined with its retained net profits of the preceding two years. These provisions limit the amount of dividends payable to stockholders of the Company, since dividends received from the Bank are the primary source of funds for the Company to pay dividends. As of December 31, 1995, approximately $666,000 was available for payment of dividends by the Bank to the Company. Under Connecticut banking law, no person may acquire the beneficial ownership of more than 10% or 25% or more of any class of voting securities of a bank chartered by the State of Connecticut or having its principal office in Connecticut or a bank holding company thereof unless the Commissioner approves such acquisition. Full statewide branching is available to all Connecticut depository institutions. This legislation expands the branching opportunities of the Bank to other towns while allowing virtually unrestricted branching expansion by other institutions into New Britain. Legislation passed in 1990 requires the Commissioner to consider significant additional criteria when reviewing branch applications. While this legislation may result in increased administrative review of bank branching applications, the Company does not anticipate at this time that the criteria to be considered by the Commissioner will adversely impact the Company's future branching activities or that any such review will materially deter financial institutions which desire to open branches in New Britain from doing so. See "Competition" above for a discussion of Connecticut interstate banking statutes. 13 FDIC Regulation The Bank's deposit accounts are insured by the FDIC, up to a maximum of $100,000 per insured depositor. The FDIC issues regulations, conducts periodic examinations, requires the filing of reports and generally supervises the operations of its insured banks. The approval of the FDIC is required prior to any merger or consolidation or the establishment or relocation of an office facility. This supervision and regulation is intended primarily for the protection of depositors. Any insured bank which does not operate in accordance with or conform to FDIC regulations, policies and directives may be sanctioned for noncompliance. Under FDIC regulations, the Bank is a member of the Bank Insurance Fund ("BIF") and is required to pay annual insurance premiums, currently 0.00% of its deposits. Under the Federal Deposit Insurance Corporation Improvement Act of 1991 (the "Improvement Act"), the FDIC has adopted regulations establishing a risk-based assessment system for insurance premiums. Under this system, a depository institution's semi-annual assessment will fall within a range of 0.00% to 0.27% of domestic deposits, based in part on the probability that the deposit insurance fund will incur a loss with respect to that institution. In setting assessments for a bank, the FDIC is required to take into account the revenue needs of the insurance fund and to set the assessments in a manner that will be sufficient to maintain the insurance fund's required reserve ratio. Insured depository institutions are required to file with the FDIC certified statements containing all information required by the FDIC for the determination of the semi-annual assessment. Each institution has been or will be notified of its risk classification based on its capital ratios. The FDIC has the authority to assess penalties against an institution that fails to make an accurate certified statement. These provisions of the Improvement Act have not affected the Bank's assessment. Under this system, the Bank, as a well capitalized institution, is required currently to pay annual insurance premiums of 0.00% of its deposits. The FDIC also requires FDIC-insured, state-chartered banks that are not members of the Federal Reserve System to meet certain minimum capital requirements. The FDIC amended its minimum requirements for capital as a percentage of total assets to define capital in a manner consistent with the risk-based capital categories described below and to require a minimum leverage standard of 3 percent Tier 1 (or core) capital to total assets (as defined in FDIC regulations) for the most highly rated banks that are not anticipating or experiencing any significant growth. All other state banks that are not members of the Federal Reserve System would be required to meet a minimum leverage ratio that is at least 100 to 200 basis points above this minimum -- that is, an absolute minimum leverage ratio of not less than 4 percent for those banks that are not highly rated or that are anticipating or experiencing significant growth. "Tier 1 capital" is generally defined as common stockholders' equity, minority interests in consolidated subsidiaries and non-cumulative perpetual preferred stock. Tier 1 capital generally excludes goodwill and other intangibles and investments in subsidiaries that the FDIC determines should be deducted from capital. As of December 31, 1994, the Bank's leverage ratio was approximately 9.35%, exceeding the FDIC requirements. The FDIC has also adopted supplementary capital regulations based on international risk-based capital standards. The other United States bank regulatory agencies have also adopted similar guidelines based on these international standards. The guidelines, as adopted, supplement the minimum leverage ratios described in the immediately preceding paragraph. The guidelines set forth (i) a definition of "capital" for risk-based capital 14 purposes; (ii) a system for calculating risk-weighted assets by assigning assets and certain off-balance sheet items to broad risk categories; and (iii) a schedule, including transitional arrangements during a phase-in period, for achieving a minimum supervisory ratio of capital to risk-weighted assets. In general, the risk-weighting imposes "zero percent" risk-weighting for cash; balances due from Federal Reserve banks; direct claims on (including securities), and the portions of claims unconditionally guaranteed by, the United States treasury and United States government agencies; and gold bullion; "twenty percent" for cash items in the process of collection; all claims on, and portions of claims guaranteed by, United States depository institutions, United States government agencies and United States government-sponsored agencies; general obligation claims on, and the portions of claims that are guaranteed by, the full faith and credit of states or other political subdivisions of the United States; and the portions of claims that are collateralized by securities issued or guaranteed by the United States treasury, governmental agencies or government-sponsored agencies; "fifty percent" for loans fully secured by first liens on one to four family residential properties written in accordance with prudent underwriting standards and certain privately issued mortgage-backed securities; and "one hundred percent" risk-weighting for assets not included in one of the other categories, including fixed assets, premises, other real estate owned and equity investments. Basically, the higher percentage of riskier assets an institution has, the more capital it must have to satisfy the risk-based guidelines; the lower the risk, the lower the required capital. The guidelines do not address other bank "risk" areas, such as interest rate, liquidity, funding and market risks, the quality and level of earnings, investment or loan portfolio concentrations, the quality of loans and investments, the effectiveness of loan and investment policies and management's ability to monitor and control financial and operating risks. The current minimum risk- based ratio is 8%. The Bank's total risk-based ratio as of December 31, 1995 was 18.38%. The Bank does not believe that the implementation of the risk-based guidelines has had or will have a material adverse effect on its prospective business or require capital-raising efforts in the foreseeable future. In January 1995, the risk-based capital standards were amended to require analysis of the Bank's and Company's concentration of credit risks and certain risks from non-traditional activities in assessing the institution's overall capital adequacy. The Company and Bank believe that these amended regulations will not materially affect the Company's and Bank's capital ratios or adequacy. The Improvement Act increases the supervisory powers of the FDIC and the other federal regulatory agencies with regard to undercapitalized depository institutions, and changes the capital rules applicable to the Company and the Bank. As of December 19, 1992, banking regulators adopted regulations which define five capital categories of institutions: institutions that are well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized and critically undercapitalized. The purpose of these categories is to allow federal regulatory agencies to monitor undercapitalized institutions more closely in order to take appropriate and prompt regulatory action to minimize the potential for significant loss to the deposit insurance fund. Institutions in the first two categories will operate with few restrictions. Institutions in the other three categories may be required to raise additional capital, curtail growth, limit interest rates paid, divest subsidiaries and limit executive compensation. Regulators are also be empowered to remove top management and call for new elections of directors. The Improvement Act also allows for the appointment of a conservator or receiver of an insured depository institution if the institution is 15 undercapitalized and either has no reasonable prospect of becoming adequately capitalized, fails to become adequately capitalized as required, or fails to submit or materially implement a capital plan. In addition, the Improvement Act requires a holding company of a failing institution to guarantee that the institution will comply with a capital restoration plan to the extent of 5% of the institution's total assets or the amount needed to achieve the required minimum capital levels. See pages 17 and 18 of the Company's 1995 Annual Report to Shareholders under the caption "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Capital". The Bank is currently categorized as a "well capitalized" institution under the Improvement Act. After notice and hearing, FDIC insurance of deposits may be terminated by the FDIC upon a finding by the FDIC that the insured institution has engaged in unsafe or unsound practices or is in an unsafe or unsound condition to continue operations, or has violated any applicable law, regulation, rule or order of, or conditions imposed by, the FDIC. Neither the Company nor the Bank is aware of any practice, condition or violation that might lead to termination of its deposit insurance. The Improvement Act also generally limits the activities and equity investments of FDIC-insured, state-chartered banks to those that are permissible for national banks. These restrictions became effective on December 19, 1992, although the restrictions dealing with equity investments became effective upon enactment of the Improvement Act on December 19, 1991. In October 1992, the FDIC issued final regulations to implement the restrictions on equity investments and indicated its intention to propose regulations addressing the activities limitations at a later date. Under the regulations dealing with equity investments, an insured state bank generally may not acquire or retain any equity investment of a type, or in an amount, that is not permissible for a national bank. In addition, an insured state bank (i) that is located in a state which authorized as of September 30, 1991 investment in common or preferred stock listed on a national securities exchange ("listed stock") or shares of a registered investment company ("registered shares"), and (ii) which during the period beginning September 30, 1990 through November 26, 1991 ("measurement period") made or maintained investments in listed stocks and registered shares, may retain whatever shares that were lawfully acquired or held prior to December 19, 1991 and continue to acquire listed stock and registered shares, provided that the bank does not convert its charter to another form or undergo one of four types of specified transactions which generally deal with changes in control. In order to acquire or retain any listed stock or registered shares, however, the bank must file a one-time notice with the FDIC which meets specified requirements and which sets forth the bank's intention to acquire and retain stocks or shares, and the FDIC must determine that acquiring or retaining the listed stocks or registered shares will not pose a significant risk to the deposit insurance fund of which the bank is a member. The Bank filed a notice of intention to invest in listed stocks and registered shares with the FDIC on December 11, 1992. On March 15, 1993, the FDIC granted its approval to the Bank to continue to hold or acquire listed stocks and registered shares, subject to the following conditions: (a) the maximum investment in listed stocks and registered shares may not exceed 100% of the Bank's Tier 1 capital; (b) the Bank must follow reasonable procedures limiting concentrations in listed stocks and registered shares so as to provide for diversification of risk; and (c) the FDIC may alter, suspend or withdraw its approval should any development warrant such action. At December 31, 1995, the Bank held $.2 million of listed stocks and registered shares. 16 The Community Reinvestment Act of 1977 ("CRA") was enacted to encourage every financial institution to help meet the credit needs of its entire community, including low and moderate-income neighborhoods, consistent with the institution's safe and sound operation. Under CRA, state and federal regulators are required, when examining financial institutions and when considering applications for approval of certain merger, acquisition or other transactions, to take into account the institution's record in helping to meet the credit needs of its entire community, including low and moderate-income neighborhoods. In reviewing an institution's CRA record for this purpose, state and federal regulators will consider reports of regulatory examination, comments received from interested members of the public or community groups, and the description of the institution's CRA activities in its publicly available CRA statement, supplemented, as necessary, by the institution. The Federal Reserve Board has the power to disapprove proposed merger or acquisition transactions involving banking organizations that are deemed by the Federal Reserve Board to have unsatisfactory examination records of CRA compliance. Following its most recent CRA examination as of August 24, 1995, the Bank received a "Satisfactory" rating regarding its compliance with CRA. Federal Reserve System Regulation Federal Reserve Board regulations require the Bank to maintain reserves against its transaction accounts and non-personal time deposits. These regulations generally require that reserves of 3% be maintained against transaction accounts (other than non-personal time deposits and Eurocurrency liabilities) totaling $54.0 million or less (except that $4.2 million in the transaction accounts is exempt from the reserve requirement) and a reserve of 10% be maintained against that portion of total transaction accounts in excess of $54.0 million. Effective December 19, 1995, the Federal Reserve Board adjusted these amounts so that reserves of 3% are required to be maintained against transaction accounts totaling $52.0 million or less (except that $4.3 million is exempt) and a reserve of 10% is required to be maintained against that portion of total transaction accounts in excess of $52.0 million. These amounts and percentages are subject to further adjustment by the Federal Reserve Board. The Bank also has authority to borrow from the Federal Reserve Bank of Boston "discount window." The Federal Reserve Board's capital adequacy guidelines for bank holding companies are similar to the FDIC leverage ratio requirements described above. This standard establishes a minimum level of Tier 1 capital to total assets of 3% for all bank holding companies with consolidated assets of $150 million or more. Except with respect to the most highly-rated institutions, this standard requires bank holding companies to maintain an additional cushion of 100 to 200 basis points depending upon the institution's financial condition and risk profile. Additionally, the Federal Reserve Board has adopted risk-based capital guidelines, similar to those adopted by the FDIC as described above, that are applicable to all bank holding companies. Management believes that the Company currently is, and expects to continue to be, in full compliance with applicable capital requirements. The Company is subject to regulation by the Federal Reserve Board as a registered bank holding company. The Bank Holding Company Act of 1956, as amended (the "BHCA"), under which the Company is registered, limits the types of companies that the Company may acquire or organize and the activities in which it or they may engage. In general, the Company and its subsidiaries are prohibited from engaging in or acquiring direct control of any company engaged 17 in non-banking activities unless such activities are so closely related to banking or managing or controlling banks or savings associations as to be a proper incident thereto. Subject to various limitations, the Federal Reserve Board has determined by regulation a number of activities that qualify without the need for specific FRB approval. The Company believes that neither it nor the Bank is engaged in any activities which would be prohibited under the BHCA. Under the BHCA, the Company is required to obtain the prior approval of the Board of Governors of the Federal Reserve System to acquire, with certain exceptions, more than 5% of the outstanding voting stock of any bank, to acquire all or substantially all of the assets of a bank or to merge or consolidate with another bank holding company. Under the BHCA, the Company, the Bank and any other subsidiaries are prohibited from engaging in certain tying arrangements in connection with any extension of credit or provision of any property or services. The Bank is also subject to certain restrictions imposed by the Federal Reserve Act on issuing any extension of credit to the Company or any of its subsidiaries, or making any investments in the stock or other securities thereof, and on the taking of such stock or securities as collateral for loans to any borrower. The Company is required under the BHCA to file an annual report of its operations with the Federal Reserve Board, and it and the Bank and any other subsidiaries are subject to examination by the Federal Reserve Board. In addition, the Company, as a bank holding company, is required to register with, submit reports to and be examined by the Commissioner under the Connecticut Bank Holding Company and Bank Acquisition Act. Effect of Government Policy Banking is a business that has historically depended primarily on interest rate differentials. In general, the difference between the interest rates received by the Bank on loans to its customers and securities held in the Bank's portfolio and the interest rate paid by the Bank on its deposits and its other borrowings will comprise the major portion of the Bank's earnings. The value and yields of its assets and the rates paid on its liabilities are sensitive to changes in prevailing market rates of interest. Thus, the earnings and growth of the Bank will be influenced by general economic conditions, the monetary and fiscal policies of the federal government, and policies of regulatory agencies, particularly the Federal Reserve Board, which implement national monetary policy. The nature and impact of any future changes in monetary policies is beyond the control of the Bank and cannot be predicted. The FDIC is required to conduct annual FDIC examinations of all insured depository institutions unless they are well or adequately capitalized, not less than $250 million in assets, and have an "outstanding" composite condition (or "good" if a bank has less than $100 million in assets); such institutions may be examined every eighteen months. The Improvement Act also requires each insured depository institution to submit a publicly available annual audit report to its federal regulators. The report is required to be prepared in accordance with generally accepted accounting principles and to contain any information that federal regulators may require. The report must contain management's statement of its responsibilities for preparing financial statements, establishing and maintaining internal controls, complying with banking laws and regulations and assessing the institution's results in these 18 areas during the past year. The institution's independent public accountants must also attest to, and report separately on, management's statement. The federal regulatory agencies are also required to adopt regulations requiring each insured depository institution to have an independent audit made of its financial statements. These audited financial statements will be included in the institution's annual reports. The Company and the Bank have always had an annual independent audit. As discussed above, the Improvement Act allows the regulatory agencies to take prompt regulatory action for institutions falling into one of the lower three of five capital categories (see "FDIC Regulation") and restricts an institution's ability to accept brokered deposits unless the institution is well capitalized. Restrictions on loans to insiders are also strengthened under the Improvement Act. Total aggregate loans to all insiders (including directors and executive officers) and their related interests are generally restricted to the amount of a bank's unimpaired capital and surplus. Unimpaired capital and surplus is defined by regulation to mean the sum of (1) the bank's total equity capital as reported on the bank's most recent consolidated report of condition, (2) any subordinated notes and debentures approved as an addition to the bank's capital structure by the appropriate federal banking agency, and (3) any valuation reserves created by charges to the bank's income as reported on its most recent consolidated report of condition. The Federal Reserve Board may, by regulation, make the restrictions on aggregate loans to insiders more stringent. In addition, certain restrictions on types and amounts of loans that can be made to executive officers of financial institutions have been added to federal regulations in addition to the existing restrictions in state law on loans to executive officers. Loans to individual directors, executive officers, principal shareholders and their related interests also may not exceed specified percentages of the Bank's unimpaired capital and surplus (generally, 15% for loans not "fully secured", and 10% additional for loans that are "fully secured", with certain limited exceptions). Because the level of the Bank's loans to insiders is significantly below the amount permitted under the Improvement Act, the Company does not expect these regulations to adversely impact the Company or the Bank. The Improvement Act has also resulted in federal regulatory agencies to adopt regulations setting forth safety and soundness standards relating to internal controls, information systems and internal audit systems; loan documentation; credit underwriting; interest rate exposure; asset growth; and officers and employees compensation, fees and benefits. The Bank and the Company do not expect these regulations will materially adversely affect them. The regulations establish a standard for the ratio of classified assets to total capital and loan loss allowances at no greater than 100%; and an earnings/capital standard which provides that a bank's capital will be sufficient if the bank's last four quarters of earnings history, projected over the next four quarters, would leave the bank with capital meeting the applicable minimum capital requirements. If the FDIC were to find that the Bank violated either of the standards, the Bank would be required to submit a compliance plan, which must be approved by the FDIC, describing the steps it would take to cure the deficiency. However, the Company and the Bank currently comply with and expect to continue to comply with these standards. The present bank regulatory scheme has undergone and continues to undergo significant change, both as it affects the banking industry itself and as it affects competition between banks and non-banking financial 19 institutions. There have been significant regulatory changes in the bank merger and acquisition area, in the products and services banks can offer, and in the non-banking activities in which bank holding companies can engage. Banks are now actively competing with other types of depository institutions and with non-bank financial institutions, such as money market funds, brokerage firms, insurance companies, and other financial services enterprises. It is not possible at this time to assess what impact these changes in the regulatory scheme will ultimately have on the Bank. Item 2 - Properties In addition to the main office of the Company and the Bank, located at 123 Broad Street, New Britain, Connecticut, the Bank has seven banking branches located in New Britain, Southington, Newington, Rocky Hill, and Plainville, Connecticut. The following table sets forth certain information regarding the Bank's banking offices. Owned Lease or Expiration Office Location Leased Date - ------ -------- ------ ---- Main Office 123 Broad Street Owned Not applicable New Britain, CT 06050 Farmington Avenue 553 Farmington Avenue Owned Not applicable New Britain, CT 06050 Columbus Plaza 150 Columbus Boulevard Leased October 1999 New Britain, CT 06050 Lafayette Square 450 Main Street Leased July 2001 New Britain, CT 06050 Southington Office 405 Queen Street Leased August 2002 Southington, CT 06489 Newington Office 36 Fenn Road Leased January 2003 Newington, CT 06111 Rocky Hill Office 2270 Silas Deane Highway Owned Not applicable Rocky Hill, CT 06067 Plainville Offic 275C New Britain Avenue Leased June 2004 Plainville, CT 06062 Total lease payments for all of the Bank's leased offices for 1995 amounted to $442,892. Item 3 - Legal Proceedings There are no pending legal proceedings to which the Company or the Bank is a party, other than ordinary routine litigation in the normal course of business. No such proceeding is material to the Company or the Bank. 20 Item 4 - Submission of Matters to a Vote of Security Holders During the fourth quarter of 1995, no matter was submitted to a vote of shareholders of the Company. Executive Officers of the Registrant The following persons are the executive officers of the Company: Richard S. Mansfield, age 55, has been the President and Chief Executive Officer and a director of the Company since its incorporation in February 1989. Mr. Mansfield has been President and Chief Executive Officer and a director of the Bank since 1986 and was Executive Vice President and Vice President in charge of mortgage lending at the Bank since 1980. Mr. Mansfield's 1986 employment agreement with the Bank provides for a term of three years with automatic one year renewals each January 1st, unless either party gives written notice of his or its intention not to extend the agreement. John G. Medvec, age 49, has been the Executive Vice President and Treasurer of the Company since its incorporation in February 1989. Mr. Medvec has been Executive Vice President and Treasurer of the Bank since 1986 and has served in various executive positions with the Bank since 1971. Mr. Medvec's 1986 employment agreement with the Bank provides for a term of three years with automatic one year renewals each January 1st, unless either party gives written notice of his or its intention not to extend the agreement. There is no relationship by blood, marriage or adoption between any executive officer or director of the Company and any other executive officer or director of the Company. PART II Item 5 - Market for Registrant's Common Equity and Related Stockholder Matters As of February 29, 1996, the Company had 1,924,363 shares of Common Stock issued and outstanding and approximately 1,404 shareholders of record. The Company's stock is traded over-the-counter and is quoted on The NASDAQ National Market under the symbol "PBNB". The market price information regarding the Company Common Stock and the information relating to the payment of dividends required by Item 5 appears on page 46 of the Company's 1995 Annual Report to Shareholders under the captions "Common Stock Information" and "Dividend Policy", and is incorporated herein by reference. Dividends are paid by the Company from its assets, which are mainly provided by dividends from the Bank. However, certain restrictions exist regarding the ability of the Bank to transfer funds to the Company in the form of cash dividends, loans or advances and such restrictions may materially limit the Company's ability to pay dividends to its shareholders. In connection with the Bank's conversion from a mutual savings bank to a capital stock savings bank, 2,444,324 shares of Common Stock were initially offered to depositors of the Bank in a subscription offering, with the remaining shares sold in a public offering. As part of the subscription 21 offering, the Bank established a liquidation account for a ten-year period for the benefit of eligible depositors who maintain their accounts with the Bank after the conversion. In the event of a complete liquidation (and only in such an event), each eligible account holder will be entitled to receive a liquidation distribution from the liquidation account before any liquidation distribution may be made with respect to Bank Common Stock. The Bank may not declare or pay a cash dividend on or repurchase any of its Common Stock if the effect thereof would cause the capital accounts to be reduced below the amount required for the liquidation account, which was approximately $913,000 as of December 31, 1995. Connecticut capital stock savings banks, such as the Bank, may not declare cash dividends in excess of "net profits". "Net profits" are statutorily defined as "the remainder of all earnings from current operations." In addition, the total of all cash dividends declared in any calendar year may not, without the specific approval of the Commissioner, exceed the total of its net profits of that year combined with its retained net profits of the preceding two years. The present intention of the Board of Directors of the Company is to continue the practice of declaring and paying cash dividends on a quarterly basis. However, the payment and size of any future Company dividend will depend on the future earnings of the Company and the Bank. Item 6 - Selected Financial Data The information required by Item 6 appears on page 1 of the Company's 1995 Annual Report to Shareholders under the caption "Selected Financial Highlights", and is incorporated by reference herein. Item 7 - Management's Discussion and Analysis of Financial Condition and Results of Operations The information required by Item 7 appears on pages 9 through 24 of the Company's 1995 Annual Report to Shareholders under the caption "Management's Discussion and Analysis of Financial Condition and Results of Operations", and is incorporated by reference herein. See Note 18 "Recent Accounting Pronouncements" on page 42 of the Company's 1995 Annual Report to Shareholders and the caption notes to the Consolidated Financial Statements contained therein. Item 8 - Financial Statements and Supplementary Data The information required by Item 8 is indexed in Item 14 of this Annual Report on Form 10-K, and portions thereof appearing on pages 23 through 45 of the Company's 1995 Annual Report to Shareholders are incorporated by reference herein. 22 Item 9 - Changes in and Disagreements with Accountants on Accounting and Financial Disclosure Not applicable. PART III Item 10 - Directors and Executive Officers of the Registrant The information required by Item 10 relating to the identification of directors and executive officers of the Company and their business experience appears on pages 3 through 14 of the Company's definitive Proxy Statement dated March 22, 1996 under the caption "Election of a Class of Directors (Proposal 1) - - Information on Nominees and Directors", and in Part I of this Annual Report on Form 10-K under the caption "Executive Officers of the Registrant", and is incorporated by reference herein. Item 11 - Executive Compensation The information required by Item 11 relating to the compensation paid and benefits provided to directors and executive officers of the Company appears on pages 8 through 14 of the Company's definitive Proxy Statement under the captions "Election of a Class of Directors (Proposal 1) - Compensation of Directors" and "Election of a Class of Directors (Proposal 1) - Compensation of Executive Officers", and is incorporated by reference herein. Item 12 - Security Ownership of Certain Beneficial Owners and Management The information required by Item 12 relating to the ownership of the Company's securities by certain beneficial owners and management appears on pages 2 through 7 of the Company's definitive Proxy Statement under the captions "Principal Stockholders", "Election of a Class of Directors (Proposal 1) - Information on Nominees and Directors" and "Election of a Class of Directors (Proposal 1) - Ownership of Shares by Directors and Officers", and is incorporated by reference herein. Item 13 - Certain Relationships and Related Transactions The information required by Item 13 relating to transactions between the Company and management, directors and certain beneficial owners of the Company's securities appears on pages 13 through 15 of the Company's definitive Proxy Statement under the caption "Transactions with Management and Others", and is incorporated by reference herein. 23 PART IV Item 14 - Exhibits, Financial Statement Schedules and Reports on Form 8-K (a) The following documents, filed as part of this report, are included herein or are incorporated by reference from the indicated pages of the Company's 1995 Annual Report to Shareholders: 1. Financial Statements: Page(s) in Annual Report ------------- Report of Independent Auditors 23 Consolidated Balance Sheets 24 Consolidated Statements of Income 25 Consolidated Statements of Stockholders' Equity 26 Consolidated Statements of Cash Flows 27 Notes to Consolidated Financial Statements 28-45 2. Financial Statement Schedules: All Schedules to the Consolidated Financial Statements required by Article 9 of Regulation S-X are not required under the related instructions or are inapplicable and therefore have been omitted. 24 3. Exhibits: Exhibit No. Description ----------- ----------- 3.1 Certificate of Incorporation of the Company (incorporated by reference to Exhibit 3.1 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1991). 3.2 Bylaws of the Company (incorporated by reference to Exhibit 3.2 to the Company's Registration Statement on Form S-4 (No. 33-27219) filed on February 23, 1989). 4 Instruments Defining the Rights of Security Holders are filed as Exhibits 3.1 and 3.2. *10.1 Employment Agreement dated August 1, 1986 between the Bank and Richard S. Mansfield (incorporated by reference to Exhibit 10.1 of the Company's Registration Statement on Form S-4 (No. 33-27219) filed on February 23, 1989). *10.2 Employment Agreement dated August 1, 1986 between the Bank and John G. Medvec (incorporated by reference to Exhibit 10.2 of the Company's Registration Statement on Form S-4 (No. 33-27219) filed on February 23, 1989). *10.3 Employment Agreement dated August 1, 1986 between the Bank and Florence Zaniewski (incorporated by reference to Exhibit 10.3 of the Company's Registration Statement on Form S-4 (No. 33-27219) filed on February 23, 1989). *10.4 1986 Stock Option and Incentive Plan (incorporated by reference to Exhibit 10.4 to the Company's Registration Statement on Form S-4 (No. 33-27219) filed on February 23, 1989). *10.5 1986 Stock Option Plan for Outside Directors (incorporated by reference to Exhibit 10.5 to the Company's Registration Statement on Form S-4 (No. 33-27219) filed on February 23, 1989). *10.6 Pension Plan of The People's Savings Bank of New Britain, as amended (incorporated by reference to Exhibit 10.6 to the Company's Registration Statement on Form S-4 (No. 33-27219) filed on February 23, 1989). *10.7 Change of Control Agreement, dated as of September 17, 1991, between the Bank and Florence K. Gagnon (incorporated by reference to Exhibit 10.7 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1991). *10.8 Change of Control Agreement, dated as of September 18, 1991, between the Bank and Teresa Sasinski (incorporated by reference to Exhibit 10.8 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1991). *10.9 Change of Control Agreement, dated as of September 23, 1991, between the Bank and Edward E. Bohnwagner, III (incorporated by reference to Exhibit 10.9 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1991). *10.10 Directors' Voluntary Deferral Agreement, dated January 1, 1985, between the Bank and Walter D. Blogoslawski, as amended January 1, 1987 (incorporated by reference to 25 Exhibit 10.10 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1991). *10.11 Directors' Voluntary Deferral Agreement, dated January 1, 1985, between the Bank and Matthew P. Duksa, as amended January 1, 1987 and January 20, 1987 (incorporated by reference to Exhibit 10.11 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1991). *10.12 Directors' Voluntary Deferral Agreement, dated January 1, 1985, between the Bank and Stanley P. Filewicz, as amended January 20, 1987 and February 10, 1989 (incorporated by reference to Exhibit 10.12 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1991). *10.13 Directors' Voluntary Deferral Agreement, dated January 1, 1985, between the Bank and Robert A. Gryboski, M.D., as amended January 1, 1987, January 20, 1987 and February 10, 1989 (incorporated by reference to Exhibit 10.13 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1991). *10.14 Directors' Voluntary Deferral Agreement, dated January 1, 1985, between the Bank and Edward Januszewski, as amended January 1, 1987 and January 20, 1987 (incorporated by reference to Exhibit 10.14 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1991). *10.15 Directors' Voluntary Deferral Agreement, dated January 1, 1985, between the Bank and Roland L. LeClerc, as amended January 1, 1987, January 20, 1987 and February 10, 1989 (incorporated by reference to Exhibit 10.15 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1991). *10.16 Directors' Voluntary Deferral Agreement, dated January 1, 1985, between the Bank and Walter J. Liss, as amended January 1, 1987 and February 10, 1989 (incorporated by reference to Exhibit 10.16 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1991). *10.17 Directors' Voluntary Deferral Agreement, dated January 1, 1985, between the Bank and Henry R. Poplaski, as amended January 1, 1987, January 20, 1987 and February 10, 1989 (incorporated by reference to Exhibit 10.17 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1991). *10.18 Directors' Voluntary Deferral Agreement, dated January 20, 1987, between the Bank and Anthony R. Puskarz, Jr. (incorporated by reference to Exhibit 10.18 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1991) *10.19 Directors' Voluntary Deferral Agreement, dated January 1, 1985, between the Bank and Eugene M. Rosol, as amended January 1, 1987 and January 20, 1987 (incorporated by reference to Exhibit 10.19 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1991). *10.20 Directors' Voluntary Deferral Agreement, dated January 1, 1985, between the Bank and Chester S. Sledzik, as amended January 1, 1987, January 20, 1987 and February 10, 1989 (incorporated by reference to Exhibit 10.20 to the 26 Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1991). *10.21 Directors' Voluntary Deferral Agreement, dated January 1, 1985, between the Bank and Robert A. Story, as amended January 1, 1987, January 20, 1987 and February 10, 1989 (incorporated by reference to Exhibit 10.21 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1991). *10.22 Directors' Voluntary Deferral Agreement, dated January 1, 1985, between the Bank and Joseph A. Welna, as amended January 1, 1987, January 20, 1987 and February 10, 1989 (incorporated by reference to Exhibit 10.22 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1991). *10.23 People's Savings Financial Corp. Dividend Reinvestment Plan and Stock Purchase Plan (incorporated by reference to Exhibit 10.23 to the Company's Annual Report on Form 10-K for this fiscal year ended December 31, 1992). *10.24 People's Savings Financial Corp. Savings and Investment Plan (incorporated by reference to Exhibit 10.24 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1993). *10.25 Change of Control Agreement, dated as of January 17, 1995, between the Bank and Daniel Hurley (incorporated by reference to Exhibit 10.25 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1994). *10.26 Change of Control Agreement, dated as of January 17, 1995, between the Bank and Earl Young (incorporated by reference to Exhibit 10.26 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1994). *10.27 The People's Savings Financial Corp. 1995 Stock Option and Incentive Plan for Outside Directors (incorporated by reference to Exhibit A to the Company's Proxy Statement for the 1995 Annual meeting of Stockholders). *10.28 The People's Savings Financial Corp. 1995 Stock Option and Incentive Plan (for Employees) (incorporated by reference to Exhibit B to the Company's Proxy Statement for the 1995 Annual meeting of Stockholders). 11 Statement Concerning Computation of Per Share Earnings 13 1995 Annual Report to Shareholders 21 Subsidiaries of the Registrant 24 Consent of Independent Accountants 25 Power of Attorney - ------ * Management contracts or compensatory plans, contracts or arrangements. 27 (b) Reports on Form 8-K. No report on Form 8-K was filed during the fourth quarter of 1995. (c) The exhibits required by Item 601 of Regulation S-K are filed as a separate part of this report. 28 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. PEOPLE'S SAVINGS FINANCIAL CORP. By /s/ RICHARD S. MANSFIELD ------------------------------------- Richard S. Mansfield President and Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. Signature Title Date --------- ----- ---- /s/ RICHARD S. MANSFIELD President and Chief March 19, 1996 - -------------------------- Executive Officer Richard S. Mansfield (Principal Executive Officer) /s/ JOHN G. MEDVEC Executive Vice March 19, 1996 - -------------------------- President and John G. Medvec Treasurer (Principal Financial Officer and Principal Accounting Officer) * Director March 19, 1996 - -------------------------- Joseph A. Welna * Director March 19, 1996 - -------------------------- Robert A. Gryboski * Director March 19, 1996 - -------------------------- Walter J. Liss * Director March 19, 1996 - -------------------------- Robert A. Story * Director March 19, 1996 - -------------------------- Walter D. Blogoslawski * Director March 19, 1996 - -------------------------- Stanley P. Filewicz 29 * Director March 19, 1996 - -------------------------- Roland L. LeClerc * Director March 19, 1996 - -------------------------- Chester S. Sledzik * Director March 19, 1996 - -------------------------- Henry Poplaski * Director March 19, 1996 - -------------------------- A. Richard Puskarz, Jr. By /c/ JOHN G. MEDVEC - -------------------------- John G. Medvec Attorney-in-Fact 30 EXHIBIT INDEX Exhibit Page Number Description Number ------ ----------- ------ 3.1 Certificate of Incorporation of the Company (incorporated by reference to Exhibit 3.1 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1991). 3.2 Bylaws of the Company (incorporated by reference to Exhibit 3.2 to the Company's Registration Statement on Form S-4 (No. 33-27219) filed on February 23, 1989). 4 Instruments Defining the Rights of Security Holders are filed as Exhibits 3.1 and 3.2. *10.1 Employment Agreement dated August 1, 1986 between the Bank and Richard S. Mansfield (incorporated by reference to Exhibit 10.1 of the Company's Registration Statement on Form S-4 (No. 33-27219) filed on February 23, 1989). *10.2 Employment Agreement dated August 1, 1986 between the Bank and John G. Medvec (incorporated by reference to Exhibit 10.2 of the Company's Registration Statement on Form S-4 (No. 33-27219) filed on February 23, 1989). *10.3 Employment Agreement dated August 1, 1986 between the Bank and Florence Zaniewski (incorporated by reference to Exhibit 10.3 of the Company's Registration Statement on Form S-4 (No. 33-27219) filed on February 23, 1989). *10.4 1986 Stock Option and Incentive Plan (incorporated by reference to Exhibit 10.4 to the Company's Registration Statement on Form S-4 (No. 33-27219) filed on February 23, 1989). *10.5 1986 Stock Option Plan for Outside Directors (incorporated by reference to Exhibit 10.5 to the Company's Registration Statement on Form S-4 (No. 33-27219) filed on February 23, 1989). *10.6 Pension Plan of The People's Savings Bank of New Britain, as amended (incorporated by reference to Exhibit 10.6 to the Company's Registration Statement on Form S-4 (No. 33-27219) filed on February 23, 1989). *10.7 Change of Control Agreement, dated as of September 17, 1991, between the Bank and Florence K. Gagnon (incorporated by reference to Exhibit 10.7 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1991). *10.8 Change of Control Agreement, dated as of September 18, 1991, between the Bank and Teresa Sasinski (incorporated by reference to Exhibit 10.8 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1991). *10.9 Change of Control Agreement, dated as of September 23, 1991, between the Bank and Edward E. Bohnwagner, III (incorporated by reference to Exhibit 10.9 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1991). *10.10 Directors' Voluntary Deferral Agreement, dated January 1, 1985, between the Bank and Walter D. Blogoslawski, as amended January 1, 1987 (incorporated by reference to Exhibit 10.10 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1991). *10.11 Directors' Voluntary Deferral Agreement, dated January 1, 1985, between the Bank and Matthew P. Duksa, as amended January 1, 1987 and January 20, 1987 (incorporated by reference to Exhibit 10.11 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1991). *10.12 Directors' Voluntary Deferral Agreement, dated January 1, 1985, between the Bank and Stanley P. Filewicz, as amended January 20, 1987 and February 10, 1989 (incorporated by reference to Exhibit 10.12 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1991). *10.13 Directors' Voluntary Deferral Agreement, dated January 1, 1985, between the Bank and Robert A. Gryboski, M.D., as amended January 1, 1987, January 20, 1987 and February 10, 1989 (incorporated by reference to Exhibit 10.13 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1991). *10.14 Directors' Voluntary Deferral Agreement, dated January 1, 1985, between the Bank and Edward Januszewski, as amended January 1, 1987 and January 20, 1987 (incorporated by reference to Exhibit 10.14 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1991). *10.15 Directors' Voluntary Deferral Agreement, dated January 1, 1985, between the Bank and Roland L. LeClerc, as amended January 1, 1987, January 20, 1987 and February 10, 1989 (incorporated by reference to Exhibit 10.15 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1991). *10.16 Directors' Voluntary Deferral Agreement, dated January 1, 1985, between the Bank and Walter J. Liss, as amended January 1, 1987 and February 10, 1989 (incorporated by reference to Exhibit 10.16 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1991). *10.17 Directors' Voluntary Deferral Agreement, dated January 1, 1985, between the Bank and Henry R. Poplaski, as amended January 1, 1987, January 20, 1987 and February 10, 1989 (incorporated by reference to Exhibit 10.17 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1991). *10.18 Directors' Voluntary Deferral Agreement, dated January 20, 1987, between the Bank and Anthony R. Puskarz, Jr. (incorporated by reference to Exhibit 10.18 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1991). *10.19 Directors' Voluntary Deferral Agreement, dated January 1, 1985, between the Bank and Eugene M. Rosol, as amended January 1, 1987 and January 20, 1987 (incorporated by reference to Exhibit 10.19 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1991). 2 *10.20 Directors' Voluntary Deferral Agreement, dated January 1, 1985, between the Bank and Chester S. Sledzik, as amended January 1, 1987, January 20, 1987 and February 10, 1989 (incorporated by reference to Exhibit 10.20 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1991). *10.21 Directors' Voluntary Deferral Agreement, dated January 1, 1985, between the Bank and Robert A. Story, as amended January 1, 1987, January 20, 1987 and February 10, 1989 (incorporated by reference to Exhibit 10.21 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1991). *10.22 Directors' Voluntary Deferral Agreement, dated January 1, 1985, between the Bank and Joseph A. Welna, as amended January 1, 1987, January 20, 1987 and February 10, 1989 (incorporated by reference to Exhibit 10.22 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1991). *10.23 People's Savings Financial Corp. Dividend Reinvestment Plan and Stock Purchase Plan (incorporated by reference to Exhibit 10.23 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1992). *10.24 People's Savings Financial Corp. Savings and Investment Plan (incorporated by reference to Exhibit 10.24 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1993). *10.25 Change of Control Agreement, dated as of January 17, 1995, between the Bank and Daniel Hurley (incorporated by reference to Exhibit 10.25 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1994). *10.26 Change of Control Agreement, dated as of January 17, 1995, between the Bank and Earl Young (incorporated by reference to Exhibit 10.26 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1994). *10.27 The People's Savings Financial Corp. 1995 Stock Option and Incentive Plan for Outside Directors. Incentive Plan for Outside Directors (incorporated by reference to Exhibit A to the Company's Proxy Statement for the 1995 Annual meeting of Stockholders). *10.28 The People's Savings Financial Corp. 1995 Stock Option and Incentive Plan for Outside Directors. Incentive Plan (for Employees), (incorporated by reference to Exhibit B to the Company's Proxy Statement for the 1995 Annual meeting of Stockholders). 11 Statement Concerning Computation of Per Share Earnings 13 1995 Annual Report to Shareholders 21 Subsidiaries of the Registrant 24 Consent of Independent Auditors 25 Power of Attorney - ------ * Management contracts or compensatory plans, contracts or arrangements. 3 EX-11 2 COMPUTATION OF NET INCOME PER COMMON SHARE EXHIBIT 11 People's Savings Financial Corp. COMPUTATION OF NET INCOME PER COMMON SHARE (in thousands except per share amounts) Year ended December 31, ----------------------- 1995 1994 1993 ---- ---- ---- Net income - primary and fully diluted $3,389 $3,565 $4,752 - -------------------------------------- Weighted Average Common Stock and Common - ---------------------------------------- Equivalent Stock ---------------- Weighted average common stock outstanding 1,954 1,996 2,022 Assumed conversion (as of the beginning of each period or upon issuance during a period) of stock options outstanding at the end of each period 33 26 27 ------ ------ ------ Weighted average common stock outstanding - primary 1,987 2,022 2,049 ====== ====== ====== Weighted average common stock outstanding 1,954 1,996 2,022 Assumed conversion (as of the beginning of each period or upon issuance during a period) of stock options outstanding at the end of each period 33 25 28 ------ ------ ------ Weighted average common stock outstanding - fully diluted 1,987 2,021 2,050 ====== ====== ====== Earnings Per Common and Common Equivalent Share - ----------------------------------------------- Primary $1.71 $1.76 $2.32 ====== ====== ====== Fully diluted $1.71 $1.76 $2.32 ====== ====== ====== EX-13 3 1995 ANNUAL REPORT Exhibit 13 1995 ANNUAL REPORT People's Savings Financial Corporation -------------------- Banking... Business to Business Person to Person. TABLE OF CONTENTS - ----------------- Selected Financial Highlights .......................... 1 To our Shareholders .................................... 2 Stepping into a New Dimension .......................... 4 Management's Discussion and Analysis of Financial Condition and Results of Operation ........... 9 Report of Independent Accountants ...................... 23 Consolidated Financial Statements ...................... 24 Notes to Consolidated Financial Statements ............. 28 Stock Information ...................................... 46 Directors and Officers ................................. 48 Bank and Trust Locations ............................... 49 SELECTED FINANCIAL HIGHLIGHTS - ----------------------------- [GRAPH APPEARS HERE]
1991 $ 2,273 1992 $ 3,296 1993 $ 4,752 1994 $ 3,565 1995 $ 3,389 1991 $ 1.12 1992 $ 1.60 1993 $ 2.18 1994 $ 1.76 1995 $ 1.71
December 31, (dollars in thousands, except per share data) 1995 1994 1993 1992 1991 - ------------------------------------------------------------------------------------------------- Financial Data At Year End: Total Assets $410,164 $402,089 $354,927 $335,396 $297,095 Loans: Mortgages Fixed-Rate, net 88,208 92,334 93,511 97,053 79,283 Mortgages Adjustable-Rate, net 116,265 104,644 93,479 92,404 106,869 Consumer and Other Loans, net 32,319 29,346 24,792 29,235 35,095 - -------------------------------------------------------------------------------------------------- Total Loans, net 236,792 226,324 211,782 218,692 221,247 Investments 153,579 151,629 126,862 88,749 61,903 Deposits 339,365 321,702 299,467 283,495 250,768 Advances from FHLB 18,950 33,450 7,910 7,000 4,000 Stockholders' Equity 44,713 41,231 42,438 40,275 37,979 - -------------------------------------------------------------------------------------------------- Operating Data For the Year Ended: Interest Income, including loan fees $ 27,522 $ 25,061 $ 24,146 $ 25,366 $ 25,329 Interest Expense 14,483 11,270 10,666 12,552 15,816 - -------------------------------------------------------------------------------------------------- Net Interest Income 13,039 13,791 13,480 12,814 9,513 - -------------------------------------------------------------------------------------------------- Provision for Loan Losses 101 129 1,010 1,255 1,282 Other Income 1,235 702 1,288 878 869 Gains (Losses) on Sale of Securities (170) 128 110 (7) (506) Trust Fees 1,129 191 1 Trading Account Gains (Losses) 49 (284) 579 63 1,179 Other Expenses 9,608 8,393 6,890 6,274 5,605 - -------------------------------------------------------------------------------------------------- Income before Income Taxes 5,573 6,006 7,558 6,219 4,168 Income Taxes 2,184 2,441 3,090 2,923 1,895 - -------------------------------------------------------------------------------------------------- Income before the Cumulative Effect of Changes in Accounting Principles: $ 3,389 $ 3,565 $ 4,468 $ 3,296 $ 2,273 Cumulative Effect of Changes in Accounting Principles: Post-Retirement Benefits (154) Income Taxes 438 - -------------------------------------------------------------------------------------------------- Net Income $ 3,389 $ 3,565 $ 4,752 $ 3,296 $ 2,273 - -------------------------------------------------------------------------------------------------- Per Share Data: Net Income Per Share $1.71 $1.76 $2.18 $1.60 $1.12 After Cumulative Effect of Changes in Accounting Principles: 1.71 1.76 2.32 1.60 1.12 Book Value Per Share 22.90 20.73 21.29 19.48 18.68 Cash Dividend Declared 0.88 0.88 0.84 0.74 0.68 - -------------------------------------------------------------------------------------------------- Selected Statistical Data:* Return on Average Assets 0.84% 0.92% 1.38% 1.04% 0.80% Return on Average Equity 7.84 8.38 11.48 8.42 6.05 Leverage Capital Ratio 10.33 10.27 11.78 12.01 12.78 Dividend Payout Ratio 50.69 49.28 35.61 45.95 60.82 Net Interest Rate Spread (1) 3.02 3.43 3.73 3.74 2.76 Net Interest Rate Margin (2) 3.41 3.74 4.09 4.22 3.50 - --------------------------------------------------------------------------------------------------
* 1993 information is after the cumulative effect of changes in accounting principles. (1) Return on average earning assets less cost of interest-bearing liabilities, (tax adjusted yield). (2) Net interest income divided by average earning assets, (tax adjusted yield). 1 TO OUR SHAREHOLDERS: - -------------------------------------------------------------------------------- [PHOTO] "The Bank can respond to the need for small or medium size business loans in a timely manner with practical and effective solutions." RICHARD S. MANSFIELD People's Savings Financial Corporation (the "Corporation") and its wholly owned subsidiary, People's Savings Bank of New Britain (the "Bank" or "PSB"), performed strongly on many important fronts during 1995: o Trust assets have increased as a result of the expertise, broad capabilities and consistent personal service provided by our staff. o Recently introduced consumer banking products and services were well received by our community. o Our entrance into commercial lending to serve small business needs in our community. PSB continues to lead the way in our community by offering the banking services that people and small businesses need. We believe that our mission of providing the community with high quality banking services in a personalized manner will continue to provide PSB with positive financial results. Net income for the year ended December 31, 1995 was $3.4 million, or $1.71 per share, representing a 4.9% decrease from 1994 net income of $3.6 million or $1.76 per share. Much of this decline is attributable to an increase in expenses resulting from the expansion of our branch system and trust operations, and establishment of a commercial lending department. Net interest income decreased by $752,000 or 5.5% in 1995 due to a decrease in the net interest spread, attributable in part to a higher cost of funds. Our investment in New Meriden Trust ("NMT") also contributed to the decrease in net interest income due to the fact that interest earning assets were used to purchase NMT, while income earned from trust operations is recorded as other income rather than interest income. In 1995, trust income increased by $938,000 to $1,129,000 from $191,000 in 1994. Trust operations were started in 1993 and expanded by PSB in 1994 and 1995 to generate a steady stream of fee income, and to reduce the Bank's reliance on net interest income which can be volatile with changes in interest rates. Asset quality remains very high, with non-performing loans delinquent 90 days or more totalling $721,000, or .30% of total loans as of December 31, 1995, as compared to $1.3 million, or .57% of total loans as of December 31, 1994. Non-performing assets, which comprise loans 90 days or more delinquent and other real estate owned, declined from a December 31, 1994 total of $1.9 million, or .48% of total assets, to a December 31, 1995 total of $899,000, or .22% of total assets. In addition, the Bank's allowance for loan losses provided 219% coverage of non-performing loans at December 31, 1995. Demand for consumer loans and mortgages was down from 1994. Loan production for the first half of 1995 was stagnant but increased during the second half of 1995 which accounted for over 66% of 2 loan production for the year. New mortgages and loans added during 1995 totaled $51 million, down from the $64 million added to the loan portfolio in 1994. This is due in part to the sluggish economy in Connecticut and higher interest rates during the first half of 1995. In order to diversify its loan products PSB established a commercial loan department to provide traditional commercial loans and Small Business Administration loans. The void resulting from industry consolidation and downsizing has created an opportunity for PSB to respond to the credit needs of small and medium size businesses in a timely manner with practical and effective solutions. Accordingly, PSB hired a team of experienced commercial lending officers to build a conservative, high-quality commercial loan portfolio. We have targeted a $10 million goal for commercial loan production during 1996. As we move confidently into 1996, we look forward to another year of expansion with our ninth branch opening in the early spring of 1996 in Meriden, Connecticut, where we already have a presence due to our purchase of New Meriden Trust. Our growth is consistent with our long term goals of geographic expansion, product expansion in the trust area and now into commercial lending. We continue to lead the way in our community and now can offer services business to business and person to person. We are grateful to our employees, officers, and directors who truly have a sense of community and to our shareholders whose investment in the Corporation we deeply appreciate. Sincerely, /s/ Richard S. Mansfield Richard S. Mansfield President and Chief Executive Officer [GRAPH APPEARS HERE] COMPARISON OF FIVE YEAR CUMULATIVE RETURN AMONG __________, __________ INDEX AND __________ INDEX
1991 $ .68 1992 $ .74 1993 $ .84 1994 $ .88 1995 $ .88 1991 $ 18.68 1992 $ 19.48 1993 $ 21.29 1994 $ 20.73 1995 $ 22.90
3 STEPPING INTO A NEW DIMENSION - ----------------------------- "It was an absolute pleasure to work with a bank that was true to its word, professionally efficient and took pride in customer satisfaction." GARY W. VOLZ, D.M.D. Expenditures key to the Bank's strategic plans for geographic and business-line expansion are investments in the Bank's future. The Bank has evolved into a multi-dimensional organization offering diversified services in strategic locations to better compete for the future banking services customers demand. WE'RE HERE, THERE, AND EVERYWHERE The Bank's expanding horizons are both a benefit to customers and an opportunity for prospects. The Bank has eight branch offices offering full service banking, including four in New Britain, and one each in Southington, Rocky Hill, Newington, and Plainville. Together, they combine to serve central Connecticut successfully while effectively extending our name and reputation to a bountiful source of new customers. A ninth office will open by the early spring of 1996 at 834 Broad Street, Meriden, Connecticut. This office will give us the opportunity to market banking services to our trust customers in Meriden, as well as the general population. BUSINESS LENDING IN OUR COMMUNITIES For the past year, the Bank has been developing a commercial lending department. The Bank maintains a tremendous opportunity to cross-sell commercial loan and deposit services to existing accounts and foster new solid and profitable relationships. We view ourselves as a Bank ideally suited to meet the banking needs of many small and medium sized businesses in our market area. As consolidation within the banking industry continues, there is a growing gap in commercial services designed and priced for smaller businesses. Feeling left out, many businesses are turning to local community banks to fill the void. [PHOTO] TERESA SASINSKI WITH LAURIE MORNHINEWAY, BRANCH MANAGER OF THE NEW BRANCH OFFICE IN MERIDEN. 4 [PHOTO] "After 18 years of excellent service, products and competitive rates for our families as well as our business accounts, we always encourage our homebuyers to meet with People's Savings Bank." LUIGI ROSSITTO, PASQUALE CALAFIORE, COPPERMINE ESTATES, INC. WE'VE GOT TO BE READY Identifying opportunity is one thing. Being prepared to meet the challenge is another. The Bank is positioned to meet our target market in a responsible and profitable manner. We've hired experienced commercial lenders who understand the business needs of our constituents and can offer viable solutions that work for the customer and the Bank. We have created an infrastructure that can intelligently extend credit, properly service accounts and provide a solid return to the Bank that will enhance shareholder value. We have also aligned ourselves with credit enhancement programs that further protect the Bank's interests. Staff The Bank has assembled a team of lenders that really understand credit, cash-flow, risk management and small businesses. Our people are experienced and know how to successfully manage a portfolio of business loans. The staff shares a vision of what it takes to be a responsive and responsible community bank. The team's collective experience and professional contacts within the market have already brought profitable new relationships to the Bank. We are greatly encouraged by the warm reception from businesses, the communities we serve and all of the professionals who continually refer business to us. Infrastructure Business lending is not a one time event. It is a dynamic process that really only begins when the loan is closed. We are keenly aware of the need to intelligently manage our commercial loan portfolio on an ongoing basis. We have created loan approval, loan servicing, account management and information reporting structures that protect the portfolio, strengthen the Bank and still provide the best customer service. Together with highly capable personnel, we believe our efforts will yield consistently positive results for the Bank and its shareholders. Credit Enhancement Programs The Bank is an approved/participating lender with the programs described below: Small Business Administration Loans This program creates loan guarantees that can reach as high as 80%. The guaranteed portion of the loan can usually be sold in the secondary market for a gain or held in the Bank's loan portfolio. The unguaranteed 5 [PHOTO] "People's Savings Bank has brought back the days of a close personal banking relationship with some old-fashioned respect for the hard-working little guy." PETER SAMIOTIS, SOLO DEVELOPMENT portion of the loan remains in the Bank's loan portfolio. Servicing fees can be earned if the Bank decides to sell off the guaranteed portion of the loan. URBANK'S Connecticut Small Business Reserve Fund Program (sponsored by the State of Connecticut's Department of Economic Development) This program is an innovative initiative by the State of Connecticut to help promote bank lending to small businesses. It is different from the SBA program, but provides the Bank the ability to further protect itself against credit risk within our portfolio of business loans. The Bank can register and insure up to 30% of each loan in the Program against loss. Connecticut Development Authority's (CDA) Works Loan Guarantee Program This program is another State of Connecticut initiative that provides insurance against any loss of up to 30% for loans registered in the Program. This program's size and structure are flexible enough to accommodate many situations. We will continue to seek out credit enhancement program opportunities that allow the Bank to expand business while also prudently managing risk. SMART BUSINESS BANKING The initial results are encouraging. We will continue our methodical development of those commercial products and services that address our markets' needs and can create favorable returns for the Bank. 6 [PHOTO] "Everyone at the Bank took a personal interest in my loan application, evidenced by their continual communication throughout the process." ROBERT M. OSEYCHIK, SIMSBURY THE CONSUMER IS STILL NUMBER ONE The Bank's consumer lending group has always maintained a reputation as a responsive, convenient and flexible provider of loans to consumers. This reputation has worked very well and will continue to be the cornerstone of our efforts. The Bank's consumer lending group recognizes that the days of sitting behind a desk and waiting for a loan customer to come in are over. We are taking a proactive sales approach that focuses upon educating our customers about alternatives. Our sales culture is designed to help people with all of their credit needs in a financially responsible manner. We meet many of our customers outside the Bank at a time and place that is convenient to their lifestyle. A MATTER OF TRUST The Bank's trust department has $310 million in assets under management, making it the second largest trust operation conducted by a savings bank in the State of Connecticut. The Bank now has trust offices in New Britain, Meriden and Middletown. Trust services are being offered in Glastonbury through an agreement with Glastonbury Bank & Trust. We also service the entire State of Connecticut by appointment, by request, and at the convenience of customers. Some services include: Trustee Under Agreement - A contract (often part of an estate plan) which can provide for tax savings, investment management, protection from creditors, and protection from financial worries. This is often used for care of a minor or an infirmed individual. 7 [PHOTO] "The staff shares a vision of what it takes to be a responsive and responsible community bank." EARL YOUNG, SENIOR LOAN OFFICER Trustee Under Will - Similar to the Trustee Under Agreement but is overseen by the Probate Court System. Investment Management Agency - An arrangement where assets are deposited with the Trust Department. The Trust Department gives the client investment advice and then buys and sells securities to achieve the clients financial goals. Custody - In this arrangement, the client leaves assets with the Trust Department to hold for safekeeping and collect and remit income as instructed. The Bank also works with the client's investment advisor in processing all security trades. Escrow Services - Similar to a real estate tax escrow on a mortgage. In many commercial transactions, sums of money or assets are left with a neutral party to ensure completion of the transaction. Trust departments are often employed for this service since they are neutral and have the capacity to monitor the assets and produce the required records and statements. Employee Benefit Services - Trust departments are often involved in employee benefit plans due to their complex administrative and record keeping requirements. These plans include: IRA rollover, 401(k), defined contribution, defined benefit, and deferred compensation arrangements. Charitable Accounts - These can fall into the category of Trust, Agency, or Custody. The Charity can be an organization, church, school, or foundation. They need the full capacity of the Trust Department for record keeping, tax work, investment management, or remittances. Estate Planning & Settlement - The process of planning and then resolving an individual's financial affairs after the person has passed away. It involves dealing with probate, Internal Revenue Service, Department of Revenue Services, and the beneficiaries. In providing this service, the Bank works closely with a person's attorney, accountant, and insurance professionals. 8 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - -------------------------------------------------------------------------------- [GRAPH APPEARS HERE] COMPARISON OF FIVE YEAR CUMULATIVE RETURN AMONG __________, __________ INDEX AND __________ INDEX
1991 $ 297,095 1992 $ 335,396 1993 $ 354,927 1994 $ 402,089 1995 $ 410,164
GENERAL People's Savings Financial Corp., New Britain, Connecticut (the "Corporation") created in 1989, is the parent company of The People's Savings Bank of New Britain (the "Bank"), a state savings bank chartered in 1907 and converted to a stock savings bank in 1986. The Corporation's assets on December 31, 1995 were $410,164,000. The Corporation competes for business with other financial institutions in its market area as well as with mortgage banking companies, insurance companies and money market funds. The Corporation's main market area is in central Connecticut. Management believes that the Corporation provides its customers with personal service that is unmatched by its competition. The Corporation's ongoing goals are to expand its consumer and commercial loan production, increase its trust business, cross-sell its services and add new services to sell to new and existing customers. In conjunction with these expansion goals, the Bank has diversified its loan portfolio through the addition of a commercial loan department. This department is responsible for developing a $10 million dollar commercial loan portfolio during 1996, consisting of both traditional and Small Business loans. The commercial loans and the unguaranteed portion of SBA loans will be held in the Bank's loan portfolio while the guaranteed portion of SBA loans may be sold to earn fee income with servicing income retained. The Bank anticipates opening a new branch in Meriden, Connecticut in the early spring of 1996. The Corporation's earnings are derived primarily from its "net interest rate spread", which is the difference between the yield on its earning assets and the cost of its interest bearing liabilities. Interest rates, after an increase in February and a stable period for the remainder of the first half of 1995, declined in the second half of 1995. Net interest income decreased by $752,000 while the net interest rate spread decreased by 41 basis points to 3.02% from 3.43%. During 1995 the average yield on earning assets increased from 6.78% in 1994 to 7.15%. The average cost of funds also increased in 1995 from 3.35% in 1994 to 4.13%. The decrease in the interest rate spread is partially attributed to competition for deposits keeping the average cost of funds from decreasing as much as market rates. The Bank earns a significant portion of its income by taking in short-term deposits and investing the money in longer term investments. During periods where there is a normal yield curve, the spread between the rate the Bank pays on a one year deposit and investing the money for longer than one year can typically be as wide as 3%. During 1995 the yield curve flattened which means that the yields on short-term investments were almost as high as those on long term investments. At one point during the year, the yield on fed funds was less than one percent lower than the 10 year treasury yield. The Corporation's earnings also depend to a lesser extent on fees generated by our expanding trust operations, the origination and sale of mortgages and income generated on the trading account, including interest and dividend income, market value appreciation and gains from the sale of stock and other services offered by the Bank, which are offset by operating expenses and market losses. Mortgage sales were down approximately 68.9% over last year, primarily due to rising interest rates that decreased refinancing activities of fixed rate mortgages which were the main source of mortgage lending for the past two years. Increased competition and a sluggish real estate market also added to the decline of 25% in mortgage originations. The majority of adjustable rate mortgages that were originated were held in portfolio. The profitability and financial condition of the Bank are affected by general economic conditions. The national economy became stronger during 1995 while Connecticut's recovery lagged behind. Connecticut's high dependence on the defense and insurance industries was a major contributor to the lackluster economy. The general economic effect of this is constrained personal income growth, less spending by the consumer, decreasing property values and higher delinquency and foreclosure rates. In contrast, the Bank experienced a substantial reduction in non-performing loans and other real estate owned during 1995 (unlike many of our competitors, this was not accomplished through bulk sales of such assets at a discount). In fact, non-performing assets were at their lowest level since December of 1989. Asset quality is expected to continue to remain high for the foreseeable future. 9 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - -------------------------------------------------------------------------------- [GRAPH APPEARS HERE] COMPARISON OF FIVE YEAR CUMULATIVE RETURN AMONG __________, __________ INDEX AND __________ INDEX
39% $ 49,990 42% $ 54,546 12% $ 15,575 7% $ 9,478 - -------------------------------- Total $129,589
INVESTMENT PORTFOLIO The Bank accounts for investments according to the Statement of Financial Accounting Standards No. 115, "Accounting for Certain Investments in Debt and Equity Securities" ("SFAS 115"). The available-for-sale investment portfolio at December 31, 1995 increased to $91,128,000 from $62,638,000 at December 31, 1994, primarily due to purchases of $44,821,000, and the transfer of $18,789,000 from the held-to-maturity portfolio, exceeding the combination of sales, maturities, called bonds and principal payments totalling $39,223,000. During December 1995 the Bank took advantage of a window of opportunity that was provided by the Financial Accounting Standards Board to allow transfers from the held-to-maturity portfolio into the available-for-sale portfolio. The Bank transferred $18,789,000 from the held-to-maturity investment portfolio into the available-for-sale portfolio and sold $3,355,000 of these investments. The Bank has intentionally let the available-for-sale portfolio grow in size to be able to have more flexibility in managing the investments in the portfolio. The held-to-maturity investment portfolio at December 31, 1995 decreased to $38,461,000 from $71,362,000 at December 31, 1994. The portfolio decreased in size due to purchases of $1,265,000 totalling less than the combination of maturities, called bonds and principal payments of $15,299,000, and the transfer of $18,789,000 to the available-for-sale portfolio. There is little credit risk associated with both portfolios since 81% of the securities are U. S. Government or U. S. Agency-backed. The portfolios are earning a positive spread over the average cost of funds, resulting in satisfactory liquidity and cash flows. Management will hold the investments in the held-to-maturity portfolio and currently has no plans to sell from the available-for-sale portfolio, unless unanticipated changes occur. Such changes may include changes in interest rates and favorable investment options which would make the sale of securities either at a loss or a gain beneficial to the operations of the Bank. The following table sets forth the carrying amount of investment securities at the dates indicated: INVESTMENT PORTFOLIO
(dollars in thousands) December 31, - ---------------------------------------------------------------------------------------- 1995 1994 1993 - ---------------------------------------------------------------------------------------- Available-for-Sale (At Market): United States Government and Agency Obligations $ 44,552 $ 39,562 $ 41,429 Connecticut State Taxable Obligations 1,251 1,237 1,838 Mortgage-Backed Securities 21,523 4,714 1,992 Other Bonds, Notes and Debentures 8,227 11,241 15,468 Marketable Equity Securities and Mutual Funds 15,046 5,393 5,977 Short-Term Mutual Funds 529 491 7,240 - ---------------------------------------------------------------------------------------- Total Investments Available-for-Sale $ 91,128 $ 62,638 $ 73,944 - ---------------------------------------------------------------------------------------- Investment Held-for-Trading (At Market): Trading Account -- $ 5,461 $ 5,537 - ---------------------------------------------------------------------------------------- Held-to-Maturity (At Cost): United States Government and Agency Obligations $ 9,994 $ 28,378 $ 23,478 Mortgage-Backed Securities 28,467 42,984 16,909 - ---------------------------------------------------------------------------------------- Total Investments Held-to-Maturity $ 38,461 $ 71,362 $ 40,387 - ---------------------------------------------------------------------------------------- Total Investment Securities $129,589 $139,461 $119,868 - ---------------------------------------------------------------------------------------- Investments as a Percent of Assets 31.59% 34.68% 33.77% - ----------------------------------------------------------------------------------------
10 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - -------------------------------------------------------------------------------- The following table sets forth the maturities of investment securities at December 31, 1995 and the weighted average yields of such securities (calculated on the basis of cost and effective yields weighted for the scheduled maturity of each security):
(dollars in thousands) Maturing -------------------------------------------------------------------------- Within After One But After Five But One Year Within Five Years Within Ten Years After Ten Years - ------------------------------------------------------------------------------------------------------------------ Amount Yield Amount Yield Amount Yield Amount Yield - ------------------------------------------------------------------------------------------------------------------ Available-for-Sale (At Market): United States Government and Agency Obligations $ 6,000 5.74% $36,547 5.80% $ 2,005 6.84% Connecticut State Taxable Obligations 1,251 6.52 Mortgage-Backed Securities 5,409 6.04 1,920 7.03 $14,194 7.14% Other Bonds, Notes and Debentures 2,006 6.63 6,221 6.41 Marketable Equity Securities and Mutual Funds 15,046 8.46 Short-Term Mutual Funds 529 4.53 - ------------------------------------------------------------------------------------------------------------------ Total Investments Available-for-Sale $24,832 $48,177 $ 3,925 $14,194 - ------------------------------------------------------------------------------------------------------------------ Held-to-Maturity (At Cost): United States Government and Agency Obligations $ 4,001 4.48% $ 5,993 6.12% Mortgage-Backed Securities 7,514 5.91 $20,953 6.40% Total Investments Held-to-Maturity $ 4,001 $13,507 $20,953 - ------------------------------------------------------------------------------------------------------------------ Total Investments $28,833 $61,684 $ 3,925 $35,147 - ------------------------------------------------------------------------------------------------------------------
The Corporation at December 31, 1995 had $21,000,000 of structured notes, which constitutes approximately 16.2% of the investment securities portfolio. Structured notes have uncertain cash flows which are driven by interest rate movements and may expose a company to greater market risk than traditional medium term notes. All of the Bank's investments of this type are government-agency issues (primarily Federal Home Loan Bank and Federal National Mortgage Association). Step-up notes comprised 90.5% and de-leveraged notes 9.5% of total structured notes at December 31, 1995. Prior to 1995, the Bank's investment strategy included the purchase of structured notes in the form of step-up notes, and de-leveraged notes. The Bank believed that devoting a portion of its investment portfolio to this type of investment was desirable in an attempt to increase yields and to diversify the portfolio. Step-up notes initially pay an above-market yield for a short non-call period and, if not called, "step-up" to a higher coupon rate, generally 1% or less. A multi-step note has a series of fixed and successively higher coupons over its life. At each call date, if the note is not called, the coupon rate increases. The Bank discontinued the investment strategy of purchasing structured notes in 1994. The structured notes are accounted for in accordance with SFAS 115. The available-for-sale portfolio at December 31, 1995 includes $17,000,000 of step-up notes with a weighted average yield of 5.6% and a weighted average maturity of 3 years, and two de-leveraged notes, each with a cost of $1,000,000, with a weighted average yield of 5.5% and a weighted average maturity of 6 months. The payment of interest on one of the de-leveraged bonds is based upon Prime Rate minus 2.72% and the other is based upon .5 times the ten year constant maturity treasury with a floor of 4.2%. There is no risk of loss of principal or interest if the structured notes are held-to-maturity. Current market value of the $21,000,000 in structured notes is $20,982,000, down $18,000 from its original cost. The interest rate being paid on structured notes, like any other bond, may fall below market rates which will cause the market price to decrease. If the notes are sold under this scenario, a market loss may occur. The Bank has no immediate plans to sell the structured notes at this time, but the Bank anticipates a considerable number of the notes to be called at par if interest rates continue to fall. 11 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - -------------------------------------------------------------------------------- The following table illustrates the composition of structured notes held by the Bank on December 31, 1995: Average Market Maturity Cost Value in Years - -------------------------------------------------------------------------------- Available-for-Sale Step-up and multi-step notes $17,000,000 $16,984,000 3.1 De-leveraged notes 2,000,000 1,998,000 0.5 Held-to-maturity Step-up and multi-step notes 2,000,000 2,000,000 3.1 - -------------------------------------------------------------------------------- Total $21,000,000 $20,982,000 2.8 - -------------------------------------------------------------------------------- Financial Condition: The discussion of the Corporation's financial condition and results of operations should be considered in conjunction with the consolidated financial data and the consolidated financial statements and notes appearing elsewhere in this report. The Corporation functions as a financial intermediary, and as such its financial condition should be examined in terms of its sources and uses of funds. SOURCES AND USES OF FUNDS The primary source of funds for the Corporation is the Bank. The primary sources of funds for the Bank are deposits, Federal Home Loan Bank ("FHLB") advances, net income, the repayment of loan principal, the maturity of investments, the origination and sale of fixed rate loans and the occasional sale of investments. Financing activities of the Bank include the following: Deposits increased by $17,663,000 or 5.5% to $339,365,000 on December 31, 1995 from $321,702,000 on December 31, 1994. The Bank decreased short-term borrowed money by $14,500,000 during 1995. The balance of borrowed money at December 31, 1995 was $18,950,000 compared to $33,450,000 on December 31, 1994. Use of funds provided by financing activities includes the payment of cash dividends by the Corporation. During 1995 the total dividends paid to shareholders was $1,727,000, as compared to $1,756,000 paid in 1994. The per share annual dividend was $.88 in 1995 and 1994. Funds were also used to purchase 40,000 shares or $721,000 of the Corporation's common stock. Funds amounting to $46,000, including tax benefits, were received on the exercise by Officers and Directors of 3,500 stock options. Investment activities of the Bank include the following: Gross loans, including loans held for sale, increased by $10,914,000, or 4.8%, to $239,784,000 on December 31, 1995, up from $228,870,000 on December 31, 1994. The net increase in loans at the end of the year was accomplished even though loan originations of $51,206,000 were down 20% from the $64,177,000 originated in 1994. Mortgage loan originations in 1995 were $35,338,000, down 25% from the $47,212,000 originated in 1994. During the same period, installment loans to consumers, including credit cards, decreased by 6% to $15,868,000 from $16,965,000 in 1994. The majority of mortgage loans that were originated in 1995 were adjustable rate mortgages which are normally held by the Bank and not sold. During 1995 the Bank sold $3,256,000 of fixed rate loans, a decrease of 69% from the $10,471,000 sold in 1994. The Bank, as part of its asset/liability management policy, sells the majority of the 30 year fixed rate mortgages and some of the fixed rate mortgages that mature in 20 years or less. The Bank does not sell consumer installment loans. The Bank continues to service most loans sold and earns servicing fees. To remain competitive, the Bank offers its customers a wide variety of mortgage programs to choose from, including bi-weekly mortgages, 5, 8, 10, 15, 20 and 30 year fixed rate mortgages and a variety of adjustable rate mortgages. Principal lending activities have generally consisted of the origination of conventional mortgages for the purchase of owner-occupied homes and, to a lesser extent, construction and land loans for single family residences. The Bank has established a commercial loan department to build a conservative, high quality commercial loan portfolio. 12 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - -------------------------------------------------------------------------------- [GRAPH APPEARS HERE] COMPARISON OF FIVE YEAR CUMULATIVE RETURN AMONG __________, __________ INDEX AND __________ INDEX
37% 88,208 14% 32,319 49% 116,265
Investment securities decreased by $9,872,000, or 7.1% to $129,589,000 on December 31, 1995 from $139,461,000 on December 31, 1994. The available-for-sale portfolio increased by $28,490,000 or 45.5% to $91,128,000 from $62,638,000 in 1994. Assets totaling $44,821,000 were purchased for the available-for-sale portfolio and sales totaled $22,949,000 during 1995. The held-to-maturity portfolio decreased by $32,901,000 or 46.1%. The decrease in the held-to-maturity category consisted primarily of maturities and principal repayments of $15,299,000 and the transfer of $18,789,000 to the available-for-sale portfolio. The Bank also liquidated the trading account during the first quarter of 1995. Foreclosed real estate decreased by $450,000 to $178,000 on December 31, 1995 from $628,000 on December 31, 1994, primarily due to sales of $1,218,000 and net charge-offs of $346,000 exceeding additions of $1,114,000. LOAN PORTFOLIO The Corporation's loan portfolio is directed toward home buyers, home equity loans and, to a lesser extent, real estate construction and commercial loans. Approximately 49.1% of the Bank's loans are adjustable rate mortgages. The following table shows the Corporation's loan distribution at the end of each of the last five years:
December 31, - ----------------------------------------------------------------------------------------------- (dollars in thousands) 1995 1994 1993 1992 1991 - ----------------------------------------------------------------------------------------------- Real Estate Mortgage (1-4 Family) $192,434 $187,914 $179,727 $180,634 $176,773 Real Estate Construction 3,933 3,110 2,247 3,205 3,444 Real Estate Multifamily (5 or more units) 3,856 3,899 3,676 4,024 4,030 Real Estate Commercial 5,937 4,177 3,936 4,117 3,612 Installment Loans to Individuals 30,832 28,955 24,656 29,033 34,500 Credit Cards 1,346 486 Commercial Loans 519 329 433 576 822 - ----------------------------------------------------------------------------------------------- Total Loans $238,857 $228,870 $214,675 $221,589 $223,181 - -----------------------------------------------------------------------------------------------
The following table shows the maturity of loans (excluding real estate mortgage loans, installment loans to individuals and credit cards) outstanding as of December 31, 1995. Also provided are the amounts due after one year classified according to the sensitivity to changes in interest rates:
Maturing Within After One but After (dollars in thousands) One Year Within Five Years Five Years Total - ---------------------------------------------------------------------------------------------- Real Estate Construction $3,227 $706 $ 0 $3,933 Commercial Loans 419 0 100 519 - ---------------------------------------------------------------------------------------------- Total $3,646 $706 $100 $4,452 - ---------------------------------------------------------------------------------------------- Loans Maturing After One Year With: Fixed Interest Rates $153 $100 Variable Interest Rates 553 - ---------------------------------------------------------------------------------------------- Total $706 $100 - ----------------------------------------------------------------------------------------------
At December 31, 1995 all loans past due 90 days were treated as non accrual loans. Total non-performing loans and foreclosed real estate aggregated $899,000 or .22% of total assets down from the $1,928,000 or .48% of total assets on December 31, 1994. 13 MANAGEMENT'S DISCUSSION AND ANALYSIS - ------------------------------------ OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - ------------------------------------------------ The following table illustrates the composition of non-performing assets as of December 31, 1995 and 1994: NON-PERFORMING ASSETS Non Accrual Loans (90 days or more delinquent) - -------------------------------------------------------------------------------- 1995 1994 - -------------------------------------------------------------------------------- Number Number (dollars in thousands) of Loans Amount of Loans Amount - -------------------------------------------------------------------------------- Residential 10 $711 15 $1,227 Installment 3 10 4 73 - -------------------------------------------------------------------------------- Total Non-Performing Loans 13 $721 19 $1,300 - -------------------------------------------------------------------------------- Foreclosed Real Estate - -------------------------------------------------------------------------------- 1995 1994 - -------------------------------------------------------------------------------- Number Number of Properties Amount of Properties Amount - -------------------------------------------------------------------------------- Residential 4 $ 98 4 $ 168 Commercial Real Estate 2 80 2 460 - -------------------------------------------------------------------------------- Total Foreclosures 6 $178 6 $ 628 - -------------------------------------------------------------------------------- Total Non-Performing Assets $899 $1,928 - -------------------------------------------------------------------------------- The Bank has two restructured loans totaling $500,000. Interest and principal payments on these loans are current. Interest income that would have been recorded in the year ended December 31, 1995 on non accrual loans under the original terms was $76,488. Interest income actually recorded on these loans in 1995 was $21,260. The accrual of interest is discontinued when a loan becomes 90 days past due as to principal or interest. ALLOWANCE FOR LOAN LOSSES The Bank's allowance for loan losses has been determined based upon management's analysis of the risks in the portfolio and the economic risks in our lending areas as well as the Bank's loss experience. Loans are charged against the allowance when management believes that collection is unlikely. Any subsequent recoveries are credited to the allowance for loan loss reserve. The allowance for loan losses was reduced in 1995 due to lower levels of non-performing loans.
ALLOWANCE FOR LOAN LOSSES AND SUMMARY OF LOAN LOSS EXPERIENCE Year ended December 31, - -------------------------------------------------------------------------------------- (dollars in thousands) 1995 1994 1993 1992 1991 - -------------------------------------------------------------------------------------- Balance at Beginning of Period $1,791 $2,223 $1,945 $1,164 $1,010 Charge Offs: Real Estate Mortgage Loans 209 524 384 295 306 Real Estate Construction Loans 109 Commercial Real Estate Loans 70 56 125 530 Installment Loans to Individuals 59 119 337 114 89 Credit Cards 18 Commercial Loans 2 120 - -------------------------------------------------------------------------------------- Total Charge Offs 356 643 777 536 1,154 - -------------------------------------------------------------------------------------- Recoveries: Real Estate Mortgage Loans 37 7 7 23 Real Estate Construction Loans 5 Commercial Real Estate Loans 37 Installment Loans to Individuals 5 75 45 13 3 - -------------------------------------------------------------------------------------- Total Recoveries 42 82 45 62 26 - -------------------------------------------------------------------------------------- Net Charge Offs 314 561 732 474 1,128 Provision for Loan Losses 101 129 1,010 1,255 1,282 Balance at End of Period $1,578 $1,791 $2,223 $1,945 $1,164 - -------------------------------------------------------------------------------------- Ratio of Net Charge Offs During Period to Average Loans Outstanding 0.13% 0.26% 0.32% 0.20% 0.53% - --------------------------------------------------------------------------------------
14 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - -------------------------------------------------------------------------------- [GRAPH APPEARS HERE] COMPARISON OF FIVE YEAR CUMULATIVE RETURN AMONG __________, __________ INDEX AND __________ INDEX
1991 $ 6.582 1992 $ 4.696 1993 $ 3.173 1994 $ 1.928 1995 $ .899 1991 $ 250,768 1992 $ 283,495 1993 $ 299,467 1994 $ 321,702 1995 $ 339,365
Potential problem loans are not disclosed as non accrual, 90 days past due, or restructured, but are loans which are monitored due to known information about possible credit problems of borrowers or which are monitored because they are greater than 30 days but less than 90 days past due. Management assesses the potential for loss on these loans when evaluating the adequacy of the allowance for loan losses on a regular basis. As of December 31, 1995, monitored loans not disclosed as non accrual, 90 days past due, or restructured that were current totaled $168,000 and monitored loans 30 days delinquent totaled $3,117,000, and 60 days delinquent totaled $791,000. The following table summarizes the Bank's non-performing assets at the end of the last five years: NON-PERFORMING ASSETS (dollars in thousands) December 31, - -------------------------------------------------------------------------------- 1995 1994 1993 1992 1991 - -------------------------------------------------------------------------------- Nonaccruing Loans $ 721 $1,300 $2,376 $3,666 $5,802 Foreclosed Real Estate 178 628 797 1,030 769 Repossessed Assets 11 - -------------------------------------------------------------------------------- Total $ 899 $1,928 $3,173 $4,696 $6,582 - -------------------------------------------------------------------------------- The following table illustrates the allocation of allowance for loan losses to the appropriate loan category:
(dollars in thousands) December 31, - --------------------------------------------------------------------------------------------------------------------------- 1995 1994 1993 1992 1991 - --------------------------------------------------------------------------------------------------------------------------- Percent of Percent of Percent of Percent of Percent of Loans to Loans to Loans to Loans to Loans to Amount Total Loans Amount Total Loans Amount Total Loans Amount Total Loans Amount Total Loans - ----------------------------------------------------------------------------------------------------------------------------- Real Estate Mortgage Loans $ 511 82.17% $ 661 83.41% $ 623 85.23% $ 535 83.33% $ 200 81.01% Installment Loans to Individuals 175 12.91 250 13.24 400 11.64 360 13.10 135 15.46 Real Estate Construction Loans 100 1.65 135 1.36 125 1.06 125 1.45 125 1.54 Commercial Real Estate Loans 340 2.49 320 1.83 500 1.86 450 1.86 450 1.62 Commercial Loans 80 0.22 75 0.16 75 0.21 75 0.26 125 0.37 Credit Cards 22 56 Unallocated 350 n/a 350 n/a 500 n/a 400 n/a 129 n/a - ----------------------------------------------------------------------------------------------------------------------------- Total Allowance for Loan Losses $1,578 100.00% $1,791 100.00% $2,223 100.00% $1,945 100.00% $1,164 100.00% - -----------------------------------------------------------------------------------------------------------------------------
DEPOSITS The average daily amount of deposits and rates paid on such deposits for the past three years are summarized in the following table: DEPOSITS
(dollars in thousands) Year ended December 31, - ------------------------------------------------------------------------------------------------ 1995 1994 1993 Amount Rate Amount Rate Amount Rate - ------------------------------------------------------------------------------------------------ Noninterest-bearing Demand Deposits $ 5,021 $ 3,761 $ 3,109 Interest-bearing Demand Deposits 10,769 1.80% 10,029 1.82% 8,693 2.29% Money Market Deposit Accounts 3,907 2.25 4,186 2.27 4,273 2.78 Savings Deposits 114,556 2.02 131,429 2.04 132,436 2.66 Time Deposits 197,309 5.36 160,704 4.23 142,935 4.39 - ------------------------------------------------------------------------------------------------ Total $331,562 $310,109 $291,446 - ------------------------------------------------------------------------------------------------
15 MANAGEMENT'S DISCUSSION AND ANALYSIS - ------------------------------------ OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - ------------------------------------------------ Maturities of time certificates of deposits in amounts of $100,000 or more outstanding at December 31, 1995 are summarized as follows: (dollars in thousands) Time Certificates of Deposit - -------------------------------------------------------------------------------- 3 months or less $ 8,369 Over 3 through 6 months 3,760 Over 6 through 12 months 5,325 Over 12 months 7,204 - -------------------------------------------------------------------------------- Total $24,658 - -------------------------------------------------------------------------------- ASSET/LIABILITY AND LIQUIDITY MANAGEMENT The primary functions of asset/liability management are to assure adequate liquidity and maintain an appropriate balance between interest sensitive earning assets and interest bearing liabilities. Liquidity management involves the ability to meet the cash flow requirements of depositors wanting to withdraw funds or borrowers needing assurance that sufficient funds will be available to meet their credit needs. The Bank has a formal written liquidity and asset/liability policy designed to address these issues. The following table sets forth certain information at December 31, 1995 regarding the rate sensitivity of the Corporation's earning assets and sources of funds:
Interest Rate Sensitivity December 31, 1995 - ------------------------------------------------------------------------------------------------------------------------------- 0-180 181-365 1-3 3-5 After (dollars in thousands) Days Days Years Years Five Years Total - ------------------------------------------------------------------------------------------------------------------------------- Assets Subject to Interest Rate Adjustment: Short Term Investments $ 21,346 $ 21,346 Investment Securities (at cost) 43,150 $8,981 $29,219 $22,882 $ 25,128 129,360 Adjustable Rate Mortgages 45,903 41,918 10,696 4,261 14,147 116,925 Fixed Rate Mortgages 2,911 1,656 2,812 6,629 74,701 88,709 Installment and Commercial Loans 7,900 1,753 3,735 4,695 14,419 32,502 Loans Held-for-Sale 927 927 Estimated Principal payments Mortgage-Backed Securities 584 584 1,168 - ------------------------------------------------------------------------------------------------------------------------------- Total Rate Sensitive Assets $ 122,721 $54,892 $46,462 $38,467 $128,395 $390,937 - ------------------------------------------------------------------------------------------------------------------------------- Liabilities Subject to Interest Rate Adjustment: Interest Bearing NOW $ 11,479 $ 11,479 Regular Savings * 102,161 102,161 Money Market Passbook 7,055 7,055 Money Market Deposits 4,000 4,000 Time Certificates of Deposits 112,664 $50,293 $28,033 $18,074 209,064 Advances from FHLB 8,000 4,000 5,300 1,500 $150 18,950 - ------------------------------------------------------------------------------------------------------------------------------- Total Rate Sensitive Liabilities $245,359 $54,293 $33,333 $19,574 $150 $352,709 - ------------------------------------------------------------------------------------------------------------------------------- INCLUDING REGULAR SAVINGS: Excess (deficiency) of Rate Sensitive Assets over Rate Sensitive Liabilities ($122,638) $599 $13,129 $18,893 $128,245 $38,228 - ------------------------------------------------------------------------------------------------------------------------------- Cumulative excess (deficiency) ($122,638) ($122,039) ($108,910) ($90,017) $ 38,228 - ------------------------------------------------------------------------------------------------------------------------------- Cumulative Rate Sensitive Assets as a percentage of Cumulative Rate Sensitive Liabilities 50.0% 59.3% 67.3% 74.5% 110.8% Cumulative excess (deficiency) as a percentage of Total Assets (29.9%) (29.8%) (26.6%) (21.9%) 9.3% Excluding Regular Savings: Excess (deficiency) of Rate Sensitive Assets over Rate Sensitive Liabilities ($20,477) $599 $13,129 $18,893 $128,245 - ------------------------------------------------------------------------------------------------------------------------------- Cumulative excess (deficiency) ($20,477) $(19,878) ($6,749) $12,144 $140,389 - ------------------------------------------------------------------------------------------------------------------------------- Cumulative Rate Sensitive Assets as a percentage of Cumulative Rate Sensitive Liabilities 85.7% 89.9% 97.1% 104.8% 156.0% Cumulative excess (deficiency) as a percentage of Total Assets (5.0%) (4.8%) (1.6%) 3.0% 34.2% - -------------------------------------------------------------------------------------------------------------------------------
16 MANAGEMENT'S DISCUSSION AND ANALYSIS - ------------------------------------ OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - ------------------------------------------------ [GRAPH APPEARS HERE] COMPARISON OF FIVE YEAR CUMULATIVE RETURN AMONG __________, __________ INDEX AND __________ INDEX
Measurement period _________ _________ _________ (Fiscal year Covered) Index Index - --------------------- --------- --------- --------- Measurement PT - __/__/__ $ _____ $ _____ 1991 $ 9,513 1992 $ 12,814 1993 $ 13,480 1994 $ 13,791 1995 $ 13,039
The interest rate sensitivity table above shows the time periods in which the Corporation's assets and liabilities are subject to changes in interest rates. The interest rate sensitivity analysis of the Corporation at December 31, 1995 suggests that if interest rates rise, the Corporation would experience a decrease in net interest income in the one-year horizon. Since the Corporation's rate sensitive liabilities are greater than its rate sensitive assets in the one-year time horizon, the Corporation's interest expense would increase greater than its interest income in a rising interest rate environment. In a falling interest rate environment the Corporation's net interest income would increase, due to interest income decreasing less than interest expense. * The Corporation has included regular savings in the "within 0-180 days" category, although management believes that the entire balance of regular savings is not interest rate sensitive within certain parameters and will not decrease substantially in the near future. The Gap analysis reflects a static analysis of interest rate sensitivity which may not reflect the true movement of interest rates. LIQUIDITY AND CAPITAL RESOURCES Liquidity Liquidity management is the ability to fund short and long-term growth in lending and other investment activities as well as having the capacity to fund any rapid unforeseen large cash outflows in an orderly and cost effective manner. The largest investment activity of the Bank is lending. Therefore, the Bank's liquidity requirements are primarily set upon anticipated loan demand which vary in response to the economy and competition. Investing in securities is the second largest investment of the Bank. The securities in the available-for-sale portfolio can be sold to meet liquidity needs. The securities in the held-to-maturity portfolio as well as the available-for-sale category can be pledged as collateral for short or long-term borrowings if needed. Deposits are the primary funding source for the Bank. The Bank's policy is not to accept brokered deposits or offer premium rates to attract certificates of deposits. The Bank believes the local community makeup of its deposit base tends to make it somewhat insensitive to moderate interest rate fluctuations. It also provides for a stable cost and effective source of funds. As a member of the FHLB, the Bank can borrow on a secured basis by pledging first mortgage loans and other qualified assets for collateral. The Bank is also required to maintain a specified ratio of FHLB stock to advances, as required under the Federal Home Loan Bank Act. Total advances from the Federal Home Loan Bank, including Ideal Way lines of credit, cannot exceed the value of qualified collateral held by the Bank. As of December 31, 1995, the Bank had borrowed $18,950,000 from the FHLB and the Bank had sufficient qualified collateral to borrow an additional $229,582,000. The $229,582,000 borrowing capacity significantly exceeds the Bank's annual financing requirements. At December 31, 1995, liquid assets totaled $33,732,000 or 8.2% of total assets compared to $25,067,000 or 6.2% of total assets as of December 31, 1994. The liquidity level during each year was within the range of management's desired level. Please see "Sources and Uses of Funds" on page 12 of this report and Note 10 (Restrictions on Subsidiary Dividends, Loans or Advances) in the Consolidated Financial Statements on page 37 of this report. Capital Stockholders' equity and book value per share were $44,713,000 and $22.90 respectively, at December 31, 1995. The increase in equity and book value was due to the net income of $3,389,000 in 1995 and an increase in the net unrealized holding gains on securities available-for-sale, net of taxes of $2,487,000 from a loss of $2,291,000 at December 31, 1994, to a gain of $196,000 at December 31, 1995. The increase was partially offset by the acquisition of treasury stock of $721,000 and dividends declared of $1,718,000. During 1995, the Corporation repurchased 40,000 shares of its common stock for $721,000 in the open market. The stock was repurchased as part of a publicly disclosed repurchase program. The buy back program was initiated to enhance shareholder value and because the Corporation believed the market value of the stock did not reflect its true value. The repurchase program also serves to increase per share earnings, 17 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - -------------------------------------------------------------------------------- book value and to support the market price for the Corporation's stock. The board of directors believes that the purchase of the Corporation's own shares is a prudent use of capital and may continue to utilize this practice as long as the Corporation remains well capitalized and the market value of the stock is determined not to be representative of its true value. The Bank is required by regulation to maintain certain capital ratios. The minimum Tier 1 capital ratio of 4.00% to 5.00% must be maintained by all banks except those that are the highest rated institutions by regulators. The Bank is also required to meet supplemental capital adequacy standards which measure qualifying capital against risk-weighted assets including off-balance sheet items such as loan commitments, letters of credits and interest rate swaps. At December 31, 1995 all of the Bank's capital ratios exceeded minimum regulatory capital requirements and places it as "well capitalized", the highest rating of five regulatory capital classifications. The following table illustrates the capital resources of the Bank and the Corporation and their capital ratios as of December 31: (dollars in thousands) 1995 1994 - ------------------------------------------------------------------------------- Bank's capital components: Tier 1 capital (Stockholders' equity) $37,279 $38,389 Tier 2 capital (Allowance for loan losses) 1,578 1,791 - ------------------------------------------------------------------------------- Bank's total risk-based capital $38,857 $40,180 Bank's capital ratios: Total Risk-Based 18.38% 19.99% - ------------------------------------------------------------------------------- Tier 1 risk-based 17.63% 19.10% Tier 1 leverage 9.35% 9.55% - ------------------------------------------------------------------------------- Corporation's capital components: Tier 1 capital (Stockholders' equity) $41,217 $39,777 Tier 2 capital (Allowance for loan losses) 1,578 1,791 - ------------------------------------------------------------------------------- Corporation's total risk-based capital $42,795 $41,568 Corporation's capital ratios: Total risk-based 20.24% 20.68% Tier 1 risk-based 19.49% 19.79% Tier 1 leverage 10.33% 9.89% - ------------------------------------------------------------------------------- IMPACT OF INFLATION The Corporation's financial statements have been prepared in terms of historical dollars, without considering changes in the relative purchasing power of money over time due to inflation. Unlike most industrial companies, virtually 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 the effect of general levels of inflation. Interest rates do not necessarily move in the same direction or in the same magnitude as the prices of goods and services. Nevertheless, inflation can directly affect the value of loan collateral, in particular real estate. Decreases in real estate prices have resulted in losses on real estate acquired. Inflation, or disinflation, could continue to significantly affect the Corporation's earnings in future periods. RESULTS OF OPERATION Comparison of years ended December 31, 1995 and 1994. Net Income: Net income decreased by $176,000 or 4.9% to $3,389,000 for the year ended December 31, 1995 from $3,565,000 in 1994. The decrease for 1995 was primarily attributable to a decrease in net interest income, and increased operating expenses primarily related to the Corporation's expansion goals. The reduction in earnings was partially offset by an increase in other income, primarily trust fees. 18 MANAGEMENT'S DISCUSSION AND ANALYSIS - ------------------------------------ OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - ------------------------------------------------ Interest Income: Interest income for the year ended December 31, 1995 was $27,522,000, an increase of $2,461,000 from the $25,061,000 for the same period in 1994. The increase in interest income can be attributed to an increase in average earning assets of $15,730,000 to $386,854,000 from $371,124,000 in 1994, and an increase in the yield on earning assets of 37 basis points in 1995 to 7.15% from 6.78% in 1994. The majority of the increase in interest income was from the loan portfolio. The increase in the volume of loans increased interest income by $1,051,000 and the increase in yield on loans increased interest income by $949,000. This increase is consistent with increased interest rates in 1994 and the first half of 1995 due to the typical lag time for the Bank's balance sheet to react to market interest rates, even though rates decreased in the second half of 1995. The following table summarizes the components of the Corporation's net interest income, net interest rate spread, and net interest rate margin:
YIELD AND RATE/VOLUME ANALYSIS Year ended December 31, 1995 1994 1993 - ------------------------------------------------------------------------------------------------------------------------------------ Average Average Average (dollars in thousands) Balance Interest Yield/Rate Balance Interest Yield/Rate Balance Interest Yield/Rate - ------------------------------------------------------------------------------------------------------------------------------------ Assets Interest-earning Assets Loans(1,2) $233,684 $18,297 7.83% $219,909 $16,297 7.41% $226,678 $18,288 8.07% Investment Securities(5) 143,298 8,637 6.14 145,700 8,480 5.88 94,609 5,376 5.76 Other Interest-earning 9,872 588 5.96 5,515 284 5.15 10,111 482 4.77 - ------------------------------------------------------------------------------------------------------------------------------------ Total Interest-earning Assets(5) $386,854 $27,522 7.15% $371,124 $25,061 6.78% $331,398 $24,146 7.31% Noninterest-earning Assets 15,358 14,377 13,110 - ------------------------------------------------------------------------------------------------------------------------------------ Total Assets $402,212 $385,501 $344,508 ==================================================================================================================================== Liabilities and Stockholders' Equity Interest-bearing Liabilities Savings Deposits $114,556 $ 2,314 2.02% $131,429 $2,675 2.04% $132,436 $3,529 2.66% Interest-bearing Demand Deposits 10,769 194 1.80 10,029 183 1.82 8,693 199 2.29 Money Market Deposit Accounts 3,907 88 2.25 4,186 95 2.27 4,273 119 2.78 Certificates of Deposit 197,309 10,576 5.36 160,704 6,805 4.23 142,935 6,273 4.39 Mortgagors' Escrow 1,794 58 3.23 1,887 57 3.02 1,909 75 3.92 Borrowed Funds 22,080 1,253 5.67 28,137 1,455 5.17 7,664 472 6.16 - ------------------------------------------------------------------------------------------------------------------------------------ Total Interest-bearing Liabilities $350,415 $14,483 4.13% $336,372 $11,270 3.35% $297,910 $10,667 3.58% Noninterest-bearing Demand Deposits 5,021 3,761 3,109 Noninterest-bearing Liabilities 3,572 2,842 2,095 Stockholders' Equity 43,204 42,526 41,394 - ------------------------------------------------------------------------------------------------------------------------------------ Total Liabilities and Stockholders' Equity $402,212 $385,501 $344,508 ==================================================================================================================================== Net Interest Income $13,039 $13,791 $13,479 ==================================================================================================================================== Net Interest Rate Spread(3)(5) 3.02% 3.43% 3.73% ==================================================================================================================================== Net Interest Rate Margin(4)(5) 3.41% 3.74% 4.09% ====================================================================================================================================
1. For purposes of these computations, nonaccrual loans are included in the average loan amount outstanding. 2. Included in interest income are loan fees of $395,269, $389,387, and $803,120, for the years ended December 31, 1995, 1994, and 1993, respectively. 3. Return on interest-earning assets less cost of interest-bearing liabilities. 4. Net interest income divided by average earning assets. 5. Tax adjusted yield, tax adjustment of $158,915, $85,771 and $70,840, for the years ended December 31, 1995, 1994, and 1993, respectively. 19 MANAGEMENT'S DISCUSSION AND ANALYSIS - ------------------------------------ OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - ------------------------------------------------ Interest Expense: Interest expense increased in 1995 by $3,213,000 to $14,483,000 from $11,270,000 in 1994. During 1995, the Bank experienced an increase in its overall cost of funds of 78 basis points to 4.13% from 3.35% in 1994. The average balance in interest-bearing liabilities increased by $14,043,000 in 1995 to $350,415,000 from $336,372,000 in 1994. The majority of the increase in interest expense was due to interest expense on certificates of deposit, offset by a reduction in interest expense on savings deposits. Interest expense on certificates of deposit increased by $3,771,000, of that $1,740,000 was due to increased volume and $2,031,000 was due to increased rate. Interest expense on savings deposits decreased by $361,000 primarily due to decreased volume. This is consistent with a shift in deposits from regular savings to certificates of deposit, and also increased rates on certificates of deposit due to increased competition. Net Interest Income: Net interest income decreased by $752,000, or 5.45%, to $13,039,000 for the year ended December 31, 1995 from $13,791,000 for 1994 as the decreased net interest rate spread more than offset the increased volume of earning assets. The net interest rate spread decreased by 41 basis points, from 3.43% in 1994, to 3.02% for the year ended December 31, 1995, due primarily to the increased cost of funds. Interest expense increased greater than interest income as explained in the previous paragraphs. The following table sets forth changes in the Corporation's interest earned and interest paid resulting from changes in volume and changes in rates. The change in interest due to both volume and rate has been allocated to volume and rate changes in proportion to the relationship of the absolute dollar amounts of the change in each.
1995 Compared to 1994 1994 Compared to 1993 (dollars in thousands) Increase (Decrease) due to Increase (Decrease) due to - -------------------------------------------------------------------------------------------------------------------------- Volume Rate Net Volume Rate Net - -------------------------------------------------------------------------------------------------------------------------- Interest Earned on: Loans $ 1,051 $ 949 $ 2,000 $ (532) $(1,459) $(1,991) Investment Securities (136) 293 157 2,969 135 3,104 Other Interest-earning 254 50 304 (234) 36 (198) - -------------------------------------------------------------------------------------------------------------------------- Total 1,169 1,292 2,461 2,203 (1,288) 915 - -------------------------------------------------------------------------------------------------------------------------- Interest Paid on: Savings Deposits (341) (20) (361) (27) (827) (854) Interest-bearing Demand Deposits 13 (2) 11 28 (44) (16) Money Market Deposit Accounts (6) (1) (7) (2) (22) (24) Certificates of Deposit 1,740 2,031 3,771 765 (233) 532 Mortgagors' Escrow (2) 3 1 (1) (17) (18) Borrowed Funds (369) 167 (202) 1,070 (87) 983 - -------------------------------------------------------------------------------------------------------------------------- Total 1,035 2,178 3,213 1,833 (1,230) 603 - -------------------------------------------------------------------------------------------------------------------------- Changes in Net Interest Income $ 134 $ (886) $ (752) $ 370 $ (58) $ 312 =========================================================================================================================
Other Operating Income and Service Fees: The following table details the significant increases and decreases in other income for the year ended December 31, 1995:
(dollars in thousands) 1995 1994 Inc (dec) % - ----------------------------------------------------------------------------------------------- Service charges and fees $1,001 $880 $ 121 13.8% Trust fees 1,129 191 938 491.1 Net investment securities gains (losses) (170) 128 (298) (232.8) Trading account gains (losses) 49 (284) 333 (117.3) Net gains (losses) on sales of mortgages 29 (376) 405 (107.7) Other operating income 205 198 7 3.5 - ----------------------------------------------------------------------------------------------- Total other income $2,243 $737 $1,506 204.3% =========================================================================================================================
20 MANAGEMENT'S DISCUSSION AND ANALYSIS - ------------------------------------ OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - ------------------------------------------------ Service charges and fees increased primarily due to the increase in the volume of deposit accounts and services sold. Trust fees increased by $938,000 from $191,000 at December 31, 1994, to $1,129,000 at December 31, 1995, primarily due to the November 7, 1994 purchase of substantially all of the assets of New Meriden Trust Co. from the FDIC, as well as new accounts generated during 1995. Security losses in the investment portfolio were $170,000, as compared to a gain of $128,000 for 1994. The trading account, liquidated in February of 1995, posted a gain of $49,000 as compared to a loss of $284,000 for 1994. The Bank recorded a small gain on the sale of mortgages of $29,000 in 1995 compared to losses of $376,000 in 1994, primarily due to rising interest rates in 1994. Other Expenses: The following table details the significant increases and decreases in other expense for the year ended December 31, 1995: (dollars in thousands) 1995 1994 Inc (dec) % - -------------------------------------------------------------------------------- Salaries and benefits $4,558 $3,556 $1,002 28.2% - -------------------------------------------------------------------------------- Occupancy 928 844 84 10.0 Furniture and equipment 893 707 186 26.3 FDIC deposit insurance 380 696 (316) (45.4) Foreclosed real estate 453 253 200 79.1 Other operating expenses 2,397 2,338 59 2.5 - -------------------------------------------------------------------------------- Total other expenses $9,609 $8,394 $1,215 14.5% - -------------------------------------------------------------------------------- Other expenses increased by $1,215,000 to $9,609,000 in 1995 from $8,394,000 in 1994. Salary and employee benefit expenses increased to $4,558,000 in 1995, a $1,002,000 or 28.2% increase over the $3,556,000 expensed in 1994. The primary reason for the increase was a full year of expense for the staffing for two new branches opened in the second quarter of 1994, and increased staffing due to the purchase of New Meriden Trust in November of 1994, as well as the establishment of a commercial loan department. Full-time employee equivalents ("FTE") increased to 122 at December 31, 1995 from 112 at December 31, 1994 and 86 at December 31, 1993. The majority of the FTE increases in 1994 occurred late in the year, thereby causing the large salary expense increase noted above. FDIC deposit insurance expenses decreased to $380,000 in 1995, a decrease of $316,000 compared to $696,000 in 1994. The FDIC decreased the rate the Bank pays for deposit insurance to $.04 per $100.00 in deposits effective June of 1995, from a rate of $.23 per $100.00 in deposits. Occupancy and furniture and equipment expenses were up $270,000 or 17.4% to $1,821,000 from $1,551,000 in 1994 due to the full year of expenses related to the opening of the two branches, and the trust department expansion begun in late 1994. Operating expenses for foreclosed real estate increased by $200,000 or 79.1% to $453,000 for the year ended December 31, 1995 from $253,000 in 1994. The increase was due to higher than expected operating costs and declines in the market value of owned real estate properties. Income Taxes: The effective tax rate for 1995 was 39.20%, a decrease of 144 basis points from 40.64% in 1994. The decrease was primarily due to an increase in dividend income eligible for the dividend received deduction, and a slight decrease in the State of Connecticut tax rate of 25 basis points to 11.25% in 1995 from 11.50% in 1994. RESULTS OF OPERATION Comparison of years ended December 31, 1994 and 1993. Net Income: Net income decreased by $902,000 or 20.2% to $3,565,000 for the year ended December 31, 1994 from $4,467,000 before the cumulative effect of changes in accounting principles for the same period in 1993. Net income for the year ended December 31, 1993 after the cumulative effect of changes in accounting principles amounted to $4,752,000. The decrease for 1994 was primarily attributed to trading account losses and losses on sales of mortgages versus gains in 1993, and increased operating expenses primarily related to our expansion goals and the settlement of a lawsuit. These reductions in earnings were partially offset by increases in net interest income and service charges and fees, and a decrease in the provision for loan losses due to continued high asset quality and a reduction in the dollar amount of delinquent loans. Operating Expenses (dollars in millions) [GRAPH APPEARS HERE] COMPARISON OF FIVE YEAR CUMULATIVE RETURN AMONG __________, __________ INDEX AND __________ INDEX
Measurement period _________ _________ _________ (Fiscal year Covered) Index Index - --------------------- --------- --------- --------- Measurement PT - __/__/__ $ _____ $ _____ $ _____ 1991 $ 5,605 1992 $ 6,274 1993 $ 6,890 1994 $ 8,393 1995 $ 9,608
21 MANAGEMENT'S DISCUSSION AND ANALYSIS - ------------------------------------ OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - ------------------------------------------------ Interest Income: Interest income for the year ended December 31, 1994 was $25,061,000, an increase of $915,000 from the $24,146,000 for the same period in 1993. The increase in interest income can be attributed to an increase in average earning assets of $39,726,000 to $371,124,000 from $331,398,000 in 1993, which was partially offset by a decrease in the yield on earning assets of 53 basis points in 1994 to 6.78% from 7.31% in 1993. Falling interest rates in 1993 continued to effect the Bank into 1994 due to the normal lag time for the Bank's balance sheet to react to market interest rates, even though rates increased in 1994. Interest Expense: Interest expense increased in 1994 by $603,000 to $11,270,000 from $10,667,000 in 1993. During 1994, the Bank experienced a decrease in its overall cost of funds of 23 basis points to 3.35% from 3.58% in 1993. The average balance in interest bearing liabilities increased by $38,462,000 in 1994 to $336,372,000 from $297,910,000 in 1993. Net Interest Income: Net interest income increased by $311,000 or 2.3% to $13,791,000 for the year ended December 31, 1994 from $13,480,000 for 1993 as increased volume of earning assets more than offset the lower spread. The net interest rate spread decreased by 30 basis points to 3.43% for the year ended December 31, 1994 from 3.73% in 1993. Other Operating Income and Service Fees: Service charge and fee income, including trust fees, increased by $267,000 to $1,070,000 for the year ended December 31, 1994 from $803,000 for the year ended December 31, 1993. The increase can be attributed primarily to trust income, in particular revenues generated from the November 7, 1994 purchase of New Meriden Trust Co. from the FDIC and increased charges to customers as well as increased volume in services sold. Security gains in the investment portfolio increased by $18,000 to a gain of $128,000 for 1994 from a gain of $110,000 in 1993. The trading account experienced a loss of $284,000 for 1994, down $863,000 from the gain in 1993 of $579,000. The Bank recorded losses on the sale of mortgages of $375,000 in 1994 compared to gains of $290,000 in 1993, a decrease of $665,000, primarily due to rising interest rates in 1994. Other Expenses: Other expenses increased by $1,503,000 to $8,394,000 in 1994 from $6,891,000 in 1993. Salary and employee benefit expenses increased to $3,556,000 in 1994, a $580,000 or 19.5% increase over the $2,976,000 expensed in 1993. The primary reason for the increase was staffing expenses for two new branches opened in 1994, and increased staffing due to the purchase of New Meriden Trust, as well as merit increases awarded throughout the year to various employees. Full-time employee equivalents increased from 86 at December 31, 1993 to 112 at December 31, 1994. FDIC deposit insurance expenses increased to $696,000 in 1994, an increase of $43,000 over the $653,000 in 1993. Occupancy, furniture and equipment, and advertising expenses combined were up $220,000 or 14.2% to $1,766,000 from $1,546,000 in 1993 due to the opening of the two new branches, and the trust department expansion. Operating expenses for foreclosed real estate decreased by $274,000 or 52.0% to $253,000 for the year ended December 31, 1994 from $527,000 in 1993. The reason for the decrease is primarily due to a decrease in the number of properties held in foreclosed real estate. Other operating expenses increased by $933,000 to $2,122,000 for the year ended December 31, 1994 from $1,189,000 in 1993, the increase was primarily due to the settlement of a lawsuit for approximately $600,000 including legal fees. The claim involved an isolated incident in which the Bank accepted for deposit four checks, with endorsements allegedly forged by the wife of the president of a closely held corporate customer of the Bank. No Bank employee was alleged to be involved in the fraudulent endorsement. The Bank believed strongly in its position which it asserted in court. However, the trial resulted in a jury decision against the Bank. In the opinion of the Bank this decision was based on the deep pocket theory. The Bank believes strongly that the case was wrongly decided and influenced by the trial court's prejudicial charge to the jury and rulings of evidence, but decided not to appeal the case to avoid the risk of up to $450,000 in interest being added to the judgment and to conclude the matter without the expense and risk of an additional trial. Income Taxes: The effective tax rate for 1994 was 40.64%, a slight decrease of 24 basis points from 40.88% in 1993. 22 REPORT OF INDEPENDENT ACCOUNTANTS - --------------------------------- To the Board of Directors of People's Savings Financial Corp.: We have audited the accompanying consolidated balance sheets of People's Savings Financial Corp. (the "Corporation") as of December 31, 1995 and 1994, and the related consolidated statements of income, stockholders' equity and cash flows for each of the three years in the period ended December 31, 1995. These consolidated financial statements are the responsibility of the Corporation'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 audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall consolidated 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 consolidated financial position of People's Savings Financial Corp. and Subsidiaries as of December 31, 1995 and 1994, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 1995 in conformity with generally accepted accounting principles. As discussed in Note 1 to the consolidated financial statements, the Corporation changed its methods of accounting for investments, income taxes, and post-retirement benefits other than pensions in 1993. /s/ Coopers & Lybrand L.L.P. Hartford, Connecticut January 19, 1996 23 PAGE> CONSOLIDATED BALANCE SHEETS - ---------------------------
December 31, 1995 1994 - ------------------------------------------------------------------------------------------------------------------------------------ Assets Cash and due from banks (Note 2): Non-interest bearing deposits and cash $ 6,815,738 $ 9,537,883 Short-term investments (Note 3) 21,346,359 9,876,312 - ------------------------------------------------------------------------------------------------------------------------------------ Cash and cash equivalents 28,162,097 19,414,195 Securities (Note 4): Trading account securities 5,461,095 Available-for-sale (at market) 91,128,434 62,637,638 Held-to-maturity (market value: $38,259,088 at December 31, 1995; $66,680,161 at December 31, 1994) 38,460,901 71,362,316 Federal Home Loan Bank stock 2,643,000 2,292,400 Loans held for sale (at market ) 927,034 Loans (Note 5): Real estate mortgage 202,225,544 195,988,157 Real estate construction 3,933,410 3,110,501 Installment 32,178,447 29,441,420 Commercial 519,461 329,492 - ------------------------------------------------------------------------------------------------------------------------------------ Total loans 238,856,862 228,869,570 Less: Deferred loan fees and unearned income (487,392) (754,496) Allowance for loan losses (1,577,547) (1,791,270) - ------------------------------------------------------------------------------------------------------------------------------------ Net loans 236,791,923 226,323,804 Bank premises and equipment (Note 6) 2,370,366 2,410,227 Foreclosed real estate 177,538 627,614 Accrued income receivable 3,747,646 3,645,910 Goodwill 3,299,902 3,745,089 Other assets 2,455,589 4,168,937 - ------------------------------------------------------------------------------------------------------------------------------------ Total assets $ 410,164,430 $ 402,089,225 - ------------------------------------------------------------------------------------------------------------------------------------ Liabilities and stockholders' equity Liabilities: Deposits (Note 7) $ 339,364,769 $ 321,701,642 Advances from Federal Home Loan Bank of Boston (Note 8) 18,950,000 33,450,000 Mortgagors' escrow accounts 2,490,394 2,609,017 Accrued expenses 1,239,131 1,164,488 Other liabilities 3,406,746 1,933,164 - ------------------------------------------------------------------------------------------------------------------------------------ Total liabilities 365,451,040 360,858,311 Commitments and Contingencies (Notes 13 and 14) Stockholders' equity (Notes 10 and 11): Preferred stock, no par value, 1,000,000 shares authorized; none issued and outstanding Common stock, par value $1.00, authorized 10,000,000 shares, issued and outstanding 2,511,824 at December 31, 1995 and 2,508,324 at December 31, 1994, including shares in treasury of 559,461 at December 31, 1995 and 519,461 at December 31, 1994 2,511,824 2,508,324 Additional paid-in capital 21,833,981 21,791,720 Retained earnings 27,421,569 25,750,679 Cost of treasury stock (7,249,861) (6,528,911) Unrealized gains (losses) on securities available-for-sale, net of taxes 195,877 (2,290,898) - ------------------------------------------------------------------------------------------------------------------------------------ Total stockholders' equity 44,713,390 41,230,914 - ----------------------------------------------------------------------------------------------------------------------------------- Total liabilities and stockholders' equity $410,164,430 $402,089,225 - ------------------------------------------------------------------------------------------------------------------------------------
See notes to consolidated financial statements. People's Savings Financial Corp. and Subsidiary 24 CONSOLIDATED STATEMENTS OF INCOME - ---------------------------------
Year ended December 31, 1995 1994 1993 - ------------------------------------------------------------------------------------------------------------------------------------ Interest income: Interest and fees on loans $ 18,297,183 $ 16,297,104 $ 18,288,123 Interest and dividends on investments: Interest income 8,157,176 8,075,009 5,182,605 Dividend income 433,030 189,206 193,321 Trading account 46,174 215,658 185,894 Other interest income 588,358 284,318 296,121 - ------------------------------------------------------------------------------------------------------------------------------------ Total interest income 27,521,921 25,061,295 24,146,064 Interest expense: Interest on deposits 13,229,587 9,814,662 10,194,733 Interest on borrowed funds 1,253,007 1,455,176 471,767 - ------------------------------------------------------------------------------------------------------------------------------------ Total interest expense 14,482,594 11,269,838 10,666,500 - ------------------------------------------------------------------------------------------------------------------------------------ Net interest income 13,039,327 13,791,457 13,479,564 Provision for loan losses 100,974 128,657 1,010,000 - ----------------------------------------------------------------------------------------------------------------------------------- Net interest income after provision for loan losses 12,938,353 13,662,800 12,469,564 Other income: Investment securities gains (losses) (169,603) 127,717 109,646 Trading account gains (losses) 49,168 (283,890) 579,193 Gain (loss) on sale of mortgages 29,472 (375,529) 290,272 Trust fees 1,129,325 190,642 616 Service charges and fees 1,001,236 879,792 802,268 Other operating income 203,787 198,326 196,409 - ----------------------------------------------------------------------------------------------------------------------------------- Total other income 2,243,385 737,058 1,978,404 - ------------------------------------------------------------------------------------------------------------------------------------ 15,181,738 14,399,858 14,447,968 Other expenses: Salaries and employee benefits (Note 12) 4,558,419 3,555,996 2,975,704 Occupancy expense 927,646 844,120 767,288 Furniture and equipment expense 892,512 707,125 616,126 Advertising 225,763 215,256 162,735 FDIC deposit insurance 380,429 696,171 652,917 Lawsuit settlement 550,000 Goodwill amortization 382,521 62,183 Foreclosed real estate expenses 452,682 253,273 527,160 Other operating expenses 1,788,954 1,509,848 1,188,636 - ----------------------------------------------------------------------------------------------------------------------------------- Total other expenses 9,608,926 8,393,972 6,890,566 Income before income taxes 5,572,812 6,005,886 7,557,402 Income taxes (Note 9): Current $ 2,359,649 $ 1,991,085 $ 3,288,964 Deferred (credit) (175,365) 449,929 (198,842) - ----------------------------------------------------------------------------------------------------------------------------------- Total income taxes 2,184,284 2,441,014 3,090,122 - ----------------------------------------------------------------------------------------------------------------------------------- Income before cumulative effect of changes in accounting principles 3,388,528 3,564,872 4,467,280 - ----------------------------------------------------------------------------------------------------------------------------------- Cumulative effect of changes in accounting principles: Post-retirement benefits (153,988) Income taxes 438,481 - ----------------------------------------------------------------------------------------------------------------------------------- Net income $ 3,388,528 $ 3,564,872 $ 4,751,773 - ------------------------------------------------------------------------------------------------------------------------------------ Per share data: Weighted-average shares outstanding and common stock equivalents 1,986,737 2,022,280 2,049,082 Net income before the cumulative effect of changes in accounting principles: $ 1.71 $ 1.76 $ 2.18 Cumulative effect of changes in accounting principles: Post-retirement benefits (.07) Income taxes .21 - ----------------------------------------------------------------------------------------------------------------------------------- Net income $ 1.71 $ 1.76 $ 2.32 - -----------------------------------------------------------------------------------------------------------------------------------
See notes to consolidated financial statements. People's Savings Financial Corp. and Subsidiary 25 CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY - -----------------------------------------------
Unrealized Holding Gains (Losses) Outstanding On Securities Shares of Additional Carried at Common Common Paid-In Retained Treasury Market, Net Stock Stock Capital Earnings Stock of Taxes - ------------------------------------------------------------------------------------------------------------------------------------ Year ended December 31, 1993 Balance at beginning of year 2,067,324 $2,478,824 $21,436,672 $20,882,750 $(4,523,212) $ -- Net income 4,751,773 Dividends declared, $.84 per share (1,691,917) Stock options exercised 26,500 26,500 243,312 Tax benefit from stock options exercised 83,986 Acquisition of treasury stock (100,461) (1,870,099) Net unrealized gains (losses) on securities available-for-sale, net of taxes 619,570 - ------------------------------------------------------------------------------------------------------------------------------------ Balance at end of year 1,993,363 $2,505,324 $21,763,970 $23,942,606 $(6,393,311) $619,570 - ------------------------------------------------------------------------------------------------------------------------------------ Year ended December 31, 1994 Balance at beginning of year 1,993,363 $2,505,324 $21,763,970 $23,942,606 $(6,393,311) $619,570 Net income 3,564,872 Dividends declared, $.88 per share (1,756,799) Stock options exercised 3,000 3,000 27,750 Acquisition of treasury stock (7,500) (135,600) Net unrealized gains (losses) on securities available-for-sale, net of taxes (2,910,468) - ------------------------------------------------------------------------------------------------------------------------------------ Balance at end of year 1,988,863 $2,508,324 $21,791,720 $25,750,679 $(6,528,911) $(2,290,898) - ------------------------------------------------------------------------------------------------------------------------------------ Year ended December 31, 1995 Balance at beginning of year 1,988,863 $2,508,324 $21,791,720 $25,750,679 $(6,528,911) $(2,290,898) Net income 3,388,528 Dividends declared, $.88 per share ( 1,717,638) Stock options exercised 3,500 3,500 42,261 Acquisition of treasury stock (40,000) (720,950) Net unrealized gains (losses) on securities available-for-sale, net of taxes 2,486,775 - ------------------------------------------------------------------------------------------------------------------------------------ Balance at end of year 1,952,363 $2,511,824 $21,833,981 $27,421,569 $(7,249,861) $ 195,877 - ------------------------------------------------------------------------------------------------------------------------------------
See notes to consolidated financial statements. People's Savings Financial Corp. and Subsidiary 26 CONSOLIDATED STATEMENTS OF CASH FLOWS - -------------------------------------
Year ended December 31, 1995 1994 1993 - ------------------------------------------------------------------------------------------------------------------------------------ Operating activities Net income $ 3,388,528 $ 3,564,872 $ 4,751,773 Adjustments to reconcile net income to net cash provided by operating activities: Provision for depreciation and amortization 478,794 426,437 305,470 Accretion and amortization of bond premiums and discounts, net 62,431 55,709 38,032 Provision for loan losses 100,974 128,657 1,010,000 Amortization of net deferred loan fees (305,641) (226,485) (673,447) Deferred income tax (credit) (175,365) 449,929 (198,842) Decrease in trading account securities 5,461,095 76,262 2,120,979 Decrease (increase) in loans held for sale (927,034) 390,780 12,199,620 Realized investment securities losses (gains) 169,603 (127,717) (109,646) Write-downs on foreclosed real estate 346,486 231,273 597,758 Amortization of goodwill 382,521 62,183 Increase in accrued expenses 74,643 120,641 344,510 Increase (decrease) in other, net 1,563,271 (1,145,093) (191,464) - ------------------------------------------------------------------------------------------------------------------------------------ Net cash provided by operating activities 10,620,306 4,007,448 20,194,743 Investing activities Proceeds from sales of available-for-sale securities 22,949,049 22,129,184 3,734,895 Proceeds from maturities of available-for-sale securities 16,273,552 11,662,635 held-to-maturity securities 15,298,572 2,545,640 38,930,261 Purchases of available-for-sale securities (44,821,086) (29,057,588) held-to-maturity securities (1,265,000) (31,859,522) (89,880,015) Purchases of Federal Home Loan Bank stock (350,600) (123,300) Net increase (decrease) in loans (11,378,262) (14,699,139) 4,160,568 Foreclosed real estate sold 1,218,400 1,457,407 2,199,500 Purchases of premises and equipment (net) (438,933) (1,041,364) (311,328) Intangibles resulting from acquisition of New Meriden Trust Co. (3,807,133) - ------------------------------------------------------------------------------------------------------------------------------------ Net cash used by investing activities (2,514,308) (42,669,880) (41,289,419) Financing activities Net increase (decrease) in demand deposits, NOW accounts, and savings accounts (17,530,631) (520,825) 3,417,370 Net increase in certificates of deposit 35,193,758 22,755,483 12,554,846 Increase (decrease) in mortgage escrow accounts (118,623) 155,685 (74,971) Net increase (decrease) in overnight borrowings from the Federal Home Loan Bank of Boston (760,433) 910,433 Proceeds from long-term borrowings 11,800,000 Proceeds from short-term borrowings 49,900,000 Principal payments on short-term borrowings (14,500,000) (35,400,000) Cash dividends paid (1,727,411) (1,756,139) (1,666,842) Acquisition of treasury stock (720,950) (135,600) (1,870,099) Issuance of common stock (under stock option plans) 45,761 30,750 353,798 - ----------------------------------------------------------------------------------------------------------------------------------- Net cash provided by financing activities 641,904 46,068,921 13,624,535 Increase (decrease) in cash and cash equivalents 8,747,902 7,406,489 (7,470,141) Cash and cash equivalents at beginning of year 19,414,195 12,007,706 19,477,847 =================================================================================================================================== Cash and cash equivalents at end of year $ 28,162,097 $ 19,414,195 $ 12,007,706 Non-cash investing and financing activities Change in unrealized gains (loss) on available-for-sale securities $ 4,256,502 $ (5,052,824) $ 1,060,276 Transfer of loans to foreclosed real estate 1,114,810 537,713 2,196,718 Transfer of investment securities from held-to-maturity to available-for-sale 18,789,280 73,943,925 - ------------------------------------------------------------------------------------------------------------------------------------
See notes to consolidated financial statements. People's Savings Financial Corp. and Subsidiary 27 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - ------------------------------------------ I SIGNIFICANT ACCOUNTING POLICIES The significant accounting policies followed by the Corporation and its subsidiary and the methods of applying those policies are summarized in the following paragraphs. Principles of Consolidation: The consolidated financial statements of People's Savings Financial Corp. (the Corporation) include the accounts of its wholly-owned subsidiary, The People's Savings Bank of New Britain (the Bank). All significant intercompany balances and transactions have been eliminated in consolidation. The Bank operates eight branches in central Connecticut. Its primary source of revenue is providing residential mortgage loans to customers. Basis of Financial Statement Presentation: Material estimates that are particularly susceptible to significant change in the near term relate to the determination of the allowance for loan losses and the valuation of real estate acquired in connection with foreclosures or in satisfaction of loans. In connection with the determination of the allowance for loan losses and valuation of foreclosed real estate, management obtains independent appraisals for significant properties. A substantial portion (97%) of the Bank's loans, including loans held for sale and loan commitments, is collateralized by real estate in depressed markets in central Connecticut. In addition, all of the real estate owned is located in these same markets. Accordingly, the ultimate collectibility of a substantial portion of the Bank's loan portfolio and the recovery of a substantial portion of the carrying amount of foreclosed real estate are particularly susceptible to changes in market conditions in central Connecticut. Other financial assets are subject to other impairment issues - similar to credit quality - that involve subjective determinations. For example, increased prepayments of principal during periods of falling interest rates have a significant impact on the economic value of assets such as mortgage servicing rights. Many banks and savings institutions activities involve custody of financial assets, management of such assets, or both. Fiduciary responsibilities are the focus of activities such as servicing the collateral behind asset-backed securities, managing mutual funds and administering trusts. These activities expose the institution to the risk of loss arising from failure to properly process transactions or handle the related assets on behalf of third parties. Management believes that the allowances for losses on loans and writedowns of foreclosed real estate are adequate. While management uses available information to recognize losses on loans and foreclosed real estate, future additions to the allowances may be necessary based on changes in economic conditions. In addition, various regulatory agencies, as an integral part of their examination process, periodically review the Bank's allowances for losses on loans and writedowns of foreclosed real estate. Such agencies may require the Bank to recognize additions to the allowances based on their judgments of information available to them at the time of their examination. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. It is at least reasonably possible that the estimate on the effect on the financial statements of a condition, situation, or set of circumstances that existed at the date of the financial statements will change in the near term due to one or more future confirming events. The effect of the change could be material to the financial statements. Investment Securities: Effective December 31, 1993 the Corporation adopted, on a prospective basis, Statement of Financial Accounting Standards No. 115, "Accounting for Certain Investments in Debt and Equity Securities" ("SFAS 115"). Please see Note 4 Investment Securities on page 31 of this report for further explanation. 28 People's Savings Financial Corp. and Subsidiary NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) - ------------------------------------------------------ Loans Held for Sale: Mortgage loans held-for-sale are valued at the lower of cost or market as determined by outstanding commitments from investors or current investor yield requirements calculated on the aggregate loan basis. Changes in the carrying value are reported in earnings as gains and losses on mortgage loans. Gains and losses resulting from sales of mortgage loans are recognized when the proceeds are received from investors. Loan Interest: Interest on loans is included in income as earned based on rates applied to principal amounts outstanding. The accrual of interest income is generally discontinued when a loan becomes 90 days past due as to principal or interest. Management may elect to continue the accrual of interest when the estimated fair value of collateral is sufficient to cover the principal balance and accrued interest. Loan origination fees and certain direct loan origination costs are deferred and the net amount amortized as an adjustment of the related loan's yield over the life of the loan. Allowance for Loan Losses: The allowance for loan losses is maintained at a level believed adequate by management to absorb potential losses in the loan portfolio. Management's determination of the adequacy of the allowance is based on an evaluation of the portfolio, past loan loss experience, current economic conditions, volume, growth and composition of the loan portfolio, and other relevant factors. The allowance is increased by provisions for loan losses charged against income. On January 1, 1995, the Corporation adopted Statement of Financial Accounting Standards No. 114 "Accounting by Creditors for Impairment of a Loan" and No. 118 "Accounting by Creditors for Impairment of a Loan - Income Recognition and Disclosures" ("SFAS 114 and 118"). SFAS No. 114 and 118 requires creditors to evaluate the collectibility of impaired loans, as defined below, based on the present value of expected future cash flows discounted at the historical effective interest rate, except that all collateral-dependent loans are measured for collectibility of contractual principal and interest based on fair value of the collateral. As permitted by the statement, smaller-balance homogeneous loans consisting of residential mortgages and consumer loans are evaluated for collectibility by the Corporation based on historical loss experience rather than on an individual loan-by-loan basis. The Corporation considers a loan to be impaired for SFAS No. 114 and 118 purposes when, based on current information and events, it is probable that it will be unable to collect all amounts of contractual interest and principal as scheduled in the loan agreement. An insignificant delay of under 90 days or a 10% shortfall in the amount of payment is not an event that, when considered in isolation, would automatically cause the Corporation to consider a loan to be impaired for purposes of SFAS No. 114 and 118. The Corporation evaluates all impaired loans, other than small balance loans, on an individual loan-by-loan basis; it does not aggregate impaired loans into major risk classifications. Except for certain restructured loans, impaired loans are loans that are on nonaccrual status. When an impaired loan or a portion of an impaired loan is deemed uncollectible, the portion deemed uncollectible is charged against the allowance for loan losses and subsequent recoveries, if any, are credited to the allowance. Prior to the adoption of SFAS No. 114 and 118, the allowance for loan losses related to all loans was based on undiscounted cash flows or the fair value of the collateral for collateral dependent loans. The adoption of SFAS No. 114 and 118 did not result in any additions to the provision for loan losses. Bank Premises and Equipment: Bank premises and equipment are stated at cost less accumulated depreciation. Depreciation is computed using the straight-line method. Maintenance, repairs and minor improvements are charged to expense as incurred. Foreclosed Real Estate: Foreclosed real estate consists principally of properties acquired through mortgage loan foreclosure proceedings. These properties are recorded at the lower of the carrying value of the related loans, including costs of foreclosure, or estimated fair value, less estimated selling costs, of the real estate acquired. Excess Cost over Net Assets Acquired: The excess cost over net assets acquired (goodwill) from the acquisition of New Meriden Trust Co. from the FDIC is being amortized on a straight-line basis over 10 People's Savings Financial Corp. and Subsidiary 29 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) - ------------------------------------------------------ years. On a periodic basis, the Corporation reviews goodwill for events or changes in circumstances that may indicate that the carrying amount of goodwill may not be recoverable. Income Taxes: Effective January 1, 1993 the Corporation adopted, on a prospective basis, Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes" ("SFAS 109"). SFAS 109 requires the use of the asset/liability method of accounting for income taxes. Deferred income taxes and tax benefits are recognized for the future tax consequence of differences between the financial statement carrying amounts of assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in when those temporary differences are expected to be recovered or settled. A valuation allowance is established when it is considered to be more likely than not that some portion of a deferred tax asset will not be realized. Prior to the adoption of SFAS 109, income taxes expense was based on items of income and expense that were reported in different years in the financial statements and tax returns and were measured at the tax rate in effect in the year the difference originated. The cumulative effect of adopting SFAS 109 resulted in a benefit of $438,481, which represents the application of the new accounting principle to the cumulative temporary differences existing at January 1, 1993. Earnings Per Share: Earnings per share was computed using the weighted average common shares outstanding during the year and increased by the average number of shares issuable on the exercise of stock options based on the treasury stock method. Cash Flows: Cash and cash equivalents include cash, amounts due from banks and short-term investments. Post-retirement Benefits Other Than Pensions: Effective January 1, 1993, the Corporation implemented, on the immediate recognition basis, Statement of Financial Accounting Standards No. 106, "Employers' Accounting for Post-retirement Benefits Other Than Pensions" ("SFAS 106"), which requires that post-retirement benefits other than pensions be accounted for using the accrual method. These benefits are unfunded and there are no assets associated with the plan. Previously, post-retirement medical and life insurance costs were expensed as claims and premiums were paid. The effect of implementing SFAS 106 had an effect upon results of operations of the Corporation of $(153,988), net of taxes for the year ended December 31, 1993. Reclassifications: Certain 1994 and 1993 amounts have been reclassified to conform to the 1995 presentation. These reclassifications had no effect on earnings in either year. II RESTRICTION ON CASH AND DUE FROM BANKS The Bank is required to maintain reserves against certain deposit transaction accounts. At December 31, 1995 the Bank was required to have cash and liquid assets of approximately $319,000 to meet these requirements. III SHORT-TERM INVESTMENTS Short-term investments consisted of: December 31, 1995 1994 - -------------------------------------------------------------------------------- Federal Home Loan Bank overnight deposits $8,072,499 Federal funds sold $ 19,610,000 1,250,000 Money market accounts 1,736,359 553,813 - -------------------------------------------------------------------------------- $ 21,346,359 $9,876,312 ================================================================================ 30 People's Savings Financial Corp. and Subsidiary NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) - ------------------------------------------------------ IV INVESTMENT SECURITIES Effective December 31, 1993 the Corporation adopted, on a prospective basis, Statement of Financial Accounting Standards No. 115 "Accounting for Certain Investments in Debt and Equity Securities" ("SFAS 115") and revised its securities accounting policy. Securities that may be sold as part of the Corporation's asset/liability or liquidity management or in response to or in anticipation of changes in interest rates and resulting prepayment risk, or for other similar factors, are classified as available-for-sale and carried at fair market value. Unrealized holding gains and losses on such securities are reported net of related taxes as a separate component of shareholders' equity. Securities that the Corporation has the ability and positive intent to hold to maturity are classified as held-to-maturity and carried at amortized cost. Realized gains and losses on the sales of securities are reported in earnings and computed using the specific identification cost basis. Securities available-for-sale (carried at fair value) and held-to-maturity (carried at amortized cost) at December 31, 1995 and 1994 were as follows:
December 31, 1995 - -------------------------------------------------------------------------------------------- Gross Gross Estimated Amortized Unrealized Unrealized Market Cost Gains Losses Value - -------------------------------------------------------------------------------------------- Available-for-Sale United States Government and Agency obligations $44,505,649 $ 158,718 $ 111,798 $44,552,569 State of Connecticut taxable obligations 1,250,000 1,250 1,251,250 Corporate securities 8,132,634 95,431 1,126 8,226,939 Mortgage-backed securities 21,480,424 162,999 120,407 21,523,016 - -------------------------------------------------------------------------------------------- Total debt securities 75,368,707 418,398 233,331 75,553,774 Marketable equity securities 9,915,136 112,285 24,875 10,002,546 Mutual funds 5,615,389 43,275 5,572,114 - -------------------------------------------------------------------------------------------- $90,899,232 $ 530,683 $ 301,481 $91,128,434 - -------------------------------------------------------------------------------------------- Held-to-Maturity United States Government and Agency obligations $ 9,994,460 $ 54,641 $ 22,896 $10,026,205 Mortgage-backed securities 28,466,441 35,045 268,603 28,232,883 - -------------------------------------------------------------------------------------------- $38,460,901 $ 89,686 $ 291,499 $38,259,088 - --------------------------------------------------------------------------------------------
People's Savings Financial Corp. and Subsidiary 31 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) - --------------------------------------------------------------------------------
December 31, 1994 - -------------------------------------------------------------------------------------------- Gross Gross Estimated Amortized Unrealized Unrealized Market Cost Gains Losses Value - -------------------------------------------------------------------------------------------- Available-for-Sale United States Government and Agency obligations $42,487,556 $ 6,272 $ 2,932,054 $39,561,774 State of Connecticut taxable obligations 1,251,870 14,520 1,237,350 Corporate securities 11,624,780 6,895 390,631 11,241,044 Mortgage-backed securities 4,727,921 205 14,005 4,714,121 - -------------------------------------------------------------------------------------------- Total debt securities 60,092,127 13,372 3,351,210 56,754,289 Marketable equity securities 103,334 128,559 1,625 230,268 Mutual funds 6,364,276 711,195 5,653,081 - -------------------------------------------------------------------------------------------- $66,559,737 $ 141,931 $ 4,064,030 $62,637,638 ============================================================================================ Held-to-Maturity United States Government and Agency obligations $28,377,684 $ 1,408,925 $26,968,759 Mortgage-backed securities 42,984,632 $ 3,138 3,276,368 39,711,402 - -------------------------------------------------------------------------------------------- $71,362,316 $ 3,138 $ 4,685,293 $66,680,161 ============================================================================================
The amortized cost and estimated market value of debt securities at December 31, 1995, 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. Amortized Estimated Cost Market Value - -------------------------------------------------------------------------------- Available-for-Sale Due in one year or less $ 9,230,374 $ 9,257,210 Due after one year through five years 42,657,909 42,768,548 Due after five years through ten years 2,000,000 2,005,000 - -------------------------------------------------------------------------------- 53,888,283 54,030,758 Mortgage-backed securities 21,480,424 21,523,016 - -------------------------------------------------------------------------------- Total $75,368,707 $75,553,774 ================================================================================ Held-to-Maturity Due in one year or less $ 4,000,509 $ 3,987,500 Due after one year through five years 5,993,951 6,038,705 - -------------------------------------------------------------------------------- 9,994,460 10,026,205 Mortgage-backed securities 28,466,441 28,232,883 - -------------------------------------------------------------------------------- Total $38,460,901 $38,259,088 ================================================================================ During 1995, there were $22,949,000 of debt security sales from the available-for-sale portfolio. Gross gains of $274,154 and gross losses of $388,875 were realized on those sales. During 1994, there were $15,807,778 of debt security sales from the available-for-sale portfolio. Gross gains of $98,793 and gross losses of $729,638 were realized on those sales. There were $3,636,769 of debt security sales during 1993. Gross gains of $45,206 were realized on those sales. Net realized losses on marketable equity securities and mutual funds were $54,882 for the year ended December 31, 1995. Net realized gains on marketable equity securities and mutual funds were $758,562 and $64,440, for the years ended 1994 and 1993, respectively. Net unrealized gains on the trading account amounted to $10,014 at December 31, 1994. As permitted by the Financial Accounting Standards Board, in a special one time opportunity, the Bank transferred $18,789,280 of investment securities classified as held-to-maturity to the available-for-sale category on 32 People's Savings Financial Corp. and Subsidiary NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) - ------------------------------------------------------ December 8, 1995. The Bank made the transfer to provide more flexibility in managing the portfolio. At the time of the transfer there was a net unrealized gain on the investments of $129,920. At December 31, 1995, $1,009,000 of United States Government and Agency obligations were pledged as collateral to secure public funds. V LOANS The carrying amounts of the Corporation's loan portfolio at December 31, 1995 and 1994 were as follows: 1995 1994 - -------------------------------------------------------------------------------- Carrying Carrying Amount Amount - -------------------------------------------------------------------------------- Real estate mortgage $201,389,246 $194,788,009 Real estate construction 4,048,186 3,110,501 Installment loans to individuals 32,178,447 29,340,700 Commercial 519,461 329,492 - -------------------------------------------------------------------------------- 238,135,340 227,568,702 Nonaccrual loans 721,522 1,300,868 - -------------------------------------------------------------------------------- $238,856,862 $228,869,570 ================================================================================ At December 31, 1995, $721,522 of the Bank's loan portfolio was on nonaccrual status. The Bank's estimate of impairment due to collectibility concerns related to these loans is included in the allowance for loan losses. At December 31, 1995, the recorded investment in loans for which impairment has been recognized in accordance with SFAS 114 and 118 totaled $457,182, excluding small-balance homogeneous loans. All of these loans have been evaluated for impairment using the present values of future cash flows method. There was a valuation allowance of $65,292 recorded for the impaired loans at December 31, 1995. For the year ended December 31, 1995 the average balance of impaired loans was approximately $172,000. The Corporation generally recognizes interest income on impaired loans on a cash basis. For the twelve month period ended December 31, 1995, the Corporation recorded no interest on impaired loans. At December 31, 1995 the Corporation had two restructured loans totaling $500,000. One of these loans in the amount of approximately $431,000 was restructured prior to the adoption of SFAS No. 114 and 118 and is therefore accounted for in accordance with SFAS No. 15 "Accounting by Debtors and Creditors for Troubled Debt Restructurings" and the other loan is considered a smaller-balance homogeneous loan under SFAS No. 114 and 118. Loans the Bank services for others were $66,833,079 and $67,834,944 at December 31, 1995 and 1994, respectively. People's Savings Financial Corp. and Subsidiary 33 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) - -------------------------------------------------------------------------------- Information with respect to nonaccrual loans at December 31, 1995 and 1994 is as follows: December 31, 1995 1994 - -------------------------------------------------------------------------------- Nonaccrual loans $721,522 $1,300,868 Interest income that would have been recorded under original terms 76,488 80,364 Interest income recorded during period 21,260 44,123 - -------------------------------------------------------------------------------- Changes in the allowance for loan losses were as follows:
Year ended December 31, 1995 1994 1993 - --------------------------------------------------------------------------------------------- Balance at beginning of year $1,791,270 $2,223,472 $1,945,025 Provision charged to operations 100,974 128,657 1,010,000 Loans charged off (356,884) (642,371) (776,290) Recoveries 42,187 81,512 44,737 - --------------------------------------------------------------------------------------------- Balance at end of year $1,577,547 $1,791,270 $2,223,472 =============================================================================================
VI BANK PREMISES AND EQUIPMENT Cost and accumulated depreciation and amortization of the various categories of premises and equipment were as follows:
December 31, 1995 December 31, 1994 - ------------------------------------------------------------------------------------------------- Accumulated Accumulated Depreciation and Depreciation and Cost Amortization Cost Amortization Building and land $1,696,624 $ 672,938 $1,682,898 $ 618,271 Leasehold improvements 906,804 460,794 882,567 378,733 Furniture and equipment 3,336,039 2,435,369 2,935,068 2,093,302 - ------------------------------------------------------------------------------------------------- $5,939,467 $3,569,101 $5,500,533 $3,090,306 =================================================================================================
VII DEPOSITS An analysis of deposits follows: December 31, 1995 December 31, 1994 - -------------------------------------------------------------------------------- Non-interest-bearing demand deposits $ 5,605,612 $ 4,945,976 Interest-bearing demand deposits 11,479,100 11,561,239 Money market deposit accounts 4,000,026 4,266,138 Savings deposits 109,215,508 127,057,525 Time deposits 209,064,523 173,870,764 - -------------------------------------------------------------------------------- $339,364,769 $321,701,642 ================================================================================ The amount of individual certificates of deposit in excess of $100,000 included in time deposits at December 31, 1995 and 1994 was $24,658,000 and $17,870,000, respectively. The Bank paid interest on deposits and escrow accounts of $13,271,552, $9,855,921 and $10,252,694 for the years ended December 31, 1995, 1994 and 1993, respectively. 34 People's Savings Financial Corp. and Subsidiary NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) - -------------------------------------------------------------------------------- VIII ADVANCES FROM FEDERAL HOME LOAN BANK OF BOSTON Advances from Federal Home Loan Bank of Boston consisted of the following: December 31, 1995 December 31, 1994 - -------------------------------------------------------------------------------- 5.57% due January 1995 $ 5,000,000 5.98% due February 1995 4,000,000 6.45% due March 1995 3,500,000 5.05% due April 1995 2,000,000 4.70% due January 1996 $ 1,000,000 1,000,000 4.56% due January 1996 1,000,000 1,000,000 4.32% due January 1996 3,000,000 3,000,000 6.94% due April 1996 3,000,000 3,000,000 5.90% due October 1996 4,000,000 4,000,000 5.01% due January 1997 1,300,000 1,300,000 4.87% due January 1997 1,300,000 1,300,000 5.20% due January 1998 2,000,000 2,000,000 8.19% due December 1998 700,000 700,000 5.70% due January 1999 750,000 750,000 5.54% due January 1999 750,000 750,000 4.00% due January 2008 150,000 150,000 - -------------------------------------------------------------------------------- $18,950,000 $33,450,000 ================================================================================ The Bank had no overnight borrowings at December 31, 1995 and 1994. The Bank paid interest on advances of $1,311,886, $1,344,952 and $471,773 for the years ended December 31, 1995, 1994 and 1993, respectively. In accordance with an agreement with the Federal Home Loan Bank of Boston (FHLBB), the Bank is required to maintain qualified collateral, as defined in the FHLBB Statement of Credit Policy, free and clear of liens, pledges and encumbrances as collateral for the advances. The Bank maintains qualified collateral as defined by the FHLBB in excess of the $26,992,000 required to collateralize the outstanding advances and short-term borrowing facility at December 31, 1995. The FHLBB Statement of Credit Policy grants members the ability to borrow up to a certain percentage of the value of their qualified collateral. At December 31, 1995 the Bank could borrow up to an additional $221,540,000. The Bank also participates in the Ideal Way Line of Credit program with the FHLBB. These advances are one day loans with automatic rollover. The Bank has a pre-approved line of $8,042,000. IX FEDERAL AND STATE TAXES ON INCOME The Corporation adopted SFAS 109 on a prospective basis on January 1, 1993 as explained in Note 1. The cumulative effect of adopting SFAS 109 resulted in a benefit of $438,481, which is reported separately in the consolidated statement of income. Prior years' financial statements have not been restated. People's Savings Financial Corp. and Subsidiary 35 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) - -------------------------------------------------------------------------------- The components of the income tax provision (benefit) for the years ended December 31, are as follows:
1995 1994 1993 - ------------------------------------------------------------------------------------------- Current Provision: Federal $1,792,124 $1,501,990 $2,442,092 State 567,525 489,095 846,872 - ------------------------------------------------------------------------------------------- 2,359,649 1,991,085 3,288,964 - ------------------------------------------------------------------------------------------- DEFERRED PROVISION (BENEFIT): - ------------------------------------------------------------------------------------------- Federal (141,166) 319,823 (170,856) State (34,199) 130,106 (27,986) - ------------------------------------------------------------------------------------------- (175,365) 449,929 (198,842) - ------------------------------------------------------------------------------------------- Total provision for income taxes $2,184,284 $2,441,014 $3,090,122 ===========================================================================================
The following is a reconciliation of the expected federal statutory tax to the income tax provision for the years ended December 31: 1995 1994 1993 - -------------------------------------------------------------------------------- Income tax at statutory federal tax rate 34.00% 34.00% 34.00% Connecticut Corporation Tax, net of federal tax benefit 6.32 6.80 7.15 Dividends received deduction (0.91) (0.16) (0.27) Change in state tax rate .19 Other (.40) - -------------------------------------------------------------------------------- Effective income tax rates 39.20% 40.64% 40.88% ================================================================================ The components of the Corporation's net deferred tax assets at December 31, 1995 and 1994 are as follows:
1995 1994 Federal State Federal State - --------------------------------------------------------------------------------------------------------- Deferred tax assets: Loan loss provision $ 482,348 $170,876 $ 540,605 $201,518 Net mortgage origination fees 8,040 2,848 83,025 30,949 Deferred directors fees 273,741 96,975 224,462 83,671 Accrued self-insurance 18,131 6,423 9,704 3,617 Accrued interest payable 34,718 12,299 12,866 4,796 Accrued pension expense 113,184 40,097 119,812 44,662 Security losses 31,613 11,199 31,441 11,720 Post-retirement benefits (SFAS 106) 107,778 38,181 119,645 44,599 Goodwill 29,277 10,372 3,753 1,399 Available-for-sale securities (SFAS 115) 1,183,689 441,236 Other 46,579 16,499 - --------------------------------------------------------------------------------------------------------- Total deferred tax assets $1,145,409 $405,769 $2,329,002 $868,167 ========================================================================================================= Deferred tax liabilities: Tax loan loss reserve in excess of base year$ $ 6,396 $ 2,266 $ 7,077 $ 2,638 Accrued dividends receivable 22,903 8,113 6,332 2,600 Bond discount accretion 12,324 4,365 87,913 32,771 Mark to market - Sec 481a adjustment 62,834 22,259 96,252 35,879 Fixed assets 18,465 6,541 42,021 15,664 Prepaid insurance 26,835 9,506 28,414 10,592 Available-for-sale securities(SFAS 115) 100,906 37,620 Other 22,818 8,267 - --------------------------------------------------------------------------------------------------------- Total deferred tax liabilities 250,663 90,670 290,827 108,411 - --------------------------------------------------------------------------------------------------------- Net deferred tax assets 894,746 315,099 2,038,175 759,756 Valuation reserve 0 0 0 0 - --------------------------------------------------------------------------------------------------------- Net deferred tax assets after valuation reserve $ 894,746 $315,099 $2,038,175 $759,756 =========================================================================================================
36 People's Savings Financial Corp. and Subsidiary NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) - -------------------------------------------------------------------------------- The allocation of deferred tax expense (benefit) involving items charged to current year income and items charged directly to stockholders' equity for the years ended December 31, are as follows:
1995 1994 1993 Federal State Federal State Federal State - ------------------------------------------------------------------------------------------------------------------------------- Deferred tax expense (benefit) allocated to stockholders' equity $ 1,284,595 $ 478,856 $(1,183,689) $(441,236) Deferred tax expense (benefit) allocated to income (141,166) (34,199) 319,823 130,106 $(170,856) $(27,986) - ------------------------------------------------------------------------------------------------------------------------------- Total deferred tax expense (benefit $ 1,143,429 $ 444,657 $ (863,866) $(311,130) $(170,856) $(27,986) ===============================================================================================================================
The Corporation will only recognize a deferred tax asset when based upon available evidence, realization is more likely than not. Accordingly, at December 31, 1995, 1994 and 1993, the Corporation has recorded no valuation allowances against deferred tax assets based on sufficient available federal taxable income in the carryback period and anticipated future earnings for state purposes. The Corporation paid Federal and State income taxes totaling $1,820,800, $2,238,000 and $3,020,000, in 1995, 1994 and 1993, respectively. X RESTRICTIONS ON SUBSIDIARY DIVIDENDS, LOANS OR ADVANCES Dividends are paid by the Corporation from its assets which are mainly provided by dividends from the Bank. However, certain restrictions exist regarding the ability of the Bank to transfer funds to the Corporation in the form of cash dividends, loans or advances. The approval by the Banking Commissioner of the State of Connecticut (the Commissioner) is required to pay dividends in excess of the Bank's net profits (as defined by Connecticut banking laws) in the current year plus retained net profits for the preceding two years. The Bank has approximately $666,000 available for payment of dividends to the Corporation, without approval of the Commissioner, at December 31, 1995. Under Federal Reserve regulation, the Bank also is limited as to the amount it may loan to the Corporation, unless such loans are collateralized by specified obligations. At December 31, 1995, the maximum amount available for transfer from the Bank to the Corporation in the form of loans approximated 10% of consolidated net assets. On August 20, 1986, the Corporation's wholly-owned subsidiary converted from a State Chartered Mutual Savings Bank to a State Chartered Stock Savings Bank through the issuance of 2,444,324 shares of common stock. The Bank has established a liquidation account for a ten year period in an amount equal to its capital accounts as of August 31, 1986. The liquidation account is maintained for the benefit of eligible account holders who maintain their savings accounts with the Bank after conversion. In the event of a complete liquidation (and only in such an event), each eligible account holder will be entitled to receive a liquidation distribution from the liquidation account, in the proportionate amount of the lowest adjusted balance as of any subsequent annual closing date for savings accounts held, before any liquidation distribution may be made with respect to common stock. The Bank may not declare or pay a cash dividend on, or repurchase any of, its common stock if the effect thereof would cause the capital accounts to be reduced below the amount required for the liquidation account (approximately $913,000 at December 31, 1995). A portion of retained earnings has been designated as a reserve for bad debts in accordance with provisions of the Internal Revenue Code (the "Code") applicable to savings banks. If the reserve were to be used for any purpose other than to absorb losses on loans or if the Bank's qualifying assets as defined by the Code are less than 60% of total assets, a federal and state income tax liability could be incurred. It is not anticipated that the reserve will be made available for other purposes, that qualifying assets will be less than 60% of total assets, or that a tax liability will be incurred. The reserve amount was $4,651,122 at December 31, 1995 and $4,637,371 at December 31, 1994. Legislation has been introduced that would repeal the tax bad debts reserve method applicable to savings banks and require savings banks to change their method of tax accounting for bad debts to conform with that of commercial banks. The proposed legislation could People's Savings Financial Corp. and Subsidiary 37 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) - ------------------------------------------------------ result in the Corporation having to pay tax on the post-1987 tax bad debt reserves of approximately $21,000 and being forgiven for the pre-1988 tax bad debt reserves of approximately $4,650,000. The Corporation has recorded a tax liability for the post-1987 reserves and established no deferred tax liability for the pre-1988 reserves in accordance with SFAS No. 109. No certainty exists as to whether the proposed legislation will be enacted into law. XI STOCK OPTION PLAN The Corporation has a stock option and incentive plan for certain employees and a stock option plan for directors under which options become exercisable upon issuance. Options were granted during 1995, 1994 and 1993 with an exercise price equal to the fair market value of common stock at the date of grant.
Shares Under Option - ------------------------------------------------------------------------------------------------------- Outside Option Employee Director Price Range Plan Plan Total Per Share - ------------------------------------------------------------------------------------------------------- Outstanding at December 31, 1992 36,500 55,000 91,500 $9.125-$14.125 Granted during 1993 3,000 3,000 $18.25 Canceled during 1993 (1,000) (1,000) $10.00 Exercised during 1993 (15,500) (11,000) (26,500) $9.125-$12.50 - ------------------------------------------------------------------------------------------------------- Outstanding at December 31, 1993 20,000 47,000 67,000 $9.125-$18.25 Granted during 1994 4,000 4,000 $18.00 Exercised during 1994 (3,000) (3,000) $10.25 - ------------------------------------------------------------------------------------------------------- Outstanding at December 31, 1994 17,000 51,000 68,000 $9.125-$18.25 Granted during 1995 87,000 20,000 107,000 $17.5625-$18.25 Exercised during 1995 (1,000) (2,500) (3,500) $10.00-$10.25 - ------------------------------------------------------------------------------------------------------- Outstanding at December 31, 1995 103,000 68,500 171,500 $9.125-$18.25 Exercisable at December 31, 1995 (expiring during the period from August 20, 1996 through April 25, 2005) 103,000 68,500 171,500 $9.125-$18.25 Shares reserved for issuance at December 31, 1995 166,000 168,500 334,500 - ------------------------------------------------------------------------------------------------------- Shares available for future options at December 31: 1994 190,000 22,000 212,000 - ------------------------------------------------------------------------------------------------------- 1995 63,000 100,000 163,000 - -------------------------------------------------------------------------------------------------------
XII EMPLOYEE BENEFIT PLANS The Corporation has a defined benefit pension plan covering substantially all of its employees who qualify as to age, length of service and minimum hours per year. The benefits are based on a covered employee's final average compensation, primary social security benefit and credited service. The Corporation's funding policy is to contribute amounts to the plan sufficient to meet ERISA 's minimum funding requirements. 38 People's Savings Financial Corp. and Subsidiary NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) - ------------------------------------------------------ The following table sets forth the plan's funded status and amounts recognized in the Corporation's statement of financial position at December 31, 1995 and 1994:
December 31, 1995 1994 - ------------------------------------------------------------------------------------------ Actuarial present value of benefit obligations: Accumulated benefit obligation, including vested benefits of $1,633,785 in 1995 and $1,760,365 in 1994 $ 1,656,265 $ 1,783,872 - ------------------------------------------------------------------------------------------ Projected benefit obligation for service rendered to date $ 2,789,792 $ 2,667,227 Plan assets at fair value, primarily cash and cash equivalents, US and other bonds and listed stocks 1,885,076 1,717,424 - ------------------------------------------------------------------------------------------ Projected benefit obligations in excess of plan assets 904,716 949,803 Unrecognized net gain from past experience different from that assumed and effects of changes in assumptions (655,177) (692,430) Unrecognized transition asset (liability) at December 31 124,574 140,184 - ------------------------------------------------------------------------------------------ Accrued pension cost included in other liabilities $ 374,113 $ 397,557 - ------------------------------------------------------------------------------------------
Net pension cost included the following components:
Year ended December 31, 1995 1994 1993 - ---------------------------------------------------------------------------------------------- Service cost-benefits earned during the period $239,153 $199,116 $189,295 Interest cost on projected benefit obligation 179,172 163,021 153,316 Actual return on plan assets (345,515) 50,401 (113,910) Net amortization and deferral 193,564 (193,075) 9,552 - ---------------------------------------------------------------------------------------------- Net periodic pension cost $266,374 $219,463 $238,253 ==============================================================================================
The weighted-average discount rate and rate of increase in future compensation levels used in determining the actuarial present value of the projected benefit obligation were 7.0% and 5.0%, respectively, at December 31, 1995 and December 31, 1994, the respective measurement dates. The expected long-term rate of return on plan assets was 8.0% in 1995, 1994 and 1993. Effective January 1, 1992, the Corporation adopted a defined contribution 401(k) plan. All employees of the Corporation who have reached age 21 and have completed one year of service are eligible to participate in the plan. Employees may contribute up to 15% of their compensation not to exceed the maximum dollar limit imposed by the Internal Revenue Service. The Corporation's matching contribution is 50% of each participant's contribution up to 6% of the participant's compensation. The Corporation's contribution expense was $63,694, $56,360 and $49,630, respectively, for the years ended December 31, 1995, 1994 and 1993. Effective January 1, 1993, the Corporation implemented, on the immediate recognition basis, Statement of Financial Accounting Standards No. 106, "Employers' Accounting for Post-retirement Benefits Other Than Pensions" (SFAS 106), which requires that post-retirement benefits other than pensions be accounted for using the accrual method. These benefits are unfunded and there are no assets associated with the plan. Previously, post-retirement medical and life insurance costs were expensed as claims and premiums were paid. The effect of implementing SFAS 106 had an effect upon results of operations of the Corporation in 1993 of $(153,988) net of taxes. The net periodic post-retirement benefits expense was $50,080, $41,560 and $32,527, respectively, in 1995, 1994 and 1993. The post-retirement benefits liability was $355,177, $311,014 and $281,343, respectively, at December 31, 1995, 1994 and 1993. People's Savings Financial Corp. and Subsidiary 39 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) - ------------------------------------------------------ XIII LEASES Seven of the Bank's branch offices are leased under noncancelable operating leases which expire at various dates through 2004. The rental payments on the lease for one of the branches are subject to an escalating payment schedule. In all instances, the leases contain renewal options which extend for periods of 5 through 15 years. The future minimum rental commitments as of December 31, 1995 for these leases are as follows: 1996 $ 428,735 1997 433,084 1998 434,251 1999 424,057 2000 368,904 Thereafter 404,819 - -------------------------------------------------------------------------------- $2,493,850 - -------------------------------------------------------------------------------- Rental expense for the branches amounted to $442,892 in 1995, $393,332 in 1994 and $372,907 in 1993. XIV CONTINGENT LIABILITIES The Bank is party to financial instruments with off-balance-sheet risk in the normal course of business in order to meet the financing needs of its customers. These expose the Bank to credit risk in excess of the amount recognized in the consolidated balance sheet. The Bank's exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit is represented by the contractual amount of those instruments. The Bank uses the same credit policies in making commitments and conditional obligations as it does for on-balance-sheet instruments. Total credit exposure related to these items at December 31, 1995 and 1994 is summarized below: 1995 1994 Contract Amount Contract Amount - -------------------------------------------------------------------------------- Loan commitments: Approved mortgage and equity loan commitments $ 2,103,300 $ 3,227,700 Unadvanced portion of construction loans 2,925,864 2,346,299 Letters of credit 534,340 500,640 Unadvanced portion of: Commercial line of credit 1,511,250 1,535,972 Home equity lines of credit 4,515,152 4,104,247 Overdraft line of credit 19,959 13,900 Credit cards 3,404,764 1,800,609 - -------------------------------------------------------------------------------- $15,014,629 $13,529,367 - -------------------------------------------------------------------------------- Commitments to extend credits are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. The Bank evaluates each customer's creditworthiness on a case-by-case basis. The amount of collateral obtained if deemed necessary by the Bank upon extension of credit is based on management's credit evaluation of the counterparty. Collateral held is primarily residential property. Interest rates on home equity lines of credit are variable and are available for a term of 10 years. All other commitments are a combination of fixed and variable with maturities of one year or more. 40 People's Savings Financial Corp. and Subsidiary NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) - -------------------------------------------------------------------------------- XV SIGNIFICANT GROUP CONCENTRATIONS OF CREDIT RISK The Bank primarily grants loans to customers located within its primary market area in the state of Connecticut. The majority of the Bank's loan portfolio, including loans held for sale and commitments (97%) at December 31, 1995 and 1994, is comprised of loans collateralized by real estate located primarily in central Connecticut. At December 31, 1995 and 1994 respectively, such loans and commitments totaled approximately $243,400,000, and $235,700,000, of which $227,300,000 and $223,400,000, is collateralized by owner occupied real estate. The Bank lends up to 95% of the appraised value of owner-occupied property. Residential borrowers are required to obtain private mortgage insurance covering any excess on loans with over 80% loan-to-value ratios. XVI LOANS TO RELATED PARTIES Loans to executive officers and directors (including loans to members of their immediate families and loans to companies of which a director is a principal owner) considered to be related parties aggregated $2,358,389 and $2,518,799 at December 31, 1995 and 1994, respectively. During 1995, the Bank made $177,309 in new loans to related parties and received $337,719 in payments on related party loans. Such related party loans were made in the ordinary course of business. XVII FAIR VALUE OF FINANCIAL INSTRUMENTS Statement of Financial Accounting Standards No. 107, "Disclosures about Fair Value of Financial Instruments" ("SFAS 107"), requires disclosure of fair value information about financial instruments, whether or not recognized in the balance sheet, for which it is practicable to estimate that value. In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques. Those techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. In that regard, the derived fair value estimates cannot be substantiated by comparison to independent markets and, in many cases, could not be realized in immediate settlement of the instrument. SFAS 107 excludes certain financial instruments and all non-financial instruments from its disclosure requirements. Accordingly, the aggregate fair value amounts presented do not represent the underlying value of the Corporation. The following methods and assumptions were used by the Corporation in estimating its fair value disclosures for financial instruments: Cash and cash equivalents: The carrying amounts reported in the balance sheet for cash and short-term instruments approximate those assets' fair values. Investment securities (including mortgage-backed securities): Fair values for investment securities (held-to-maturity and available-for-sale portfolios) are based on quoted market prices, where available. If quoted market prices are not available, fair values are based on quoted market prices of comparable instruments. Trading account assets: Fair values for the Corporation's trading account assets, which also are the amounts recognized in the balance sheet, are based on quoted market prices where available. If quoted market prices are not available, fair values are based on quoted market prices of comparable instruments. Loans held for sale: The fair values for mortgage loans held for sale are based on quoted market prices of similar loans sold in conjunction with securitization transactions, adjusted for differences in loan characteristics. Loans receivable: For variable-rate loans that reprice frequently and with no significant change in credit risk, fair values are based on carrying values. The fair values for certain mortgage loans (e.g., one-to-four family residential) and other consumer loans are based on quoted market prices of similar loans sold in conjunction with securitization transactions, adjusted for differences in loan characteristics. The fair values for other loans (e.g., commercial real estate and rental property mortgage loans and commercial and People's Savings Financial Corp. and Subsidiary 41 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) - -------------------------------------------------------------------------------- industrial loans) are estimated using discounted cash flow analyses, using interest rates currently being offered for loans with similar terms to borrowers of similar credit quality. The carrying amount of accrued interest approximates its fair value. Foreclosed real estate: The carrying amount reported in the balance sheet for foreclosed real estate are estimated by management to approximate those assets' fair value. Off-balance-sheet instruments: Fair values for the Corporation's off-balance-sheet instruments (primarily lending commitments) are based on fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the counterparties' credit standing (guarantees, loan commitments). Deposit liabilities: The fair values disclosed for demand deposits (e.g., interest and noninterest checking, passbook savings, and certain types of money market accounts) are, by definition, equal to the amount payable on demand at the reporting date (i.e., their carrying amounts). The carrying amounts for variable-rate, fixed-term money market accounts and certificates of deposit approximate their fair values at the reporting date. Fair values for fixed-rate certificates of deposit are estimated using a discounted cash flow calculation that applies interest rates currently being offered on certificates to a schedule of aggregated expected monthly maturities on time deposits. Advances from Federal Home Loan Bank of Boston: The fair values of the Corporation's borrowings from the Federal Home Loan Bank of Boston are estimated using discounted cash flow analyses, based on the Corporation's current incremental borrowing rates for similar types of borrowing arrangements. The following table presents a comparison of the carrying value and estimated fair value of the Bank's financial instruments at December 31, 1995 and 1994:
1995 1994 - ---------------------------------------------------------------------------------------------- Carrying Fair Carrying Fair Value Value Value Value - ---------------------------------------------------------------------------------------------- Financial assets: Cash and due from banks $6,815,738 $6,815,738 $9,537,883 $9,537,883 Short-term investments 21,346,359 21,346,359 9,876,312 9,876,312 Securities held-to-maturity 38,460,901 38,259,088 71,362,316 66,680,161 Securities available-for-sale 91,128,434 91,128,434 62,637,638 62,637,638 Federal Home Loan Bank stock 2,643,000 2,643,000 2,292,400 2,292,400 Trading account securities 5,461,095 5,461,095 Loans 238,135,340 239,832,317 227,568,702 216,870,000 Loans held for sale 927,034 927,034 Financial Liabilities: Deposits with no stated maturity 130,300,246 130,300,246 147,830,878 147,830,878 Time deposits 209,064,523 211,671,000 173,870,764 173,971,000 Federal Home Loan Bank borrowings 18,950,000 18,959,000 33,450,000 32,573,000 ==============================================================================================
XVIII RECENT ACCOUNTING PRONOUNCEMENTS In March 1995, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived Assets to Be Disposed Of" ("FAS 121"), which the Bank will adopt on January 1, 1996. FAS 121 establishes accounting standards for the impairment of long-lived assets, certain identifiable intangibles, and goodwill related to those assets to be held and used and for long-lived assets and certain identifiable intangibles to be disposed of. The adoption of this standard is not expected to have a material impact on the Bank's financial condition or its results of operations. In May 1995, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards No. 122, "Accounting for Mortgage Servicing Rights - an amendment of FASB Statement No. 65" 42 People's Savings Financial Corp. and Subsidiary NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) - -------------------------------------------------------------------------------- ("FAS 122"), which the Bank will adopt on January 1, 1996. FAS 122 amends FASB Statement No. 65, "Accounting for Certain Mortgage Banking Activities", to provide that a mortgage banking enterprise recognize as separate assets rights to service mortgage loans for others however those servicing rights are acquired. It also requires the Bank to assess its capitalized mortgage servicing rights for impairment based on the fair value of those rights. The adoption of this standard is not expected to have a material impact on the Bank's financial condition or its results of operations. In October 1995, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" ("FAS 123"). FAS 123 establishes financial accounting and reporting standards for stock-based compensation plans. FAS 123 defines a fair value based method of accounting for an employee stock option or similar equity instrument and encourages all entities to adopt that method of accounting for all of their employee stock compensation plans. However, FAS 123 also allows the Bank to continue to measure compensation costs for stock-based compensation plans using the intrinsic value based method of accounting prescribed by APB No. 25, "Accounting for Stock Issued to Employees" and make pro forma disclosures of net income and earnings per share, as if the fair value based method of accounting defined in FAS 123 had been applied. The Bank has elected not to adopt the accounting requirements of FAS 123, and will continue to account for stock-based compensation plans in accordance with APB No. 25. The Bank's fiscal 1996 financial statements will include the pro forma disclosure requirements of FAS 123. XIX PEOPLE'S SAVINGS FINANCIAL CORP. (PARENT CORPORATION ONLY) FINANCIAL INFORMATION BALANCE SHEETS December 31, 1995 1994 - -------------------------------------------------------------------------------- Assets Advances to subsidiary $ 4,326,117 $ 1,827,336 Investment in subsidiaries 40,816,793 39,842,779 - -------------------------------------------------------------------------------- Total assets $45,142,910 $41,670,115 ================================================================================ Liabilities Dividends payable $ 429,520 $ 439,201 - -------------------------------------------------------------------------------- Total liabilities 429,520 439,201 Stockholders' equity 44,713,390 41,230,914 - -------------------------------------------------------------------------------- Total liabilities and stockholders' equity $45,142,910 $41,670,115 ================================================================================ Investment in subsidiaries are carried under the equity method of accounting. People's Savings Financial Corp. and Subsidiary 43 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) - ------------------------------------------------------ STATEMENTS OF INCOME
Year ended December 31, 1995 1994 1993 - ----------------------------------------------------------------------------------------------- Dividends from subsidiary $ 5,000,000 $2,600,000 $3,300,000 Investment securities gains 450,163 Other income 68,294 84,564 82,439 - ----------------------------------------------------------------------------------------------- Income before income taxes and equity distributed in excess of income of subsidiary 5,068,294 3,134,727 3,382,439 Other expenses 151,501 130,245 152,320 Income taxes (credit) (34,489) 168,224 (29,064) - ----------------------------------------------------------------------------------------------- 117,012 298,469 123,256 - ----------------------------------------------------------------------------------------------- Income before equity in undistributed net income of subsidiary 4,951,282 2,836,258 3,259,183 Equity in undistributed net income (loss) of subsidiaries (1,562,754) 728,614 1,492,590 - ----------------------------------------------------------------------------------------------- Net income $ 3,388,528 $3,564,872 $4,751,773 ===============================================================================================
STATEMENT OF CASH FLOWS
Year ended December 31, 1995 1994 1993 - ----------------------------------------------------------------------------------------------- Operating activities Net income $ 3,388,528 $3,564,872 $ 4,751,773 Adjustments to reconcile net income to net cash provided by operating activities: Equity in undistributed net (income) loss of subsidiary 1,562,754 (728,614) (1,492,590) Gain on sale of investment securities (430,163) Other items, net 9 - ----------------------------------------------------------------------------------------------- Cash provided by operating activities 4,951,282 2,386,095 3,259,192 Investing activities Sales of investment securities 614,376 Investment in subsidiary (50,000) Net decrease (increase) in advances to subsidiaries (2,498,682) (1,139,482) (76,049) - ----------------------------------------------------------------------------------------------- Net cash used by investing activities (2,548,682) (525,106) (76,049) Financing activities Issuance of common stock 45,761 30,750 353,798 Acquisition of treasury stock (720,950) (135,600) (1,870,099) Cash dividends (1,727,411) (1,756,139) (1,666,842) - ----------------------------------------------------------------------------------------------- Net cash used by financing activities (2,402,600) (1,860,989) (3,183,143) - ----------------------------------------------------------------------------------------------- Increase (decrease) in cash and cash equivalents -- -- -- Cash and cash equivalents at beginning of year -- -- -- - ----------------------------------------------------------------------------------------------- Cash and cash equivalents at end of year $ -- $ -- $ -- ===============================================================================================
44 People's Savings Financial Corp. and Subsidiary NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) - ------------------------------------------------------ XX QUARTERLY FINANCIAL DATA (UNAUDITED) The following is a summary of the quarterly results of operations for the years ended December 31, 1995 and 1994 (in thousands of dollars, except per share data):
Three months ended March 31 June 30 September 30 December 31 - ------------------------------------------------------------------------------------------------- 1995 Interest income $6,505 $6,773 $7,058 $7,186 Interest expense 3,295 3,619 3,726 3,843 - ------------------------------------------------------------------------------------------------- Net interest income 3,210 3,154 3,332 3,343 Provision for loan losses 36 35 30 0 Net gain (loss) on securities transactions 4 (73) (1) (100) Trading account gains (losses) 49 0 0 0 Other income 544 583 609 628 Other expenses 2,358 2,475 2,331 2,444 - ------------------------------------------------------------------------------------------------- Income before income taxes 1,413 1,154 1,579 1,427 Income taxes 577 447 618 542 - ------------------------------------------------------------------------------------------------- Net income $ 836 $ 707 $ 961 $ 885 ================================================================================================= Net income per common share $ .42 $ .36 $ .48 $ .45 =================================================================================================
Three months ended March 31 June 30 September 30 December 31 - ---------------------------------------------------------------------------------------------------- 1994 Interest income $6,100 $6,089 $6,360 $6,512 Interest expense 2,603 2,741 2,830 3,096 - ---------------------------------------------------------------------------------------------------- Net interest income 3,497 3,348 3,530 3,416 Provision for loan losses 19 60 50 0 Net gain (loss) on securities transactions (38) 788 0 (622) Trading account gains (losses) (134) (78) 107 (179) Other income 2 209 285 397 Other expenses 1,810 2,011 2,345 2,227 - ---------------------------------------------------------------------------------------------------- Income before income taxes 1,498 2,196 1,527 785 Income taxes 596 906 622 317 - ---------------------------------------------------------------------------------------------------- Net income $ 902 $1,290 $ 905 $ 468 ==================================================================================================== Net income per common share $ .44 $ .64 $ .45 $ .23 ====================================================================================================
People's Savings Financial Corp. and Subsidiary 45 STOCK INFORMATION - ----------------- Common Stock Information The Corporation's common stock is traded over the counter on the Nasdaq National Market under the symbol "PBNB". There were 1,404 stockholders of record on February 29, 1996. The following table sets forth for the periods indicated, market price information regarding PBNB stock as reported by Nasdaq. Stock price information includes high and low daily closing sales prices as reported by the Nasdaq National Market. Quarter ended LOW HIGH - -------------------------------------------------------------------------------- March 31, 1994 18 19 1/4 June 30, 1994 17 1/4 20 5/8 September 30, 1994 17 3/4 21 December 31, 1994 17 18 1/2 March 31, 1995 17 1/2 18 3/4 June 30, 1995 18 19 1/2 September 30, 1995 19 1/4 22 1/2 December 31, 1995 19 20 - -------------------------------------------------------------------------------- Dividend Policy The Board of Directors of People's Savings Financial Corp. expects to maintain its regular quarterly dividend policy and it may authorize increases in quarterly dividends or other special dividends in the future if warranted by the Corporation's earnings and performance. Please see Note 10 - Restrictions on Subsidiary Dividends, Loans or Advances on page 37 of this report. The following table illustrates dividends that were declared: Dividends Date Declared Date Payable Amount - -------------------------------------------------------------------------------- March 15, 1994 April 29, 1994 .22 June 21, 1994 July 29, 1994 .22 September 20, 1994 October 31, 1994 .22 December 20, 1994 January 31, 1995 .22 March 21, 1995 April 28, 1995 .22 June 20, 1995 July 31, 1995 .22 September 19, 1995 October 31, 1995 .22 December 21, 1995 January 31, 1996 .22 - -------------------------------------------------------------------------------- Stockholder Information The People's Savings Bank of New Britain and People's Savings Financial Corp. People's Savings Bank is a savings bank chartered by the State of Connecticut. People's Savings Financial Corp. is a Connecticut bank holding company. Both the Bank and the Corporation are headquartered at 123 Broad Street, New Britain, Connecticut and their telephone number is (860) 224-7771. Stock Transfer Agent People's Savings Financial Corp. c/o Boston EquiServe P.O. Box 8200 Boston, MA 02266-8200 1-800-426-5523 46 People's Savings Financial Corp. and Subsidiary STOCK INFORMATION (continued) - ----------------------------- Annual Report on Form 10-K The Corporation's annual report on Form 10-K, and the financial statement schedules thereto, as required to be filed with the Securities and Exchange Commission for 1995, will be provided without charge to any stockholder upon written request of such stockholder. Requests should be addressed to Investor Relations, People's Savings Financial Corp., 123 Broad Street, P.O. Box 2980, New Britain, CT 06050-2980. Independent Auditors Coopers & Lybrand L.L.P. 100 Pearl Street Hartford, CT 06103-4508 THIS ANNUAL REPORT HAS NOT BEEN REVIEWED, OR CONFIRMED FOR ACCURACY OR RELEVANCE, BY THE FEDERAL DEPOSIT INSURANCE CORPORATION. People's Savings Financial Corp. and Subsidiary 47 [PICTURE] People's Savings Financial Corp. Officers from left to right: Teresa D. Sasinski, Senior Vice President and Secretary; Richard S. Mansfield, President and Chief Executive Officer; John G. Medvec, Executive Vice President and Treasurer DIRECTORS AND OFFICERS - ---------------------- Directors of People's Savings Financial Corporation and The People's Savings Bank of New Britain Joseph A. Welna, MD, Chairman of the Board Obstetrician/Gynecologist Walter J. Liss, Secretary of the Board President of Liss Insurance Agency Inc. Walter D. Blogoslawski Owner of Investment Research and PHB Realty Stanley P. Filewicz, MD Orthopedic Surgeon Robert A. Gryboski, MD Otolaryngologist Roland L. LeClerc Retired Partner, LeClerc and Fortier, Insurance and Realty Richard S. Mansfield President and Chief Executive Officer of The People's Savings Bank of New Britain and People's Savings Financial Corp. Henry R. Poplaski Owner and manager of Hank's Automotive Serivce A. Richard Puskarz President and Chief Executive Officer of Art Press Inc., Printers Chester S. Sledzik Partner in the law firm of Sledzik & McGuire Robert A. Story President of the Story Brothers Inc., Automotive Service The People's Savings Bank of New Britain Officers Richard S. Mansfield President and Chief Executive Officer John G. Medvec Executive Vice President and Treasurer Lending Earl T. Young Senior Vice President Robert J. Mendillo Vice President John J. Ancheff Assistant Vice President Mark A. Iadarola Assistant Vice President Donna M. Evans Assistant Treasurer Donna D. Mattson Assistant Treasurer Operations Teresa D. Sasinski Senior Vice President and Secretary Geraldine F. Valuk Assistant Vice President Maurizio D'Oca Assistant Treasurer Jeffrey S. Gable Assistant Treasurer Alina M. Grabala Assistant Treasurer Laurie S. Mornhineway Assistant Treasurer Barbara Powojski Assistant Treasurer Accounting Edward E. Bohnwagner, III Vice President and Controller Susan Carluccio Link Assistant Controller Jennifer A. Lodovico Assistant Treasurer Human Resources Florence K. Gagnon Vice President Marketing Joyce L. Petrisko Assistant Treasurer Management Information Systems Stanley W. Styrczula Assistant Vice President Compliance Lisa K. MacDonald Vice President Trust Daniel A. Hurley, III Senior Vice President Lois A. Muraro Vice President Jeffrey F. Otis Vice President David J. Papallo Vice President Irma C. Sulewski Vice President Maria F. Del Sesto Assistant Vice President Annabell Priola Assistant Vice President Non-deposit Investment Products Roger T. Helal Vice President 48 BANK AND TRUST LOCATIONS - ------------------------ Bank Offices Main Office Southington Office 123 Broad Street 405 Queen Street New Britain, CT Southington, CT 860-224-7771 860-621-8901 Columbus Plaza Office Newington Office 150 Columbus Boulevard 36 Fenn Road New Britain, CT Newington, CT 860-827-3660 860-666-8400 Lafayette Square Office Rocky Hill Office 450 Main Street 2270 Silas Deane Highway New Britain, CT Rocky Hill, CT 860-224-7771 860-529-8161 Farmington Avenue Office Plainville Office 553 Farmington Avenue 2750 New Britain Avenue New Britain, CT Plainville, CT 860-827-3656 860-793-6020 Opening in April 1996 Meriden Office 834 Broad Street Meriden, CT Trust Offices New Britain Office Meriden Office 450 Main Street 834 Broad Street New Britain, CT Meriden, CT 860-224-7771 203-235-4456 Middletown Office 49 Main Street Middletown, CT 860-343-5987 [LOGO] PSB -------------------- PEOPLES SAVINGS BANK MEMBER FDIC EX-21 4 SUBSIDIARIES OF THE REGISTRANT Exhibit 21 Subsidiaries of the Registrant The People's Savings Bank of New Britain 123 Broad Street New Britain, CT 06053 People's Savings Financial Services, Inc. 123 Broad Street New Britain, CT 06053 EX-23 5 CONSENT OF INDEPENDENT ACCOUNTANTS EXHIBIT 23 [Letterhead of Coopers & Lybrand] CONSENT OF INDEPENDENT ACCOUNTANTS We consent to the incorporation by reference in the registration statements of People's Savings Financial Corp. and Subsidiary (the "Corporation") on Form S-8 (File Nos. 33-55936 and 33-55940) of our report dated January 19, 1996, on our audit of the consolidated financial statements of the Corporation as of December 31, 1995 and 1994, and for the years ended December 31, 1995, 1994, and 1993, which report is incorporated by reference in this Annual Report on Form 10-K. /s/ Coopers & Lybrand L.L.P. COOPERS & LYBRAND L.L.P. Hartford, Connecticut March 22, 1996 EX-24 6 POWER OF ATTORNEY EXHIBIT 24 POWER OF ATTORNEY We the undersigned officers and directors of People's Savings Financial Corp., hereby severally constitute Richard S. Mansfield, and John G. Medvec and each of them singly, our true and lawful attorneys with full power of substitution, to sign for us and in our names in the capacities indicated below, the Annual Report on Form 10-K of People's Savings Financial Corp. for the fiscal year ended December 31, 1995, and generally to do all such things in our name and behalf in our capacities as officers and directors to enable People's Savings Financial Corp. to comply with the provisions of the Securities Exchange Act of 1934, as amended, all requirements of the Securities and Exchange Commissioner, and all requirements of any other applicable law or regulation, hereby ratifying and confirming our signatures as they may be signed by our said attorneys, or any of them, to said Annual Report. SIGNATURE TITLE DATE /s/ RICHARD S. MANSFIELD President and Chief March 19, 1996 - -------------------------- Executive Officer Richard S. Mansfield /s/ JOHN G. MEDVEC Executive Vice March 19, 1996 - -------------------------- President John G. Medvec /s/ JOSEPH A. WELNA Chairman of the Board March 19, 1996 - -------------------------- and Director Joseph A. Welna -----END PRIVACY-ENHANCED MESSAGE-----