<PAGE>
 
                      -----------------------------------
                        PEOPLES SAVINGS BANK AND TRUST
                      -----------------------------------

                                             A New Name.
                                             A Familiar Face.







                                             People's Savings
                                             Financial Corporation
                                             1996 Annual Report
<PAGE>
-------------------- 
TABLE OF CONTENTS
--------------------

<TABLE>
<S>                                                                        <C> 
Selected Financial Highlights.............................................. 1

To Our Shareholders........................................................ 2

Banking...Business to Business, Person to Person........................... 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
</TABLE>


<PAGE>
 
-------------------------------
SELECTED FINANCIAL HIGHLIGHTS
-------------------------------

(dollars in thousands, except per share data)

<TABLE> 
<CAPTION> 
                                                               December 31,
                                            1996       1995       1994        1993       1992
------------------------------------------------------------------------------------------------
<S>                                       <C>        <C>        <C>        <C>         <C>
Financial Data At Year End:
Total Assets                              $482,394   $410,164   $402,089   $354,92 7   $335,396
Loans:
  Mortgages Fixed-Rate, net                 88,722     88,208     92,334      93,511     97,053
  Mortgages Adjustable-Rate, net           128,695    116,265    104,644      93,479     92,404
  Consumer and Other Loans, net             39,497     32,319     29,346      24,792     29,235
------------------------------------------------------------------------------------------------
Total Loans, net                           256,914    236,792    226,042     211,782    218,692
Investments (including FHLB stock and      207,425    153,579    151,629     126,862     88,749
 federal funds)
Deposits                                   358,060    339,365    321,702     299,467    283,495     
Advances from FHLB                          49,750     18,950     33,450       7,910      7,000
Repurchase agreements                       21,500          -          -           -          -
Capital                                     46,201     44,713     41,231      42,438     40,275
------------------------------------------------------------------------------------------------

Operating Data For the Year Ended:
Interest Income, including loan fees      $ 30,521   $ 27,522   $ 25,061   $  24,146   $ 25,366
Interest Expense                            16,428     14,483     11,270      10,666     12,552
------------------------------------------------------------------------------------------------
Net Interest Income                         14,093     13,039     13,791      13,480     12,814
Provision for Loan Losses                      938        101        129       1,010      1,255
Other Income                                 1,256      1,235        702       1,288        878
Gains (Losses) on Sale of Securities           (20)      (170)       128         110         (7)
Trust Fees                                   1,419      1,129        191           1
Trading Account Gains (Losses)                             49       (284)        579         63
Other Expenses                               9,814      9,608      8,393       6,890      6,274
------------------------------------------------------------------------------------------------
 
Income before Income Taxes                   5,996      5,573      6,006       7,558      6,219
Income Taxes                                 1,982      2,184      2,441       3,090      2,923
------------------------------------------------------------------------------------------------

Income before the Cumulative Effect
 of Changes in Accounting Principles:     $  4,014   $  3,389   $  3,565   $   4,468   $  3,296        
Cumulative Effect of Changes in
  Accounting Principles:
  Post-Retirement Benefits                                                      (154)
  Income Taxes                                                                   438
------------------------------------------------------------------------------------------------
Net Income                                $  4,014   $  3,389   $  3,565   $   4,752   $  3,296
------------------------------------------------------------------------------------------------
 
Per Share Data:
Net Income Per Share - Primary            $   2.05   $   1.71   $   1.76   $    2.18   $   1.60
Net Income Per Share - Fully Diluted      $   2.03   $   1.70   $   1.76   $    2.18   $   1.60
After Cumulative Effect of Changes in
  Accounting Principles - Fully Diluted   $   2.03   $   1.70   $   1.76   $    2.32   $   1.60
Book Value Per Share                         24.24      22.90      20.73       21.29      19.48
Cash Dividend Declared                         .91        .88        .88         .84        .74
------------------------------------------------------------------------------------------------
 
Selected Statistical Data:*
Return on Average Assets                      0.93%      0.84%      0.92%       1.38%      1.04%
Return on Average Equity                      8.91       7.84       8.38       11.48       8.42
Leverage Capital Ratio                       10.18      10.33      10.27       11.78      12.01
Dividend Payout Ratio                        43.22      50.69      49.28       35.61      45.95
Net Interest Rate Spread (1)                  3.00       3.01       3.43        3.73       3.74
Net Interest Rate Margin (2)                  3.41       3.41       3.74        4.09       4.22
------------------------------------------------------------------------------------------------ 
</TABLE>

  * 1993 information is after the cumulative effect of changes in accounting
principles. 
(1) Return on average earning assets less cost of interest-bearing liabilities.
(2) Net interest income divided by average earning assets.

                                                                               1
<PAGE>
 
-------------------
TO OUR SHAREHOLDERS
-------------------

[PHOTO OF RICHARD S. MANSFIELD APPEARS HERE]

Since 1907 our Bank's name has been The People's Savings Bank of New Britain.
The name served us well because all of our branches were located in New Britain
and, through these branches, we offered deposit and residential loan services.

We now have four branches in New Britain and five others in towns throughout
central Connecticut. To reflect our expansion into surrounding communities, we
shortened our name in our marketing materials to People's Savings Bank.

In 1993 we became part of the state's $25 billion-asset personal and
institutional trust industry. Our growth has diversified our business, allowing
us to offer new trust services as well as the traditional deposit and lending
services.

Our marketing efforts of trust services were assisted by the recent mergers of
several banking institutions, creating "mega-banks" that perform their services
from impersonal, remote locations. This was our opportunity to fill the need for
community-based, person-to-person trust services.

[LOGO OF PEOPLES SAVINGS BANK & TRUST APPEARS HERE]

In 1994 People's Savings Bank purchased $176 million of trust assets of the New
Meriden Trust Company from the FDIC. The phenomenal growth in trust assets to
$385 million has made our trust operations a major part of the organization. We
felt that it was only natural to recognize "trust" in our name. Therefore, the
new name of our Bank is Peoples Savings Bank & Trust.

Net income for the year ended December 31, 1996 was $4,014,000, up $625,000 or
18% over the $3,389,000 earned in 1995. Fully diluted net income per share was
$2.03 for the year ended December 31, 1996 compared to $1.70 per share earned in
1995. Net income for 1996 includes a one-time tax refund of $304,000 or $.16 per
share. Without this tax refund, net income for 1996 would be $3,710,000, up
$321,000 or 9.5% over the $3,389,000 earned in 1995 and fully diluted net income
per share would be $1.87.

Asset quality remains good, with non-performing assets (loans 90 days or more
delinquent and foreclosed real estate), totaling $1.8 million, or .37% of total
assets as of December 31, 1996. From December 31, 1995 to December 31, 1996 non-
performing assets had increased although they are still below our peer group
averages.

The increase in non-performing assets to current levels influenced us to
increase this year's loan losses provision to $938,000 from $101,000 in 1995.
The increase was due to higher charge-offs of residential loans and our
continuing concern over declining values of collateral in certain areas of our
loan portfolio. While the timing of the charge-offs cannot be anticipated, we
were 

2
<PAGE>
 
disappointed -- but not surprised -- by their occurrence in the fourth quarter.
The level of the allowance and the provision for this quarter reflects
management's continuing policy of aggressively managing our loan portfolio.


Net interest income increased to $14,093,000 in 1996 from $13,039,000 in 1995, a
$1,054,000 or 8.1% increase. The net interest margin in 1996 was 3.41%,
unchanged from 1995. Return on average assets increased to .93% of assets
compared to .84% for 1995, and the return on average equity increased to 8.91%
from 7.84% for 1995.

                         DIVIDENDS DECLARED PER SHARE

YEARS          1992      1993      1994      1995      1996

DOLLARS     $   .74       .84       .88       .88       .91

Consumer and commercial loan volume in 1996 represented a marked improvement
over 1995's level of production, boosted by better economic conditions in
Connecticut. The Bank's loan production in 1996 was up 35% to $68.9 million from
$51.2 million in 1995, despite increased competition from other banks and
mortgage companies. These results show that PSB&T can compete effectively within
our market. Our growth has been, and will continue to be, based on a strong
referral network and our customers' desire to do business with a knowledgeable,
professional and competitive community bank.

                             BOOK VALUE PER SHARE

YEAR           1992      1993      1994      1995      1995

DOLLARS       19.48     21.29     20.73     22.90     24.24

Our focus over the next several years will be to provide the banking services of
the future. PSB&T is implementing new technology to allow the computerized
banking services that a growing sector of our customer base demands, while still
offering the person-to-person service  on which our reputation was built. We
also have added the convenience of a home page on the Internet, from which our
current and future customers can receive information about our services and
products.

More important than the investment we make in new technology is the investment
we make in our employees. They are our first line of customer contact, and they
are the people who make the lasting impression on all customers. To many of our
customers, these employees are the bank. On-going training programs give our
employees the knowledge and information they need to serve our customers more
efficiently.

As Peoples Savings Bank & Trust continues to grow and prosper, we are committed
to serving our local communities with the same personal and quality service as
we have since we opened our doors in 1907. We are grateful to our employees,
officers and directors who share the vision of our Bank, and to our shareholders
whose continued investment is deeply appreciated.

       [PHOTO OF PEOPLE'S SAVINGS FINANCIAL CORP. OFFICERS APPEARS HERE]

Sincerely,

/s/ Richard S. Mansfield

Richard S. Mansfield
President and Chief Executive Officer

                                                                               3
<PAGE>
  
               BANKING... BUSINESS TO BUSINESS, PERSON TO PERSON

                       [FOUR-COLOR GRAPHICS APPEAR HERE]

   Behind the

 scenes and on

the front lines,

our friendly and

 knowledgeable

staff works as a

customer service

  team, always

looking for new

  ways to help

      you.
<PAGE>

A NEW NAME, A FAMILIAR FACE

The current environment for banking is anything but timeless. What we are seeing
today in the industry is a rapid and dramatic change; the friendly bank teller 
is being replaced by the ATM; the helpful voice at the end of the bank's 
telephone line now comes from a computer. The convenient neighborhood branch is 
vanishing and familiar banks are disappearing, merging into larger and 
unfamiliar institutions. Banking customers are receiving less of the personal
touch, and realize that their formerly free services are now available only for
a fee.

A generation ago, most people relied on a single bank for all their financial 
products; today, customers often maintain accounts in several banks. Bankers are
being challenged to win new customers who demand the ultimate in convenience, 
while serving the more traditional -- and often profitable -- customer segment 
that thrives on face-to-face, personal interaction.

The strategy at Peoples Savings Bank & Trust is to concentrate on small 
businesses and retail customers who are turned off by the impersonal and 
bureaucratic nature of the larger banks. We feel we are big enough to meet your 
business needs, yet small enough to offer personal service. And although the 
name on our building has changed to reflect our expanding services and 
technologies, our commitment to that personal touch remains as strong as our 
history.

BRANCHING OUT TO SERVE OUR CUSTOMERS

We also have made a commitment to the communities we serve, and we are working 
hard to earn your approval. Our branch offices and the people who work in them 
are the pillars of our success.

[4/C PHOTOSHOP IMAGE APPEARS HERE]

Joyce Petrisko, Marketing Manager, keeps the public informed about products the
Bank offers. Joyce, a New Britain native, firmly believes that a "volunteer can
make a difference," and she has proven this time and time again. Her volunteer
efforts have reached nearly every corner of her community, from the YWCA to the
Main Street USA Committee and Dozynki Polish Harvest Festival to the March of
Dimes Walk America and the Retired Senior and Volunteer Program (RSVP).

                                                                               5
<PAGE>
 
[4/C PHOTOSHOP IMAGE APPEARS HERE]

Gerry Valuk introduces new tellers to our customers service standards - creating
a welcoming environment and responding to individual customer needs. Enhancing 
interpersonal skills, as well as understanding our products and services, is an 
integral part of employee development as we strive to create a professional 
caring and competent staff:

In April, 1996 we opened our ninth full service branch office in central 
Connecticut. Along with the new Meriden branch office, PSB&T has four locations 
in New Britain and one each in Southington, Rocky Hill, Newington and 
Plainville. Our successful expansion efforts are the result of a thorough 
evaluation of each potential location and how the Bank can best serve the 
community.

Personalized service is the key to our success and your satisfaction. Our 
dedicated staff works as a customer services team, always looking for new ways 
to help you. With each transaction, our employees strive to earn your trust and 
offer the highest possible level of service. Continuous training in current 
banking developments, new products and improved customer service gives our 
employees the ability to assist our customers in the Bank's full range of 
products and services.

Although you may not be able to see them, our "behind the scenes" staff is as 
dedicated to serving your needs as the teller or branch manager. Our staff in 
the checking department supports all aspects of our checking services, such as 
check clearing, automatic payments, third party payments, phone transfers and 
ATM transactions. In our loan/mortgage department, our staff provides a myraid 
of services to our borrowing customers. The accounting department maintains 
strict control over the Bank's daily cash flows, including investments, bill 
paying and general money management, wire transfers, safe deposit billing and 
savings bonds. The accounting department ensures that your wire transfers and 
savings bond purchases are promptly and accurately placed through the Federal 
Reserve System.

We believe the investment we make in our employees is also an investment in the 
Bank's future.

6
<PAGE>
 
THE FUTURE IS TODAY AT PSB&T

As fast as the banking industry is changing, our customer's needs are changing 
even faster PSB&T is striving to keep pace with those needs by offering several 
advanced service features for today's busy lifestyle.

Pick up your touch-tone phone and do your banking from anywhere.  With PSB&T 
24Hour Telebanking, customers can transfer funds, make loan payments, and obtain
account balances any time of the day or night with complete security and 
privacy.  Soon we will provide our customers the opportunity to also pay bills 
by phone.

While on your next Internet web surfing excursion, check out our new home page 
at www.psbnet.com. We are excited to be able to provide this web site as a 
resource center for our current and future customers. Site features include 
current mortgage rates, deposit rates, loan and trust information, and general 
information on the Bank's services.

THE TRUST DEPARTMENT -- AT YOUR SERVICE

During 1996, the PSB&T trust department continued to benefit from the 
Connecticut banking climate. As larger bank mergers were announced and offices 
consolidated, our trust department perserved in its efforts to invite those 
customers who felt disenfranchised to look at our ability to provide local, 
face-to-face trust services. Those dedicated efforts helped our trust assets 
grow to more than $384,780,000 from $310,121,000 at year end 1995, an increase 
in excess of 24.07% over last year.

The trust department believes that the concept of trust is best achieved when 
the customer is able to meet frequently and personally with our officers, 
Nameless,

[4/C PHOTOSHOP IMAGE APPEARS HERE]

We're on the Web! Current and future customers may access the Bank's mortgage 
rates; deposit rates, loan information and trust services through our home pages
on the World Wide Web: Find us at www.psbnet.com:      

                                                                               7

<PAGE>
 
[4/C PHOTOSHOP IMAGE APPEARS HERE]

Along with the other members of the trust department team, Dan Hurley, Senior 
V.P and Inna Sulewski, V.P. and Trust Operations Officer, are well versed in all
aspects of trust operations and are ready to provide quality, expert service to
any Bank customer.

faceless out-of-state trust committees are unable to provide the level of 
personal service required and expected by trust customers.

Meetings may be held at one of our trust offices, a branch office, the attorney 
or other advisors office, or at the customer's workplace or residence -- and 
always at the customers' convenience. All of our trust officers have the ability
to respond to customer needs and questions, and are empowered to make those 
decisions necessary for the administration of trust accounts.

Our trust department has expended its capabilities to deliver quality service. 
Each of PSB&T trust offices, located in New Britain, Meriden and Middletown, are
staffed with seasoned officers, well known and respected in their communities. 
These three officers, as well as our joint venture with Glastonbury Bank & 
Trust, will provide a level of service and expertise that is all too rare in 
other banks.

The Bank's trust department has $385 million in assets under management, making 
it the second largest trust operation conducted by a savings bank in the State 
of Connecticut. Some of our trust services include:

 .    Trustee Under Agreement

 .    Trustee Under Will

 .    Investment Management Agency

 .    Custody

 .    Escrow Services

 .    Employee Benefit Services

 .    Charitable Accounts

 .    Estate Planning & Settlement


8
<PAGE>
 
---------------------------------------------------------------------------
MANAGEMENT' DISCUSSION AND ANALYSIS  OF FINANCIAL CONDITION AND RESULTS OF 
OPERATIONS
---------------------------------------------------------------------------

GENERAL

People's Savings Financial Corp., New Britain (the "Corporation") created in
1989, is the parent company of Peoples Savings Bank & Trust (the "Bank"), a
state savings bank chartered in 1907 as The People's Savings Bank of New
Britain, and converted to a stock savings bank in 1986.  The Bank changed its
name in November 1996 to Peoples Savings Bank & Trust for marketing purposes.
The Corporation's assets on December 31, 1996 were $482,394,000.

Peoples Savings Bank & Trust provides a variety of services to the communities
located in the central Connecticut region. We offer a diversified product line
including: residential, consumer and commercial loans, a variety of deposit
products, investment brokerage services and full trust services.  In April 1996,
the Bank opened a full service branch in Meriden, CT.

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 in general increased
during the first two quarters of 1996 and then decreased slightly during the
last two quarters.  This resulted in a steepening of the yield curve.  On
January 1, 1996 the difference between the 120 day treasury bill and the 30 year
treasury bond was 78 basis points; on December 31, 1996 it was 145 basis points.
A steeper yield curve can be beneficial to Bank's net interest spread.

Net interest income increased to $14,093,000 in 1996 from $13,039,000 in 1995, a
$1,054,000 or 8.1% increase.  During 1996 the average yield on earning assets
increased from 7.15% in 1995 to 7.34% in 1996.  The average cost of funds also
increased in 1996 from 4.13% to 4.34% in 1996.  The net interest rate spread
decreased slightly in 1996 to 3.00% from 3.02%, while the net interest margin
remained at the 1995 level of 3.41%.  The increased net interest income can be
attributed to an increase in Bank borrowing from the Federal Home Loan Bank,
through repurchase agreements, and purchasing a variety of investments with
those funds.  The increase in the Bank's average cost of funds is partially due
to interest rates on the borrowed funds being higher than our average cost of
deposits.

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 other
services offered by the Bank. Trust fees increased to $1,419,000 or 25.7% over
the $1,129,000 earned last year.  Other fees increased to $1,302,000 or 8.0%
over the $1,205,000 in 1995.

The profitability and financial condition of the Corporation are affected by
general economic conditions.  Economic conditions in central Connecticut lagged
behind the slight rebound of economic activity that was experienced in other
sections of the state.  Connecticut as a whole hasn't fully recovered from the
late 1980's, early 1990's recession.  The general economic effect of this is
constrained personal income growth, tightened consumer spending decreasing
property values and higher delinquency rates. Delinquency prior to 1996 drifted
downward and bottomed out December 31, 1995. Since then they have increased due
increased unemployment and personal bankruptcies in our market area.

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.

                                                                               9

     
<PAGE>
 
---------------------------------------------------------------------------
MANAGEMENT' DISCUSSION AND ANALYSIS  OF FINANCIAL CONDITION AND RESULTS OF 
OPERATIONS
---------------------------------------------------------------------------

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.

INVESTMENT PORTFOLIO

Investment securities increased by $70,591,000, or 54.5% to $200,180,000 on
December 31, 1996 from $129,589,000 on December 31, 1995. The available-for-sale
portfolio increased by $80,539,000 or 88.4% to $171,667,000 from $91,128,000 in
1995. Assets totaling $119,085,000 were purchased for the available-for-sale
portfolio and sales  and maturities totaled $38,867,000 during 1996. The Bank
has increased the available-for-sale portfolio to be able to have more
flexibility in managing the investments in the portfolio. The held-to-maturity
portfolio decreased by $9,948,000 or 25.9%. The decrease in the held-to-maturity
category consisted primarily of maturities and principal repayments of
$9,878,000.

There is little credit risk associated with both portfolios since 88% 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

<TABLE>
<CAPTION>
                                                                            December 31,    
------------------------------------------------------------------------------------------------------
(dollars in thousands)                                           1996           1995           1994
----------------------------------------------------------------------------------------------------- 
<S>                                                            <C>            <C>            <C>
Available-for-Sale (At Market):                                                           
 United States Government and Agency Obligations               $ 55,389       $ 44,552       $ 39,562
 Connecticut State Taxable Obligations                                -          1,251          1,237
 Mortgage-Backed Securities                                      95,029         21,523          4,714
 Other Bonds, Notes and Debentures                                5,650          8,227         11,241
 Marketable Equity Securities and Mutual Funds                   15,044         15,046          5,393
 Short-Term Mutual Funds                                            555            529            491
-----------------------------------------------------------------------------------------------------
Total Investments Available-for-Sale                           $171,667       $ 91,128       $ 62,638
----------------------------------------------------------------------------------------------------- 
                                                                                          
Investment Held-for-Trading (At Market):                                                  
 Trading Account                                               $      -       $      -       $  5,461
----------------------------------------------------------------------------------------------------- 
Held-to-Maturity (At Cost):                                                               
 United States Government and Agency Obligations               $  3,998       $  9,994       $ 28,378
 Mortgage-Backed Securities                                      24,515         28,467         42,984
----------------------------------------------------------------------------------------------------- 
Total Investments Held-to-Maturity                             $ 28,513       $ 38,461       $ 71,362
----------------------------------------------------------------------------------------------------- 
Total Investment Securities                                    $200,180       $129,589       $139,461
----------------------------------------------------------------------------------------------------- 
Investments as a Percent of Assets                                41.50%        31.59%         34.68%
----------------------------------------------------------------------------------------------------- 
</TABLE>

10

 
<PAGE>
 
--------------------------------------------------------------------------
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, 1996 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):

<TABLE> 
<CAPTION> 
(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
---------------------------------------------------------------------------------------------------------------------------------- 
<S>                                               <C>     <C>        <C>     <C>          <C>       <C>         <C>        <C> 
Available-for-Sale (At Market):
 United States Government and Agency Obligations                    $50,449    6.34%       $4,940   6.81%
 Mortgage-Backed Securities                                           4,548    6.08         7,486   7.19        $ 82,995(a)  7.31%
 Other Bonds, Notes and Debentures                                    5,650    6.45
 Marketable Equity Securities and Mutual Funds    $15,044  10.28%
 Short-Term Mutual Funds                              555   5.56
----------------------------------------------------------------------------------------------------------------------------------  


Total Investments Available-for-sale              $15,599           $60,647               $12,426               $ 82,995
----------------------------------------------------------------------------------------------------------------------------------  


Held-to-Maturity (At Cost):
 United States Government and Agency Obligations  $ 1,000   6.62%   $ 2,998    6.10%
 Mortgage-Backed Securities                                           6,226    5.99                             $ 18,289(b)  6.40% 
----------------------------------------------------------------------------------------------------------------------------------  


Total Investments Held-to-Maturity                $ 1,000           $ 9,224                                     $ 18,289
----------------------------------------------------------------------------------------------------------------------------------

Total Investments                                 $16,599           $69,871               $12,426               $101,284
----------------------------------------------------------------------------------------------------------------------------------
</TABLE> 

(a) The current estimated weighted average life of these mortgage-backed
securities is 8.57 years.

(b) The current estimated weighted average life of these mortgage-backed
securities is 4.54 years.


Loan Portfolio

Gross loans, including loans held for sale, increased by $20,191,000, or 8.4%,
to $259,975,000 on December 31, 1996 up from $239,784,000 on December 31, 1995.
The net increase in loans at the end of the year was accomplished through an
increase in loan originations of $17,769,000 to $68,975,000 an increase of
34.7% from the $51,206,000 originated in 1995, and also advances taken on lines
of credit extended prior to 1996. Mortgage loan and commercial mortgage loan
originations in 1996 were $50,133,000, up 41.9% from the $35,338,000 originated
in 1995. During the same period, installment loans to consumers, including
credit cards and commercial loans, increased by 18.7% to $18,842,000 from
$15,868,000 in 1995.

     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 50.0% 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:

<TABLE>
<CAPTION>
                                                            December 31,
------------------------------------------------------------------------------------------
(dollars in thousands)                        1996      1995      1994      1993      1992
------------------------------------------------------------------------------------------
<S>                                       <C>       <C>       <C>       <C>       <C> 
Real Estate Mortgage (1-4 Family)         $201,923  $192,434  $187,914  $179,727  $180,634
Real Estate Construction                     7,499     3,933     3,110     2,247     3,205
Real Estate Multifamily (5 or more units)    3,574     3,856     3,899     3,676     4,024
Real Estate Commercial                       8,029     5,937     4,177     3,936     4,117
Installment Loans to Individuals            35,702    30,832    28,955    24,656    29,033
Credit Cards                                 1,218     1,346       486
Commercial Loans                               888       519       329       433       576
------------------------------------------------------------------------------------------
 
Total Loans                               $258,833  $238,857  $228,870  $214,675  $221,589
==========================================================================================
</TABLE>

                                                                              11
<PAGE>
 
--------------------------------------------------------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF 
OPERATIONS
--------------------------------------------------------------------------

The majority of mortgage loans that were originated in 1996 were adjustable rate
mortgages which are normally held by the Bank and not sold. During 1996, the
Bank sold $4,134,000 of fixed rate loans,  an increase of 27.0% from the
$3,256,000  sold in 1995. 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 with a goal of building a conservative,
high quality commercial loan portfolio.


The following table shows the maturity of loans (excluding real estate mortgage
loans and installment loans to individuals) outstanding as of December 31, 1996.
Also provided are the amounts due after one year, classified according to the
sensitivity to changes in interest rates:

<TABLE>
<CAPTION>
                                                     Maturing
                                       --------------------------------------
                                        Within     After One but      After
(dollars in thousands)                 One Year  Within Five Years  Five Years   Total
----------------------------------------------------------------------------------------  
<S>                                    <C>       <C>                <C>         <C> 
Real Estate Construction                 $6,603         $  786          $110    $7,499
Commercial Loans                            123            596           169       888
----------------------------------------------------------------------------------------
Total                                    $6,726         $1,382          $279    $8,387
========================================================================================
Loans Maturing After One Year With:                                           
  Fixed Interest Rates                                  $  774                
  Variable Interest Rates                                  608          $279  
----------------------------------------------------------------------------------------
Total                                                   $1,382          $279  
========================================================================================   
</TABLE>

At December 31, 1996 all loans past due 90 days were treated as non accrual
loans. Total non-performing loans and foreclosed real estate aggregated
$1,772,000 or .37% of total assets up from the $899,000 or .22% of total assets
on December 31, 1995.


The Bank has four restructured loans totaling $686,000. Interest and principal
payments on these loans are current. Interest income that would have been
recorded in the year ended December 31, 1996 on non accrual loans under the
original terms was $124,168. Interest income actually recorded on these loans in
1996 was $74,505. 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.

Non-performing assets increased to $1,772,000 at December 31, 1996, up from
$899,000 at December 31, 1995, but  lower than non-performing asset levels of
$1,928,000, $3,173,000, and $4,696,000 at December 31, 1994, 1993, and 1992,
respectively.  Non-performing assets at the end of 1995 were at the lowest
levels since the 1980's.  The allowance for loan losses has been maintained at a
level to absorb potential charge-offs.  During 1996 charge-offs increased due to
higher levels of bankruptcies and our continuing concern over declining values
of collateral in certain areas of the Bank's loan portfolio. The provision for
loan losses was increased in 1996, due to higher levels of non-performing loans
and the increase in charge offs, to keep the allowance for loan losses at a
level determined to be adequate to absorb future potential charge-offs.

12
<PAGE>
 
--------------------------------------------------------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF 
OPERATIONS
--------------------------------------------------------------------------

         Allowance for Loan Losses and Summary of Loan Loss Experience

<TABLE>
<CAPTION>
                                                    Year ended December 31,
--------------------------------------------------------------------------------------
(dollars in thousands)                      1996     1995     1994     1993     1992
--------------------------------------------------------------------------------------
<S>                                       <C>      <C>      <C>      <C>      <C>
Balance at Beginning of Period            $1,578   $1,791   $2,223   $1,945   $1,164
Charge Offs:
  Real Estate Mortgage Loans                 515      209      524      384      295
  Real Estate Construction Loans
  Commercial Real Estate Loans               245       70                56      125
  Installment Loans to Individuals           146       59      119      337      116
  Credit Cards                                92       18
--------------------------------------------------------------------------------------
Total Charge Offs                            998      356      643      777      536
--------------------------------------------------------------------------------------
Recoveries:
  Real Estate Mortgage Loans                  36       37        7                 7
  Real Estate Construction Loans                                                   5
  Commercial Real Estate Loans                 2                                  37
  Installment Loans to Individuals             3        5       75       45       13
  Credit Cards                                18
--------------------------------------------------------------------------------------
Total Recoveries                              59       42       82       45       62
--------------------------------------------------------------------------------------
Net Charge Offs                              939      314      561      732      474
Provision for Loan Losses                    938      101      129    1,010    1,255
--------------------------------------------------------------------------------------
Balance at End of Period                  $1,577   $1,578   $1,791   $2,223   $1,945
==================================================================================== -
Ratio of Net Charge Offs During  Period     0.38%    0.13%    0.26%    0.32%    0.20%
 to Average Loans Outstanding
==================================================================================== 
</TABLE>

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, 1996, monitored loans not
disclosed as non accrual, 90 days past due, or restructured that were current
totaled $567,000 and monitored loans 30 days delinquent totaled $2,442,000, and
60 days delinquent totaled $1,183,000.

The following table summarizes the Bank's non-performing assets at the end of
the last five years:

                             Non-Performing Assets

<TABLE> 
<CAPTION> 
(dollars in thousands)             December 31,
--------------------------------------------------------------------------------
                               1996       1995      1994      1993     1992
--------------------------------------------------------------------------------
<S>                          <C>        <C>       <C>       <C>       <C>    
Non accruing Loans              $1,549   $  721   $ 1,300    $2,376  $ 3,666
Foreclosed Real Estate             223      178       628       797    1,030
--------------------------------------------------------------------------------
Total                           $1,772   $  899   $ 1,928    $3,173  $ 4,696
================================================================================
</TABLE> 

The following table illustrates the allocation of allowance for loan losses to
 the appropriate loan category:

<TABLE> 
<CAPTION> 
(dollars in thousands)                                            December 31,
----------------------------------------------------------------------------------------------------------------------------------
                                  1996                    1995                 1994                1993                1992
---------------------------------------------------------------------------------------------------------------------------------- 
                                       Percent of            Percent of          Percent of          Percent of          Percent of
                                        Loans to             Loans to            Loans to            Loans to            Loans      
                               Amount    Total      Amount     Total     Amount   Total       Amount   Total     Amount    Total 
                                         Loans                 Loans              Loans                Loans               Loans   
----------------------------------------------------------------------------------------------------------------------------------- 
<S>                            <C>                  <C>                   <C>                 <C>                <C>      
Real Estate                                                                                                                        
 Mortgage Loans                $  555   79.40%      $   511      82.17%   $   661   83.41%    $  623    85.23%   $   535     83.33%
Installment Loans                                                                                                                  
 to Individuals                   185   13.92           175      12.91        250   13.24        400    11.64        360     13.10 
Real Estate                                                                                                                        
 Construction                                                                                                                      
  Loans                           110    2.81           100       1.65        135    1.36        125     1.06        125      1.45 
Commercial Real                                                                                                                    
 Estate Loans                     350    3.10           340       2.49        320    1.83        500     1.86        450      1.86 
Commercial Loans                   85    0.30            80       0.22         75    0.16         75     0.21         75      0.26 
Credit Cards                       42     .47            22        .56                                                             
Unallocated                       250     N/A           350        n/a        350     n/a        500      n/a        400       n/a 
----------------------------------------------------------------------------------------------------------------------------------- 
Total Allowance for Loan                                                                                                            

Losses                         $1,577  100.00%         $1,578   100.00%    $1,791  100.00%     $2,223  100.00%     $1,945   100.00% 
=================================================================================================================================== 

</TABLE>

                                                                              13
<PAGE>
 
------------------------------------------------------------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
------------------------------------------------------------------------------

DEPOSITS AND BORROWINGS

Deposits increased by $18,695,000 or 5.5% to $358,060,000 on December 31, 1996
from $339,365,000 on December 31, 1995. The Bank increased FHLB borrowings by
$30,800,000 during 1996. The balance of FHLB borrowings at December 31, 1996 was
$49,750,000 compared to $18,950,000 on December 31, 1995.  The Bank also entered
into repurchase agreements totaling $21,500,000 at December 31, 1996.

The average daily amount of deposits and rates paid on such deposits for the
past three years are summarized in the following table:

                                   Deposits

<TABLE> 
<CAPTION> 
(DOLLARS IN THOUSANDS)                                            YEAR ENDED DECEMBER 31,
-----------------------------------------------------------------------------------------------------------------
                                                   1996                    1995                     1994       
-----------------------------------------------------------------------------------------------------------------
                                             AMOUNT      RATE         Amount      Rate         Amount      Rate
----------------------------------------------------------------------------------------------------------------- 
<S>                                        <C>          <C>         <C>          <C>         <C>          <C>
Noninterest-bearing Demand Deposits        $  6,535                 $  5,021                 $  3,761
Interest-bearing Demand Deposits             11,373      1.35%        10,769      1.80%        10,029      1.82%
Money Market Deposit Accounts                 4,540      2.25          3,907      2.25          4,186      2.27
Savings Deposits                            108,988      2.02        114,556      2.02        131,429      2.04
Time Deposits                               218,044      5.46        197,309      5.36        160,704      4.23
----------------------------------------------------------------------------------------------------------------- 
Total                                      $349,480                 $331,562                 $310,109    
================================================================================================================= 
</TABLE>

Maturities of time certificates of deposits in amounts of $100,000 or more
outstanding at December 31, 1996 are summarized as follows:

<TABLE> 
<CAPTION> 
                                                                 

(dollars in thousands)                            Time Certificates of Deposit
--------------------------------------------------------------------------------
<S>                                               <C>
3 months or less                                              $ 5,668
Over 3 through 6 months                                         4,099
Over 6 through 12 months                                        6,249
Over 12 months                                                  9,193
--------------------------------------------------------------------------------
Total                                                         $25,209
================================================================================
</TABLE>

ASSET/LIABILITY AND LIQUIDITY MANAGEMENT

The purpose of asset/liability management is profit management.  We do not
believe it is possible to reliably predict interest rates and therefore our
policies and procedures for asset/liability management are to manage the Bank's
interest rate risk within certain parameters and to provide adequate earnings in
all plausible future interest rate environments.  The Bank also recognizes the
importance of liquidity/funds management in effectively managing its balance
sheet and related earnings stream.

The primary objective of the Bank's asset/liability management process is to
maximize earnings and return on capital within the following acceptable levels
of risk:

Interest Rate Risk (IRR)-impact on earnings from potential short and long term
changes in interest rates.

Liquidity-sufficiency of funds available to respond to the needs of depositors
and borrowers; and to access unanticipated earning enhancement opportunities.

Capital-adequacy relative to regulatory and internal guidelines as well as
impact on asset size and resultant earnings capacity.

Credit-implications of asset mix on risk-based capital; and asset quality on
ability to leverage the Bank's capital.

14
<PAGE>
 
------------------------------------------------------------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
------------------------------------------------------------------------------

During 1996 the Bank engaged a consultant to assist management in
asset/liability and liquidity management. The Bank now utilizes several methods
to measure interest rate risk.  Prior to 1996, the Bank relied heavily on the
GAP (interest rate sensitivity) report to measure interest rate risk. The GAP
report is still utilized but less importance is placed on it as a measurement of
interest rate sensitivity. The Bank now relies more heavily on a dynamic
simulation model that measures interest rate risk based on three different
interest rate scenarios; rates rising 200 basis points, a flat interest rate
scenario and rates falling 200 basis points. The Bank also uses a static GAP
matrix report to demonstrate how investments are matched to liabilities.

The GAP report on xx page shows that the Bank is liability sensitivity in the 0-
3 year time horizon.  This means that in a rising interest rate environment, net
interest income would decrease and in a falling interest rate environment net
interest income will increase.  This is measured with managements estimate that
12% of  regular savings is interest rate sensitive and split equally into the
"within 0-180 days" category and the "within 181 to 365 day category,  the
remainder of the regular savings balance has been included in the "within 1-3
year" category. Contrary to the GAP report, the simulation model shows a slight
decrease in net interest income if there is a 200 basis point increase or
decrease to interest rates. The simulation model shows a slight decrease in net
interest income if there is a 200 basis point increase or decrease to interest
rates. The simulation model takes into account that if interest rates fell 200
basis points, mortgages would prepay at a faster rate and call-able bonds would
be called and both would be reinvested at lower rates while certificates of
deposits would stay at the same rate until they mature sometime in the future.
The GAP report does not take this into account.

The following table sets forth certain information at December 31, 1996
regarding the rate sensitivity of the Corporation's earning assets and sources
of funds:

                           Interest Rate Sensitivity

<TABLE>
<CAPTION>
                                                                                           December 31, 1996
------------------------------------------------------------------------------------------------------------------------------------
                                                                      0-180           181-365             1-3               3-5     
(dollars in thousands)                                                Days              Days             Years             Years    
------------------------------------------------------------------------------------------------------------------------------------
<S>                                                                <C>              <C>               <C>               <C>         
Assets Subject to Interest Rate Adjustment:                                                                                         
Short Term Investments                                             $   4,509                                                        
Investment Securities (at cost)                                       38,319        $    9,541        $   30,131        $   37,258  
Adjustable Rate Mortgages (a)                                         39,921            36,247            14,483            10,953  
Fixed Rate Mortgages                                                   4,125             3,122             4,817             4,691  
Installment and Commercial Loans                                      10,889             1,780             5,610             5,265  
Loans Held for Sale                                                    1,143                                                        
Estimated Principal payments Mortgage Backed Securities                1,418             1,418                                      
------------------------------------------------------------------------------------------------------------------------------------
Total Rate Sensitive Assets                                        $ 100,324        $   52,108        $   55,041        $   58,167  
====================================================================================================================================
Liabilities Subject to Interest Rate Adjustment:                                                                                    
Interest Bearing NOW                                               $  12,244                                                        
Regular Savings  *                                                     5,989             5,989            87,841                    
Money Market Passbook                                                  5,560                                                        
Money Market Deposits                                                  4,331                                                        
Time Certificates of Deposits                                        123,539        $   60,006        $   28,026        $   16,234  
Advances from FHLB                                                    27,900             4,500            13,700             3,500  
Repurchase agreements                                                  1,500             5,500            14,500                    
------------------------------------------------------------------------------------------------------------------------------------
Total Rate Sensitive Liabilities                                   $ 181,063        $   75,995        $  144,067        $   19,734  
====================================================================================================================================
INCLUDING REGULAR SAVINGS:                                                                                                          
Excess (deficiency) of Rate Sensitive Assets over
 Rate Sensitive Liabilities                                         ($80,739)         ($23,887)         ($89,026)       $   38,433  
------------------------------------------------------------------------------------------------------------------------------------
Cumulative excess (deficiency)                                      ($80,739)        ($104,626)        ($193,652)        ($155,219) 
====================================================================================================================================
Cumulative Rate Sensitive Assets as a percentage of 
 Cumulative Rate Sensitive Liabilities                                  55.4%             59.3%             51.7%             63.1% 
Cumulative excess (deficiency) as a percentage of Total Assets         (16.7%)           (21.7%)           (40.1%)           (32.2%)
====================================================================================================================================
<CAPTION>
                                                                                December 31, 1996
--------------------------------------------------------------------------------------------------------- 
                                                                         After
(dollars in thousands)                                                 Five Years                Total    
--------------------------------------------------------------------------------------------------------- 
<S>                                                                    <C>                      <C>
Assets Subject to Interest Rate Adjustment:                                                       
Short Term Investments                                                                          $  4,509  
Investment Securities (at cost)                                          $ 83,817                199,066  
Adjustable Rate Mortgages (a)                                              27,908                129,512  
Fixed Rate Mortgages                                                       72,551                 89,306  
Installment and Commercial Loans                                           16,471                 40,015  
Loans Held for Sale                                                                                1,143  
Estimated Principal payments Mortgage Backed Securities                                            2,836  
--------------------------------------------------------------------------------------------------------- 
Total Rate Sensitive Assets                                              $200,747               $466,387  
=========================================================================================================
Liabilities Subject to Interest Rate Adjustment:                                                          
Interest Bearing NOW                                                                            $ 12,244  
Regular Savings  *                                                                                99,819  
Money Market Passbook                                                                              5,560  
Money Market Deposits                                                                              4,331  
Time Certificates of Deposits                                                                    227,805  
Advances from FHLB                                                       $    150                 49,750  
Repurchase agreements                                                                             21,500  
--------------------------------------------------------------------------------------------------------- 
Total Rate Sensitive Liabilities                                         $    150               $421,009  
========================================================================================================= 
INCLUDING REGULAR SAVINGS:                                                                                
Excess (deficiency) of Rate Sensitive Assets over                                                                                
 Rate Sensitive Liabilities                                              $200,597               $ 45,378  
--------------------------------------------------------------------------------------------------------- 
Cumulative excess (deficiency)                                           $ 45,378                         
========================================================================================================= 
Cumulative Rate Sensitive Assets as a percentage of 
 Cumulative Rate Sensitive Liabilities                                      110.8% 
Cumulative excess (deficiency) as a percentage of Total Assets                9.4%                          
========================================================================================================= 
</TABLE> 

                                                                              15
<PAGE>
 
------------------------------------------------------------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
------------------------------------------------------------------------------

                     Interest Rate Sensitivity (Continued)

<TABLE> 
<CAPTION> 
                                                                                 December 31, 1996
--------------------------------------------------------------------------------------------------------------------------
                                                                      0-180           181-365             1-3             
(dollars in thousands)                                                Days              Days             Years            
-------------------------------------------------------------------------------------------------------------------------- 
<S>                                                                 <C>         <C>             <C>         <C>           
EXCLUDING REGULAR SAVINGS:                                                                                                
Excess (deficiency) of Rate Sensitive Assets over                                                                         
   Rate Sensitive Liabilities                                       ($74,750)     ($17,898)      ($1,185)   $   38,433    
-------------------------------------------------------------------------------------------------------------------------- 
Cumulative excess (deficiency)                                      ($74,750)   $  (92,648)     ($93,833)     ($55,400)   
========================================================================================================================== 
Cumulative Rate Sensitive Assets as a percentage                                                                          
   of Cumulative Rate Sensitive Liabilities                             57.3%         62.2%         68.9%         82.8%   
Cumulative excess (deficiency) as a percentage of  Total Assets        (15.5%)       (19.2%)       (19.5%)       (11.5%)  
==========================================================================================================================
<CAPTION> 
                                                                                December 31, 1996
--------------------------------------------------------------------------------------------------------- 
                                                                         After
(dollars in thousands)                                                 Five Years                Total    
---------------------------------------------------------------------------------------------------------  
<S>                                                                    <C>                      <C>
EXCLUDING REGULAR SAVINGS:
Excess (deficiency) of Rate Sensitive Assets over
   Rate Sensitive Liabilities                                           $200,597                $145,197
---------------------------------------------------------------------------------------------------------  
Cumulative excess (deficiency)                                          $145,197
=========================================================================================================   
Cumulative Rate Sensitive Assets as a percentage                    
   of Cumulative Rate Sensitive Liabilities                                145.2%
Cumulative excess (deficiency) as a percentage of  Total Assets             30.1% 
=========================================================================================================   
</TABLE>

(a)  Based on actual maturities.

(b)  Included with adjustable rate mortgages are loans that are fixed for a
     period of 3, 5, 7, and 10 years, and then after the fixed period, convert
     to a one year adjustable mortgage.

(c)  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. Therefore management has estimated that
     12% of regular savings is interest rate sensitive and split equally into
     the "within 0-180 days" category and the "within 181 to 365 day category,
     the remainder of the regular savings balance has been included in the
     "within 1-3 year" category. The GAP analysis reflects a static analysis of
     interest rate sensitivity which may not reflect the true movement of
     interest rates.

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, 1996
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.

LIQUIDITY AND CAPITAL RESOURCES

Liquidity

Liquidity management is the Bank's ability to raise cash when it needs it at a
reasonable cost and with a minimum of loss. Given the uncertain nature of our
customers' demands as well as the Bank's desire to take advantage of earnings
enhancement opportunities, the Bank must have available adequate sources of on
and off balance sheet funds that can be acquired in time of need. Accordingly,
in addition to the liquidity provided by balance sheet cash-flows, liquidity
must be supplemented with additional sources such as credit lines with the
Federal Home Loan Bank (FHLB). Other funding alternatives are available and
appropriate for use by the Bank from time to time, including: wholesale and
retail repurchase agreements; brokered certificates of deposits; and large
certificates of deposits.

As of December 31, 1996 the Bank borrowed $49,750,000 from the FHLB and has
sufficient qualified collateral to borrow an additional $233,470,000 from the
FHLB.  The Bank also has repurchase agreement lines with various brokers
totaling $70,000,000.  If the Bank drew $70,000,000 on its repurchase agreement
lines then it would only be able to borrow $163,470,000 from the FHLB, since it
used that portion of collateral as collateral for the repurchase agreement. As
of December 31, 1996 the Bank used $21,500,000 of the repurchase agreements and
has an additional $48,500,000 available to borrow.  Total immediate credit lines
available to the Bank at year end were $8,042,000. The Bank's method of
measuring liquidity is called the Basic Surplus/Deficit method. This method
takes into account liquid assets, investment maturities and the total amount
that can be raised by pledging

16
<PAGE>
 
--------------------------------------------------------------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDIOION AND RESULTS OF 
OPERATIONS
--------------------------------------------------------------------------------


investments and obtaining FHLB borrowings less short-term liabilities. On
December 31, 1996 the Basic Surplus amounted to $137,380,000 or 28.5% of assets.

CAPITAL

During 1996 the total dividends paid to shareholders was $1,726,000, as compared
to $1,727,000 paid in 1995. The per share annual dividend was $.91 in 1996 and
$.88 in 1995. Funds were also used to purchase 77,500 shares or $1,589,000 of
the Corporation's common stock. Funds amounting to $337,000, including tax
benefits, were received on the exercise by Officers and Directors of 31,000
stock options.

Stockholders' equity and book value per share were $46,201,000 and $24.24
respectively, at December 31, 1996. The increase in equity and book value was
due to the net income of $4,014,000 in 1996 and an increase in net unrealized
holding gains on securities available-for-sale, net of taxes of $460,000 from a
gain of $196,000 at December 31, 1995, to a gain of $656,000 at December 31,
1996. The increase was partially offset by dividends declared of $1,735,000.

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, 1996 all of the Bank's capital ratios exceeded minimum regulatory
capital requirements and places it as "well capitalized", the highest rating of
five regularity capital classifications.


THE FOLLOWING TABLE ILLUSTRATES THE CAPITAL RESOURCES OF THE BANK AND THE
CORPORATION AND THEIR CAPITAL RATIOS AS OF DECEMBER 31:

<TABLE>
<CAPTION>
(dollars in thousands)                                1996              1995
------------------------------------------------------------------------------------ 
<S>                                                 <C>               <C>
Bank's capital components:
Tier 1 capital (Stockholders' equity)               $40,928           $37,279                    
Tier 2 capital (Allowance for loan losses)            1,577             1,578                    
------------------------------------------------------------------------------------      
Bank's total risk-based capital                     $42,505           $38,857       
                                                                                                 
Bank's capital ratios:                                                                           
Total risk-based                                      18.46%            18.38%                   
Tier 1 risk-based                                     17.78%            17.63%                   
Tier 1 leverage                                        9.50%             9.35%                    
====================================================================================  
 
Corporation's capital components:
Tier 1 capital (Stockholders' equity)               $42,539            $41,217
Tier 2 capital (Allowance for loan losses)            1,577              1,578
------------------------------------------------------------------------------------   
Corporation's total risk-based capital              $44,116            $42,795

Corporation's capital ratios:
Total risk-based                                      19.16%            20.24%  
Tier 1 risk-based                                     18.47%            19.49%  
Tier 1 leverage                                        9.88%            10.33%   
==================================================================================== 
</TABLE>


Impact of Inflation and Other Items

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

                                                                              17
<PAGE>
 
------------------------------------------------------------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
------------------------------------------------------------------------------

industrial companies, the majority 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 loan
charge-offs and losses on real estate acquired. Inflation, or disinflation,
could continue to significantly affect the Corporation's earnings in future
periods.

In June 1996, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards No. 125, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishment of Liabilities" ("SFAS 125").
SFAS 125 provides accounting and reporting standards for transfers and servicing
of financial assets and extinguishment of liabilities. The Bank will be required
to adopt SFAS 125 for transfers and servicing of financial assets and
extinguishment of liabilites ocurring after December 31, 1996, on a prospective
basis. The adoption of this standard is not expected to have a material impact
on the Bank's financial condition or its results of operations.

As the year 2000 approaches, a critical issue has emerged regarding how existing
application software programs and operating systems can accommodate this date
value. In brief, many existing application software products in the marketplace
were designed to only accommodate a two digit date position which represents the
year (e.g., '95' is stored on the system and represents the year 1995). As a
result, the year 1999 (i.e. '99') could be the maximum date value these systems
will be able to accurately process. Management is in the process of working with
its software vendors to assure that the Bank is prepared for the year 2000.
Management does not anticipate that the Corporation will incur operating
expenses or be required to invest heavily in computer system improvements to be
year 2000 compliant.


Results of Operations
Comparison of years ended December 31 1996 and 1995.

NET INCOME: Net income increased by $625,000 or 18.4% to $4,014,000 for the year
ended December 31, 1996 from $3,389,000 in 1995. The increase for 1996 was
primarily attributable to an increase in net interest income, increased total
other income (primarily increased trust fees), and a state tax refund on prior
taxes paid. These increases were partially offset by an increase in the
provision for loan losses and increases in operating expenses primarily related
to the Corporation's expansion of products and branches.

INTEREST INCOME: Interest income for the year ended December 31, 1996 was
$30,521,000, an increase of $2,999,000 from the $27,522,000 for the same period
in 1995. The increase in interest income can be attributed to an increase in
average earning assets of $31,415,000 to $418,269,000 from $386,854,000 in 1995,
and an increase in the yield on earning assets of 19 basis points in 1996 to
7.34% from 7.15% in 1995. The majority of the increase in interest income was
from the investment portfolio. The increase in the volume of investments
increased interest income by $1,030,000 and the increase in yield on investments
increased interest income by $812,000. The increase in the volume of loans
increased interest income by $1,245,000. These increases are consistent with
changes in the Bank's balance sheet and increased longer term interest rates
from a year ago. During 1996, the Bank took advantage of investment
opportunities in the market place and entered into four investment arbitrages.
In accordance with the Bank's investment objectives, high quality Mortgage
Backed Securities were selected as the investment vehicle and to utilize its
capital more efficiently, the Bank leveraged it's position through a series of
borrowings and repurchase agreements. The initial transaction occurred in June
1996 with purchases totaling $20,170,734 with an estimated yield of 7.86% funded
by borrowings and repurchase agreements of varied terms totaling $20,070,000 at
a cost of 6.31%, for a net interest spread of 155 basis points. In August 1996,
the Bank invested a total of $20,448,552 with an estimated yield of 7.09% funded

18
<PAGE>
 
--------------------------------------------------------------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF 
OPERATIONS
--------------------------------------------------------------------------------

by borrowings and repurchase agreements of varied terms totaling $20,070,000 at
a cost of 6.31%, for a net interest spread of 155 basis points. In August 1996,
the Bank invested a total of $20,448,552 with an estimated yield of 7.09% funded
by borrowings and repurchase agreements totaling $20,000,000 at a cost of 5.69%,
for a net interest spread of 140 basis points. The final two arbitrages took
place in November 1996. Bank purchases totaled $20,622,374 with an estimated
yield of 6.99% funded by borrowings and repurchase agreements totaling
$20,200,000 at a cost of 5.53%, for a net interest spread of 146 basis points.
The total growth of the investment portfolio for all combined strategies was
$61,241,660 with a weighted average life of 5.87 years, based on a constant
prepayment rate of 13.33. These investments were financed by borrowings and
repurchase agreements of varied terms totaling $60,270,000 with a weighted
average maturity of 15.2 months. The initial estimated annualized pretax profit
of the combined transactions is $887,660.

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

<TABLE>
<CAPTION>
                                                                       Year ended December 31,
-----------------------------------------------------------------------------------------------------------------------------------
                                                1996                             1995                             1994
----------------------------------------------------------------------------------------------------------------------------------- 
                                  AVERAGE                          Average                          Average
(dollars in thousands)            BALANCE   INTEREST  YIELD/RATE   Balance   Interest  Yield/Rate   Balance   Interest  Yield/Rate
-----------------------------------------------------------------------------------------------------------------------------------
<S>                               <C>       <C>       <C>          <C>       <C>       <C>          <C>       <C>       <C> 
Assets
Interest-earning Assets
  Loans(1,2)                      $249,576   $19,557        7.84%  $233,684   $18,297        7.83%  $219,909   $16,297        7.41%
  Investment Securities(5)         159,577    10,479        6.68    143,298     8,637        6.14    145,700     8,480        5.88
  Other Interest-earning             9,116       485        5.32      9,872       588        5.96      5,515       284        5.15
-----------------------------------------------------------------------------------------------------------------------------------
Total Interest-earning Assets(5)  $418,269   $30,521        7.34%  $386,854   $27,522        7.15%  $371,124   $25,061        6.78%
Noninterest-earning Assets          15,425                           15,358                           14,377
-----------------------------------------------------------------------------------------------------------------------------------
   Total Assets                   $433,694                         $402,212                         $385,501
-----------------------------------------------------------------------------------------------------------------------------------
 
Liabilities and Stockholders'
 Equity
Interest-bearing Liabilities
  Savings Deposits                $108,988   $ 2,198        2.02%  $114,556   $ 2,314        2.02%  $131,429   $ 2,675        2.04%
  Interest-bearing Demand 
    Deposits                        11,373       154        1.35     10,769       194        1.80     10,029       183        1.82
  Money Market Deposit Accounts      4,540       102        2.25      3,907        88        2.25      4,186        95        2.27
  Certificates of Deposit          218,044    11,911        5.46    197,309    10,576        5.36    160,704     6,805        4.23
  Mortgagors' Escrow                 1,772        71        4.01      1,794        58        3.23      1,887        57        3.02
  Borrowed Funds                    26,029     1,512        5.81     22,080     1,253        5.67     28,137     1,455        5.17
  Repurchase Agreements              7,351       480        6.53          -         -           -          -         -           -
-----------------------------------------------------------------------------------------------------------------------------------
Total Interest-bearing
 Liabilities                      $378,097   $16,428        4.34%  $350,415   $14,483        4.13%  $336,372   $11,270        3.35%
Noninterest-bearing
    Demand Deposits                  6,535                            5,021                            3,761
Noninterest-bearing Liabilities      4,007                            3,572                            2,842
Stockholders' Equity                45,055                           43,204                           42,526
-----------------------------------------------------------------------------------------------------------------------------------
Total Liabilities
    and Stockholders' Equity      $433,694                         $402,212                         $385,501
----------------------------------------------------------------------------------------------------------------------------------- 
Net Interest Income                          $14,093                          $13,039                          $13,791
----------------------------------------------------------------------------------------------------------------------------------- 
Net Interest Rate Spread(3)(5)                              3.00%                            3.02%                            3.43%
----------------------------------------------------------------------------------------------------------------------------------- 
Net Interest Rate Margin(4)(5)                              3.41%                            3.41%                            3.74%
----------------------------------------------------------------------------------------------------------------------------------- 
</TABLE> 

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 $160,094, $395,269, and
   $389,387, for the years ended December 31, 1996, 1995, and 1994,
   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 $182,226, $158,915 and $85,771,
   for the years ended December 31, 1996, 1995, and 1994.

                                                                              19
<PAGE>
 
--------------------------------------------------------------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF 
OPERATIONS
--------------------------------------------------------------------------------

INTEREST EXPENSE: Interest expense increased in 1996 by $1,945,000 to
$16,428,000 from $14,483,000 in 1995. During 1996, the Bank experienced an
increase in its overall cost of funds of 21 basis points to 4.34% from 4.13% in
1995. The average balance in interest-bearing liabilities increased by
$27,682,000 in 1996 to $378,097,000 from $350,415,000 in 1995.  The majority of
the increase in interest expense was due to certificates of deposit, FHLB
borrowings and repurchase agreements, partially offset by a reduction in
interest expense on savings deposits. Interest expense on certificates of
deposit increased by $1,335,000, of which $1,129,000 was due to increased volume
and $206,000 was due to increased rate.  Interest expense on savings deposits
decreased by $116,000 primarily due to decreased volume.  Interest expense on
borrowings and repurchase agreements increased due to volume.  These changes are
consistent changes in the Bank's balance sheet with a shift in deposits from
regular savings to certificates of deposit, customers preferring certificates of
deposit over regular savings accounts and also the Bank's increase in borrowings
and repurchase agreements.

NET INTEREST INCOME: Net interest income increased by $1,054,000, or 8.08%, to
$14,093,000 for the year ended December 31, 1996 from $13,039,000 for 1995 as
the increase in the volume of earning assets more than offset the decrease in
the net interest rate. The net interest rate spread decreased by 2 basis points,
from 3.02% in 1995,  to 3.00% for the year ended December 31, 1996, due
primarily to the Bank's cost of funds increasing slightly more than the yield on
the Bank's earning assets.

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:

<TABLE>
<CAPTION>
                                     1996 COMPARED TO 1995                1995 Compared to 1994        
(dollars in thousands)             INCREASE (DECREASE) DUE TO          Increase (Decrease) due to      
-----------------------------------------------------------------------------------------------------  
                                   VOLUME      RATE      NET            VOLUME     RATE      NET       
-----------------------------------------------------------------------------------------------------  
<S>                                <C>         <C>      <C>             <C>        <C>       <C>       
INTEREST EARNED ON:                                                                                    
Loans                               $1,245     $ 15     $1,260          $1,051     $  949    $2,000     
Investment Securities                1,030      812      1,842            (136)      293       157     
Other Interest-earning                 (43)     (60)      (103)            254        50       304     
-----------------------------------------------------------------------------------------------------  
  Total                              2,232      767      2,999           1,169     1,292     2,461     
-----------------------------------------------------------------------------------------------------  
INTEREST PAID ON:                                                                                      
Savings Deposits                      (112)     ( 4)      (116)           (341)      (20)     (361)    
Interest-bearing                                                                                       
 Demand Deposits                        12      (52)       (40)             13        (2)       11     
Money Market Deposit                                                                                   
 Accounts                               14        -         14              (6)       (1)       (7)    
Certificates of Deposit              1,129      206      1,335           1,740     2,031     3,771     
Mortgagors' Escrow                      (1)      14         13              (2)        3         1     
Borrowed Funds                         229       30        259            (369)      167      (202)    
Repurchase Agreements                  480        -        480               -         -         -     
-----------------------------------------------------------------------------------------------------  
  Total                              1,751      194      1,945           1,035     2,178     3,213     
-----------------------------------------------------------------------------------------------------  
CHANGES IN NET INTEREST INCOME      $  481     $573     $1,054          $  134    $ (886)   $ (752)     
-----------------------------------------------------------------------------------------------------  
</TABLE>

OTHER OPERATING INCOME AND SERVICE FEES: The following table details the
significant increases and decreases in other income for the year ended December
31, 1996:

<TABLE>
<CAPTION>
 
(dollars in thousands)                                 1996        1995        Inc (dec)       %   
-----------------------------------------------------------------------------------------------------  
<S>                                                  <C>         <C>           <C>          <C>     
Service charges and fees                             $ 1,032     $ 1,001        $  31          3.1% 
Trust fees                                             1,419       1,129          290         25.7  
Net investment securities gains (losses)                 (20)       (170)         150        (88.2) 
Trading account gains (losses)                             -         (49)         (49)      (100.0) 
Net gains (losses) on sales of mortgages                 (46)         29          (75)      (258.6) 
Other operating income                                   270         205           65         31.7  
-----------------------------------------------------------------------------------------------------             
Total other income                                   $ 2,655     $ 2,243        $ 412         18.4%  
-----------------------------------------------------------------------------------------------------   
</TABLE>

20
<PAGE>
 
--------------------------------------------------------------------------------
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 $290,000 from
$1,129,000 at December 31, 1995, to $1,419,000 at December 31, 1996, primarily
due to new accounts generated during 1996. Trust assets under management
increased to $385 million at December 31, 1996 from $310 million at December 31,
1995, an increase of 24%. The Bank recorded losses on the sale of mortgages of
$46,000 in 1996 compared to gains of $29,000 in 1995, primarily due to a small
increase in mortgage interest rates in the first half of 1996.

OTHER EXPENSES: The following table details the significant increases and
decreases in other expense for the year ended December 31, 1996:

<TABLE>
<CAPTION>
 
(dollars in thousands)       1996    1995     Inc (dec)    %  
--------------------------------------------------------------- 
<S>                         <C>     <C>       <C>       <C>    
Salaries and benefits       $4,924  $4,558     $ 366      8.0%
Occupancy                    1,052     928       124     13.4 
Furniture and equipment        960     893        67      7.5      
FDIC deposit insurance           2     380      (378)   (99.5)        
Foreclosed real estate         118     453      (335)   (74.0)
Other operating expenses     2,758   2,397       361     15.1 
--------------------------------------------------------------- 
Total other expenses        $9,814  $9,609     $ 205      2.1% 
---------------------------------------------------------------  
</TABLE>

Other expenses increased by $205,000 to $9,814,000 in 1996 from $9,609,000 in
1995. Salary and employee benefit expenses increased to $4,924,000 in 1996, a
$366,000 or 8.0% increase over the $4,558,000 expensed in 1995. The primary
reason for the increase was a full year of expense for the commercial loan
department, staffing of our Meriden, Connecticut branch that opened in April of
1996, and a slight increase in employee benefit costs. Full-time employee
equivalents ("FTE") increased to 127 at December 31, 1996 from 122 at December
31, 1995 and 112 at December 31, 1994. FDIC deposit insurance expenses decreased
to $2,000 in 1996, a decrease of $378,000 compared to $380,000 in 1995. The FDIC
decreased the rate the Bank pays for deposit insurance to $.00 per $100.00 in
deposits, except for a small base charge, effective January 1996, from a rate of
$.04 per $100 in deposits. The FDIC had previously reduced the rate in June of
1995, from a rate of $.23 per $100.00 in deposits. Occupancy and furniture and
equipment expenses were up $191,000 or 10.5% to $2,012,000 from $1,821,000 in
1995 due to our expansion efforts. Operating expenses for foreclosed real estate
decreased by $335,000 or 74.0% to $118,000 for the year ended December 31, 1996
from $453,000 in 1995. The decrease was due to a lower number of properties in
foreclosed real estate during the year.

INCOME TAXES: The effective tax rate for 1996 was 33.05%, a decrease of 6.15%
from 39.20% in 1995. The decrease was primarily due to a state tax refund on
prior taxes paid, an increase in dividend income eligible for the dividend
received deduction, and a slight decrease in the State of Connecticut tax rate
of 50 basis points to 10.75% in 1996 from 11.25% in 1995.

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.

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 

                                                                              21
<PAGE>
 
--------------------------------------------------------------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF 
OPERATIONS
--------------------------------------------------------------------------------

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.

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 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.

OTHER OPERATING INCOME AND SERVICE FEES: 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: 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 late1994.
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 39.24%, a decrease of 140
basis points from 40.64% in 1994. The decrease was primarily due to an increase
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.

22
<PAGE>
 
---------------------------------
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, 1996 and 1995, and the
related consolidated statements of income, stockholders' equity and cash flows
for each of the three years in the period ended December 31, 1996. 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, 1996 and
1995, and the consolidated results of their operations and their cash flows for
each of the three years in the period ended December 31, 1996 in conformity with
generally accepted accounting principles.



/s/  Coopers & Lybrand L.L.P.

Hartford, Connecticut
January 21, 1997

                                                                              23
<PAGE>
 
---------------------------
CONSOLIDATED BALANCE SHEETS
---------------------------

<TABLE>
<CAPTION>
                                                                                                  December 31,
                                                                                               1996           1995
<S>                                                                                        <C>            <C> 
------------------------------------------------------------------------------------------------------------------------
ASSETS
Cash and due from banks (Note 2):
  Non-interest bearing deposits and cash                                                   $  5,113,253   $  6,815,738
Short-term investments (Note 3)                                                               4,508,950     21,346,359
------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents                                                                     9,622,203     28,162,097

Securities (Note 4):
 Available-for-sale (at market)                                                             171,666,791     91,128,434
 Held-to-maturity (market value: $28,015,243 at December 31, 1996;
  $38,259,088 at December 31, 1995)                                                          28,513,493     38,460,901
Federal Home Loan Bank stock                                                                  2,736,100      2,643,000
Loans held for sale (at market )                                                              1,142,510        927,034
Loans (Note 5):
 Real estate mortgage                                                                       213,525,322    202,225,544
 Real estate construction                                                                     7,498,893      3,933,410
 Installment                                                                                 36,920,096     32,178,447
 Commercial                                                                                     888,658        519,461
------------------------------------------------------------------------------------------------------------------------
Total loans                                                                                 258,832,969    238,856,862
 
Less:
 Deferred loan fees and unearned income                                                        (342,678)      (487,392)
 Allowance for loan losses                                                                   (1,576,649)    (1,577,547)
------------------------------------------------------------------------------------------------------------------------
Net loans                                                                                   256,913,642    236,791,923
 
Bank premises and equipment (Note 6)                                                          2,136,119      2,370,366
Foreclosed real estate                                                                          223,402        177,538
Accrued income receivable                                                                     4,029,682      3,747,646
Goodwill                                                                                      3,006,178      3,299,902
Other assets                                                                                  2,403,676      2,455,589
------------------------------------------------------------------------------------------------------------------------
Total assets                                                                               $482,393,796   $410,164,430
------------------------------------------------------------------------------------------------------------------------ 

lIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits (Note 7)                                                                          $358,059,926   $339,364,769
Advances from Federal Home Loan Bank of Boston (Note 8)                                      49,750,000     18,950,000
Securities sold under agreements to repurchase (Note 8)                                      21,500,000
Mortgagors' escrow accounts                                                                   2,658,993      2,490,394
Accrued expenses                                                                              1,548,331      1,239,131
Other liabilities                                                                             2,675,397      3,406,746
------------------------------------------------------------------------------------------------------------------------
Total liabilities                                                                           436,192,647    365,451,040
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
 2,542,824 at December 31, 1996 and 2,511,824 at December 31, 1995,
 including shares in treasury of 636,961 at December 31, 1996
 and 559,461 at December 31, 1995                                                             2,542,824      2,511,824
Additional paid-in capital                                                                   22,140,106     21,833,981
Retained earnings                                                                            29,701,051     27,421,569
Cost of treasury stock                                                                       (8,839,261)    (7,249,861)
Unrealized gains on securities available for sale, net of taxes                                 656,429        195,877
------------------------------------------------------------------------------------------------------------------------
Total stockholders' equity                                                                   46,201,149     44,713,390
------------------------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity                                                 $482,393,796   $410,164,430
------------------------------------------------------------------------------------------------------------------------
</TABLE> 

See notes to consolidated financial statements.

24                               People's Savings Financial Corp, and Subsidiary
<PAGE>
 
--------------------------------------
CONSOLIDATED STATEMENTS OF INCOME
--------------------------------------

<TABLE>
<CAPTION>
                                                                                   YEAR ENDED DECEMBER 31,  
                                                                             1996            1995          1994           
---------------------------------------------------------------------------------------------------------------------
<S>                                                                      <C>            <C>            <C>
Interest income:
Interest and fees on loans                                               $19,557,980    $18,297,183    $16,297,104
Interest and dividends on investments:
     Interest income                                                       9,848,116      8,157,176      8,075,009  
     Dividend income                                                         630,703        433,030        189,206  
     Trading account                                                               -         46,174        215,658  
Other interest income                                                        484,599        588,358        284,318   
--------------------------------------------------------------------------------------------------------------------- 
Total interest income                                                     30,521,398     27,521,921     25,061,295
===================================================================================================================== 

Interest expense:
Interest on deposits                                                      14,435,714     13,229,587      9,814,662 
Interest on FHLB borrowings                                                1,512,612      1,253,007      1,455,176 
Interest repurchase agreements                                               479,611              -              - 
--------------------------------------------------------------------------------------------------------------------- 
Total interest expense                                                    16,427,937     14,482,594     11,269,838
---------------------------------------------------------------------------------------------------------------------
Net interest income                                                       14,093,461     13,039,327     13,791,457
 
Provision for loan losses                                                    938,357        100,974        128,657
---------------------------------------------------------------------------------------------------------------------
Net interest income after provision for loan losses                       13,155,104     12,938,353     13,662,800   
Other income:
Investment securities gains (losses)                                         (19,915)      (169,603)       127,717
Trading account gains (losses)                                                     -         49,168       (283,890)
Gain (loss) on sale of mortgages                                             (45,967)        29,472       (375,529)
Trust fees                                                                 1,419,005      1,129,325        190,642            
Service charges and fees                                                   1,032,030      1,001,236        879,792             
Other operating income                                                       269,550        203,787        198,326  
--------------------------------------------------------------------------------------------------------------------- 
Total other income                                                         2,654,703      2,243,385        737,058    
---------------------------------------------------------------------------------------------------------------------
                                                                          15,809,807     15,181,738     14,399,858 
Other expenses:                                                                                                    
Salaries and employee benefits (Note 12)                                   4,924,156      4,558,419      3,555,996 
Occupancy expense                                                          1,051,711        927,646        844,120 
Furniture and equipment expense                                              959,566        892,512        707,125 
Advertising                                                                  266,373        225,763        215,256 
FDIC deposit insurance                                                         2,000        380,429        696,171 
Lawsuit settlement                                                                 -              -        550,000 
Goodwill amortization                                                        382,851        382,521         62,183 
Foreclosed real estate expenses                                              117,742        452,682        253,273 
Other operating expenses                                                   2,109,249      1,788,954      1,509,848 
--------------------------------------------------------------------------------------------------------------------- 
Total other expenses                                                       9,813,648      9,608,926      8,393,972 
---------------------------------------------------------------------------------------------------------------------
Income before income taxes                                                 5,996,159      5,572,812      6,005,886
Income taxes (Note 9):                                                                                            
Current                                                                  $ 2,402,771    $ 2,359,649    $ 1,991,085
Deferred (credit)                                                           (421,068)      (175,365)       449,929
---------------------------------------------------------------------------------------------------------------------
Total income taxes                                                         1,981,703      2,184,284      2,441,014
--------------------------------------------------------------------------------------------------------------------- 
Net income                                                               $ 4,014,456    $ 3,388,528    $ 3,564,872
---------------------------------------------------------------------------------------------------------------------
 
Per share data:
Primary
     Weighted-average shares outstanding and common stock equivalents      1,954,953      1,986,737      2,022,280 
     Net income per share                                                $      2.05    $      1.71    $      1.76 
Fully Diluted
     Weighted-average shares outstanding and common stock equivalents      1,974,891      1,989,360      2,022,280 
     Net income per share                                                $      2.03    $      1.70    $      1.76
===================================================================================================================== 
</TABLE> 

See notes to consolidated Financial statements.

People's Savings Financial Corp. and Subsidiary 
<PAGE>

----------------------------------------------- 
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY        
-----------------------------------------------

<TABLE>
<CAPTION>
                                                                                                                      Net
                                                                                                                    Unrealized
                                                                                                                   Holding Gains
                                              Outstanding                                                      (Losses)On Securities
                                               Shares of                 Additional                                 Carried at
                                                Common      Common        Paid-In       Retained      Treasury      Market, Net
                                                Stock        Stock        Capital       Earnings       Stock         of Taxes
<S>                                          <C>         <C>           <C>          <C>            <C>         <C>
------------------------------------------------------------------------------------------------------------------------------------
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  $ 25,750,678   $(6,528,911)  $  (2,290,898)
Net income                                                                             3,388,528
Dividends declared, $.88  per share                                                   (1,717,637)
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
====================================================================================================================================

YEAR ENDED DECEMBER 31, 1996
Balance at beginning of year                 1,952,363   $2,511,824    $21,833,981  $ 27,421,569   $(7,249,861)  $     195,877
Net income                                                                             4,014,456
Dividends declared, $.91 per share                                                    (1,734,974)
Stock options exercised                         31,000       31,000        306,125
Acquisition of treasury stock                  (77,500)                                             (1,589,400)
Net unrealized  gains on securities
 available for sale, net of taxes                                                                                      460,552
------------------------------------------------------------------------------------------------------------------------------------
BALANCE AT END OF YEAR                       1,905,863   $2,542,824    $22,140,106  $ 29,701,051   $(8,839,261)  $     656,429
====================================================================================================================================
</TABLE>

See notes to consolidated financial statements.

28                             People's Savings Financial Corp. and Subsidiary
<PAGE>
 
--------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
--------------------------------------

<TABLE> 
<CAPTION> 
                                                                         Year ended December 31,
                                                                 1996            1995                     1994
------------------------------------------------------------------------------------------------------------------ 
<S>                                                        <C>             <C>                     <C> 
OPERATING ACTIVITIES
Net income                                                 $   4,014,456   $  3,388,528            $   3,564,872
Adjustments to reconcile net income to net
  cash provided by operating activities:
  Provision for depreciation and amortization                    515,213        478,794                  426,437
  Accretion and amortization of bond                     
    premiums and discounts, net                                  190,024         62,431                   55,709
  Provision for loan losses                                      938,357        100,974                  128,657
  Amortization of net deferred loan fees                         (67,505)      (305,641)                (226,485)
  Deferred income tax (credit)                                  (421,068)      (175,365)                 449,929
  Decrease in trading account securities                               -      5,461,095                   76,262
  Decrease (increase) in loans held for sale                    (215,476)      (927,034)                 390,780
  Realized investment securities losses (gains)                   19,915        169,603                 (127,717)
  Write-downs on foreclosed real estate                           46,820        346,486                  231,273
  Amortization of goodwill                                       293,724        382,521                   62,183
  Increase in accrued expenses                                   309,200         74,643                  120,641
  Increase (decrease) in other, net                             (549,230)     1,563,271               (1,145,093)
------------------------------------------------------------------------------------------------------------------ 
NET CASH PROVIDED BY OPERATING ACTIVITIES                  $   5,074,430   $ 10,620,306            $   4,007,448
------------------------------------------------------------------------------------------------------------------ 
 
INVESTING ACTIVITIES
Proceeds from sales of available-for-sale securities              13,500     22,949,049               22,129,184
Proceeds from maturities of
  available-for-sale securities                               38,853,915     16,273,552               11,662,635
  held-to-maturity securities                                  9,877,685     15,298,572                2,545,640
Purchases of
  available-for-sale securities                             (119,085,436)   (44,821,086)             (29,057,588)
  held-to-maturity securities                                          -     (1,265,000)             (31,859,522)
Purchases of Federal Home Loan Bank stock                        (93,100)      (350,600)
Net increase (decrease) in loans                             (21,488,155)   (11,378,262)             (14,699,139)
Foreclosed real estate sold                                      402,900      1,218,400                1,457,407
Purchases of premises and equipment (net)                       (280,966)      (438,933)              (1,041,364)
Intangibles resulting from acquisition of New Meriden                                                 (3,807,133)
 Trust Co.
------------------------------------------------------------------------------------------------------------------ 
NET CASH USED BY INVESTING ACTIVITIES                      $ (91,799,657)  $ (2,514,308)           $ (42,669,880)
------------------------------------------------------------------------------------------------------------------  

FINANCING ACTIVITIES
Net increase (decrease) in demand deposits,
  NOW accounts, and savings accounts                             (45,480)   (17,530,631)                (520,825)
Net increase in certificates of deposit                       18,740,637     35,193,758               22,755,483
Increase (decrease) in mortgage escrow accounts                  168,599       (118,623)                 155,685
Net increase (decrease) in overnight borrowings
  from the Federal Home Loan Bank of Boston                            -              -                 (760,433)
Proceeds from long-term borrowings                            16,500,000              -               11,800,000
Proceeds from short-term borrowings                           62,270,000              -               49,900,000
Principal payments on long-term borrowings                   (12,000,000)             -                        -
Principal payments on short-term borrowings                  (39,970,000)   (14,500,000)             (35,400,000)
Proceeds from securites sold under agreements to              21,500,000              -                        -
 repurchase
Cash dividends paid                                           (1,726,148)    (1,727,411)              (1,756,139)
Acquisition of treasury stock                                 (1,589,400)      (720,950)                (135,600)
Issuance of common stock (under stock option plans)              337,125         45,761                   30,750
------------------------------------------------------------------------------------------------------------------ 
NET CASH PROVIDED BY FINANCING ACTIVITIES                     68,185,333        641,904               46,068,921
------------------------------------------------------------------------------------------------------------------ 

INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS             (18,539,894)     8,747,902                7,406,489
Cash and cash equivalents at beginning of year                28,162,097     19,414,195               12,007,706
------------------------------------------------------------------------------------------------------------------ 
CASH AND CASH EQUIVALENTS AT END OF YEAR                   $   9,622,203   $ 28,162,097            $  19,414,195
------------------------------------------------------------------------------------------------------------------
 
NON-CASH INVESTING AND FINANCING ACTIVITIES
Change in unrealized gains (loss) on available for sale    $     779,983      4,256,502               (5,052,824)
 securities
Transfer of loans to foreclosed real estate                      740,901      1,114,810                  537,713
Transfer of investment securities from held-to-maturity
  to available for sale                                                -     18,789,280                        -
------------------------------------------------------------------------------------------------------------------
</TABLE>
See notes to consolidated financial statements.

People's Savings Financial Corp. and Subsidiary
<PAGE>
 
------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------

   1. 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 (95%) 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.

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 judgment 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.


INVESTMENT SECURITIES: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.

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.

28                              People's Savings Financial Corp. and Subsidiary
<PAGE>
 
------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------ 

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" ("FAS 122"), which the Bank
adopted  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
Company to assess its capitalized mortgage servicing rights for impairment based
on the fair value of those rights.

FAS 122 requires that a portion of the cost of originating a mortgage loan that
is sold with servicing rights retained be allocated to the mortgage servicing
right, based on its fair value relative to the loan as a whole.  To determine
the fair value of the servicing rights, the Corporation uses a valuation model
that calculates the present value of future cash flows to determine the fair
value of the servicing rights.  Certain assumptions, such as estimates of the
cost of servicing per loan, discount rate, and prepayment were used in the
calculation which was done on an aggregate loan basis.

Mortgage servicing rights are amortized in proportion to, and over the period
of, estimated net servicing income.

FAS 122 also requires a periodic assessment of the fair value of mortgage
servicng rights.  In determining fair value, the servicng rights are
disaggregated into the predominant risk characteristics, which are currently
loan type and interest rate.  These segments are then valued using the same
model used  to originally determine the fair value at origination, using current
assumptions.  The new value is then compared to the book value to determine if a
reserve for impairment is required.

At December 31, 1996 the Bank had recorded $35,000 as the fair value of its
mortgage servicing rights.


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 

People's Savings Financial Corp. and Subsidiary
<PAGE>
 
------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------ 

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 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 straightline
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 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: 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.

EARNINGS PER SHARE: Primary earnings per share was computed using the weighted-
average common shares outstanding during the year, including common stock
equivalents, when dilutive.  The computation of  fully diluted earnings per
share is calculated in the same way as primary earnings per share, except that
the higher of the ending market price or average market price is used to
determine the dilutive effect of common stock equivalents.  The shares used in
the computations for the three years ended December 31, 1996 were as follows:

<TABLE>
<CAPTION>
                   1996         1995           1994    
-----------------------------------------------------------
<S>              <C>          <C>            <C>       
Primary          1,954,953    1,986,737      2,022,280 
Fully diluted    1,974,891    1,989,360      2,022,280  
-----------------------------------------------------------
</TABLE>

CASH FLOWS: Cash and cash equivalents include cash, amounts due from banks and
short-term investments.

POST-RETIREMENT BENEFITS OTHER THAN PENSIONS: The Corporation accounts for post-
retirement benefits other than pensions using the accrual method. These benefits
are unfunded and there are no assets associated with the plan.

30                              People's Savings Financial Corp. and Subsidiary

<PAGE>
 
------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------ 


RECLASSIFICATIONS: Certain 1995 and 1994 amounts have been reclassified to
conform to the 1996 presentation. These reclassifications had no effect on
earnings in the years presented.

2. RESTRICTION ON CASH AND DUE FROM BANKS

The Bank is required to maintain reserves against certain deposit transaction
accounts. At December 31, 1996 the Bank was required to have cash and liquid
assets of approximately $413,000 to meet these requirements.

3. SHORT-TERM INVESTMENTS

Short-term investments consisted of:

<TABLE> 
<CAPTION> 
                                              December 31,
                                        1996              1995
------------------------------------------------------------------ 
<S>                                  <C>              <C>  
Federal funds sold                   $4,500,000       $19,610,000
Money market accounts                     8,950         1,736,359
------------------------------------------------------------------
                                     $4,508,950       $21,346,359
================================================================== 
</TABLE>

4. INVESTMENT SECURITIES

Securities available-for-sale (carried at fair value) and held-to-maturity
(carried at amortized cost) at December 31, 1996 and 1995 were as follows:

<TABLE>
<CAPTION>
                                                                December 31, 1996              
--------------------------------------------------------------------------------------------------- 
                                                             Gross          Gross        Estimated    
                                           Amortized       Unrealized     Unrealized       Market     
                                              Cost           Gains          Losses         Value       
--------------------------------------------------------------------------------------------------- 
<S>                                        <C>             <C>            <C>          <C>         
Available-for-Sale
 United States Government and
    Agency obligations                     $ 55,522,324     $  176,878     $310,037    $ 55,389,165
 Corporate securities                         5,640,365         12,400        2,803       5,649,962
 Mortgage-backed securities                  94,438,775        785,010      194,715      95,029,070
--------------------------------------------------------------------------------------------------- 
Total debt securities                       155,601,464        974,288      507,555     156,068,197
 
Marketable equity securities                  5,905,584        357,956       20,812       6,242,728
Mutual funds                                  9,045,356        310,510            -       9,355,866
--------------------------------------------------------------------------------------------------- 
                                            170,552,404     $1,642,754     $528,367    $171,666,791
=================================================================================================== 

Held-to-Maturity
 United States Government and
   Agency obligations                      $  3,998,386     $   13,176     $ 16,090    $  3,995,472
 Mortgage-backed securities                  24,515,107         12,942      508,278      24,019,771
--------------------------------------------------------------------------------------------------- 
                                           $ 28,513,493     $   26,118     $524,368    $ 28,015,243
=================================================================================================== 
</TABLE> 
 
People's Savings Financial Corp. and Subsidiary
<PAGE>
 
--------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------

<TABLE> 
<CAPTION> 
                                                       December 31, 1995
-------------------------------------------------------------------------------------
                                                  Gross       Gross    Estimated
                                     Amortized  Unrealized  Unrealized  Market
                                       Cost       Gains      Losses      Value
--------------------------------------------------------------------------------------
<S>                               <C>           <C>         <C>        <C>  
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           0     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           0      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
======================================================================================
</TABLE>

The amortized cost and estimated market value of debt securities at December 31,
1996, by contractual maturity, are shown below. Expected maturities will differ
from contractual maturities because borrowers may have the right to call or
prepay obligations with or without call or prepayment penalties.

<TABLE>
<CAPTION>
                                                   Amortized               Estimated
                                                      Cost                Market Value
--------------------------------------------------------------------------------------
<S>                                               <C>                     <C>
Available-for-Sale                                                 
  Due in one year or less                         $    500,000            $    504,062
  Due after one year through five years             55,652,530              55,595,095
  Due after five years through ten years             5,010,159               4,939,970
  Due after ten years                                        0                       0
--------------------------------------------------------------------------------------
                                                    61,162,689              61,039,127
                                                                   
Mortgage-backed securities                          94,438,775              95,029,070
--------------------------------------------------------------------------------------
Total                                             $155,601,464            $156,068,197
======================================================================================

Held-to-Maturity
  Due in one year or less                         $    999,667            $  1,000,000
  Due after one year through five years              2,998,719               2,995,472
  Due after five years through ten years                     0                       0
--------------------------------------------------------------------------------------
                                                     3,998,386               3,995,472
                                                                                     
Mortgage-backed securities                          24,515,106              24,019,772
--------------------------------------------------------------------------------------
Total                                             $ 28,513,492            $ 28,015,244
====================================================================================== 
</TABLE>

32                               People's Savings Financial Corp. and Subsidiary
<PAGE>
 
--------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------

During 1996 there were no debt security sales from the available-for-sale
portfolio.  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. Net realized gains on marketable equity
securities and mutual funds were $6,950 for the year ended December 31, 1996.
Net realized gains and (losses) on marketable equity securities and mutual funds
were ( $54,882) and $758,562, for the years ended 1995 and 1994, respectively.
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 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, 1996, $1,000,000 of United States Government and Agency
obligations were pledged as collateral to secure public funds.

At December 31, 1996, $23,971,000 of mortgage-backed securities were pledged
under repurchase agreements.

5. Loans

The carrying amounts of the Corporation's loan portfolio at December 31, 1996
and 1995 were as follows:

<TABLE>
<CAPTION>
                                         1996                1995
---------------------------------------------------------------------
<S>                                 <C>                 <C>         
Real estate mortgage                $212,199,248        $201,504,022
Real estate construction               7,498,893           3,933,410
Installment loans to individuals      36,696,902          32,178,447
Commercial                               888,658             519,461
---------------------------------------------------------------------
                                     257,283,701         238,135,340
Non-accrual loans                      1,549,268             721,522
---------------------------------------------------------------------
                                    $258,832,969        $238,856,862
=====================================================================
</TABLE>

At December 31, 1996, $ 1,549,268 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, 1996, the recorded investment in loans for which impairment has
been recognized in accordance with SFAS 114 and 118 totaled $602,747, excluding
small-balance homogeneous loans.  The majority of these loans, $443,011, have
been evaluated for impairment using estimated market value of the collateral.
One loan totaling $159,736 was evaluated for impairmentusing the present values
of future cash flows method.  There was a valuation allowance of $65,149
recorded for the impaired loans at December 31, 1996.

For the year ended December 31, 1996 the average balance of impaired loans was
approximately $678,000.

The Corporation generally recognizes interest income on impaired loans on a cash
basis.  For the twelve month period ended December 31, 1996, the Corporation
recorded $46,123 in interest on impaired loans.

At December 31, 1996 the Corporation had four restructured loans totaling
$686,000.  One of these loans in the amount of approximately $392,000 was
restructured prior to the adoption of SFAS No. 114 and 118 

People's Savings Financial Corp. and Subsidiary
<PAGE>
 
-----------------------------------------
NOTES CONSOLIDATED FINANCIAL STATEMENTS
-----------------------------------------

and is therefore accounted for in accordance with SFAS No. 15 "Accounting by
Debtors and Creditors for Troubled Debt Restructurings" and the other loans are
considered smaller-balance homogeneous loans under SFAS No. 114 and 118.

Loans the Bank services for others were $63,660,941 and $66,833,079 at December
31, 1996 and 1995, respectively.

Information with respect to nonaccrual loans at December 31, 1996 and 1995 is
as follows:

<TABLE>
<CAPTION>
                                                                                  December 31,
                                                                        1996                     1995       
--------------------------------------------------------------------------------------------------------
<S>                                                                  <C>                     <C>            
Nonaccrual                                                           $1,549,268              $  721,522     
Interest income that would have been recorded under                                                         
 original terms                                                         124,168                  76,488     
Interest income recorded during period                                   74,505                  21,260      
========================================================================================================
</TABLE> 

Changes in the allowance for loan losses were as follows:

<TABLE> 
<CAPTION>                                                                                              
                                                                Year ended December 31,
                                                           1996          1995         1994
----------------------------------------------------------------------------------------------
<S>                                                     <C>           <C>          <C>        
Balance at beginning of year                            $1,577,547    $1,791,270   $2,223,472 
Provision charged to operations                            938,357       100,974      128,657 
Loans charged off                                         (998,202)     (356,884)    (642,371)
Recoveries                                                  58,947        42,187       81,512 
----------------------------------------------------------------------------------------------
Balance at end of year                                  $1,576,649    $1,577,547   $1,791,270 
----------------------------------------------------------------------------------------------
</TABLE>

6. Bank Premises and Equipment

Cost and accumulated depreciation and amortization of the various categories of
premises and equipment were as follows:

<TABLE>
<CAPTION>
                                                       December 31, 1996                       December 31, 1995
-------------------------------------------------------------------------------------------------------------------------
                                                                 Accumulated                             Accumulated
                                                               Depreciation and                        Depreciation and
                                                  Cost           Amortization             Cost           Amortization
-------------------------------------------------------------------------------------------------------------------------
<S>                                          <C>                <C>                    <C>             <C>
Building and land                            $  1,737,077       $    731,985           $1,696,624         $  672,938
Leasehold improvements                            922,787            546,635              906,804            460,794
Furniture and equipment                         3,560,570          2,805,695            3,336,039          2,435,369
-------------------------------------------------------------------------------------------------------------------------
                                             $  6,220,434       $  4,084,315           $5,939,467         $3,569,101
=========================================================================================================================
</TABLE>

7. Deposits

An analysis of deposits follows:

<TABLE> 
<CAPTION> 
                                                      December 31, 1996        December 31, 1995
-------------------------------------------------------------------------------------------------
<S>                                                   <C>                      <C> 
Non-interest-bearing demand deposits                     $  8,301,154            $  5,605,612 
Interest-bearing demand deposits                           12,247,163              11,479,100 
Money market deposit accounts                               4,327,022               4,000,026 
Savings deposits                                          105,379,428             109,215,508 
Time deposits                                             227,805,159             209,064,523 
-------------------------------------------------------------------------------------------------
                                                         $358,059,926            $339,364,769  
=================================================================================================
</TABLE>

The amount of individual certificates of deposit in excess of $100,000 included
in time deposits at December 31, 1996 and 1995 was $25,209,000 and $24,658,000,
respectively. The Bank paid interest on deposits and escrow accounts of
$14,493,370, $13,271,552 and $9,855,921 for the years ended December 31, 1996,
1995 and 1994, respectively.

34                               People's Savings Financial Corp. and Subsidiary
<PAGE>

--------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------

8. Advances from Federal Home Loan Bank of Boston and Securities Sold Under
   Agreements to Repurchase

Advances from Federal Home Loan Bank of Boston consisted of the following:

<TABLE>
<CAPTION>
                                     December 31, 1996          December 31, 1995
---------------------------------------------------------------------------------
<S>                                  <C>                        <C>
4.70% due January 1996                                             $ 1,000,000
4.56% due January 1996                                               1,000,000
4.32% due January 1996                                               3,000,000
6.94% due April 1996                                                 3,000,000
5.90% due October 1996                                               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
5.52% due January 1997                      800,000                          -
5.44% due February 1997                     700,000                          -
5.44% due February 1997                   4,000,000                          -
5.46% due March 1997                      3,700,000                          -
5.47% due May 1997                        3,700,000                          -
5.47% due May 1997                        4,000,000                          -
6.09% due June 1997                       1,000,000                          - 
5.46% due June 1997                       4,400,000                          -
5.54% due June 1997                       3,000,000                          - 
5.52% due September 1997                  2,000,000                          -
5.67% due December 1997                   2,500,000                          -
5.20% due January 1998                    2,000,000                  2,000,000
6.40% due June 1998                       2,500,000                          - 
6.07% due October 1998                    4,000,000                          -
8.19% due December 1998                     700,000                    700,000
6.01% due December 1998                   1,000,000                          -
5.70% due January 1999                      750,000                    750,000
5.54% due January 1999                      750,000                    750,000
6.71% due June 1999                       2,000,000                          -  
6.87% due June 2000                       1,500,000                          - 
6.96% due June 2000                       1,000,000                          -
6.69% due August 2001                     1,000,000                          -
4.00% due January 2008                      150,000                    150,000
---------------------------------------------------------------------------------
                                        $49,750,000                $18,950,000
=================================================================================
</TABLE>

The Bank had no overnight borrowings at December 31, 1996 and 1995.

The Bank paid interest on advances of $1,403,200, $1,311,886 and $1,344,952 for
the years ended December 31, 1996, 1995 and 1994, 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 $57,792,000 required to
collateralize the outstanding advances and short-term borrowing facility at
December 31, 1996.

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,
1996 the Bank could borrow up to an additional 

People's Savings Financial Corp. and Subsidiary
<PAGE>
 
--------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------

$233,470,000. 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.

Securities Sold Under Agreements to Repurchase consisted of the following:

<TABLE>
<CAPTION>
                                             December 31, 1996     
------------------------------------------------------------------ 
     <S>                                     <C>                  
     6.10% due June 1997                         1,500,000        
     5.79% due August 1997                       2,000,000        
     5.58% due November 1997                     3,500,000        
     6.47% due June 1998                         3,000,000        
     6.08% due August 1998                       3,000,000        
     5.80% due November 1998                     3,500,000        
     6.70% due June 1999                         3,000,000        
     6.29% due August 1999                       2,000,000        
------------------------------------------------------------------
                                               $21,500,000        
================================================================== 
</TABLE>

The Bank paid interest on repurchase agreements of $351,656 for the year ended
December 31, 1996.

9. Federal and State Taxes on Income

The components of the income tax provision (benefit) for the years ended
December 31, are as follows:

<TABLE>
<CAPTION>
                                             1996         1995         1994
---------------------------------------------------------------------------------
<S>                                       <C>          <C>          <C>
Current Provision:                    
  Federal                                 $1,917,314   $1,792,124   $1,501,990
  State                                      485,457      567,525      489,095
---------------------------------------------------------------------------------
                                           2,402,771    2,359,649    1,991,085
---------------------------------------------------------------------------------
Deferred Provision (Benefit):         
  Federal                                     (1,754)    (141,166)     319,823
  State                                     (419,314)     (34,199)     130,106
---------------------------------------------------------------------------------
                                            (421,068)    (175,365)     449,929
---------------------------------------------------------------------------------
Total provision for income taxes          $1,981,703   $2,184,284   $2,441,014
=================================================================================
</TABLE>

The following is a reconciliation of the expected federal statutory tax to the
income tax provision for the years ended December 31:

<TABLE>
<CAPTION>
1996                                                              1996          1995         1994
--------------------------------------------------------------------------------------------------
<S>                                                              <C>           <C>          <C>   
Income tax at statutory federal tax rate                         34.00%        34.00%       34.00%
Connecticut Corporation Tax, net of federal tax benefit           5.88%         6.32%        6.80% 
State tax refund on prior taxes paid                             (5.15%)           -            - 
Dividends received deduction                                     (2.83%)       (0.91%)      (0.16%
Change in state tax rate                                           .34%          .19            - 
Other                                                              .81%         (.40%)          - 
--------------------------------------------------------------------------------------------------
Effective income tax rate                                        33.05%        39.20%       40.64%
--------------------------------------------------------------------------------------------------
</TABLE> 

36                               People's Savings Financial Corp. and Subsidiary
<PAGE>
 
--------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------

The components of the Corporation's net deferred tax assets at December 31, 
1996, 1995 and 1994 are as follows:

<TABLE> 
<CAPTION> 
                                              1996                    1995                   1994         
                                        Federal     State       Federal      State     Federal      State   
----------------------------------------------------------------------------------------------------------
<S>                                  <C>           <C>        <C>         <C>        <C>         <C>
Deferred tax assets:
State tax credits                             -    $382,949           -          -           -          -
Loan loss provision                  $  479,774     165,548   $ 482,348   $170,876   $ 540,605   $201,518
Net mortgage origination fees                 -           -       8,040      2,848      83,025     30,949
Deferred directors fees                 290,634     100,284     273,741     96,975     224,462     83,671
Accrued self-insurance                   29,681      10,241      18,131      6,423       9,704      3,617
Accrued interest payable                 16,500       5,693      34,718     12,299      12,866      4,796
Accrued pension expense                  98,338      33,932     113,184     40,097     119,812     44,662
Securities losses                        31,701      10,939      31,613     11,199      31,441     11,720
Post-retirement benefits 
 (SFAS 106)                             123,148      42,493     107,778     38,181     119,645     44,599
Fixed assets                             19,839       6,846           -          -           -          -
Goodwill                                 55,033      18,989      29,277     10,372       3,753      1,399
Available-for-sale securities
 (SFAS 115)                                   -           -           -          -   1,183,689    441,236
Other                                    60,692      20,941      46,579     16,499           -          -
----------------------------------------------------------------------------------------------------------
Total deferred tax assets             1,205,340     798,855   1,145,409    405,769   2,329,002    868,167
----------------------------------------------------------------------------------------------------------

Deferred tax liabilities         
State tax credits                       130,203           -           -          -           -          -
Tax loan loss reserve
 in excess of base year                       -           -       6,396      2,266       7,077      2,638
Net mortgage origination fees             8,039       2,774           -          -           -          -
Accrued dividends receivable              3,598       1,242      22,903      8,113       6,332      2,600
Bond discount accretion                   7,491       2,585      12,324      4,365      87,913     32,771
Mark to market - Sec 481a
 adjustment                              31,505      10,871      62,834     22,259      96,252     35,879
Fixed assets                                  -           -      18,465      6,541      42,021     15,664
Prepaid insurance                        27,098       9,350      26,835      9,506      28,414     10,592
Available-for-sale securities
  (SFAS 115)                            338,161     119,797     100,906     37,620           -          -
Other                                         -           -           -          -      22,818      8,267
-----------------------------------------------------------------------------------------------------------
Total deferred tax liabilities          546,095     146,619     250,663     90,670     290,827    108,411
-----------------------------------------------------------------------------------------------------------
Net deferred tax assets                 659,245     652,236     894,746    315,099   2,038,175    759,756
Valuation reserve                             -           -           -          -           -          -
-----------------------------------------------------------------------------------------------------------
Net deferred tax assets after
 valuation reserve                   $  659,245    $652,236   $ 894,746   $315,099  $2,038,175   $759,756
===========================================================================================================
</TABLE> 

The allocation of deferred tax expense (benefit) involving items charged to 
current year income and items charged directly to stockholders' equity for the 
year ended December 31, are as follows:

<TABLE> 
<CAPTION> 
                                              1996                    1995                   1994
                                        Federal     State       Federal      State     Federal      State
---------------------------------------------------------------------------------------------------------------
<S>                                  <C>          <C>         <C>         <C>        <C>           <C> 
Deferred tax expense (benefit)
 allocated to shareholders' equity   $237,255     $ 82,177    $1,284,595  $478,856   $(1,183,689)  $(441,236)
Deferred tax expense (benefit)
 allocated to income                   (1,754)    (419,314)     (141,166)  (34,199)      319,823     130,106
---------------------------------------------------------------------------------------------------------------
Total deferred tax expense
 (benefit)                           $235,501    $(337,137)   $1,143,429  $444,657   $  (863,866)  $(311,130)
===============================================================================================================
</TABLE> 

People's Savings Financial Corp. and Subsidiary
<PAGE>
 
------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------

The Corporation will only recognize a deferred tax asset, when based upon
available evidence, realization is more likely than not. Accordingly, at
December 31, 1996, 1995 and 1994, 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 $2,165,000 and
$1,820,800 and $2,238,000, in 1996, 1995 and 1994, respectively.

Pursuant to the Small Business Job Protection Act of 1996, the Corporation is
required to change its method of accounting with respect to its bad debt
reserves.  The change results in taxable income of approximately $21,000 which
will be recognized ratably over a six year period.  A deferred tax liability has
been established for the unrecognized portion relating to the change in tax
method of accounting.

The Corporation has not provided deferred taxes for the tax reserve for bad
debts that arose in tax years beginning before 1988 because it is expected that
the requirements of Section 593, as amended by the Small Business Job Protection
Act of 1996, will be met in the foreseeable future.  If the requirements of
Section 593 are not met, a potential tax liability could be incurred of
approximately $1,900,000 relating to the pre-1988 tax bad debt reserve of
$4,600,000.

------------------------------------------------------------------------
10. STOCKHOLDER'S EQUITY, 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 $2,529,000 available for payment of dividends to the Corporation,
without approval of the Commissioner, at December 31, 1996.

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, 1996, the maximum amount available for transfer
from the Bank to the Corporation in the form of loans approximated 10% of
consolidated net assets.

The Bank is subject to various regulatory capital requirements administered by
the federal banking agencies.  Failure to meet minimum capital requirements can
initiate certain mandatory - and possibly additional discretionary - actions by
regulators that, if undertaken, could have a direct material effect on the
Bank's financial statements.  Under capital adequacy guidelines and the
regulatory framework for prompt corrective action, the Bank must meet specific
capital guidelines that involve quantitative measures of the Bank's assets,
liabilities, and certain off-balance-sheet items as calculated under regulatory
accounting practices.  The Bank's capital amounts and classification are also
subject to qualitative judgements by the regulators about components, risk
weightings, and other factors.

Quantitative measures established by regulation to ensure capital adequacy
require the Bank to maintain minimum amounts and ratios of total and Tier 1
capital to risk-weighted assets of 8.0%, and  4.0%, respectively, and of Tier 1
capital to average assets of  4.0%.   Quantitative measures established by
regulation to be classified as "well capitalized"  require the Bank to maintain
minimum amounts and ratios of total and Tier 1 capital to risk-weighted assets
of 10.0%, and  6.0%, respectively, and of Tier 1 capital to average assets of
5.0%.  At December 31, 1996 all of the Bank's capital ratios exceeded minimum
regulatory capital requirements and places it as "well capitalized", the highest
rating of five regularity capital classifications.

                                 People's Savings Financial Corp. and Subsidiary

38

<PAGE>
 
------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------

The following table illustrates the capital resources of the Bank and the
Corporation and their capital ratios as of December 31:

<TABLE>
<CAPTION>
(dollars in thousands)                          1996      1995
-----------------------------------------------------------------
<S>                                           <C>       <C>
Bank's capital components:
Tier 1 capital (Stockholders' equity)         $40,928   $37,279
Tier 2 capital (Allowance for loan losses)      1,577     1,578
-----------------------------------------------------------------
Bank's total risk-based capital               $42,505   $38,857
-----------------------------------------------------------------
Bank's capital ratios:
Total risk-based                                18.46%    18.38%
Tier 1 risk-based                               17.78%    17.63%
Tier 1 leverage                                  9.50%     9.35%
-----------------------------------------------------------------
 
Corporation's capital components:
Tier 1 capital (Stockholders' equity)         $42,539   $41,217
Tier 2 capital (Allowance for loan losses)      1,577     1,578
-----------------------------------------------------------------
Corporation's total risk-based capital        $44,116   $42,795
-----------------------------------------------------------------
 
Corporation's capital ratios:
Total risk-based                                19.16%    20.24%
Tier 1 risk-based                               18.47%    19.49%
Tier 1 leverage                                  9.88%    10.33%
-----------------------------------------------------------------
</TABLE>

---------------------
11. STOCK OPTION PLAN
---------------------

The Corporation has a stock option and incentive plan for certain employees and
a stock option plan for directors under which the Corporation may grant options
to its employees for up to 150,000 shares of common stock and may grant options
to its directors for up to 100,000 shares of its common stock.  Under the plans
the exercise price of each option equals the market price of the Corporation's
stock on the date of the grant and an option's maximum term is ten years.
Options are granted upon approval of the Board of Directors and become
exercisable upon issuance. Options were granted during 1996, 1995 and 1994 with
an exercise price equal to the fair market value of common stock at the date of
grant.

On January 1, 1996 the Corporation adopted Statement of Financial Accounting
Standards No. 123, "Accounting for Stock Based Compensation" (SFAS 123).  As
permitted by SFAS 123, the Corporation has chosen to apply APB Opinion No. 25,
"Accounting for Stock Issued to Employees" (APB 25) and related interpretations
in accounting for its Plans.  Had compensation cost  for the Corporation's Plans
been determined based on the fair value at the grant dates for awards under the
Plans consistent with the method of SFAS 123, the Corporation's net income and
fully diluted net income per share would have been reduced to the pro forma
amounts indicated below.

<TABLE>
<CAPTION>
                                 1996                       1995                 1994
----------------------------------------------------------------------------------------------
                             As                      As                     As     
                          Reported    Pro Forma   Reported   Pro Forma   Reported   Pro Forma
---------------------------------------------------------------------------------------------- 
<S>                     <C>         <C>         <C>         <C>         <C>         <C>                 
Net Income              $4,014,456  $3,985,019  $3,388,528  $3,107,779  $3,564,872  $3,555,817
Net Income per share
 (fully diluted)        $     2.03  $     2.02  $     1.70  $     1.56  $     1.76  $     1.76
----------------------------------------------------------------------------------------------
</TABLE>

The fair value of each option grant is estimated on the date of grant using the
Black-Scholes option-pricing model with the following weighted-average
assumptions used for grant in 1996; dividend yield of 4.49%, expected volatity
of 22.68%, risk free interest rate of 5.25%, and expected term of options of 10
years.

People's Savings Financial Corp. and Subsidiary
<PAGE>
 
------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------

<TABLE>
<CAPTION>
                                             1996                          1995                1994
----------------------------------------------------------------------------------------------------------------
                                                 Weighted                 Weighted                 Weighted
                                                 Average                   Average                 Average
                                     Shares   Exercise Price   Shares   Exercise Price  Shares  Exercise Price
----------------------------------------------------------------------------------------------------------------
<S>                                  <C>      <C>             <C>       <C>             <C>     <C>
Outstanding at beginning of year     171,500       15.316       68,000       11.313     67,000          10.867
Granted                               27,500       20.500      107,000       17.691      4,000          18.000
Exercised                             31,000       10.875        3,500       10.179      3,000          10.250
Forfeited                              1,500       17.563            -            -          -               -
----------------------------------------------------------------------------------------------------------------
Outstanding at end of year           166,500       16.978      171,500        15.316    68,000          11.313
----------------------------------------------------------------------------------------------------------------
Options exercisable at year-end      166,500                   171,500                  68,000
-----------------------------------------------------------------------------------------------------------------
</TABLE> 

The following table summarizes information about the Plan's stock options at
December 31, 1996:

<TABLE>
<CAPTION>
                                        Options Outstanding                        Options Exercisable
--------------------------------------------------------------------------------------------------------
                      Number        Weighted-Average    Weighted          Number            Weighted
    Range of        Outstanding        Remaining         Average        Exercisable         Average
Exercise Prices    at 12/31/96     Contractual Life   Exercise Price    at 12/31/96      Exercise Price
--------------------------------------------------------------------------------------------------------
<S>                <C>             <C>                <C>               <C>              <C>
9.125-20.500        166,500            7.415             16.978            166,500          16.978
--------------------------------------------------------------------------------------------------------
</TABLE>

--------------------------
12. 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.

The following table sets forth the plan's funded status and amounts recognized
in the Corporation's statement of financial position at December 31, 1996 and
1995:

<TABLE>
<CAPTION>
                                                                                December 31,
                                                                             1996          1995
---------------------------------------------------------------------------------------------------
<S>                                                                        <C>          <C>
Actuarial present value of benefit obligations:
Accumulated benefit obligation, including vested benefits
 of $1,567,849 in 1996 and $1,633,785 in 1995                              $1,654,618   $1,656,265
---------------------------------------------------------------------------------------------------
Projected benefit obligation for service rendered to date                  $2,787,510   $2,789,792
Plan assets at fair value, primarily cash and cash
 equivalents, US and other bonds and listed stocks                          2,038,059    1,885,076
--------------------------------------------------------------------------------------------------- 
Projected benefit obligations in excess of plan assets                        749,451      904,716

Unrecognized net gain (loss) from past experience different
 from that assumed and effects of changes in assumptions                     (534,249)    (655,177)
Unrecognized transition asset at December 31                                  108,964      124,574
---------------------------------------------------------------------------------------------------
Accrued pension cost included in other liabilities                         $  324,166   $  374,113
---------------------------------------------------------------------------------------------------
</TABLE> 

Net pension cost included the following components:

<TABLE> 
<CAPTION> 
                                                                        Year ended December 31,
                                                                    1996         1995         1994
---------------------------------------------------------------------------------------------------
<S>                                                            <C>         <C>          <C> 
Service cost-benefits earned during the period                 $ 317,995   $  239,153   $  199,116
Interest cost on projected benefit obligation                    172,843      179,172      163,021
Actual return on plan assets                                    (273,891)    (345,515)      50,401
Net amortization and deferral                                     93,737      193,564     (193,075)
---------------------------------------------------------------------------------------------------
Net periodic pension cost                                      $ 310,684   $  266,374   $  219,463
---------------------------------------------------------------------------------------------------
</TABLE>

                                 People's Savings Financial Corp. and Subsidiary

40

<PAGE>
 
------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------

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 7.5% and 7.0%, respectively, at December 31, 1996 and December
31, 1995, the respective measurement dates. The expected long-term rate of
return on plan assets was 8.0% in 1996, 1995 and 1994

The Corporation has 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 $79,119, $63,694 and $56,360,
respectively, for the years ended December 31, 1996, 1995and 1994.

The Corporation offers Post-retirement benefits and life insurance benefits
which are accounted for using the accrual method. These benefits are unfunded
and there are no assets associated with the plan. The net periodic post-
retirement benefits expense was $63,031, $50,080 and $41,560, respectively,  in
1996, 1995 and 1994.  The post-retirement benefits liability was $402,499,
$355,177, and 311,014, respectively, at December 31, 1996, 1995, and 1994.  The
discount rate used to compute the post-retirement benefits liability was 7.50%
during 1996.  A 1% increase in the assumed health care cost trend rates would
have increased  the expenses by $21,163.

----------
13. 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, 1996
for these leases are as follows:

<TABLE>
<CAPTION>
                   <S>           <C>         
                   1997          $  438,283             
                   1998             435,100                   
                   1999             427,417 
                   2000             368,904  
                   2001             274,176  
                   Thereafter        95,067  
----------------------------------------------------------------------------
                                 $2,038,947       
---------------------------------------------------------------------------- 
</TABLE>

Rental expense for the branches amounted to $468,211 in 1996, $442,892 in 1995
and $393,332 in 1994.

--------------------------
14. 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 

People's Savings Financial Corp. and Subsidiary
<PAGE>
 
------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------

as it does for on-balance-sheet instruments. Total credit exposure related to
these items at December 31, 1996 and 1995 is summarized below:

<TABLE>
<CAPTION>
                                                         1996                  1995         
                                                   Contract Amount       Contract Amount    
------------------------------------------------------------------------------------------
<S>                                                <C>                   <C>                
Loan commitments:                                                                           
  Approved mortgage and equity loan commitments        $   783,250           $ 2,103,300    
  Unadvanced portion of construction loans               4,169,707             2,925,864    
Letters of credit                                          534,340               534,340    
Unadvanced portion of:                                                                      
  Commercial line of credit                              1,453,977             1,511,250    
  Home equity lines of credit                            7,008,210             4,515,152    
  Overdraft line of credit                                  35,487                19,959    
  Credit cards                                           3,458,312             3,404,764    
------------------------------------------------------------------------------------------
                                                       $17,443,283           $15,014,629     
------------------------------------------------------------------------------------------
</TABLE>

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.

---------------------------------------------------
15. 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 (95%) at December 31, 1996 and
(97%) at December 31, 1995, is comprised of loans collateralized by real estate
located primarily in central Connecticut. At December 31, 1996 and 1995
respectively, such loans and commitments totaled approximately $276,101,000, and
$243,400,000, of which $243,117,000 and $227,300,000, 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.

----------------------------
16. 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 $2,618,633 and $2,521,121 at
December 31, 1996 and 1995, respectively. During 1996, the Bank made $388,950 in
new loans to related parties and received $291,438 in payments on related party
loans. Such related party loans were made in the ordinary course of business.

---------------------------------------
17. 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 

42                               People's Savings Financial Corp. and Subsidiary

<PAGE>
 
------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------

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.

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 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.

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.

Securities Sold Under Agreements to Repurchase:  The fair values of the
Corporation's repurchase agreements are estimated using discounted cash flow
analyses, based on the Corporation's current incremental borrowing rates for
similar types of borrowing arrangements.

People's Savings Financial Corp. and Subsidiary
<PAGE>
 
------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------

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:

<TABLE>
<CAPTION>
                                                           1996                               1995                                  

-----------------------------------------------------------------------------------------------------------------
                                              Carrying                Fair           Carrying           Fair   
                                               Value                  Value           Value            Value   
-----------------------------------------------------------------------------------------------------------------
<S>                                           <C>                  <C>              <C>              <C>      
Financial assets:
  Cash and due from banks                        $   5,113,253     $  5,113,253     $  6,815,738     $  6,815,738     
  Short-term investments                             4,508,950        4,508,950       21,346,359       21,346,359     
  Securities held-to-maturity                       28,513,493       28,015,244       38,460,901       38,259,088     
  Securities available-for-sale                    171,666,791      171,666,791       91,128,434       91,128,434     
  Federal Home Loan Bank stock                       2,736,100        2,736,100        2,643,000        2,643,000     
  Loans                                            257,283,701       XX,000,000      238,135,340      239,832,317     
  Loans held for sale                                1,142,510        1,142,510          927,034          927,034     
Financial Liabilities:                                                                                                
  Deposits with no stated maturity                 130,254,767      130,254,767      130,300,246      130,300,246     
  Time deposits                                    227,805,159      230,066,000      209,064,523      211,671,000     
  Federal Home Loan Bank                                                                                              
    borrowings                                      49,750,000       49,784,000       18,950,000       18,959,000      
  Repurchase Agreements                             21,500,000       21,609,839                                 
-----------------------------------------------------------------------------------------------------------------
</TABLE>

------------------------------------
18. RECENT ACCOUNTING PRONOUNCEMENTS
------------------------------------

In June 1996, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards No. 125, "Accounting for Transfers and
Servicing of  Financial Assets and Extinguishment of Liabilities" ("SFAS 125").
SFAS 125 provides accounting and reporting standards for transfers and servicing
of financial assets and extinguishment of liabilities.  The Bank will be
required to adopt SFAS 125 for transfers and servicing of financial assets and
extinguishment of liabilites ocurring after December 31, 1996, on a prospective
basis.  The adoption of this standard is not expected to have a material impact
on the Bank's financial condition or its results of operations.

------------------------------------------------------------------
19. PEOPLE'S SAVINGS FINANCIAL CORP. (PARENT CORPORATION ONLY)
FINANCIAL INFORMATION
------------------------------------------------------------------

Balance Sheets

<TABLE>
<CAPTION>
                                                                         December 31,                      
                                                                 1996                  1995                       
-------------------------------------------------------------------------------------------------
<S>                                                           <C>                   <C>  
Assets                                                                                                    
Advances to subsidiary                                        $ 2,021,474           $ 4,326,117                    
Investment in subsidiaries                                     44,614,563            40,816,793                    
-------------------------------------------------------------------------------------------------
Total assets                                                  $46,636,037           $45,142,910                    
-------------------------------------------------------------------------------------------------

Liabilities                                                                                                        
Dividends payable/other liabilities                           $   434,888           $   429,520                    
-------------------------------------------------------------------------------------------------
Total liabilities                                                 434,888               429,520                    
Stockholders' equity                                           46,201,149            44,713,390                    
-------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity                    $46,636,037           $45,142,910                     
-------------------------------------------------------------------------------------------------
</TABLE> 

44                               People's Savings Financial Corp. and Subsidiary

<PAGE>
 
------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------

Statements of Income

<TABLE> 
<CAPTION> 
                                                                          Year ended December 31,
                                                                    1995            1995            1994    
-------------------------------------------------------------------------------------------------------------
<S>                                                            <C>              <C>             <C>  
Dividends from subsidiary                                      $   700,000      $ 5,000,000     $ 2,600,000              
Investment securities gains                                        450,163                                             
Other income                                                       136,765           68,294          84,564            
-------------------------------------------------------------------------------------------------------------
Income before income taxes and equity                                                                                  
  distributed in excess of income of subsidiary                    836,765        5,068,294       3,134,727            
                                                                                                                       
Other expenses                                                     173,532          151,501         130,245            
Income taxes (credit)                                              (15,109)         (34,489)        168,224            
-------------------------------------------------------------------------------------------------------------
                                                                   158,423          117,012         298,469            
-------------------------------------------------------------------------------------------------------------
Income before equity in undistributed                                                                                  
  net income of subsidiary                                         678,342        4,951,282       2,836,258            
                                                                                                                       
Equity in undistributed net income                                                                                     
   (loss) of subsidiaries                                        3,336,114       (1,562,754)        728,614            
-------------------------------------------------------------------------------------------------------------

Net income                                                     $ 4,014,456      $ 3,388,528     $ 3,564,872             
-------------------------------------------------------------------------------------------------------------
</TABLE> 

Statements of Cash Flows

<TABLE> 
<CAPTION> 
                                                                          Year ended December 31,
                                                                   1996            1995            1994                         
-------------------------------------------------------------------------------------------------------------
<S>                                                            <C>              <C>             <C> 
Operating activities                                                                                                       
Net income                                                     $ 4,014,456      $ 3,388,528     $ 3,564,872           
Adjustments to reconcile net income                                                                                        
  to net cash provided by operating activities:                                                                            
    Equity in undistributed net (income)                                                                                   
      loss of subsidiary                                        (3,336,114)       1,562,754        (728,614)                      
    Gain on sale of investment securities                                -                -        (450,163)       

    Other items, net                                                (4,562)               -               -                         

-------------------------------------------------------------------------------------------------------------
Cash provided by operating activities                              673,780        4,951,282       2,386,095                       
-------------------------------------------------------------------------------------------------------------

Investing activities                                                                                                              
Sales of investment securities                                           -                -         614,376                       
Investment in subsidiary                                                 -          (50,000)              -                       
Net decrease (increase) in advances                                                                                               
  to subsidiaries                                                2,304,643       (2,498,682)     (1,139,482)                      
-------------------------------------------------------------------------------------------------------------
Net cash provided (used)                                         2,304,643       (2,548,682)       (525,106)                      
  by investing activities                                                                                                         
-------------------------------------------------------------------------------------------------------------

Financing activities                                                                                                              
Issuance of common stock                                           337,125           45,761          30,750                       
Acquisition of treasury stock                                   (1,589,400)        (720,950)       (135,600)                      
Cash dividends                                                  (1,726,148)      (1,727,411)     (1,756,139)                      
-------------------------------------------------------------------------------------------------------------
Net cash used by financing activities                           (2,978,423)      (2,402,600)     (1,860,989)                      
-------------------------------------------------------------------------------------------------------------
Increase (decrease) in cash and cash equivalents                         -                -               -                       
                                                                                                                                  
Cash and cash equivalents at beginning of year                           -                -               -                       
-------------------------------------------------------------------------------------------------------------

Cash and cash equivalents at end of year                       $         -      $         -     $         -           
-------------------------------------------------------------------------------------------------------------
</TABLE>

People's Savings Financial Corp. and Subsidiary
<PAGE>
 
------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------

20. QUARTERLY FINANCIAL DATA (UNAUDITED)

The following is a summary of the quarterly results of operations for the years
ended December 31, 1996 and 1995 (in thousands of dollars, except per share
data):

<TABLE>
<CAPTION>
                                                                               Three months ended                          
                                                              March 31      June 30    September 30   December 31          
---------------------------------------------------------------------------------------------------------------------
<S>                                                          <C>            <C>        <C>            <C>                  
1996                                                                                                                       
Interest income                                               $7,059        $7,195         $7,781        $8,486            
Interest expense                                               3,772         3,766          4,268         4,622            
---------------------------------------------------------------------------------------------------------------------
Net interest income                                            3,287         3,429          3,513         3,864            
---------------------------------------------------------------------------------------------------------------------

Provision for loan losses                                         64            95             95           684            
Net gain (loss) on securities transactions                       (20)            -              -             -            
Other income                                                     586           630            729           730            
Other expenses                                                 2,368         2,506          2,486         2,454            
---------------------------------------------------------------------------------------------------------------------
Income before income taxes                                     1,421         1,458          1,661         1,456            
Income taxes                                                     533           249            640           560            
---------------------------------------------------------------------------------------------------------------------
Net income                                                    $  888        $1,209         $1,021        $  896            
---------------------------------------------------------------------------------------------------------------------

Net income per common share                                   $  .45        $  .62         $  .52        $  .45             
---------------------------------------------------------------------------------------------------------------------
</TABLE> 

<TABLE> 
<CAPTION> 
                                                                         Three months ended                    
                                                             March 31      June 30      September 30   December 31     
---------------------------------------------------------------------------------------------------------------------
<S>                                                          <C>           <C>          <C>            <C> 
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             -     
Net gain (loss) on securities transactions                         4           (73)            (1)         (100)    
Trading account gains (losses)                                    49             -              -             -     
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      
---------------------------------------------------------------------------------------------------------------------
</TABLE>

-----------------
STOCK INFORMATION
-----------------

Common Stock Information

People's Savings Bank of New Britain (the "Bank") common stock began trading
over the counter on the Nasdaq National Market System in August of 1986 under
the symbol "PBNB". Effective upon the Bank's formation of a holding company on
July 31, 1989, People's Savings Financial Corp. succeeded to the Bank's listing
symbol "PBNB" on the National Market System. There were 1,312 stockholders of
record on February 28, 1997. 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 System.

46                               People's Savings Financial Corp. and Subsidiary


<PAGE>
 
-----------------
STOCK INFORMATION
-----------------

<TABLE>
<CAPTION>
Quarter ended                          LOW                       HIGH
-------------------------------------------------------------------------------
<S>                                  <C>                       <C> 
March 31, 1995                       17 1/2                     18   
June 30, 1995                        18                         19 1/2   
September 30, 1995                   19 1/4                     22 1/2   
December 31, 1995                    19                         20   
March 31, 1996                       19                         20 3/4   
June 30, 1996                        20 1/4                     22 3/8   
September 30, 1996                   21 3/4                     30 3/16   
December 31, 1996                    26 1/4                     29    
-------------------------------------------------------------------------------
</TABLE>

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- Stockholders Equity
Restrictions on Subsidiary Dividends, Loans or Advances on page XX of this
report.

The following table illustrates dividends that were declared:

<TABLE>
<CAPTION>
Dividends Date Declared         Date Payable             Amount  
-------------------------------------------------------------------------------
<S>                             <C>                     <C>    
March 22, 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 

March 19, 1996                  April 30, 1996           .22   
May 22, 1996                    July 31, 1996            .23    
September 17, 1996              October 31, 1996         .23 
December 17, 1996               January 31, 1997         .23  
-------------------------------------------------------------------------------
</TABLE>

Stockholder Information
Peoples Savings Bank & Trust and People's Savings Financial Corp.

Peoples Savings Bank & Trust 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 06050 and their telephone number is (860) 224-
7771.

Stock Transfer Agent
     People's Savings Financial Corp.         
     c/o State Street Bank and Trust Company  
     P.O. Box 8200                            
     Boston, MA 02266-8200                    
     1-800-426-5523                            

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 1996, 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
<PAGE>
----------------------
DIRECTORS AND OFFICERS
----------------------

DIRECTORS OF PEOPLE'S SAVINGS FINANCIAL CORPORATION
AND PEOPLES SAVINGS BANK & TRUST 

<TABLE> 
<S>                                                    <C>            
Joseph A. Welna, M.D., Chairman of the Board           Richard S. Mansfield  
 Obstetrician/Gynecologist                              President and Chief Executive Officer    
Walter J. Liss, Secretary of the Board                  Peoples Savings Bank & Trust and People's 
 President of Liss Insurance Agency Inc.                Savings Financial Corp.
Walter D. Blogoslawski                                 Henry R. Poplaski
 Owner of Investment Research and PHB Realty            Owner and manager of Hank's
Stanley P. Filewicz, M.D.                               Automotive Services
 Orthopedic Surgeon                                    A Richard Puskarz
Robert A. Gryboski, M.D.                                President and Chief Executive Officer of 
 Otolaryngologist                                       Art Press Inc., Printers
Roland L. LeClerc                                      Chester S. Sledzik
 Retired Partner, LeClerc and Fortier,                  Partner in the law firm of Sledzik & McGuire
 Insurance and Realty                                  Robert A. Story
                                                        President of Story Brothers Inc.,
                                                        Automotive Service
PEOPLES SAVINGS BANK & TRUST

Officers                                               Accounting
Richard S. Mansfield                                   Edward E. Bohnwagner, III
 President and Chief Executive Officer                  Vice President & Controller
John G. Medvec                                         Janina M. Chlus
 Executive Vice President and Treasurer                 Assistant Controller
Lending                                                Jennifer A. Lodovico
Earl T. Young                                           Assistant Treasurer
 Senior Vice President                                 Marketing
Robert J. Mendillo                                     Joyce L. Petrisko
 Vice President                                         Assistant Treasurer
Mark A. Iadarola                                       Management Information Systems
 Assistant Vice President                              Jay Mongillo
Richard J. Frey                                         Assistant Vice President & Systems Officer
 Commercial Loan Officer                               Compliance
Donna M. Evans                                         Jodi J. Michaud
 Assistant Treasurer                                    Compliance/Audit Officer
Donna D. Mattson                                       Trust
 Assistant Treasurer                                   Daniel A. Hurley, III
Hanna M. Jarzebowski                                    Senior Vice President
 Assistant Treasurer                                   Lois A. Muraro
Operations                                              Vice President
Teresa D. Sasinski                                     Jeffrey F. Otis
 Senior Vice President & Secretary                      Vice President
Diane C. Rudy                                          David J. Papallo
 Vice President                                         Vice President
Geraldine F. Valuk                                     Irma C. Sulewski
 Assistant Vice President                               Vice President
Maurizio D'Oca                                         Robert E. Dell
 Assistant Treasurer                                    Vice President
Alina M. Grabala                                       Maria F. Del Sesto
 Assistant Treasurer                                    Assistant Vice President
Laurie S. Mornhineway                                  Annabell Priola
 Assistant Treasurer                                    Assistant Vice President
Barbara Powojski                                       Elaine A. Niland
 Assistant Treasurer                                    Trust Officer
                                                       Non-deposit Investment Products
                                                       Roger T. Helal
                                                        Vice President
</TABLE> 

48
<PAGE>
 
-----------------------------
  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                  275C New Britain Avenue
New Britain, CT                        Plainville, CT
860-827-3656                           860-793-6020

Meriden Office
834 Broad Street
Meriden, CT
203-317-3932



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
<PAGE>
 
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