FORM 10-QSB
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For Quarterly Period ended September 30, 1998
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to ____________.
Commission File Number 0-22223
PEOPLES-SIDNEY FINANCIAL CORPORATION
- --------------------------------------------------------------------------------
(Exact name of small business issuer as specified in its charter)
Delaware 31-1499862
- --------------------------------------------------------------------------------
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
101 E. Court Street, Sidney, Ohio 45365
(Address of principal executive offices)
(937) 492-6129
(Issuer's telephone number)
Check whether the small business issuer (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act during the past 12
months (or for such shorter period that the small business issuer was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.
Yes [ X ] No [ ]
As of November 3, 1998, the latest practicable date, 1,740,375 shares of the
issuer's common shares, $.01 par value, were outstanding.
<PAGE>
PEOPLES-SIDNEY FINANCIAL CORPORATION
INDEX
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Consolidated Balance Sheets.........................................
Consolidated Statements of Income ..................................
Consolidated Statements of Comprehensive Income.....................
Condensed Consolidated Statements of Changes in Shareholders' Equity
Consolidated Statements of Cash Flows ..............................
Notes to Consolidated Financial Statements .........................
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations.....................
PART II - OTHER INFORMATION
Item 1. Legal Proceedings...................................................
Item 2. Changes in Securities and Use of Proceeds...........................
Item 3. Defaults Upon Senior Securities.....................................
Item 4. Submission of Matters to a Vote of Security Holders.................
Item 5. Other Information...................................................
Item 6. Exhibits and Reports on Form 8-K....................................
SIGNATURES .....................................................................
<PAGE>
<TABLE>
<CAPTION>
PEOPLES-SIDNEY FINANCIAL CORPORATION
CONSOLIDATED BALANCE SHEETS
(Unaudited)
Item 1. Financial Statements
September 30, June 30,
1998 1998
------------- -------------
<S> <C> <C>
ASSETS
Cash and amounts due from depository institutions $ 917,507 $ 655,188
Interest-bearing deposits in other financial institutions 1,066,366 2,292,065
Overnight deposits 2,000,000 2,000,000
------------- -------------
Total cash and cash equivalents 3,983,873 4,947,253
Time deposits in other financial institutions 100,000 100,000
Securities available for sale 3,528,905 4,015,890
Loans receivable, net 96,122,208 94,052,531
Accrued interest receivable 769,661 722,401
Premises and equipment, net 1,552,177 973,403
Federal Home Loan Bank stock available for sale 861,900 846,500
Other assets 159,598 245,339
------------- -------------
Total assets $ 107,078,322 $ 105,903,317
============= =============
LIABILITIES
Deposits $ 79,686,922 $ 79,053,686
Borrowed funds 8,000,000 7,000,000
Accrued expense and other liabilities 255,058 223,615
------------- -------------
Total liabilities 87,941,980 86,277,301
SHAREHOLDERS' EQUITY
Preferred stock, $.01 par value, 500,000 shares
authorized, none issued and outstanding
Common stock, $.01 par value, 3,500,000 shares
authorized, 1,785,375 shares issued 17,854 17,854
Additional paid-in capital 10,747,903 10,717,991
Retained earnings 10,583,992 10,581,096
Treasury stock, 30,000 shares at cost (578,750) --
Unearned employee stock-ownership plan shares (1,654,323) (1,702,114)
Unrealized gain on securities available for sale 19,666 11,189
------------- -------------
Total shareholders' equity 19,136,342 19,626,016
------------- -------------
Total liabilities and shareholders' equity $ 107,078,322 $ 105,903,317
============= =============
</TABLE>
See accompanying notes to consolidated financial statements
<PAGE>
<TABLE>
<CAPTION>
PEOPLES-SIDNEY FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
Three Months Ended
September 30,
-------------------------
1998 1997
---------- ----------
<S> <C> <C>
Interest income
Loans, including fees $1,872,303 $1,836,110
Securities 64,033 63,563
Interest-bearing demand and overnight deposits 48,727 80,784
Dividends on Federal Home Loan Bank stock 15,469 13,934
---------- ----------
Total interest income 2,000,532 1,994,391
Interest expense
Deposits 977,941 979,265
Other borrowings 108,314 --
---------- ----------
Total interest expense 1,086,255 979,265
---------- ----------
Net interest income 914,277 1,015,126
Provision for loan losses 36,780 26,083
---------- ----------
Net interest income after provision for loan losses 877,497 989,043
---------- ----------
Noninterest income
Service fees and other charges 14,291 15,868
---------- ----------
Noninterest expense
Compensation and benefits 383,034 223,013
Occupancy and equipment 47,302 39,426
Computer processing expense 42,882 36,926
FDIC deposit insurance premiums 11,910 12,710
State franchise taxes 68,356 35,081
Other 154,991 133,701
---------- ----------
Total noninterest expense 708,475 480,857
---------- ----------
Income before income taxes 183,313 524,054
Provision for income taxes 66,137 186,495
---------- ----------
Net income $ 117,176 $ 337,559
========== ==========
Earnings per common share - basic $ 0.07 $ 0.20
========== ==========
Earnings per common share - diluted $ 0.07 $ 0.20
========== ==========
</TABLE>
See accompanying notes to consolidated financial statements
<PAGE>
<TABLE>
<CAPTION>
PEOPLES-SIDNEY FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
Three Months Ended
September 30,
-----------------------
1998 1997
-------- --------
<S> <C> <C>
Net income $117,176 $337,559
Other comprehensive income, net of tax
Unrealized gain/(loss) on available for
sale securities arising during the
period 8,477 7,388
-------- --------
Comprehensive income $125,653 $344,947
======== ========
</TABLE>
See accompanying notes to consolidated financial statements
<PAGE>
<TABLE>
<CAPTION>
PEOPLES-SIDNEY FINANCIAL CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN
SHAREHOLDERS' EQUITY
(Unaudited)
Three Months Ended
September 30,
-------------------------------
1998 1997
------------ -------------
<S> <C> <C>
Balance, beginning of period $ 19,626,016 $ 25,711,713
Net income for period 117,176 337,559
Cash dividends of $.07 per share in 1998 and $.05 per share
in 1997 (114,280) (82,638)
Purchase of 30,000 shares of treasury stock, at cost (578,750) --
Commitment to release 3,812 and 2,550 employee stock
ownership plan shares in 1998 and 1997, at fair value 77,703 40,061
Change in unrealized gain on securities available for sale 8,477 7,388
------------ ------------
Balance, end of period $ 19,136,342 $ 26,014,083
============ ============
</TABLE>
See accompanying notes to consolidated financial statements
<PAGE>
<TABLE>
<CAPTION>
PEOPLES-SIDNEY FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Three Months Ended
September 30,
----------------------------
1998 1997
----------- -----------
<S> <C> <C>
Cash flows from operating activities
Net income (loss) $ 117,176 $ 337,559
Adjustments to reconcile net income to net cash from
operating activities
Depreciation 13,580 11,784
Provision for loan losses 36,780 26,083
FHLB stock dividends (15,400) (13,900)
Compensation expense related to ESOP shares 77,703 40,061
Change in
Accrued interest receivable and other assets 38,310 (44,114)
Accrued expense and other liabilities 27,076 32,925
Deferred loan fees 7,716 (5,343)
----------- -----------
Net cash from operating activities 302,941 385,055
Cash flows from investing activities
Purchases of securities available for sale -- (499,219)
Maturities of securities available for sale 500,000 --
Maturities of securities held to maturity -- 500,000
Proceeds from maturities of time deposits in other financial
institutions -- 3,000,000
Purchase of time deposits in other financial institutions -- (1,000,000)
Net increase in loans (2,114,173) (2,509,759)
Premises and equipment expenditures (592,354) (8,154)
----------- -----------
Net cash from investing activities (2,206,527) (517,132)
Cash flows from financing activities
Net increase in deposits 633,236 (646,721)
Net change in short-term Federal Home Loan Bank advances 1,000,000 --
Purchase of treasury stock (578,750) --
Cash dividends paid (114,280) (82,638)
----------- -----------
Net cash from financing activities 940,206 (729,359)
----------- -----------
Net change in cash and cash equivalents (963,380) (861,436)
Cash and cash equivalents at beginning of period 4,947,253 2,795,826
----------- -----------
Cash and cash equivalents at end of period $ 3,983,873 $ 1,934,390
=========== ===========
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
PEOPLES-SIDNEY FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(continued)
Three Months Ended
September 30,
----------------------------
1998 1997
----------- -----------
<S> <C> <C>
Supplemental disclosures of cash flow information
Cash paid during the year for
Interest $ 982,737 $ 983,034
Income taxes -- 100,000
</TABLE>
See accompanying notes to consolidated financial statements
<PAGE>
PEOPLES-SIDNEY FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
These interim financial statements are prepared without audit and reflect all
adjustments which, in the opinion of management, are necessary to present fairly
the financial position of Peoples-Sidney Financial Corporation (the
"Corporation") at September 30, 1998 and its results of operations and cash
flows for the periods presented. All such adjustments are normal and recurring
in nature. The accompanying consolidated financial statements have been prepared
in accordance with the instructions of Form 10-QSB and, therefore, do not
purport to contain all the necessary financial disclosures required by generally
accepted accounting principles that might otherwise be necessary in the
circumstances, and should be read in conjunction with the consolidated financial
statements and notes thereto of the Corporation for the fiscal year ended June
30, 1998, included in its 1998 Annual Report. Reference is made to the
accounting policies of the Corporation described in the notes to consolidated
financial statements contained in its 1998 Annual Report. The Corporation has
consistently followed these policies in preparing this Form 10-QSB.
The accompanying consolidated financial statements include accounts of the
Corporation and its wholly-owned subsidiary, Peoples Federal Savings and Loan
Association (the "Association"), a federal stock savings and loan association.
All significant intercompany transactions and balances have been eliminated.
The Corporation's and Association's revenues, operating income and assets are
primarily from the financial institution industry. The Association is engaged
primarily in the business of making residential real estate loans and accepting
deposits. Its operations are conducted solely through its main office located in
Sidney, Ohio. The Association's market area consists of Shelby and surrounding
counties.
To prepare financial statements in conformity with generally accepted accounting
principles, management makes estimates and assumptions based on available
information. These estimates and assumptions affect the amounts reported in the
financial statements and disclosures provided, and future results could differ.
The collectibility of loans, fair values of financial instruments and status of
contingencies are particularly subject to change.
The provision for income taxes is based on the effective tax rate expected to be
applicable for the entire year. Income tax expense is the sum of the
current-year income tax due or refundable and the change in deferred tax assets
and liabilities. Deferred tax assets and liabilities are expected future tax
consequences of temporary differences between the carrying amounts and tax basis
of assets and liabilities, computed using enacted tax rates. A valuation
allowance, if needed, reduces deferred tax assets to the amount expected to be
realized.
The Corporation adopted Statement of Financial Accounting Standards ("SFAS") No.
128, "Earnings Per Share," on December 31, 1997. SFAS No. 128 requires dual
presentation of basic and diluted earnings per share ("EPS") for entities with
complex capital structures. Prior EPS data has been restated to conform to the
new method. Basic EPS is based on net income divided by the weighted average
number of shares outstanding during the period. Diluted EPS shows the dilutive
effect of unearned management recognition plan ("MRP") shares and the additional
common shares issuable under stock options.
<PAGE>
PEOPLES-SIDNEY FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
The weighted average number of shares outstanding for basic and diluted EPS was
1,626,929 for the three months ended September 30, 1998. The weighted average
number of shares outstanding for basic and diluted EPS was 1,658,803 for the
three months ended September 30, 1997. Unreleased employee stock ownership plan
shares are not considered outstanding for determining the weighted average
number of shares used in calculating both basic and diluted EPS. Unearned MRP
shares are not considered to be outstanding shares for determining the weighted
average number of shares used in calculating basic EPS. Stock options granted
did not have a dilutive effect on EPS for the three months ended September 30,
1998 as the exercise price of outstanding options was greater than the average
market price for the period. Unearned MRP shares did not have a dilutive effect
on EPS, as no shares had been purchased by the MRP plan as of September 30,
1998. Unearned MRP shares and stock options did not have a dilutive effect on
the weighted average shares outstanding for the three months ended September 30,
1997 as the neither MRP shares or stock options were granted until May 22, 1998.
Under a new accounting standard adopted on July 1, 1998, SFAS No. 130,
"Reporting Comprehensive Income," comprehensive income is reported for all
periods. Comprehensive income includes both net income and other comprehensive
income. Other comprehensive income includes the change in unrealized gains and
losses on securities available for sale.
SFAS No. 131, "Disclosures about Segments of an Enterprise and Related
Information," was issued in June 1997. This Standard significantly changes the
way public-business enterprises report information about operating segments in
annual financial statements, and requires those enterprises report selected
information about reportable segments in interim financial reports issued to
shareholders. It also establishes standards for related disclosures about
products and services, geographic areas and major customers. SFAS No. 131 uses a
"management approach" to disclose financial and descriptive information about an
enterprise's reportable operating segments which is based on reporting
information the way management organizes the segments within the enterprise for
making operating decisions and assessing performance. For many enterprises, the
management approach will likely result in more segments being reported. In
addition, the Standard requires significantly more information be disclosed for
each reportable segment than is presently being reported in annual financial
statements. The Standard also requires selected information be reported in
interim financial statements. SFAS No. 131 will be effective beginning with the
Corporation's 1999 annual financial statements. Adoption of the Standard is not
expected to have a significant impact on the Corporation's financial statements.
SFAS No. 132, "Employers' Disclosures about Pensions and Other Postretirement
Benefits," will also be effective in fiscal 1999. SFAS 132 amends the disclosure
requirements of previous pension and other postretirement benefit accounting
standards by requiring additional disclosures about such plans as well as
eliminating some disclosures no longer considered useful. SFAS 132 also allows
greater aggregation of disclosures for employers with multiple defined benefit
plans. Non-public companies are subject to reduced disclosure requirements,
however, such entities may elect to follow the full disclosure requirements of
SFAS 132. SFAS 132 is not expected to have a significant impact on the
Corporation's financial statements.
<PAGE>
PEOPLES-SIDNEY FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities,"
will be effective in fiscal 2000. SFAS 133 requires companies to record
derivatives on the balance sheet as assets or liabilities, measured at fair
value. Gains or losses resulting from changes in the values of those derivatives
would be accounted for depending on the use of the derivative and whether it
qualifies for hedge accounting. The key criterion for hedge accounting is that
the hedging relationship must be highly effective in achieving offsetting
changes in fair value or cash flows. SFAS 133 does not allow hedging of a
security which is classified as held to maturity, accordingly, upon adoption of
SFAS 133, companies may reclassify any security from held to maturity to
available for sale if they wish to be able to hedge the security in the future.
Management does not expect the adoption SFAS 133 to have a significant impact on
the Corporation's financial statements.
SFAS No. 134, "Accounting for Mortgage-backed Securities Retained after the
Securitization of Mortgage Loans Held for Sale by a Mortgage Banking
Enterprise," will be effective on January 1, 1999. SFAS 134 amends SFAS No. 65,
"Accounting for Certain Mortgage Banking Activities" by changing the way
companies involved in mortgage banking account for certain securities and other
interests they retain after securitizing mortgage loans that were held for sale.
SFAS 134 allows any retained mortgage-backed securities after a securitization
of mortgage loans held for sale to be classified based on holding intent in
accordance with SFAS 115 except in cases where the retained mortgage-backed
security is committed to be sold before or during the securitization process in
which case it must be classified as trading. Previously, under SFAS 65, all
retained mortgage-backed securities were required to be classified as trading.
SFAS 134 is not expected to have a significant impact on the Corporation's
financial statements.
NOTE 2 - CONSUMMATION OF THE CONVERSION TO A STOCK SAVINGS AND LOAN ASSOCIATION
WITH THE CONCURRENT FORMATION OF A HOLDING COMPANY
On November 8, 1996, the Board of Directors of the Association unanimously
adopted a Plan of Conversion to convert from a federally-chartered mutual
savings and loan association to a federally-chartered stock savings and loan
association with the concurrent formation of a holding company, Peoples-Sidney
Financial Corporation. The conversion was consummated on April 25, 1997, by
amending the Association's charter and selling the holding company's common
stock in an amount equal to the market value of the Association after giving
effect to the conversion. Common shares of the Corporation were offered in
accordance with the plan of conversion. A total of 1,785,375 common shares of
the Corporation were sold at $10.00 per share and net proceeds from the sale
were $17,217,944 after deducting the costs of conversion.
The Corporation retained 50% of the net proceeds from the sale of common shares.
The remainder of the net proceeds was invested in capital stock issued by the
Association to the Corporation as a result of the conversion.
At the time of conversion, the Association established a liquidation account in
an amount equal to its regulatory capital as of the latest practicable date
before the conversion. In the event of a complete liquidation, each eligible
depositor will be entitled to receive a distribution from the liquidation
account in an amount proportionate to the current adjusted qualifying balances
for accounts then held.
<PAGE>
PEOPLES-SIDNEY FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 2 - CONSUMMATION OF THE CONVERSION TO A STOCK SAVINGS AND LOAN ASSOCIATION
WITH THE CONCURRENT FORMATION OF A HOLDING COMPANY (CONTINUED)
Under Office of Thrift Supervision (OTS) regulations, limitations have been
imposed on all "capital distributions" by savings institutions, including cash
dividends. The regulation establishes a three-tiered system of restrictions,
with greatest flexibility afforded to thrifts that are both well capitalized and
given favorable qualitative examination ratings by the OTS.
NOTE 3 - SECURITIES
The amortized cost and estimated fair values of securities are summarized as
follows:
<TABLE>
<CAPTION>
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
<S> <C> <C> <C> <C>
---------- ---------- ------------ ----------
September 30, 1998
Securities available for sale
U.S. Government agencies $3,499,108 $ 29,797 $ -- $3,528,905
========== ========== ============ ==========
June 30, 1998
Securities available for sale
U.S. Government agencies $3,998,936 $ 21,459 $ 4,505 $4,015,890
========== ========== ============ ==========
</TABLE>
Amortized cost and estimated fair values of securities at September 30, 1998, by
contractual maturity, are shown below. Actual maturities could differ from
contractual maturities because borrowers may have the right to call or prepay
obligations with or without call or prepayment penalties.
<TABLE>
<CAPTION>
Estimated
Amortized Fair
Cost Value
---------- ----------
<S> <C> <C>
Securities available for sale
Due in one year or less $ 999,701 $1,009,060
Due after one year through five years 2,499,407 2,519,845
---------- ----------
$3,499,108 $3,528,905
========== ==========
</TABLE>
No securities were sold during the three-month periods ended September 30, 1998
and 1997. No securities were pledged as collateral at September 30, 1998 or June
30, 1998.
<PAGE>
PEOPLES-SIDNEY FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 4 - LOANS RECEIVABLE
Loans receivable are summarized as follows:
<TABLE>
<CAPTION>
September 30, June 30,
1998 1998
------------ ------------
<S> <C> <C>
Mortgage loans:
1-4 family residential $ 79,972,437 $ 79,690,787
Multi-family residential 643,139 654,871
Commercial real estate 8,021,584 6,608,207
Real estate construction and
development 6,222,915 6,776,389
Land 909,556 867,755
Total mortgage loans 95,769,631 94,598,009
Consumer and other loans 2,863,696 2,154,474
------------ ------------
Total loans receivable 98,633,327 96,752,483
Less:
Allowance for loan losses (446,145) (425,642)
Loans in process (1,861,885) (2,078,937)
Deferred loan fees (203,089) (195,373)
------------ ------------
$ 96,122,208 $ 94,052,531
============ ============
</TABLE>
Activity in the allowance for loan losses is summarized as follows:
<TABLE>
<CAPTION>
Three Months Ended
September 30,
----------------------------
1998 1997
--------- ---------
<S> <C> <C>
Balance at beginning of period $ 425,642 $ 397,159
Provision for losses 36,780 26,083
Charge-offs (16,277) (10,547)
Recoveries -- --
--------- ---------
Balance at end of period $ 446,145 $ 412,695
========= =========
</TABLE>
As of and for the three months ended September 30, 1998 and 1997, no loans were
considered impaired within the scope of SFAS No. 114.
<PAGE>
PEOPLES-SIDNEY FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 5 - OTHER BORROWINGS
At September 30, 1998 and June 30, 1998, the Association had a cash management
line of credit enabling it to borrow up to $5,100,000 from the Federal Home Loan
Bank (FHLB) of Cincinnati. The line of credit must be renewed on an annual
basis. Borrowings outstanding on this line of credit totaled $1,000,000 at
September 30, 1998 while there were no such borrowings at June 30, 1998. As a
member of the Federal Home Loan Bank system, the Association has the ability to
obtain additional borrowings up to a maximum total of approximately $17,238,000,
including the line of credit. The Association had one fixed-rate borrowing, with
an interest rate of 6.13%, totaling $7,000,000 at September 30, 1998 and June
30, 1998. The original term of the borrowing was 120 months with interest due
monthly and principal due upon maturity on June 25, 2008. Advances under the
borrowing agreements are collateralized by a blanket pledge of the Association's
residential mortgage loan portfolio and its FHLB stock.
NOTE 6 - COMMITMENTS, CONTINGENCIES AND FINANCIAL INSTRUMENTS WITH
OFF-BALANCE-SHEET RISK
Various contingent liabilities are not reflected in the financial statements,
including claims and legal actions arising in the ordinary course of business.
In the opinion of management, after consultation with legal counsel, ultimate
disposition of these matters is not expected to have a material effect on the
Corporation's financial condition or results of operations.
Some financial instruments are used in the normal course of business to meet
financing needs of customers and reduce exposure to interest rate changes. These
financial instruments include commitments to extend credit, standby letters of
credit and financial guarantees. These involve, to varying degrees, more credit
risk than the amount reported in the financial statements.
Exposure to credit loss if the other party does not perform is represented by
contractual amount for commitments to extend credit, standby letters of credit
and financial guarantees written. The same credit policies are used for
commitments and conditional obligations as are used for loans. The amount of
collateral obtained, if deemed necessary, on extension of credit is based on
management's credit evaluation and generally consists of residential or
commercial real estate.
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the commitment.
Commitments generally have fixed expiration dates or other termination clauses
and may require payment of a fee. Since many commitments are expected to expire
without being used, total commitments do not necessarily represent future cash
requirements.
As of September 30, 1998 and June 30, 1998, the Corporation had commitments to
make fixed-rate commercial and residential real estate mortgage loans at current
market rates totaling $349,000 and $621,000, and variable-rate commercial and
residential real estate mortgage loans at current market rates totaling
$1,067,000 and $687,000. Loan commitments are generally for 30 days. The
<PAGE>
PEOPLES-SIDNEY FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 6 - COMMITMENTS, CONTINGENCIES AND FINANCIAL INSTRUMENTS WITH
OFF-BALANCE-SHEET RISK (Continued)
interest rates on fixed-rate commitments ranged from 7.50% to 7.75% at September
30, 1998 and 7.50% to 8.25% at June 30, 1998. The interest rates on
variable-rate commitments ranged from 7.00% to 8.00% at September 30, 1998, and
7.25% to 8.00% at June 30, 1998. The Corporation also had unused lines of credit
totaling $642,000 and $548,000 at September 30, 1998 and June 30, 1998.
At September 30, 1998 and June 30, 1998, compensating balances of $319,000 and
$299,000 were required as deposits with various correspondent banks. These
balances do not earn interest.
The Association entered into employment agreements with certain officers of the
Corporation and Association. The agreements provide for terms of one to three
years, and an annual salary and performance review by the Board of Directors, as
well as inclusion of the employee in any formally-established employee benefit,
bonus, pension and profit-sharing plans for which management personnel are
eligible. The agreements provide for extensions for a period of one year on each
annual anniversary date, subject to review and approval of the extension by
disinterested members of the Board of Directors of the Association. The
employment agreements also provide for vacation and sick leave.
NOTE 7 - EMPLOYEE STOCK OWNERSHIP PLAN
The Corporation offers an employee stock ownership plan ("ESOP") for the benefit
of substantially all employees of the Corporation and Association. During July
1997, the ESOP received a favorable determination letter from the Internal
Revenue Service on the qualified status of the ESOP under applicable provisions
of the Internal Revenue Code.
The ESOP borrowed funds from the Corporation in order to acquire common shares
of the Corporation. The loan is secured by shares purchased with loan proceeds
and will be repaid by ESOP with funds from the Association's discretionary
contributions to the ESOP and earnings on ESOP assets. All dividends on
unallocated shares received by the ESOP are used to pay debt service. Shares
purchased with loan proceeds are held in a suspense account for allocation among
participants as the loan is repaid. As payments are made and shares are released
from the suspense account, such shares will be validly issued, fully paid and
nonassessable.
The Corporation accounts for the ESOP in accordance with Statement of Position
("SOP") 93-6. Accordingly, shares pledged as collateral are reported as unearned
ESOP shares in the Consolidated Balance Sheets. As shares are released from
collateral, the Corporation reports compensation expense equal to the current
market price of the shares and the shares become outstanding for
earnings-per-share computations. Dividends on allocated ESOP shares are recorded
as a reduction of retained earnings; dividends on unallocated ESOP shares are
recorded as a reduction of debt and accrued interest. ESOP compensation expense
was $77,703 and $40,061 for the three months ended September 30, 1998 and 1997.
<PAGE>
PEOPLES-SIDNEY FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 7 - EMPLOYEE STOCK OWNERSHIP PLAN (Continued)
The ESOP shares as of September 30, 1998 and June 30, 1998 were as follows:
<TABLE>
<CAPTION>
September 30, June 30,
1998 1998
---------- ----------
<S> <C> <C>
Allocated shares 24,031 24,031
Shares committed to be released for allocation 3,812 --
Unreleased shares 140,987 144,799
---------- ----------
Total ESOP shares 168,830 168,830
========== ==========
Fair value of unreleased shares $2,626,588 $2,588,282
========== ==========
</TABLE>
NOTE 8 - STOCK OPTION AND INCENTIVE PLAN
Upon approval of the Stock Option and Incentive Plan by the shareholders of the
Corporation on May 22, 1998, the Board of Directors granted options to purchase
138,809 shares of common stock at an exercise price of $20.00 to certain
employees, officers and directors of the Association and Corporation. No options
had been previously awarded. One-fifth of the options awarded become first
exercisable on each of the first five anniversaries of the date of grant. The
option period expires 10 years from the date of grant. No options were
exercisable at September 30, 1998 or June 30, 1998. In addition, 39,729 options
to purchase common stock are reserved for future grants.
NOTE 9 - MANAGEMENT RECOGNITION PLAN
A Management Recognition Plan ("MRP") was adopted by the Board of Directors and
approved by the shareholders of the Corporation on May 22, 1998. The MRP will be
used as a means of providing directors and certain key employees of the
Association and Corporation with an ownership interest in the Corporation in a
manner designed to compensate such directors and key employees for services to
the Association and Corporation. The MRP will purchase 71,415 common shares,
which is equal to 4% of the common shares sold in connection with the
conversion. As of September 30, 1998, no shares have been purchased.
In conjunction with the adoption of the MRP on May 22, 1998, the Board of
Directors awarded 57,128 shares to certain directors, officers and employees of
the Association and Corporation. No shares had been previously awarded.
One-fifth of such shares will be earned and nonforfeitable on each of the first
five anniversaries of the date of the award. In the event of the death or
disability of a participant, however, the participant's shares will be deemed to
be earned and nonforfeitable upon such date. At September 30, 1998 and June 30,
1998, there were 14,287 shares reserved for future awards. Compensation expense
related to MRP shares is based upon the cost of the shares. For the three months
ended September 30, 1998, the Corporation has accrued compensation expense
totaling $60,000 based upon the estimated cost of the number of shares earned
during the period. No compensation expense was recognized during the three
months ended September 30, 1997.
<PAGE>
PEOPLES-SIDNEY FINANCIAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
Introduction
In the following pages, management presents an analysis of the financial
condition of Peoples-Sidney Financial Corporation (the "Corporation") as of
September 30, 1998, compared to June 30, 1998, and results of operations for the
three months ended September 30, 1998, compared with the same period in 1997.
This discussion is designed to provide a more comprehensive review of operating
results and financial position than could be obtained from an examination of the
financial statements alone. This analysis should be read in conjunction with the
interim financial statements and related footnotes included herein.
In addition to the historical information contained herein, the following
discussion contains forward-looking statements involving risks and
uncertainties. Economic circumstances, the Corporation's operations and actual
results could differ significantly from those discussed in the forward-looking
statements. Some factors that could cause or contribute to such differences are
discussed herein, but also include changes in the economy and interest rates in
the nation and the Association's general market area.
On November 8, 1996, the Board of Directors of the Peoples Federal Savings and
Loan (the "Association") unanimously adopted a Plan of Conversion to convert
from a federally-chartered mutual savings and loan association to a
federally-chartered stock savings and loan association with the concurrent
formation of a holding company, Peoples-Sidney Financial Corporation. The
conversion was consummated on April 25, 1997, by amending the Association's
charter and selling the holding company's common stock in an amount equal to the
market value of the Association, after giving effect to the conversion. A total
of 1,785,375 common shares of the Corporation were sold at $10.00 per share and
net proceeds from the sale were $17,217,944 after deducting the costs of
conversion.
The Corporation retained 50% of the net proceeds from the sale of common shares.
The remainder of the net proceeds was invested in the capital stock issued by
the Association to the Corporation as a result of the conversion.
The Corporation is a thrift holding company, primarily engaged in the business
of attracting savings deposits from the general public and investing such funds
in permanent mortgage loans secured by one- to four-family residential real
estate located in Shelby, Logan, Auglaize, Miami, Darke and Champaign Counties,
Ohio. The Corporation also originates, to a lesser extent, loans for the
construction of one- to four-family residential real estate loans secured by
multi-family residential real estate (over four units) and nonresidential real
estate and consumer loans, and invests in U.S. government obligations,
interest-bearing deposits in other financial institutions and other investments
permitted by applicable law.
<PAGE>
PEOPLES-SIDNEY FINANCIAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Financial Condition
Total assets at September 30, 1998 were $107.1 million compared to $105.9
million at June 30, 1998, an increase of $1.2 million, or 1.1%. The increase in
total assets was due to increases in loans and premises and equipment funded by
a decrease in interest-bearing deposits in other financial institutions and
proceeds from maturities of securities of available for sale and borrowings.
Loans receivable increased $2.0 million from $94.1 million at June 30, 1998, to
$96.1 million at September 30, 1998. The increase was primarily in commercial
real estate loans which increased $1.4 million. A decrease in real estate
construction and land development loans was partly offset by an increase in one-
to four-family residential real estate loans as several construction loans were
converted to more permanent financing upon completion of construction. Changes
in other types of mortgage loans were not significant. The overall increase in
total mortgage loans is reflective of a strong local economy coupled with
attractive loan rates and products compared to local competition. The
Corporation has not changed its philosophy regarding pricing or underwriting
standards during the year.
The Corporation's consumer and other loan portfolio increased $709,000 between
June 30, 1998 and September 30, 1998. Despite the increase, consumer and other
loans remain a small portion of the entire loan portfolio and represented only
2.9% and 2.2% of gross loans at September 30, 1998 and June 30, 1998.
Premises and equipment increased $579,000 from $973,000 at June 30, 1998 to
$1,552,000 at September 30, 1998. The Corporation is in the process of
constructing a new, full-service branch banking office in Anna, Ohio. Management
expects the total cost of the construction project to be $805,000, of which,
through September 30, 1998, the Corporation has paid $692,000.
Total deposits increased $633,000 from $79.1 million at June 30, 1998 to $79.7
million at September 30, 1998. The Corporation experienced increases in all
types of deposits, however, the majority of the growth was in negotiable order
of withdraw ("NOW") accounts, which increased $346,000, and passbook savings
accounts, which increased $217,000. The growth is the result of special
promotions offered in connection with the opening of the new branch location in
Anna, Ohio which occurred in the latter part of September 1998.
Borrowed funds increased $1.0 million from $7.0 million at June 30, 1998 to $8.0
million at September 30, 1998. The Association maintains a $5.1 million
cash-management line of credit with the FHLB under which $1.0 million was
borrowed to provide additional liquidity for loan growth. The advance carries a
variable interest rate and can be prepaid at any time without penalty.
Additional advances may be obtained from the FHLB to fund future loan growth and
liquidity as needed.
<PAGE>
PEOPLES-SIDNEY FINANCIAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Results of Operations
The operating results of the Corporation are affected by general economic
conditions, monetary and fiscal policies of federal agencies and regulatory
policies of agencies that regulate financial institutions. The Corporation's
cost of funds is influenced by interest rates on competing investments and
general market rates of interest. Lending activities are influenced by demand
for real estate loans and other types of loans, which in turn is affected by
interest rates at which such loans are made, general economic conditions and
availability of funds for lending activities.
The Corporation's net income primarily depends on its net interest income, which
is the difference between interest income earned on interest-earning assets,
such as loans and securities, and interest expense incurred on interest-bearing
liabilities, such as deposits and other borrowings. The level of net interest
income is dependent on the interest rate environment and volume and composition
of interest-earning assets and interest-bearing liabilities. Net income is also
affected by provisions for loan losses, service charges, gains on the sale of
assets and other income, noninterest expense and income taxes.
Net Income. The Corporation earned net income of $117,000 for the three months
ended September 30, 1998 compared to $338,000 for the three months ended
September 30, 1997. The decrease in net income was primarily due to a decrease
in net interest income combined with an increase in noninterest expense.
Net Interest Income. Net interest income totaled $914,000 for the three months
ended September 30, 1998 compared to $1,015,000 for the three months ended
September 30, 1997, a decrease of $101,000, or 10.0%. The decrease was the
result of additional interest paid on borrowed funds.
Interest and fees on loans increased $36,000, or 2.0% from $1,836,000 for the
three months ended September 30, 1997 to $1,872,000 for the three months ended
September 30, 1998. The increase in interest income was due to higher average
loans receivable, related primarily to the origination of new one- to
four-family residential real estate and commercial real estate loans.
Interest earned on securities increased slightly for the three months ended
September 30, 1998 compared to the three months ended September 30, 1997. The
increase was the result of a higher average yield earned partly offset by a
decrease in the average balance of such investments.
Interest earned on interest-bearing demand and overnight deposits decreased
$32,000 for the three months ended September 30, 1998 as compared to the same
period in the prior year. The decrease was the result of lower average balances
coupled with a decrease in the average yield earned on such investments.
Dividends on FHLB stock increased slightly over the comparable periods due to an
increase in the number of shares of FHLB stock owned.
<PAGE>
PEOPLES-SIDNEY FINANCIAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Interest paid on deposits decreased slightly for the three months ended
September 30, 1998 compared to the three months ended September 30, 1997. There
was little change in the interest paid on deposits as the mix of the deposit
portfolio remained fairly stable while the effect of an increase in the average
balance of deposits was offset by a decrease in the average cost. The average
cost of deposits decreased from 5.08% for the three months ended September 30,
1997 to 4.91% for the three months ended September 30, 1998.
Interest paid on borrowed funds totaled $108,000 for the three months ended
September 30, 1998. There were no borrowings during the three months ended
September 30, 1997. The increase resulted as the Corporation borrowed $7.0
million under a ten-year, fixed-rate, interest-only advance from the FHLB at the
end of fiscal 1998 to fund a $4.00 per share tax-free return of capital totaling
$7.1 million. The Corporation paid the return of capital on June 26, 1998 as a
means to reduce the excess capital provided from the stock conversion. The
Corporation borrowed an additional $1.0 million under its cash management line
of credit during the three months ended September 30, 1998 to provide liquidity
for loan growth.
Provision for Loan Losses. The Corporation maintains an allowance for loan
losses in an amount that, in management's judgment, is adequate to absorb
reasonably foreseeable losses inherent in the loan portfolio. While management
uses its best judgment and information available, the ultimate adequacy of the
allowance is dependent on a variety of factors, including performance of the
Corporation's loan portfolio, the economy, changes in real estate values and
interest rates and the view of regulatory authorities toward loan
classifications. The provision for loan losses is determined by management as
the amount to be added to the allowance for loan losses after net charge-offs
have been deducted to bring the allowance to a level considered adequate to
absorb potential losses in the loan portfolio. The amount of the provision is
based on management's monthly review of the loan portfolio and consideration of
such factors as historical loss experience, general prevailing economic
conditions, changes in size and composition of the loan portfolio and specific
borrower considerations, including ability of the borrower to repay the loan and
the estimated value of the underlying collateral.
The provision for loan losses for the three months ended September 30, 1998
totaled $37,000 compared to $26,000 for the three months ended September 30,
1997, an increase of $11,000, or 42.3%. Charge-offs experienced by the
Corporation have primarily related to consumer and other nonreal estate loans.
As indicated previously, such loans make up an insignificant portion of the
Corporation's total loan portfolio. The Corporation's low historical charge-off
history is the product of a variety of factors, including the Corporation's
underwriting guidelines, which generally require a loan-to-value or projected
completed value ratio of 90% for purchase or construction of one- to four-family
residential properties and 75% for commercial real estate and land loans,
established income information and defined ratios of debt to income.
Notwithstanding the historical charge-off history, as well as a low volume of
nonperforming loans, management believes it is prudent to continue to increase
the allowance for loan losses as total loans increase. Accordingly, management
anticipates it will continue its provisions to the allowance for loan losses as
loan growth continues. The allowance for loan losses totaled $446,000, or .45%
of gross loans receivable, at September 30, 1998 compared to $426,000, or .44%
of gross loans receivable, at June 30, 1998
<PAGE>
PEOPLES-SIDNEY FINANCIAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Noninterest income. Noninterest income includes service fees and other
miscellaneous income and totaled $14,000 for the three months ended September
30, 1998 and $16,000 for the three months ended September 30, 1997.
Noninterest expense. Noninterest expense totaled $708,000 for the three months
ended September 30, 1998 compared to $481,000 for three months ended September
30, 1997, an increase of $227,000, or 47.2%. The increase was primarily the
result of increases in compensation and benefits, state franchise taxes and
other expenses.
Compensation and benefits expense increased $160,000, or 71.8%, for the three
months ended September 30, 1998 compared to the same period in 1997. The
increase is the result of normal, annual merit increases, the addition of new
employees and the added expense of employee benefit plans. The expense related
to the ESOP increased due to an increase in the market price of the
Corporation's common stock over the prior period. The Corporation was also able
to allocate more ESOP shares to participants in 1998. Compensation expense
related to the ESOP was $78,000 for the three months ended September 30, 1998
compared to $40,000 for the three months ended September 30, 1997. The
Corporation also implemented a Management Recognition Plan ("MRP") in May 1998
for which the expense totaled $60,000 for the three months ended September 30,
1998. State franchise taxes increased $33,000, or 94.9%, due to the change in
corporate structure during fiscal 1997 and the resulting tax impact of higher
capital levels at the Association and earnings at the Corporation. The third and
fourth quarters of fiscal 1998 were the first periods impacted by the capital
raised in the conversion. The increase in other expense was attributable to
various miscellaneous items.
Income Tax Expense. The volatility of income tax expense is primarily
attributable to the change in income before income taxes. The provision for
income taxes totaled $66,000 for the three months ended September 30, 1998
compared to $186,000 for the three months ended September 30, 1997, a decrease
of $120,000, or 64.5%. The effective tax rates were 36.1% and 35.6% for the
three months ended September 30, 1998 and 1997, respectively.
Prior to the enactment of legislation discussed below, thrifts which met certain
tests relating to the composition of assets had been permitted to establish
reserves for bad debts and make annual additions thereto which could, within
specified formula limits, be taken as a deduction in computing taxable income
for federal income tax purposes. The amount of bad debt reserve deduction for
"nonqualifying loans" was computed under the experience method. The amount of
the bad debt reserve deduction for "qualifying real property loans" could be
computed under either the experience or the percentage of taxable income method,
based on an annual election.
In August 1996, legislation was enacted repealing the reserve method of
accounting used by many thrifts to calculate their bad debt reserve for federal
income tax purposes. Therefore, small thrifts, such as the Association, must
recapture that portion of the reserve exceeding the amount that could have been
taken under the experience method for tax years beginning after December 31,
<PAGE>
PEOPLES-SIDNEY FINANCIAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
1987. The legislation also requires thrifts to account for bad debts for federal
income tax purposes on the same basis as commercial banks for tax years
beginning after December 31, 1995. The recapture will occur over a six-year
period, commencement of which will be delayed until the first taxable year
beginning after December 31, 1997, provided the institution meets certain
residential lending requirements. At September 30, 1998, the Association had
approximately $581,000 in bad debt reserves subject to recapture for federal
income tax purposes. The deferred tax liability related to the recapture has
been previously established.
Liquidity and Capital Resources
The Corporation's liquidity, primarily represented by cash equivalents, is a
result of operating, investing and financing activities. These activities are
summarized below for the three months ended September 30, 1998 and 1997.
<TABLE>
<CAPTION>
Three Months
Ended September 30,
--------------------
1998 1997
------- -------
(Dollars in thousands)
<S> <C> <C>
Net income $ 117 $ 338
Adjustments to reconcile net income to net cash from
operating activities 186 47
------- -------
Net cash from operating activities 303 385
Net cash from investing activities (2,206) (517)
Net cash from financing activities 940 (730)
------- -------
Net change in cash and cash equivalents (963) (862)
Cash and cash equivalents at beginning of period 4,947 2,796
------- -------
Cash and cash equivalents at end of period $ 3,984 $ 1,934
======= =======
</TABLE>
The Corporation's principal sources of funds are deposits, loan repayments,
maturities of securities and other funds provided by operations. The Association
also has the ability to borrow from the FHLB. While scheduled loan repayments
and maturing investments are relatively predictable, deposit flows and early
loan prepayments are more influenced by interest rates, general economic
conditions and competition. The Association maintains investments in liquid
assets based on management's assessment of (1) need for funds, (2) expected
deposit flows, (3) yields available on short-term liquid assets and (4)
objectives of the asset/liability management program. OTS regulations presently
require the Association to maintain an average daily balance of investments in
United States Treasury, federal agency obligations and other investments in an
amount equal to 1% of the sum of the Association's average daily balance of net
withdrawable deposit accounts and borrowings payable in one year or less. The
liquidity requirement, which may be changed from time to time by the OTS to
reflect changing economic conditions, is intended to provide a source of
relatively liquid funds on which the Association may rely, if necessary, to fund
<PAGE>
PEOPLES-SIDNEY FINANCIAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
deposit withdrawals or other short-term funding needs. At September 30, 1998,
the Association's regulatory liquidity was 8.1%. At such date, the Corporation
had commitments to originate fixed-rate commercial and residential real estate
loans totaling $349,000, and variable-rate commercial and residential real
estate mortgage loans totaling $1,067,000. Loan commitments are generally for 30
days. The Corporation considers its liquidity and capital reserves sufficient to
meet its outstanding short- and long-term needs. See Note 6 of the Notes to
Consolidated Financial Statements.
The Association is subject to various regulatory capital requirements
administered by federal regulatory agencies. Failure to meet minimum capital
requirements can initiate certain mandatory actions that, if undertaken, could
have a direct material affect on the Association's financial statements. Under
capital adequacy guidelines and the regulatory framework for prompt corrective
action, the Association must meet specific capital guidelines involving
quantitative measures of the Association's assets, liabilities and certain
off-balance-sheet items as calculated under regulatory accounting practices. The
Association's capital amounts and classifications are also subject to
qualitative judgments by regulators about the Association's components, risk
weightings and other factors. At September 30, 1998 and June 30, 1998,
management believes the Association complied with all regulatory capital
requirements. Based on the Association's computed regulatory capital ratios, the
Association is considered well capitalized under the Federal Deposit Insurance
Act at September 30, 1998 and June 30, 1998. Management is not aware of any
matters subsequent to September 30, 1998 that would cause the Association's
capital category to change.
At September 30, 1998 and June 30, 1998, the Association's actual capital levels
and minimum required levels were:
<TABLE>
<CAPTION>
Minimum
Required To Be
Minimum Required Well Capitalized
For Capital Under Prompt Corrective
Actual Adequacy Purposes Action Regulations
----------------------- ---------------------- --------------------------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
September 30, 1998
Total capital (to risk
weighted assets) $ 16,725 24.1% $ 5,560 8.0% $ 6,949 10.0%
Tier 1 (core) capital to
risk-weighted assets) 16,289 23.4 2,780 4.0 4,170 6.0
Tier 1 (core) capital to
adjusted total assets) 16,289 15.2 4,287 4.0 5,360 5.0
Tangible capital (to
adjusted total assets) 16,289 15.2 1,608 1.5 N/A
</TABLE>
<PAGE>
PEOPLES-SIDNEY FINANCIAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
<TABLE>
<CAPTION>
Minimum
Required To Be
Minimum Required Well Capitalized
For Capital Under Prompt Corrective
Actual Adequacy Purposes Action Regulations
----------------------- ---------------------- --------------------------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
June 30, 1998
Total capital (to risk
weighted assets) $ 18,743 27.6% $ 5,426 8.0% $ 6,783 10.0%
Tier 1 (core) capital to
risk-weighted assets) 18,330 27.0 2,713 4.0 4,070 6.0
Tier 1 (core) capital to
adjusted total assets) 18,330 17.3 4,240 4.0 5,300 5.0
Tangible capital (to
adjusted total assets) 18,330 17.3 1,590 1.5 N/A
</TABLE>
In May 1998, the Board of Directors of the Corporation authorized the purchase
of up to 5% of the Corporation's outstanding common shares over a twelve-month
period to commence on July 1, 1998. The shares will be purchased in the
over-the-counter market. The number of shares to be purchased and the price to
be paid will depend on the availability of shares, the prevailing market prices
and any other considerations which may, in the opinion of the Corporation's
Board of Directors or management, affect the advisability of purchasing shares.
As of September 30, 1998, 30,000 shares have been repurchased at a cost of
$579,000.
Year 2000 Issue
The Corporation's lending and deposit activities are almost entirely dependent
upon computer systems which process and record transactions, although the
Corporation can effectively operate with manual systems for brief periods when
its electronic systems malfunction or cannot be accessed. The Corporation
utilizes the services of a nationally-recognized data processing service bureau
which specializes in data processing for financial institutions. In addition to
its basic operating activities, the Corporation's facilities and infrastructure,
such as security systems and communications equipment, are dependent, to varying
degrees, upon computer systems.
The Corporation is aware of the potential Year 2000 related problems that may
affect the computers which control or operate Corporation's operating systems,
facilities and infrastructure. In 1997, the Corporation began a process of
identifying any Year 2000 related problems that may be experienced by its
computer-operated or computer-dependent systems. The Corporation has examined
its computer hardware and software and determined it will cost approximately
$13,000 to make such systems Year 2000 compliant. The Corporation has contacted
the companies that supply or service the Corporation's computer-operated or
<PAGE>
PEOPLES-SIDNEY FINANCIAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
computer-dependent systems to obtain confirmation that each system that is
material to the operations of the Corporation is either currently Year 2000
compliant or is expected to be Year 2000 compliant. With respect to systems that
cannot presently be confirmed as Year 2000 compliant, the Corporation will
continue to work with the appropriate supplier or servicer to ensure all such
systems will be rendered compliant in a timely manner, with minimal expense to
the Corporation or disruption of the Corporation's operations. All of the
identified computer systems affected by the Year 2000 issue are currently in the
renovation, validation or implementation phase of the process of becoming Year
2000 compliant. The Corporation has identified various companies whose services
are deemed critical to the mission of the Corporation and received assurances
that such companies will be Year 2000 compliant. As a contingency plan, however,
the Corporation has determined that if such service providers were to have their
systems fail, the Corporation would implement manual systems until such systems
could be re-established. The Corporation does not anticipate that such
short-term manual systems would have a material adverse effect on the
Corporation's operations. The expense of any change in suppliers or servicers is
not expected to be material to the Corporation. At this time, however, the
expense that may be incurred by the Corporation in connection with Year 2000
issues cannot be determined.
In addition to the possible expense related to its own systems, the Corporation
could incur losses if loan payments are delayed due to Year 2000 problems
affecting any of the Corporation's significant borrowers or impairing the
payroll systems of large employers in the Corporation's primary market area.
Because the Corporation's loan portfolio is highly diversified with regard to
individual borrowers and types of businesses and the Corporation's primary
market area is not significantly dependent on one employer or industry, the
Corporation does not expect any significant or prolonged Year 2000 related
difficulties will affect net earnings or cash flow. At this time, however, the
expense that may be incurred by the Corporation in connection with Year 2000
issues cannot be determined.
An OTS examination of the Corporation's Year 2000 state of readiness was
conducted as of April 29, 1998 and based upon the examination results, the
Corporation is progressing satisfactorily towards completing the process of
becoming Year 2000 compliant.
<PAGE>
PEOPLES-SIDNEY FINANCIAL CORPORATION
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
None
Item 2. Changes in Securities
None
Item 3. Defaults Upon Senior Securities
Not applicable
Item 4. Submission of Matters to a Vote of Security Holders
There were no matters brought to a vote of security holders during
the quarter ended September 30, 1998.
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibit No. 27: Financial Data Schedule
(b) No current reports on form 8-K were filed by the small business
issuer during the quarter ended September 30, 1998.
<PAGE>
SIGNATURES
Pursuant to the requirement of the Securities Exchange Act of 1934, the small
business issuer has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: November 6, 1998 /s/ Douglas Stewart
-------------------
Douglas Stewart
President
Date: November 6, 1998 /s/ Debra Geuy
--------------
Debra Geuy
Chief Financial Officer
<PAGE>
INDEX TO EXHIBITS
EXHIBIT
NUMBER DESCRIPTION
27 Financial Data Schedule
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
The schedule contains summary financial information extracted from the
consolidated balance sheet and the consolidated statement of income filed as
part of the quarterly report on Form 10-Q and is qualified in its entirety by
reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-30-1999
<PERIOD-END> SEP-30-1998
<CASH> 918
<INT-BEARING-DEPOSITS> 1,166
<FED-FUNDS-SOLD> 2,000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 3,529
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 96,122
<ALLOWANCE> 446
<TOTAL-ASSETS> 107,078
<DEPOSITS> 79,687
<SHORT-TERM> 1,000
<LIABILITIES-OTHER> 255
<LONG-TERM> 7,000
0
0
<COMMON> 18
<OTHER-SE> 19,118
<TOTAL-LIABILITIES-AND-EQUITY> 107,078
<INTEREST-LOAN> 1,872
<INTEREST-INVEST> 64
<INTEREST-OTHER> 64
<INTEREST-TOTAL> 2,000
<INTEREST-DEPOSIT> 978
<INTEREST-EXPENSE> 1,086
<INTEREST-INCOME-NET> 914
<LOAN-LOSSES> 37
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 708
<INCOME-PRETAX> 183
<INCOME-PRE-EXTRAORDINARY> 117
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 117
<EPS-PRIMARY> .07
<EPS-DILUTED> .07
<YIELD-ACTUAL> 3.56
<LOANS-NON> 543
<LOANS-PAST> 379
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 426
<CHARGE-OFFS> 16
<RECOVERIES> 0
<ALLOWANCE-CLOSE> 446
<ALLOWANCE-DOMESTIC> 446
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
