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 March 31, 1999
[ ] 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 May 11, 1999, the latest practicable date, 1,753,234 shares of the
issuer's common shares, $.01 par value, were issued and outstanding.
Transitional Small Business Disclosure Format (Check One):
Yes [ ] No [ X ]
<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................................
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
March 31, June 30,
1999 1998
------------- -------------
<S> <C> <C>
ASSETS
Cash and amounts due from depository institutions $ 927,132 $ 655,188
Interest-bearing deposits in other financial institutions 553,518 2,292,065
Overnight deposits -- 2,000,000
------------- -------------
Total cash and cash equivalents 1,480,650 4,947,253
Time deposits in other financial institutions 100,000 100,000
Securities available for sale 3,993,280 4,015,890
Federal Home Loan Bank stock available for sale 892,200 846,500
Loans receivable, net 99,909,845 94,052,531
Accrued interest receivable 774,207 722,401
Premises and equipment, net 2,023,041 973,403
Other assets 255,758 245,339
------------- -------------
Total assets $ 109,428,981 $ 105,903,317
============= =============
LIABILITIES
Deposits $ 83,679,604 $ 79,053,686
Borrowed funds 7,000,000 7,000,000
Accrued expense and other liabilities 268,929 223,615
------------- -------------
Total liabilities 90,948,533 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 10,778,469 10,717,991
Retained earnings 10,659,079 10,581,096
Treasury stock, 32,141 shares at cost (611,400) --
Unearned management recognition plan shares (794,383) --
Unearned employee stock ownership plan shares (1,564,867) (1,702,114)
Unrealized gain on securities available for sale (4,304) 11,189
------------- -------------
Total shareholders' equity 18,480,448 19,626,016
------------- -------------
Total liabilities and shareholders' equity $ 109,428,981 $ 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 Nine Months Ended
March 31, March 31,
---------------------------- ---------------------------
1999 1998 1999 1998
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Interest income
Loans, including fees $ 1,917,451 $ 1,882,434 $ 5,719,497 $ 5,585,430
Securities 49,287 61,030 170,829 187,318
Interest-bearing deposits and
overnight deposits 24,829 65,887 98,807 236,602
Dividends on Federal Home
Loan Bank stock 15,139 14,131 45,815 42,253
----------- ----------- ----------- -----------
Total interest income 2,006,706 2,023,482 6,034,948 6,051,603
Interest expense
Deposits 956,098 984,109 2,912,512 2,977,100
Other borrowings 114,437 -- 334,589 --
----------- ----------- ----------- -----------
Total interest expense 1,070,535 984,109 3,247,101 2,977,100
----------- ----------- ----------- -----------
Net interest income 936,171 1,039,373 2,787,847 3,074,503
Provision for loan losses (12,001) (9,383) 40,918 26,377
----------- ----------- ----------- -----------
Net interest income after
provision for loan losses 948,172 1,048,756 2,746,929 3,048,126
Noninterest income
Service charges and other fees 18,495 15,369 52,909 46,490
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
PEOPLES-SIDNEY FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
Three Months Ended Nine Months Ended
March 31, March 31,
---------------------------- ---------------------------
1999 1998 1999 1998
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Noninterest expense
Compensation and benefits 337,570 257,870 1,125,934 725,670
Occupancy and equipment 83,484 38,504 204,134 120,175
Computer processing expense 49,385 43,168 133,570 117,096
FDIC deposit insurance
premiums 12,256 11,935 35,590 36,766
State franchise taxes 69,704 67,259 214,160 137,420
Professional fees 25,241 18,763 85,407 72,967
Other 109,230 110,468 353,562 319,708
----------- ----------- ----------- -----------
Total noninterest expense 686,870 547,967 2,152,357 1,529,802
----------- ----------- ----------- -----------
Income before income tax expense 279,797 516,158 647,481 1,564,814
Income tax expense 100,860 183,700 233,657 556,846
----------- ----------- ----------- -----------
Net income $ 178,937 $ 332,458 $ 413,824 $ 1,007,968
=========== =========== =========== ===========
Earnings per common share - basic $ 0.11 $ 0.20 $ 0.26 $ 0.61
=========== =========== =========== ===========
Earnings per common share - diluted $ 0.11 $ 0.20 $ 0.26 $ 0.61
=========== =========== =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
<TABLE>
<CAPTION>
PEOPLES-SIDNEY FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
Three Months Ended Nine Months Ended
March 31, March 31,
---------------------------- -----------------------------
1999 1998 1999 1998
------------ ------------ ------------ --------------
<S> <C> <C> <C> <C>
Net income $ 178,937 $ 332,458 $ 413,824 $ 1,007,968
Other comprehensive income
Unrealized gain (loss) on available for
sale securities arising during the
period (19,112) (6,664) (23,475) 3,584
Tax effect 6,498 2,265 7,982 (1,219)
------------ ------------ ------------ --------------
Other comprehensive income (12,614) (4,399) (15,493) 2,365
------------ ------------ ------------ --------------
Comprehensive income $ 166,323 $ 328,059 $ 398,331 $ 1,010,333
============ ============ ============ ==============
</TABLE>
See accompanying notes to consolidated finanical statements.
<PAGE>
<TABLE>
<CAPTION>
PEOPLES-SIDNEY FINANCIAL CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN
SHAREHOLDERS' EQUITY
(Unaudited)
Nine Months
Ended March 31,
------------------------------
1999 1998
------------ ------------
<S> <C> <C>
Balance, beginning of period $ 19,626,016 $ 25,711,713
Net income for period 413,824 1,007,968
Cash dividends, $.21 per share in 1999, $.19 per share in 1998 (335,841) (314,022)
Purchase of 32,141 shares of treasury stock, at cost (611,400) --
Establish 57,128 shares for management recognition plan (953,293) --
Commitment to release 9,523 management recognition plan shares 158,910 --
Commitment to release 11,436 and 8,076 employee stock ownership plan
shares in 1999 and 1998, at fair value 197,725 138,276
Change in fair value on securities available for sale, net of tax (15,493) 2,365
------------ ------------
Balance, end of period $ 18,480,448 $ 26,546,300
============ ============
</TABLE>
See accompanying notes to financial statements.
<PAGE>
<TABLE>
<CAPTION>
PEOPLES FEDERAL SAVINGS LOAN ASSOCIATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Nine Months Ended
March 31,
----------------------------
1999 1998
----------- -----------
<S> <C> <C>
Cash flows from operating activities
Net income $ 413,824 $ 1,007,968
Adjustments to reconcile net income to net cash from
operating activities
Depreciation 84,844 37,687
Provision for loan losses 40,918 26,377
Gain on sale of other real estate owned (3,086)
FHLB stock dividends (45,700) (42,100)
Compensation expense on ESOP shares 197,725 138,276
Compensation expense on MRP shares 158,910 --
Change in
Accrued interest receivable and other assets (63,245) (163,463)
Accrued expense and other liabilities 53,295 (23,801)
Deferred loan fees 17,022 23,310
----------- -----------
Net cash from operating activities 854,507 1,004,254
Cash flows from investing activities
Purchases of securities available for sale (1,999,844) (1,999,141)
Maturities of securities available for sale 2,000,000 --
Maturities of securities held to maturity -- 2,000,000
Purchases of time deposits in other financial institutions (500,000) (3,000,000)
Maturities of time deposits in other financial institutions 500,000 6,000,000
Net increase in loans (5,977,698) (4,306,080)
Premises and equipment expenditures (1,134,482) (175,059)
Proceeds from sale of real estate owned 65,530 --
----------- -----------
Net cash from investing activities (7,046,494) (1,480,280)
Cash flows from financing activities
Net increase in deposits 4,625,918 1,567,974
Cash dividends paid (335,841) (314,022)
Purchase of treasury stock (611,400) --
Purchase of shares for management recognition plan (953,293) --
----------- -----------
Net cash from financing activities 2,725,384 1,253,952
----------- -----------
Net change in cash and cash equivalents (3,466,603) 777,926
Cash and cash equivalents at beginning of period 4,947,253 2,795,826
----------- -----------
Cash and cash equivalents at end of period $ 1,480,650 $ 3,573,752
=========== ===========
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
PEOPLES FEDERAL SAVINGS LOAN ASSOCIATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Nine Months Ended
March 31,
----------------------------
1999 1998
----------- -----------
<S> <C> <C>
Supplemental disclosures of cash flow information
Cash paid during the period for
Interest $ 3,242,250 $ 2,982,098
Income taxes 91,000 546,000
Noncash transactions
Transfer from loans to real estate owned 62,444 --
</TABLE>
See accompanying notes to financial statements.
<PAGE>
PEOPLES-SIDNEY FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
These interim consolidated 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 March 31, 1999 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 through its main office located in
Sidney, Ohio, and branches in Anna and Jackson Center, Ohio. The Association's
market area consists of Shelby and surrounding counties in Ohio.
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 allowance for loan losses, fair values of financial instruments and status
of contingencies are particularly subject to change.
Income tax expense 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.
Basic earnings per share ("EPS") is based on net income divided by the weighted
average number of shares outstanding during the period. Unallocated ESOP shares
are not considered outstanding for this calculation. Management Recognition Plan
("MRP") shares are considered outstanding as they become vested. Diluted EPS
shows the dilutive effect of unearned 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)
A reconciliation of the numerators and denominators used in the computation of
the basic earnings per common share and diluted earnings per common share is
presented below:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
March 31, March 31,
---------------------------- ----------------------------
1999 1998 1999 1998
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Basic Earnings Per Common Share
Numerator
Net income $ 178,937 $ 332,458 $ 413,824 $ 1,007,968
=========== =========== =========== ===========
Denominator
Weighted average common shares
outstanding 1,755,987 1,785,375 1,788,751 1,785,375
Less: Average unallocated ESOP shares (135,269) (126,572) (139,081) (129,177)
Less: Average nonvested MRP shares (49,035) -- (51,891) --
----------- ----------- ----------- -----------
Weighted average common shares
outstanding for basis earnings per
common share 1,571,683 1,658,803 1,597,779 1,656,198
=========== =========== =========== ===========
Basic earnings per common share $ 0.11 $ 0.20 $ 0.26 $ 0.61
=========== =========== =========== ===========
Diluted Earnings Per Common Share
Numerator
Net income $ 178,937 $ 332,453 $ 413,824 $ 1,007,968
=========== =========== =========== ===========
Denominator
Weighted average common shares
outstanding for basic earnings per
common share 1,571,683 1,658,803 1,597,779 1,656,198
Add: Dilutive effects of average
nonvested MRP shares -- -- 233 --
Add: Dilutive effects of assumed
exercises of stock options -- -- 5,632 --
----------- ----------- ----------- -----------
Weighted average common shares
and dilutive potential common
shares outstanding 1,571,683 1,658,803 1,603,644 1,656,198
=========== =========== =========== ===========
Diluted earnings per common share $ 0.11 $ 0.20 $ 0.26 $ 0.61
=========== =========== =========== ===========
</TABLE>
<PAGE>
PEOPLES-SIDNEY FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Unearned MRP shares and stock options granted did not have a dilutive effect on
EPS for the three and nine months ended March 31, 1999 as the fair value of the
MRP shares on the date of grant and the exercise price of outstanding options
was greater than the average market price for the period. Unearned MRP shares
and stock options did not have a dilutive effect on the weighted average shares
outstanding for the three and nine months ended March 31, 1998 as neither MRP
shares or stock options were granted until May 22, 1998.
Under a new accounting standard adopted on July 1, 1998, Statement of Financial
Accounting Standards ("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 that is also recognized as a separate component of equity.
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 No. 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 No. 132
also allows greater aggregation of disclosures for employers with multiple
defined benefit plans. SFAS No. 132 is not expected to have a significant impact
on the Corporation's financial statements.
SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities,"
will be effective in fiscal 2000. SFAS No. 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
<PAGE>
PEOPLES-SIDNEY FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
changes in fair value or cash flows. SFAS No. 133 does not allow hedging of a
security which is classified as held to maturity, accordingly, upon adoption of
SFAS No. 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 No. 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," was effective on January 1, 1999. SFAS No. 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 No. 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 No. 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 No. 65, all retained mortgage-backed securities were
required to be classified as trading. SFAS No. 134 did not 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 were 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
prior to 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
Securities were as follows:
<TABLE>
<CAPTION>
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---------- ---------- ---------- -----------
<S> <C> <C> <C> <C>
March 31, 1999
Securities available for sale
U.S. Government agencies $3,999,801 $ 3,163 $ (9,684) $3,993,280
========== ========== ========== ==========
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 March 31, 1999, 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 $ 999,957 $1,000,780
Due after one year through five years 2,999,844 2,992,500
---------- ----------
$3,999,801 $3,993,280
========== ==========
</TABLE>
No securities were sold during the three or nine month periods ended March 31,
1999 and 1998. No securities were pledged as collateral at March 31, 1999 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>
March 31, June 30,
1999 1998
------------- -------------
<S> <C> <C>
Mortgage loans:
1-4 family residential $ 82,568,887 $ 79,690,787
Multi-family residential 1,277,717 654,871
Commercial real estate 9,040,324 6,608,207
Real estate construction and
development 5,751,784 6,776,389
Land 650,497 867,755
Total mortgage loans 99,289,209 94,598,009
Consumer and other loans 3,394,019 2,154,474
------------- -------------
Total loans receivable 102,683,228 96,752,483
Less:
Allowance for loan losses (464,062) (425,642)
Loans in process (2,096,926) (2,078,937)
Deferred loan fees (212,395) (195,373)
------------- -------------
$ 99,909,845 $ 94,052,531
============= =============
</TABLE>
Activity in the allowance for loan losses is summarized as follows:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
March 31, March 31,
------------------------ ------------------------
1999 1998 1999 1998
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Balance at beginning of period $ 456,502 $ 418,075 $ 425,642 $ 397,159
Provision for losses (12,001) (9,383) 40,918 26,377
Charge-offs -- -- (22,621) (15,036)
Recoveries 19,561 1,856 20,123 2,048
--------- --------- --------- ---------
Balance at end of period $ 464,062 $ 410,548 $ 464,062 $ 410,548
========= ========= ========= =========
</TABLE>
As of and for the three and nine months ended March 31, 1999 and 1998, loans
considered impaired within the scope of SFAS No. 114 were not material.
<PAGE>
PEOPLES-SIDNEY FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 5 - OTHER BORROWINGS
At March 31, 1999 and June 30, 1998, the Association had a cash management line
of credit enabling it to borrow up to $5,360,000 and $5,100,000 from the Federal
Home Loan Bank (FHLB) of Cincinnati. The line of credit must be renewed on an
annual basis. There were no borrowings outstanding at March 31, 1999 or 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
$17,844,000, including the line of credit. The Association had one fixed-rate
borrowing, with an interest rate of 6.13%, totaling $7,000,000 at March 31, 1999
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 March 31, 1999 and June 30, 1998, the Corporation had commitments to make
fixed-rate commercial and residential real estate mortgage loans at current
market rates totaling $863,000 and $621,000, and variable-rate commercial and
residential real estate mortgage loans at current market rates totaling
$1,146,000 and $687,000. Loan commitments are generally for 30 days. The
<PAGE>
PEOPLES-SIDNEY FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
interest rates on fixed-rate commitments ranged from 7.00% to 8.00% at March 31,
1999 and 7.50% to 8.25% at June 30, 1998. The interest rates on variable-rate
commitments ranged from 6.75% to 7.75% at March 31, 1999 and 7.25% to 8.00% at
June 30, 1998. The Corporation also had unused lines of credit totaling
$1,723,000 and $548,000 at March 31, 1999 and June 30, 1998.
At March 31, 1999 and June 30, 1998, compensating balances of $464,000 and
$299,000 were required as deposits with various correspondent banks. These
balances do not earn interest.
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.
During fiscal 1998, the Corporation declared and paid a $4.00 per share
distribution of which $3.99 was a tax free return of capital distribution. The
ESOP received approximately $539,000 on 134,262 unallocated shares from the
return of capital distribution. The ESOP used the proceeds to purchase 26,000
additional shares. The additional shares are held in suspense and allocated to
participants in a manner similar to the shares originally in the ESOP.
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 $57,246
and $197,725 for the three and nine months ended March 31, 1999. ESOP
compensation expense was $53,850 and $138,276 for the three and nine months
ended March 31, 1998.
<PAGE>
PEOPLES-SIDNEY FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 7 - EMPLOYEE STOCK OWNERSHIP PLAN (Continued)
The ESOP shares as of March 31, 1999 and June 30, 1998 were as follows:
<TABLE>
<CAPTION>
March 31, June 30,
1999 1998
---------- ----------
<S> <C> <C>
Allocated shares 24,031 24,031
Shares committed to be released for allocation 11,436 --
Unreleased shares 133,363 144,799
---------- ----------
Total ESOP shares 168,830 168,830
========== ==========
Fair value of unreleased shares $1,700,378 $2,588,282
========== ==========
</TABLE>
NOTE 8 - STOCK OPTION AND INCENTIVE PLAN
The Stock Option and Incentive Plan was approved by the shareholders of the
Corporation on May 22, 1998. Through March 31, 1999, the Board of Directors have
granted options to purchase 141,824 shares of common stock at an exercise price
ranging from $16.01 to $18.75 to certain employees, officers and directors of
the Association and Corporation. Options granted prior to June 10, 1998 were
reduced by the $3.99 return of capital distribution. 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 March 31, 1999 or June 30, 1998. In addition, 36,714
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 to purchase
71,415 common shares, which is equal to 4% of the common shares sold in
connection with the conversion. 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.
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 March 31, 1999 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 and
nine months ended March 31, 1999, the Corporation has compensation expense
totaling $18,910 and $138,910 based upon the cost of the number of shares earned
during the period. No compensation expense was recognized during the three and
nine months ended March 31, 1998.
<PAGE>
PEOPLES-SIDNEY FINANCIAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS
Item 2. Management's Discussion and Analysis
Introduction
In the following pages, management presents an analysis of the financial
condition of Peoples-Sidney Financial Corporation (the "Corporation") as of
March 31, 1999, compared to June 30, 1998, and results of operations for the
three and nine months ended March 31, 1999, compared with the same periods in
1998. 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.
When used in this discussion or future filings by the Corporation with the
Securities and Exchange Commission, or other public or shareholder
communications, or in oral statements made with the approval of an authorized
executive officer, the words or phrases "will likely result," "are expected to,"
"will continue," "is anticipated," "estimate," "project," "believe" or similar
expressions are intended to identify "forward-looking statements" within the
meaning of the Private Securities Litigation Reform Act of 1995. The Corporation
wishes to caution readers not to place undue reliance on any such
forward-looking statements, which speak only as of the date made, and to advise
readers that various factors, including regional and national economic
conditions, changes in levels of market interest rates, credit risks of lending
activities and competitive and regulatory factors, could affect the
Corporation's financial performance and could cause the Corporation's actual
results for future periods to differ materially from those anticipated or
projected.
The Corporation is not aware of any trends, events or uncertainties that will
have or are reasonably likely to have a material effect on its liquidity,
capital resources or operations except as discussed herein. The Corporation is
not aware of any current recommendations by regulatory authorities that would
have such effect if implemented.
The Corporation does not undertake, and specifically disclaims, any obligation
to publicly release the result of any revisions which may be made to any
forward-looking statements to reflect occurrence of anticipated or unanticipated
events or circumstances after the date of such statements.
Financial Condition
Total assets at March 31, 1999 were $109.4 million compared to $105.9 million at
June 30, 1998, an increase of $3.5 million, or 3.3%. The increase in total
assets was due to increases in loans and premises and equipment funded by a
decrease in overnight deposits and interest-bearing deposits in other financial
institutions and proceeds from increased deposits.
<PAGE>
PEOPLES-SIDNEY FINANCIAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS
Loans receivable increased $5.8 million from $94.1 million at June 30, 1998 to
$99.9 million at March 31, 1999. The increase was primarily in commercial real
estate loans which increased $2.4 million, one- to four-family residential loans
which increased $2.9 million and multi-family residential loans which increased
$600,000. These increases were partially offset by a $1.0 million decrease in
real estate construction and development loans. 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. Expansion into new market areas
through the Association's two new Branch banking facilities also contributed to
the growth.
The Corporation's consumer and other loan portfolio increased $1.2 million
between June 30, 1998 and March 31, 1999. Despite the increase, consumer and
other loans remain a small portion of the entire loan portfolio and represented
only 3.3% and 2.2% of gross loans at March 31, 1999 and June 30, 1998.
Premises and equipment increased $1.0 million from $1.0 million at June 30, 1998
to $2.0 million at March 31, 1999. The increase resulted because the Corporation
constructed a new, full-service branch banking office in Anna, Ohio. The
Corporation also purchased equipment and made leasehold improvements in
connection with the opening of a new, leased branch banking office in Jackson
Center, Ohio.
Total deposits increased $4.6 million from $79.1 million at June 30, 1998 to
$83.7 million at March 31, 1999. The Corporation experienced increases in all
types of deposits, however, the majority of the growth was in negotiable order
of withdraw ("NOW") and money market demand deposit accounts, which increased
$1.7 million, and certificates of deposit, which increased $2.0 million. The
growth is the result of regular interest rate promotions as well as special
promotions offered in connection with the opening of new branch locations in
Anna and Jackson Center, Ohio.
Borrowed funds were $7.0 million at March 31, 1999 and June 30, 1998. The
advance carries a fixed 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.
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.
<PAGE>
PEOPLES-SIDNEY FINANCIAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS
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 $179,000 and $414,000 for the
three and nine months ended March 31, 1999 compared to $332,000 and $1,008,000
for the three and nine months ended March 31, 1998. 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 $936,000 and $2,788,000 for the
three and nine months ended March 31, 1999 compared to $1,039,000 and $3,075,000
for the three and nine months ended March 31, 1998. The decreases were the
result of additional interest paid on borrowed funds.
Interest and fees on loans increased $35,000 and $134,000, or 1.9% and 2.4% from
$1,882,000 and $5,585,000 for the three and nine months ended March 31, 1998 to
$1,917,000 and $5,719,000 for the three and nine months ended March 31, 1999.
The increase in interest income was due to higher average loans receivable,
related primarily to the origination of new commercial real estate and one- to
four-family residential loans.
Interest earned on interest-bearing demand and overnight deposits decreased
$41,000 and $138,000 for the three and nine months ended March 31, 1999 as
compared to the same periods 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.
Interest paid on deposits decreased $28,000 and $65,000 for the three and nine
months ended March 31, 1999 compared to the three and nine months ended March
31, 1998. There was little change in the interest paid on deposits as the mix of
the deposit portfolio remained fairly stable. 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 5.09% for the nine months ended March
31, 1998 to 4.84% for the nine months ended March 31, 1999.
Interest paid on borrowed funds totaled $114,000 and $335,000 for the three and
nine months ended March 31, 1999. There were no borrowings during the three or
nine months ended March 31, 1998. 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 distribution of capital totaling $7.1 million.
The Corporation paid the distribution of capital on June 26, 1998 as a means to
reduce the excess capital provided from the stock conversion.
Provision for Loan Losses. The Corporation maintains an allowance for loan
losses in an amount that, in management's judgment, is adequate to absorb
probable 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
<PAGE>
PEOPLES-SIDNEY FINANCIAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS
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 probable 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 and nine months ended March 31, 1999
totaled $(12,000) and $41,000 compared to $(9,000) and $26,000 for the three and
nine months ended March 31, 1998. Charge-offs experienced by the Corporation
have primarily related to consumer and other non-real 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. The loan growth experienced by the Corporation from June
30, 1998 to March 31, 1999 was concentrated in the commercial real estate and
one- to four-family residential loan area. Since commercial real estate loan
types inherently carry more risk than one- to four-family real estate loans,
management believes it is prudent to provide for potential losses, even
considering the stability in the level of nonperforming loans. However, a
negative provision was recorded for the three months ended March 31, 1999 as the
Association received a recovery of $16,000 on a loan charged-off in prior years.
Management anticipates it will continue its provisions to the allowance for loan
losses as loan growth continues. The allowance for loan losses totaled $464,000,
or .45% of gross loans receivable, at March 31, 1999 compared to $426,000, or
.44% of gross loans receivable, at June 30, 1998.
Noninterest income. Noninterest income includes service fees and other
miscellaneous income and totaled $18,000 and $53,000 for the three and nine
months ended March 31, 1999 and $15,000 and $46,000 for the three and nine
months ended March 31, 1998.
Noninterest expense. Noninterest expense totaled $687,000 and $2,152,000 for the
three and nine months ended March 31, 1999 compared to $548,000 and $1,530,000
for three and nine months ended March 31, 1998, an increase of $139,000 and
$622,000, or 25.3% and 40.7%. The increases were the result of increases in
compensation and benefits, occupancy and equipment, state franchise taxes and
other expenses.
<PAGE>
PEOPLES-SIDNEY FINANCIAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS
Compensation and benefits expense increased $80,000 and $400,000, or 31.0% and
55.2%, for the three and nine months ended March 31, 1999 compared to the same
periods in 1998. The increases are 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 number of
ESOP shares expected to be allocated to participants in 1999. Compensation
expense related to the ESOP was $57,000 and $198,000 for the three and nine
months ended March 31, 1999 compared to $54,000 and $138,000 for the three and
nine months ended March 31, 1998. The Corporation also implemented a Management
Recognition Plan ("MRP") in May 1998 for which the expense totaled $19,000 and
$139,000 for the three and nine months ended March 31, 1999. Occupancy and
equipment expense increased $45,000 and $84,000 due to the added costs of
opening two new branch offices during the nine months ended March 31, 1999.
State franchise taxes increased $77,000 for the nine months ended March 31,
1999, due to 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. Income tax expense
totaled $101,000 and $234,000 for the three and nine months ended March 31, 1999
compared to $184,000 and $557,000 for the three and nine months ended March 31,
1998, representing decreases of $83,000 and $323,000, or 45.1% and 58.0%. The
effective tax rate was 36.0% and 36.1% for the three and nine months ended March
31, 1999, and 35.6% for the three and nine months ended March 31, 1998.
Liquidity and Capital Resources
The Corporation's liquidity, primarily represented by cash and cash equivalents,
is a result of operating, investing and financing activities. These activities
are summarized below for the nine months ended March 31, 1999 and 1998.
<TABLE>
<CAPTION>
Nine Months
Ended March 31,
----------------------
1999 1998
(Dollars in thousands)
<S> <C> <C>
Net income $ 414 $ 1,008
Adjustments to reconcile net income to net cash from
operating activities 441 (4)
------- -------
Net cash from operating activities 855 1,004
Net cash from investing activities (7,046) (1,480)
Net cash from financing activities 2,725 1,254
------- -------
Net change in cash and cash equivalents (3,466) 778
Cash and cash equivalents at beginning of period 4,947 2,796
------- -------
Cash and cash equivalents at end of period $ 1,481 $ 3,574
======= =======
</TABLE>
<PAGE>
PEOPLES-SIDNEY FINANCIAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS
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 the (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 4% 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 deposit withdrawals or other short-term funding
needs. At March 31, 1999, the Association's regulatory liquidity was 8.2%. At
such date, the Corporation had commitments to originate fixed-rate commercial
and residential real estate loans totaling $863,000 and variable-rate commercial
and residential real estate mortgage loans totaling $1,146,000. 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 required by regulations to meet certain minimum capital
requirements, which must be generally as stringent as the requirements
established for commercial banks. 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. Current capital
requirements call for tangible capital of 1.5% of adjusted total assets, core
capital (which, for the Association, consists solely of tangible capital) of
3.0% of adjusted total assets and risk-based capital (which, for the
Association, consists of core capital and general valuation allowances) of 8.0%
of risk-weighted assets (assets are weighted at percentage levels ranging from
0% to 100% depending on their relative risk). The following table indicates that
the requirement for core capital is 4.0% because that is the level that the OTS
prompt corrective action regulations require to be considered adequately
capitalized. At March 31, 1999, and June 30, 1998, the Association complies with
all regulatory capital requirements. Based on the Association's computed
regulatory capital ratios, the Association is considered well capitalized under
the applicable requirements at March 31, 1999 and June 30, 1998. Management is
not aware of any matter after the latest regulatory exam that would cause the
Association's capital category to change.
<PAGE>
PEOPLES-SIDNEY FINANCIAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS
At March 31, 1999 and June 30, 1998, the Association's actual capital levels and
minimum required levels were:
<TABLE>
<CAPTION>
Minimum Minimum
Required To Be Required To Be
Adequately Capitalized Well Capitalized
Under Prompt Corrective Under Prompt Corrective
Actual Action Regulations Action Regulations
-------------------- -------------------- ---------------------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
March 31, 1999
Total capital (to risk
weighted assets) $ 16,406 22.2% $ 5,902 8.0% $ 7,377 10.0%
Tier 1 (core) capital (to
risk-weighted assets) 15,947 21.6 2,951 4.0 4,426 6.0
Tier 1 (core) capital (to
adjusted total assets) 15,947 14.6 4,380 4.0 5,475 5.0
Tangible capital (to
adjusted total assets) 15,947 14.6 1,642 1.5 N/A
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.
The 5% repurchase was completed on January 22, 1999.
<PAGE>
PEOPLES-SIDNEY FINANCIAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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 uses
the services of a nationally-recognized data processing service bureau that
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 that 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
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.
<PAGE>
PEOPLES-SIDNEY FINANCIAL CORPORATION
PART II - OTHER INFORMATION
- --------------------------------------------------------------------------------
Item 1. Legal Proceedings
None.
Item 2. Changes in Securities and Use of Proceeds
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 March 31, 1999.
Item 5. Other Information
None.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibit No. 27: Financial Data Schedule
(b) Form 8-K was filed on February 2, 1999. Under Item 5, Other
Events, the Corporation reported the issuance of a press release
to announce the completion of its repurchase of 5% of its common
stock.
<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: May 11, 1999 /s/ Douglas Stewart
-------------------
Douglas Stewart
President
Date: May 11, 1999 /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 FILES 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>
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0
0
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