PEOPLES-SIDNEY FINANCIAL CORPORATION
Sidney, Ohio
ANNUAL REPORT
June 30, 2000
<PAGE>
PEOPLES-SIDNEY FINANCIAL CORPORATION
Sidney, Ohio
ANNUAL REPORT
June 30, 2000
CONTENTS
TO OUR SHAREHOLDERS.................................................... 2
BUSINESS OF PEOPLES-SIDNEY FINANCIAL CORPORATION....................... 4
MARKET PRICE OF THE CORPORATION'S COMMON SHARES
AND RELATED SHAREHOLDER MATTERS...................................... 4
SELECTED CONSOLIDATED FINANCIAL INFORMATION
AND OTHER DATA....................................................... 6
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS.................................. 8
REPORT OF INDEPENDENT AUDITORS ........................................ 20
CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Balance Sheets ..................................... 21
Consolidated Statements of Income ............................... 22
Consolidated Statements of Changes in Shareholders' Equity ...... 23
Consolidated Statements of Cash Flows ........................... 26
Notes To Consolidated Financial Statements ...................... 28
SHAREHOLDER INFORMATION................................................ 46
CORPORATE INFORMATION.................................................. 47
--------------------------------------------------------------------------------
1
<PAGE>
BUSINESS OF PEOPLES-SIDNEY FINANCIAL CORPORATION
Peoples-Sidney Financial Corporation ("Peoples"), a unitary thrift holding
company incorporated under the laws of the State of Delaware, owns all of the
issued and outstanding capital stock of Peoples Federal Savings and Loan
Association ("Association"), a savings and loan association chartered under the
laws of the United States together referred to as the Corporation. On April 25,
1997, Peoples acquired all of the common stock issued by the Association upon
its conversion from a mutual savings and loan association to a stock savings and
loan association ("Conversion"). Peoples' activities have been limited primarily
to holding the common shares of the Association.
Serving the Sidney, Ohio area since 1886, the Association conducts business from
its main office at 101 East Court Street, Sidney, Ohio. During fiscal 1999, the
Association opened full-service branches in Anna and Jackson Center, Ohio. The
Association's business involves attracting deposits from the general public and
using such deposits to originate one- to four-family permanent and construction
residential mortgages and, to a lesser extent, commercial real estate, consumer,
land, multi-family and commercial business loans in its market area, consisting
primarily of Shelby County and contiguous counties in Ohio. The Association also
invests in securities consisting primarily of U.S. government obligations,
mortgage-backed and related securities and various types of short-term liquid
assets.
As a savings and loan holding company, Peoples is subject to regulation,
supervision and examination by the Office of Thrift Supervision of the United
States Department of the Treasury ("OTS"). As a savings and loan association
chartered under the laws of the United States, the Association is subject to
regulation, supervision and examination by the OTS and the Federal Deposit
Insurance Corporation (the "FDIC"). The FDIC insures deposits in the Association
up to applicable limits. The Association is also a member of the Federal Home
Loan Bank of Cincinnati ("FHLB").
MARKET PRICE OF THE CORPORATION'S COMMON SHARES AND
RELATED SHAREHOLDER MATTERS
The Corporation had 1,578,315 common shares outstanding on July 31, 2000, held
of record by approximately 888 shareholders. Price information with respect to
the Corporation's common shares is quoted on The NASDAQ National Market System.
The high and low daily closing prices for the common shares of the Corporation
as quoted by The NASDAQ Stock Market, Inc. and cash dividends paid by quarter
are shown below.
<TABLE>
<CAPTION>
September 30, December 31, March 31, June 30,
1999 1999 2000 2000
-------------- ------------- -------------- --------------
<S> <C> <C> <C> <C>
High $ 11.50 $ 10.50 $ 10.75 $ 10.75
Low 9.88 7.94 8.88 8.50
Cash Dividends .07 .07 .07 .07
September 30, December 31, March 31, June 30,
1998 1998 1999 1999
-------------- ------------- -------------- --------------
High $ 21.75 $ 18.06 $ 16.88 $ 13.25
Low 18.13 15.00 12.50 10.00
Cash Dividends .07 .07 .07 .07
</TABLE>
--------------------------------------------------------------------------------
4
<PAGE>
Peoples' primary source of funds with which to pay dividends to shareholders is
from dividends received from the Association. In addition to certain federal
income tax considerations, OTS regulations impose limitations on the payment of
dividends and other capital distributions by savings associations. Under OTS
regulations applicable to converted savings associations, the Association is not
permitted to pay a cash dividend on its common shares if its regulatory capital
would, as a result of payment of such dividend, be reduced below the amount
required for the Liquidation Account (the account established for the purpose of
granting a limited priority claim on the assets of the Association in the event
of complete liquidation to those members of the Association before the
Conversion who maintain a savings account at the Association after the
Conversion), or applicable regulatory capital requirements prescribed by the
OTS.
An application must be submitted and approval from the OTS must be obtained by a
subsidiary of a savings and loan holding company (1) if the proposed
distribution would cause total distributions for the calendar year to exceed net
income for that year to date plus the savings association's retained net income
for the preceding two years; (2) if the savings association will not be at least
adequately capitalized following the capital distribution; (3) if the proposed
distribution would violate a prohibition contained in any applicable statute,
regulations or agreement between the savings association and the OTS (or the
FDIC), or a condition imposed on the savings association in an OTS-approved
application or notice; or, (4) if the savings association has not received
certain favorable examination ratings from the OTS. If a savings association
subsidiary of a holding company is not required to file an application, it must
file a notice with the OTS.
--------------------------------------------------------------------------------
5
<PAGE>
SELECTED CONSOLIDATED FINANCIAL
INFORMATION AND OTHER DATA
The following tables set forth certain information concerning the consolidated
financial condition and earnings of and other data regarding the Corporation at
the dates and for the periods indicated. As the conversion was completed on
April 25, 1997, information before the year ended June 30, 1997 is for the
Association.
<TABLE>
<CAPTION>
Selected Financial Condition At June 30,
---------------------------- --------------------------------------------------------------------------
and Other Data: 2000 1999 1998 1997 1996
-------------- ------------ ------------- ----------- ------------ ------------
(In thousands)
Total amount of:
<S> <C> <C> <C> <C> <C>
Assets $ 129,287 $ 116,882 $ 105,903 $ 103,142 $ 86,882
Time deposits in other
financial institutions -- 400 100 5,000 1,100
Securities available for sale 8,447 7,858 4,016 2,013 --
Securities held to maturity -- -- -- 1,999 2,598
FHLB stock 1,023 908 847 763 667
Loans, net (1) 114,650 102,803 94,053 88,924 78,233
Deposits 93,057 84,310 79,054 77,045 77,318
Borrowed funds 19,000 14,800 7,000 -- --
Shareholders' equity (2) 16,960 17,362 19,626 25,712 9,213
Year ended June 30,
--------------------------------------------------------------------------
Selected Operations Data: 2000 1999 1998 1997 1996
------------------------ ------------ ------------- ----------- ------------ ------------
(In thousands)
Interest income $ 9,156 $ 8,105 $ 8,067 $ 7,189 $ 6,513
Interest expense 5,376 4,353 3,944 4,051 3,706
------------ ------------- ------------ ------------ ------------
Net interest income 3,780 3,752 4,123 3,138 2,807
Provision for loan losses 61 104 41 103 68
------------ ------------- ------------ ------------ ------------
Net interest income after
provision for loan losses 3,719 3,648 4,082 3,035 2,739
Noninterest income 82 89 63 63 57
Noninterest expense 2,787 2,873 2,205 2,222 1,504
------------ ------------- ------------ ------------ ------------
Income before income taxes 1,014 864 1,940 876 1,292
Income tax expense 378 354 707 312 440
------------ ------------- ------------ ------------ ------------
Net income $ 636 $ 510 $ 1,233 $ 564 $ 852
============ ============= ============ ============ ============
Earnings per common
share - basic (3) $ .43 $ .32 $ .74 $ .09
============ ============ ============ ============
Earnings per common
share - diluted (3) $ .43 $ .32 $ .74 $ .09
============ ============ ============ ============
Dividends declared per share (3) $ .28 $ .28 $ 4.26 $ --
============ ============ ============ ============
</TABLE>
--------------------------------------------------------------------------------
6
<PAGE>
<TABLE>
<CAPTION>
Selected Financial Ratios and Other Data:
----------------------------------------
Performance Ratios: 2000 1999 1998 1997 1996
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Return on assets (ratio of net
income to average total assets) 0.51% 0.47% 1.17% 0.60% 1.01%
Return on equity (ratio of net
income to average equity) (2) 3.70 2.73 4.77 4.70 9.70
Dividend payout ratio (3)(8) 65.12 87.50 575.68 0.00 N/A
Interest rate spread (4) 2.52 2.81 2.78 2.81 2.97
Net interest margin (5) 3.13 3.57 4.01 3.45 3.41
Ratio of operating expense to
average total assets 2.23 2.65 2.10 2.38 1.78
Ratio of average interest-earning
assets to average interest-bearing
liabilities 1.14x 1.18x 1.32x 1.14x 1.10x
Quality Ratios:
Nonperforming assets to total
assets at end of period (6) 0.81% 0.65% 0.91% 0.84% 1.41%
Allowance for loan losses to
nonperforming loans 56.59 70.03 44.41 45.78 25.14
Allowance for loan losses to
gross loans (7) 0.50 0.50 0.44 0.43 0.37
Capital Ratios:
Shareholders' equity to total
assets at end of period (2) 13.12 14.85 18.53 24.93 10.60
Average equity to average assets (2) 13.77 17.24 24.59 12.87 10.43
Other Data:
Number of full service offices 3 3 1 1 1
</TABLE>
---------------
(1) Loans are shown net of net deferred loan fees, loans in process and the
allowance for loan losses.
(2) Retained earnings only before April 25, 1997.
(3) Earnings and dividends per share are not applicable for any of the periods
presented before April 25, 1997 due to the Association's mutual form of
ownership before April 25, 1997. Earnings per share for the period ended
June 30, 1997 was computed based on net income of the Corporation from
April 25, 1997 to June 30, 1997. The dividends for 1998 include a $4.00 per
share special dividend of which $3.99 was a return of capital distribution.
(4) The average interest rate spread represents the difference between the
weighted average yield on interest-earning assets and the weighted average
cost of interest-bearing liabilities.
(5) The net interest margin represents net interest income as a percent of
average interest-earning assets.
(6) Nonperforming assets consist of nonperforming loans and foreclosed assets.
Nonperforming loans consist of all accruing loans 90 days or more past due
and all nonaccrual loans.
(7) Gross loans are stated at unpaid principal balances.
(8) Dividends declared per share divided by basic earnings per common share.
--------------------------------------------------------------------------------
7
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
General
The following is management's analysis of the Corporation's consolidated
financial condition and consolidated results of operations as of and for the
year ended June 30, 2000, compared to prior years. This discussion is designed
to provide a more comprehensive review of the operating results and financial
position than could be obtained from an examination of the consolidated
financial statements alone. This analysis should be read in conjunction with the
consolidated financial statements and related footnotes and the selected
financial data included elsewhere in this report.
The Corporation provides financial services through its main office in Sidney,
Ohio, and branch offices in Anna and Jackson Center, Ohio. Its primary deposit
products are checking, savings and term certificate accounts, and it primary
lending products are residential mortgage, commercial and installment loans.
Substantially all loans are secured by specific items of collateral including
business assets, consumer assets and real estate. Commercial loans are expected
to be repaid from cash flow from operations of businesses. Real estate loans are
secured by both residential and commercial real estate. Substantially all
revenues and services are derived from financial institution products and
services in Shelby County and contiguous counties.
Forward-Looking Statements
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 June 30, 2000 were $129.3 million compared to $116.9 million at
June 30, 1999, an increase of $12.4 million, or 10.6%. The increase in total
assets was primarily due to an increase in loans, funded by an increase in
deposits and borrowed funds.
The sum of cash and cash equivalents and time deposits in other financial
institutions had very little change from June 30, 1999 to June 30, 2000,
decreasing from $2.3 million to $2.2 million.
The securities portfolio, which is classified as available for sale, increased
$600,000 from June 30, 1999 to June 30, 2000. The Corporation had very little
activity in its securities portfolio during 2000. Security maturities and sales
were reinvested in new purchases. One security was sold at a loss during 2000
and reinvested in a higher yielding security. Management believed the increase
in yield more than compensated for the loss associated with the sale.
--------------------------------------------------------------------------------
8
<PAGE>
Federal Home Loan Bank stock increased from $900,000 at June 30, 1999 to $1.0
million at June 30, 2000 due to stock dividends and purchases required to
increase borrowings.
Loans increased $11.8 million from $102.8 million at June 30, 1999 to $114.6
million at June 30, 2000. The Corporation experienced increases in all mortgage
loan categories except for multi-family residential. The largest increase was in
one- to four-family residential real estate loans which increased $7.9 million
and real estate construction and development, which increased $2.2 million.
Commercial real estate and land loans increased a combined total of $800,000.
The overall increase and continued growth in total mortgage loans is reflective
of a strong local economy coupled with attractive loan rates and products
compared to local competition. However, the loan growth has slowed down during
the last several months due to the increase in interest rates.
The Corporation's consumer loan portfolio increased $835,000 between June 30,
1999 and June 30, 2000. Commercial loans increased $1.0 million between June 30,
1999 and June 30, 2000. The increases were primarily related to new auto loans
and commercial lines of credit originated at the Association's two new branch
locations. Even with the increase, non-mortgage loans remain a small portion of
the entire loan portfolio and represented only 5.0% of gross loans at June 30,
2000 compared to 3.9% at June 30, 1999.
Premises and equipment decreased $100,000 from $2.0 million at June 30, 1999 to
$1.9 million at June 30, 2000. The decrease resulted from annual depreciation on
the Corporation's premises and equipment.
Total deposits increased $8.8 million from $84.3 million at June 30, 1998 to
$93.1 million at June 30, 2000. The majority of deposit growth was in
certificates of deposit, which increased by $9.4 million. The certificates of
deposit growth can be attributed to the Corporation's special 15-month
certificate of deposit product. This product totaled $17.2 million at June 30,
2000. Other certificates of deposit declined $7.8 million. Noninterest-bearing
demand accounts and NOW accounts increased slightly from totals at June 30,
1999. Money market accounts and savings accounts declined from June 30, 1999 as
customers moved funds to higher yielding certificates of deposit during the
rising interest rate environment.
Borrowed funds totaled $19.0 million at June 30, 2000 and $14.8 million at June
30, 1999. Borrowings at June 30, 2000 consisted entirely of long-term fixed-rate
advances. $7.0 million in new borrowings were taken in 2000 to replace cash
management advances and lock in interest rates during a rising interest rate
environment and to fund loan growth not supported by increased deposits. The
$5.0 million long-term fixed-rate advance borrowed in June 1999 was used to
purchase GNMA mortgage-backed securities with an original par value of $5.0
million to leverage some of the Corporation's excess capital. The remaining $7.0
million in long-term fixed-rate advance was borrowed near the end of fiscal 1998
under a 10-year fixed-rate advance from the FHLB of Cincinnati to fund a $4.00
per share special dividend, of which $3.99 was a tax free return of capital,
totaling $7.1 million. The Corporation paid the return of capital on June 26,
1998 as a means of reducing the excess capital provided from the stock
conversion.
Total shareholders' equity decreased $400,000 from $17.4 million at June 30,
1999 to $17.0 million at June 30, 2000. The net decrease is due to the purchase
of treasury stock and paying out a substantial portion of the Corporation's 2000
earnings in dividends. The decrease is part of Management's capital planning
strategy. During 2000, the Corporation's Board of Directors approved a 5% stock
buyback, which was completed prior to June 30, 2000.
Results of Operations
The operating results of the Corporation are affected by general economic
conditions, the monetary and fiscal policies of federal agencies and the
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 the demand for real estate loans and other types of loans, which
in turn is affected by the interest rates at which such loans are made, general
economic conditions and the availability of funds for lending activities.
The Corporation's net income primarily depends upon its net interest income,
which is the difference between the interest income earned on interest-earning
assets, such as loans and securities, and interest expense incurred on
--------------------------------------------------------------------------------
(Continued)
9
<PAGE>
interest-bearing liabilities, such as deposits and other borrowings. The level
of net interest income is dependent upon the interest rate environment and the
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.
Comparison of Results of Operations for the
Year Ended June 30, 2000 and June 30, 1999
Net Income. The Corporation earned net income of $636,000 for the year ended
June 30, 2000 compared to net income of $510,000 for the year ended June 30,
1999. The increase in net income was primarily due to a slight increase in net
interest income combined with a decrease in the provision for loan losses and
noninterest expense.
Net Interest Income. Net interest income totaled $3,780,000 for the year ended
June 30, 2000 compared to $3,752,000 for the year ended June 30, 1999, an
increase of $29,000, or 0.8%. The increase was the result of an increase in the
volume of interest-earning assets almost entirely offset by a decrease in the
net interest margin.
Interest and fees on loans increased $737,000 or 9.6%, from $7,697,000 for the
year ended June 30, 1999 to $8,434,000 for the year ended June 30, 2000. 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
construction and development, commercial real estate, consumer and commercial
loans. The increase in interest and fees on loans due to volume was partially
offset by a decline in the yield earned on loans, which dropped from 7.88% for
1999 to 7.74% for 2000.
Interest earned on securities totaled $577,000 for the year ended June 30, 2000
compared to $229,000 for the year ended June 30, 1999. Interest on
interest-bearing demand, time and overnight deposits with other financial
institutions decreased to $78,000 for the year ended June 30, 2000 compared to
$117,000 for the year ended June 30, 1999. The increase in interest on
securities was the result of higher average balance of securities combined with
a higher yield earned on securities. The decrease in interest-bearing demand,
time and overnight deposits was the result of lower average balances of
interest-bearing deposits and 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.
Interest paid on deposits increased $417,000 for the year ended June 30, 2000
compared to the year ended June 30, 1999. The average balance for
interest-bearing deposits increased and due to the majority of the growth being
in certificates of deposit, the mix of the deposit portfolio shifted from lower
yielding transaction accounts to higher yielding certificates of deposit. As a
result, the average cost of deposits increased from 4.80% for the year ended
June 30, 1999 to 4.86% for the year ended June 30, 2000. The increase in the
average cost of funds may continue due to the current interest rate environment.
Interest paid on borrowed funds totaled $1,076,000 for the year ended June 30,
2000 compared to $470,000 for the year ended June 30, 1999. Management increased
its borrowings from the FHLB throughout 2000 to fund 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
probable losses inherent in the loan portfolio. While management utilizes its
best judgment and information available, the ultimate adequacy of the allowance
is dependent upon a variety of factors, including the performance of the
Corporation's loan portfolio, the economy, changes in real estate values and
interest rates and the view of the 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 which is considered
adequate to absorb probable losses inherent 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
--------------------------------------------------------------------------------
(Continued)
10
<PAGE>
the size and composition of the loan portfolio and specific borrower
considerations, including the ability of the borrower to repay the loan and the
estimated value of the underlying collateral.
The provision for loan losses for the year ended June 30, 2000 totaled $61,000
compared to $104,000 for the year ended June 30, 1999, a decrease of $43,000, or
40.8%. The allowance for loan losses totaled $591,000, or 0.50% of gross loans
receivable and 56.6% of total nonperforming loans at June 30, 2000, compared
with $529,000, or 0.50% of gross loans receivable and 70.0% of total
nonperforming loans at June 30, 1999. Charge-offs experienced by the Corporation
have primarily related to consumer and other non-real estate loans. As indicated
previously, such loans make up a small 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.
Noninterest income. Noninterest income includes service fees and other
miscellaneous income and loss on sale of available-for-sale securities totaled
$83,000 for the year ended June 30, 2000 compared to $89,000 for the year ended
June 30, 1999. The primary reasons for the decrease was the $16,000 loss on sale
partially offset by higher late charge income and service charges on NOW
accounts due to the increase in the number of accounts.
Noninterest expense. Noninterest expense totaled $2,787,000 for the year ended
June 30, 2000 compared to $2,872,000 for the year ended June 30, 1999, a
decrease of $85,000 or 3.0%. The decrease is primarily related to state
franchise taxes and other expenses.
Compensation and benefits expense decreased $9,000, or 0.6%. Increases in
salaries were more than offset by a decrease in expense associated with the
Corporation's ESOP. ESOP expense was lower in 2000 due to the Corporation's
lower average stock price during the period. State franchise taxes decreased
$45,000, or 15.8%. The Association pays franchise taxes on a calendar-year basis
based on its net worth at June 30 of the preceding year. The lower capital
levels at the Association at June 30, 1999, after the large dividend paid to
Peoples prior to June 30, 1999, resulted in lower franchise taxes beginning
January 1, 2000. Other expenses declined $64,000, or 14.3%, due to costs such as
advertising and supplies incurred in 1999 associated with the opening of two new
branches, which were not repeated in 2000, along with lower professional fees.
--------------------------------------------------------------------------------
(Continued)
11
<PAGE>
Income Tax Expense. The volatility of income tax expense is primarily
attributable to the change in income before income taxes. Income tax expense
totaled $378,000 for the year ended June 30, 2000 compared to $354,000 for the
year ended June 30, 1999, an increase of $24,000, or 6.9%. The effective tax
rates were 37.3% and 40.9% for the years ended June 30, 2000 and 1999,
respectively. The decrease in the effective tax rate primarily relates to the
Corporation's stock-based benefit plans and their relative tax impact resulting
from higher pretax earnings, combined with the Corporation's lower average stock
price in fiscal 2000.
Comparison of Results of Operations for the
Year Ended June 30, 1999 and June 30, 1998
Net Income. The Corporation earned net income of $510,000 for the year ended
June 30, 1999 compared to net income of $1,233,000 for the year ended June 30,
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 $3,752,000 for the year ended
June 30, 1999 compared to $4,123,000 for the year ended June 30, 1998, a
decrease of $371,000, or 9.0%. The decrease was the result of additional
interest paid on borrowed funds.
Interest and fees on loans increased $234,000, or 3.1%, from $7,463,000 for the
year ended June 30, 1998 to $7,697,000 for the year ended June 30, 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. The increase in interest and fees on loans due to
volume was partially offset by a decline in the yield earned on loans, which
dropped from 8.09% for 1998 to 7.88% for 1999.
Interest earned on securities totaled $229,000 for the year ended June 30, 1999
compared to $252,000 for the year ended June 30, 1998. Interest on
interest-bearing demand, time and overnight deposits with other financial
institutions decreased $177,000 for the year ended June 30, 1999 compared to the
year ended June 30, 1998. The decreases were the result of lower average
balances of securities and interest-bearing deposits and decreases in the
average yields 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.
Interest paid on deposits decreased $55,000 for the year ended June 30, 1999
compared to the year ended June 30, 1998. The average balance for all
interest-bearing deposits increased and the mix of the deposit portfolio shifted
slightly from certificates of deposit to transaction accounts. The average cost
of deposits decreased from 5.06% for the year ended June 30, 1998 to 4.80% for
the year ended June 30, 1999. The decrease in the average cost of funds more
than offset the increase in volume.
Interest paid on borrowed funds totaled $470,000 for the year ended June 30,
1999 compared to $6,000 for the year ended June 30, 1998. The Corporation did
not borrow funds during 1998 until June 25, 1998 to fund the return of capital
discussed previously. Management borrowed short- and long-term funds from the
FHLB throughout 1999 to fund loan growth and leverage some of the Corporation's
excess capital.
Provision for Loan Losses. The provision for loan losses for the year ended June
30, 1999 totaled $104,000 compared to $41,000 for the year ended June 30, 1998,
an increase of $63,000, or 151.7%. The allowance for loan losses totaled
$529,000, or 0.50% of gross loans receivable and 70.0% of total nonperforming
loans at June 30, 1999, compared with $426,000, or 0.44% of gross loans
receivable and 44.4% of total nonperforming loans at June 30, 1998.
--------------------------------------------------------------------------------
(Continued)
12
<PAGE>
Noninterest income. Noninterest income includes service fees and other
miscellaneous income and totaled $89,000 for the year ended June 30, 1999
compared to $63,000 for the year ended June 30, 1998. The primary reasons for
the increase were higher late charge income and service charges on NOW accounts
due to the increase in the number of accounts.
Noninterest expense. Noninterest expense totaled $2,872,000 for the year ended
June 30, 1999 compared to $2,205,000 for the year ended June 30, 1998, an
increase of $667,000 or 30.3%. The increase is primarily related to compensation
and benefits, occupancy expenses and state franchise taxes.
Compensation and benefits expense increased $409,000, or 37.5%. The increase is
the result of normal, annual merit increases, the addition of employees for the
two new branches and the added expense of the MRP, which began in May 1998.
Compensation expense related to the MRP was $187,000 and $20,000 for the years
ended June 30, 1999 and 1998. Occupancy and equipment expense increased
$128,000, or 82.0%, due to the added costs of the two new branch offices. State
franchise taxes increased $70,000, or 32.7%, due to being taxed at higher
capital levels at the Association for a full year for 1999. 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 $354,000 for the year ended June 30, 1999 compared to $706,000 for the
year ended June 30, 1998, a decrease of $352,000, or 49.9%. The effective tax
rates were 40.9% and 36.4% for the years ended June 30, 1999 and 1998,
respectively. The increase in the effective tax rate primarily relates to the
Corporation's stock-based benefit plans and their relative tax impact resulting
from lower pretax earnings.
--------------------------------------------------------------------------------
13
<PAGE>
Yields Earned and Rates Paid. The following table sets forth certain information
relating to the Corporation's average balance sheet and reflects the average
yield on interest-earning assets and the average cost of interest-bearing
liabilities for the periods indicated. Such yields and costs are derived by
dividing income or expense by the average balances of interest-earning assets or
interest-bearing liabilities, respectively, for the periods presented. Average
balances are derived from average daily balances. Nonaccruing loans have been
included in the table as loans carrying a zero yield.
<TABLE>
<CAPTION>
Year ended June 30,
-------------------------------------------------------------------------------------------------------
2000 1999 1998
---------------------------------- --------------------------------- ----------------------------------
Average Interest Average Interest Average Interest
outstanding earned/ Yield/ outstanding earned/ Yield/ outstanding earned/ Yield/
balance paid rate balance paid rate balance paid rate
------- ---- ---- ------- ---- ---- ------- ---- ----
(Dollars in thousands)
ASSETS:
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Interest-earning
deposits $ 2,203 $ 78 3.53% $ 2,853 $ 117 4.10% $ 5,919 $ 295 4.98%
Securities available
for sale (1) 8,344 577 6.76 3,635 229 6.31 3,013 199 6.65
Securities held to
maturity -- -- -- -- -- -- 958 53 5.53
Loans (2) 109,030 8,434 7.74 97,702 7,697 7.88 92,208 7,463 8.09
FHLB stock 942 67 7.16 870 62 7.13 789 57 7.22
--------- ------- --------- ------- --------- -------
Total interest-
earning assets 120,519 9,156 7.59 105,060 8,105 7.72 102,887 8,067 7.84
--------- ------- --------- ------- --------- -------
Noninterest-earning
assets:
Cash and due from
banks 1,257 725 536
Premises and
equipment, net 1,947 1,809 817
Accrued interest and
other assets 1,006 950 920
--------- --------- ---------
Total noninterest-
earning assets 4,210 3,484 2,273
--------- --------- ---------
Total assets $ 124,729 $ 108,544 $ 105,160
========= ========= =========
</TABLE>
--------------------------------------------------------------------------------
(Continued)
14
<PAGE>
<TABLE>
<CAPTION>
Year ended June 30,
-----------------------------------------------------------------------------------------------------
2000 1999 1998
--------------------------------- -------------------------------- ----------------------------------
Average Interest Average Interest Average Interest
outstanding earned/ Yield/ outstanding earned/ Yield/ outstanding earned/ Yield/
balance paid rate balance paid rate balance paid rate
------- ---- ---- ------- ---- ---- ------- ---- ----
(Dollars in thousands)
LIABILITIES AND SHAREHOLDERS' EQUITY:
Interest-bearing
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
liabilities:
Savings deposits $ 18,738 $ 572 3.05% $ 18,939 $ 571 3.01% $ 18,236 $ 557 3.05%
Demand and NOW
deposits 6,719 189 2.81 5,591 152 2.72 3,911 95 2.43
Certificate accounts 63,078 3,539 5.61 56,415 3,160 5.60 55,737 3,286 5.90
---------- -------- ---------- -------- -------- -------
Total deposits 88,535 4,300 4.86 80,945 3,883 4.80 77,884 3,938 5.06
Borrowed funds 17,603 1,076 6.11 7,764 470 6.05 96 6 6.25
---------- -------- ---------- -------- -------- -------
Total interest-
bearing liabilities 106,138 5,376 5.07 88,709 4,353 4.91 77,980 3,944 5.06
---------- -------- ---------- -------- -------- -------
Noninterest-bearing
liabilities
Demand deposits 691 440 493
Accrued interest
payable and other
liabilities 722 681 825
---------- ---------- --------
Total noninterest-
bearing liabilities 1,413 1,121 1,318
---------- ---------- --------
Total liabilities 107,551 89,830 79,298
Total shareholders'
equity 17,178 18,714 25,862
---------- ---------- --------
Total liabilities and
shareholders' equity $ 124,729 $ 108,544 $105,160
========== ========== ========
Net interest income;
interest rate
spread (3) $ 3,780 2.52% $ 3,752 2.81% $ 4,123 2.78%
======== ===== ======== ===== ======= =====
Net earning assets $ 14,381 $ 16,351 $ 24,907
========== ========== ========
Net interest margin (4) 3.13% 3.57% 4.01%
===== ===== =====
Average interest-earning
assets to interest-
bearing liabilities 1.14x 1.18x 1.32x
========== ========== ========
</TABLE>
(1) Average balance includes unrealized gains and losses while yield is based
on amortized cost.
(2) Calculated net of deferred loan fees, loan discounts, loans in process and
allowance for loan losses and includes nonperforming loans.
(3) Net interest rate spread represents the difference between the yield on
interest-earning assets and the cost of interest-bearing liabilities.
(4) Net interest margin represents net interest income divided by average
interest-earning assets.
--------------------------------------------------------------------------------
(Continued)
15
<PAGE>
The table below describes the extent to which changes in interest rates and
changes in volume of interest-earning assets and interest-bearing liabilities
have affected the Corporation's interest income and expense during the years
indicated. For each category of interest-earning assets and interest-bearing
liabilities, information is provided on changes attributable to (1) changes in
volume (multiplied by prior year rate), (2) changes in rate (multiplied by prior
year volume) and (3) total changes in rate and volume. The combined effects of
changes in both volume and rate, that are not separately identified, have been
allocated proportionately to the change due to volume and change due to rate:
<TABLE>
<CAPTION>
Year ended June 30,
-----------------------------------------------------------------
2000 vs. 1999 1999 vs. 1998
------------------------------- -------------------------------
Increase Increase
(decrease) (decrease)
due to due to
-------------------- -----------------
Volume Rate Total Volume Rate Total
------ ---- ----- ------ ---- -----
(In thousands)
Interest income attributable to:
<S> <C> <C> <C> <C> <C> <C>
Interest-earning deposits $ (24) $ (15) $ (39) $ (133) $ (45) $ (178)
Securities available for sale 331 17 348 39 (9) 30
Securities held to maturity -- -- -- (53) -- (53)
Loans receivable 878 (141) 737 436 (202) 234
FHLB stock 5 -- 5 6 (1) 5
--------- -------- --------- ------- -------- -------
Total interest-earning assets $ 1,190 $ (139) 1,051 $ 295 $ (257) 38
========= ======== --------- ======= ======== -------
Interest expense attributable to:
Savings deposits $ (6) $ 7 1 $ 21 $ (7) 14
Demand and NOW deposits 32 5 37 37 20 57
Certificates accounts 374 5 379 40 (166) (126)
Borrowed funds 601 5 606 464 -- 464
--------- -------- --------- ------- -------- -------
Total interest-bearing liabilities $ 1,001 $ 22 1,023 $ 562 $ (153) 409
========= ======== --------- ======= ======== -------
Net interest income $ 28 $ (371)
========= =======
</TABLE>
Asset and Liability Management
The Association, like other financial institutions, is subject to interest rate
risk to the extent that its interest-earning assets reprice differently than its
interest-bearing liabilities. As part of its effort to monitor and manage
interest rate risk, the Association uses the "net portfolio value" ("NPV")
methodology adopted by the OTS as part of its capital regulations. Although the
Association is not currently subject to NPV regulation because such regulation
does not apply to institutions with less than $300 million in assets and
risk-based capital in excess of 12%, application of NPV methodology may
illustrate the Association's interest rate risk.
Generally, NPV is the discounted present value of the difference between
incoming cash flows on interest-earning and other assets and outgoing cash flows
on interest-bearing and other liabilities. The application of the methodology
attempts to quantify interest rate risk as the change in the NPV that would
result from a theoretical 200 basis point (1 basis point equals 0.01%) change in
market interest rates. Both a 200 basis point increase in market interest rates
and a 200 basis point decrease in market interest rates are considered. If the
NPV would decrease by more than 2% of the present value of the institution's
assets with either an increase or a decrease in market rates, the institution
must deduct 50% of the amount of decrease in excess of such 2% in the
calculation of the institution's risk-based capital.
At March 31, 2000, the most recent date with available data, 2% of the present
value of the Association's assets was $2,459,000. Because the interest rate risk
of a 200 basis point increase in market interest rates (which was greater than
the interest rate risk of a 200 basis point decrease) was $3,509,000 at March
31, 2000, the Association would
--------------------------------------------------------------------------------
(Continued)
16
<PAGE>
have been required to make additional deductions from its capital of $525,000 in
determining whether the Association met its risk-based capital requirement. Even
with the deduction, the Association would have still exceeded its risk-based
capital requirement by more than $7.4 million.
Presented below, as of March 31, 2000, is an analysis of the Association's
interest-rate risk as measured by changes in the NPV for instantaneous and
sustained parallel shifts of 100 basis points in market interest rates. The
table below represents the new Thrift Bulletin 13a reporting requirements and
the new target limits set by the Association. As illustrated in the table, the
Association is more sensitive to increasing rates than declining rates. This is
the result of increases in interest rates by over 1% since July 1999 and the
movement of capital from the Association to Peoples, which not only lowered
capital of the Association, but also increased deposit liabilities. The
shortening of terms of certificates of deposit by Association customers also
contributed to the interest-rate sensitivity to rising interest rates. As a way
to reduce this risk, the Board of Directors and management are looking at ways
to restructure borrowings at the Federal Home Loan Bank by extending maturities
through longer-term advances and by matching longer-term advances to the
origination of fixed-rate mortgages. The Board of Directors and management also
discussed potentially offering 48- to 60-month certificates of deposit specials
as a way to lengthen the deposit liabilities as the Association continues to
have a larger percentage of 1- ,3- and 5-year adjustable-rate mortgages than it
does fixed-rate mortgages. Since the NPV ratio at the 400 basis point increasing
interest rate scenario exceeds the Board of Director limit, management and the
Board of Directors have also agreed to look at the possibility and effects of
selling longer-term mortgage loans as another way to shorten asset maturities
and avoid additional borrowings. While these options are being considered, they
must be looked at in conjunction with their effect on the net interest income
since the Association continues to have a strong shareholders' equity position
overall. Although exceeding any limit is critical to interest rate risk, the
Board of Directors and management do not consider it imperative that wholesale
changes be made immediately for exceeding the 400 basis point limit at this
time.
Target Limit
Economic Value NPV Ratio Under Asset
-------------- --------- Liability
Change Market Value Market Value MVE/ Management
In Rates Equity Assets MVTA Policy
-------- ------------ ------------ --------- ------------
+400 $ 2,886 $ 106,996 2.70% 4%
+300 4,557 110,719 4.12 4
+200 6,391 114,722 5.57 4
+100 8,186 118,813 6.89 4
STATIC 9,900 122,961 8.05
-100 10,704 126,348 8.47 4
-200 10,728 129,120 8.31 4
-300 8,849 130,167 6.80 4
-400 7,236 131,169 5.52 4
As with any method of measuring interest rate risk, certain shortcomings are
inherent in the NPV approach. For example, although certain assets and
liabilities may have similar maturities or periods of repricing, they may react
in different degrees to changes in market interest rates. Also, the interest
rates on certain types of assets and liabilities may fluctuate in advance of
changes in market interest rates, while interest rates on other types may lag
behind changes in market rates. Further, in the event of a change in interest
rates, expected rates of prepayment on loans and mortgage-backed securities and
early withdrawal levels from certificates of deposit would likely deviate
significantly from those assumed in making risk calculations.
Liquidity and Capital Resources
The Corporation's liquidity, primarily represented by cash and cash equivalents,
is a result of its operating, investing and financing activities. These
activities are summarized below for the years ended June 30, 2000, 1999 and
1998.
<TABLE>
<CAPTION>
Year Ended June 30,
------------------------------------------------
2000 1999 1998
------------- ------------ ------------
<S> <C> <C> <C>
Net income $ 636 $ 510 $ 1,233
Adjustments to reconcile net income to net
cash from operating activities 355 824 83
------------- ------------ ------------
Net cash from operating activities 991 1,334 1,316
Net cash from investing activities (12,372) (14,237) (602)
Net cash from financing activities 11,654 9,889 1,437
------------- ------------ ------------
Net change in cash and cash equivalents 273 (3,014) 2,151
Cash and cash equivalents at beginning of period 1,933 4,947 2,796
------------- ------------ ------------
Cash and cash equivalents at end of period $ 2,206 $ 1,933 $ 4,947
============= ============ ============
</TABLE>
The Corporation's principal sources of funds are deposits, loan repayments,
maturities of securities and other funds provided by operations. The Corporation
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 Corporation maintains investments in liquid
assets based upon 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 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 June 30, 2000, the Association's regulatory liquidity was 10.6%. At
such date, the Corporation had commitments to originate fixed-rate residential
real estate loans totaling $15,000, and variable-rate residential real estate
mortgage loans totaling $879,000. 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 14 of the Notes to
Consolidated Financial Statements.
The Association is subject to various regulatory capital requirements
administered by the federal regulatory agencies. Under capital adequacy
guidelines and the regulatory framework for prompt corrective action, the
Association must meet specific capital guidelines that involve 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
the regulators about the Association's components, risk weightings and other
factors. Failure to meet minimum capital requirements can initiate certain
mandatory actions that, if undertaken, could have a direct material effect on
the Corporation's financial statements. At June 30, 2000 and 1999, management
believes 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 Federal Deposit Insurance Act at June
30, 2000 and 1999. No conditions or events have occurred subsequent to the last
notification by regulators that management believes would have changed the
Association's category.
--------------------------------------------------------------------------------
(Continued)
18
<PAGE>
The following table summarizes the Association's minimum regulatory capital
requirements and actual capital at June 30, 2000.
<TABLE>
<CAPTION>
Excess of Actual
Capital Over Current
Actual capital Current requirement Requirement
---------------------- ----------------------- ---------------------- Applicable
Amount Percent Amount Percent Amount Percent Asset Total
------ ------- ------ ------- ------ ------- -----------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Total risk-based
capital $ 14,773 17.2% $ 6,858 8.0% $ 7,915 9.2% $ 85,724
Tier 1 risk-based
capital 14,183 16.5 3,429 4.0 10,754 12.5 85,724
Core capital 14,183 10.9 5,183 4.0 9,000 6.9 129,582
Tangible capital 14,183 10.9 1,944 1.5 12,239 9.4 129,582
</TABLE>
Impact of New Accounting Standards
Statement of Financial Accounting Standards (SFAS) No. 133, "Accounting for
Derivative Instruments and Hedging Activities" - 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. SFAS 133, as amended by SFAS 137, is effective for
fiscal years beginning after June 15, 2000 with early adoption encouraged for
any fiscal quarter beginning July 1, 1998 or later, with no retroactive
application. Management does not expect the adoption SFAS 133 to have a
significant impact on the Corporation's financial statements.
Impact of Inflation and Changing Prices
The Consolidated Financial Statements and Notes included herein have been
prepared in accordance with generally accepted accounting principles ("GAAP").
Presently, GAAP requires the Corporation to measure financial position and
operating results primarily in terms of historic dollars. Changes in the
relative value of money due to inflation or recession are generally not
considered.
In management's opinion, changes in interest rates affect the financial
condition of a financial institution to a far greater degree than changes in the
inflation rate. While interest rates are greatly influenced by changes in the
inflation rate, they do not change at the same rate or in the same magnitude as
the inflation rate. Rather, interest rate volatility is based on changes in the
expected rate of inflation, as well as on changes in monetary and fiscal
policies.
Year 2000
The Corporation experienced no problems in their computer application systems,
nor has management been made aware of any system problems of the Corporation's
major customers and vendors, related to Year 2000 issues. In addition, the
Corporation did not experience unusual deposit withdrawals related to the Year
2000. The Corporation does not anticipate any additional significant expenses in
regards to Year 2000 issues.
--------------------------------------------------------------------------------
(Continued)
19
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Board of Directors and Shareholders
Peoples-Sidney Financial Corporation
Sidney, Ohio
We have audited the accompanying consolidated balance sheets of Peoples-Sidney
Financial Corporation as of June 30, 2000 and 1999, and the related consolidated
statements of income, changes in shareholders' equity and cash flows for each of
the three years in the period ended June 30, 2000. These financial statements
are the responsibility of the Corporation's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Peoples-Sidney
Financial Corporation as of June 30, 2000 and 1999, and the results of its
operations and its cash flows for each of the three years in the period ended
June 30, 2000, in conformity with generally accepted accounting principles.
Crowe, Chizek and Company LLP
Columbus, Ohio
July 14, 2000
--------------------------------------------------------------------------------
(Continued)
20
<PAGE>
PEOPLES-SIDNEY FINANCIAL CORPORATION
CONSOLIDATED BALANCE SHEETS
June 30, 2000 and 1999
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
2000 1999
---- ----
ASSETS
<S> <C> <C>
Cash and due from financial institutions $ 820,629 $ 1,298,357
Interest-bearing deposits in other financial institutions 885,364 634,621
Overnight deposits 500,000 --
--------------- ----------------
Total cash and cash equivalents 2,205,993 1,932,978
Time deposits in other financial institutions -- 400,000
Securities available for sale 8,446,681 7,858,111
Federal Home Loan Bank stock 1,023,000 907,700
Loans, net 114,649,700 102,802,845
Accrued interest receivable 893,569 759,913
Premises and equipment, net 1,890,886 1,985,608
Other assets 177,387 235,104
--------------- ----------------
Total assets $ 129,287,216 $ 116,882,259
=============== ================
LIABILITIES
Deposits $ 93,056,941 $ 84,310,492
Borrowed funds 19,000,000 14,800,000
Accrued interest payable and other liabilities 270,477 409,550
--------------- ----------------
Total liabilities 112,327,418 99,520,042
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 10,754,463 10,779,941
Retained earnings 10,856,394 10,643,040
Treasury stock, 207,060 and 120,753 shares at cost (2,636,295) (1,766,399)
Unearned employee stock ownership plan shares (1,347,800) (1,520,139)
Unearned management recognition plan shares (556,043) (746,692)
Accumulated other comprehensive income (loss) (128,775) (45,388)
--------------- ----------------
Total shareholders' equity 16,959,798 17,362,217
--------------- ----------------
Total liabilities and shareholders' equity $ 129,287,216 $ 116,882,259
=============== ================
</TABLE>
--------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
21
<PAGE>
PEOPLES-SIDNEY FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
Years Ended June 30, 2000, 1999 and 1998
<TABLE>
<CAPTION>
2000 1999 1998
---- ---- ----
Interest income
<S> <C> <C> <C>
Loans, including fees $ 8,434,123 $ 7,697,298 $ 7,463,234
Securities 577,292 228,786 252,271
Demand, time and overnight deposits 77,798 117,218 294,440
Dividends on Federal Home Loan Bank stock 67,490 61,386 57,204
-------------- -------------- ---------------
Total interest income 9,156,703 8,104,688 8,067,149
Interest expense
Deposits 4,299,957 3,883,143 3,938,606
Borrowed funds 1,076,346 469,997 5,878
-------------- -------------- ---------------
Total interest expense 5,376,303 4,353,140 3,944,484
-------------- -------------- ---------------
Net interest income 3,780,400 3,751,548 4,122,665
Provision for loan losses 61,503 103,803 41,240
-------------- -------------- ---------------
Net interest income after provision for loan losses 3,718,897 3,647,745 4,081,425
Noninterest income
Service fees and other charges 98,325 88,729 62,912
Loss on sale of available for sale securities (15,781) -- --
-------------- -------------- ---------------
Total noninterest income 82,544 88,729 62,912
Noninterest expense
Compensation and benefits 1,490,680 1,499,573 1,090,237
Director fees 120,000 120,000 129,000
Occupancy and equipment 312,827 285,073 156,676
Computer processing expense 204,123 185,542 156,470
FDIC deposit insurance premiums 34,490 47,627 49,096
State franchise taxes 239,118 283,863 213,864
Other 386,208 450,555 409,197
-------------- -------------- ---------------
Total noninterest expense 2,787,446 2,872,233 2,204,540
-------------- -------------- ---------------
Income before income taxes 1,013,995 864,241 1,939,797
Income tax expense 378,397 353,865 706,488
-------------- -------------- ---------------
Net income $ 635,598 $ 510,376 $ 1,233,309
============== ============== ===============
Earnings per common share - basic $ .43 $ .32 $ .74
============== ============== ==============
Earnings per common share - diluted $ .43 $ .32 $ .74
============== ============== ==============
</TABLE>
--------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
22
<PAGE>
PEOPLES-SIDNEY FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
Years Ended June 30, 2000, 1999 and 1998
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Additional
Common Paid-In Retained Treasury
Stock Capital Earnings Stock
----- ------- -------- -----
<S> <C> <C> <C> <C>
Balance, July 1, 1997 $ 17,854 $ 17,234,087 $ 9,776,982 $ --
Comprehensive income:
Net income for the year ended
June 30, 1998 -- -- 1,233,309 --
Change in net unrealized gain (loss) on
securities available for sale, net of
reclassification and tax effects -- -- -- --
Total comprehensive income
Cash dividends - $.26 per share -- -- (429,195) --
$4.00 per share special dividend of
which $3.99 was a return of capital
distribution -- (6,602,996) -- --
Commitment to release 13,920 employee
stock ownership plan shares -- 86,900 -- --
---------- ---------------- --------------- ------------
Balance, June 30, 1998 $ 17,854 $ 10,717,991 $ 10,581,096 $ --
========== ================ =============== ============
<CAPTION>
Accumulated
Unearned Unearned Other
ESOP MRP Comprehensive
Shares Shares Income Total
------ ------ ------ -----
<S> <C> <C> <C> <C>
Balance, July 1, 1997 $ (1,326,280) $ -- $ 9,070 $ 25,711,713
Comprehensive income:
Net income for the year ended
June 30, 1998 -- -- -- 1,233,309
Change in net unrealized gain (loss) on
securities available for sale, net of
reclassification and tax effects -- -- 2,119 2,119
-------------
Total comprehensive income 1,235,428
Cash dividends - $.26 per share -- -- -- (429,195)
$4.00 per share special dividend of
which $3.99 was a return of capital
distribution (538,504) -- -- (7,141,500)
Commitment to release 13,920 employee
stock ownership plan shares 162,670 -- -- 249,570
------------- ----------- ------------ -------------
Balance, June 30, 1998 $ (1,702,114) $ -- $ 11,189 $ 19,626,016
============= =========== ============ =============
</TABLE>
--------------------------------------------------------------------------------
(Continued)
23
<PAGE>
PEOPLES-SIDNEY FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
Years Ended June 30, 2000, 1999 and 1998
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Additional
Common Paid-In Retained Treasury
Stock Capital Earnings Stock
----- ------- -------- -----
<S> <C> <C> <C> <C>
Balance, July 1, 1998 $ 17,854 $ 10,717,991 $ 10,581,096 $ --
Comprehensive income:
Net income for the year ended
June 30, 1999 -- -- 510,376 --
Change in unrealized gain (loss) on
securities available for sale, net of
reclassification and tax effects -- -- -- --
Total comprehensive income
Cash dividends - $.28 per share -- -- (448,432) --
Commitment to release 15,248 employee
stock ownership plan shares -- 61,950 -- --
Purchase of 177,881 treasury shares,
at cost -- -- -- (2,719,692)
Transfer of 57,128 shares from treasury
stock to management recognition plan -- -- -- 953,293
12,378 shares earned under
management recognition plan -- -- -- --
---------- --------------- --------------- -------------
Balance, June 30, 1999 $ 17,854 $ 10,779,941 $ 10,643,040 $ (1,766,399)
========== =============== =============== =============
<CAPTION>
Accumulated
Unearned Unearned Other
ESOP MRP Comprehensive
Shares Shares Income (Loss) Total
------ ------ ------------- -----
<S> <C> <C> <C> <C>
Balance, July 1, 1998 $ (1,702,114) $ -- $ 11,189 $ 19,626,016
Comprehensive income:
Net income for the year ended
June 30, 1999 -- -- -- 510,376
Change in unrealized gain (loss) on
securities available for sale, net of
reclassification and tax effects -- -- (56,577) (56,577)
-------------
Total comprehensive income 453,799
Cash dividends - $.28 per share -- -- -- (448,432)
Commitment to release 15,248 employee
stock ownership plan shares 181,975 -- -- 243,925
Purchase of 177,881 treasury shares,
at cost -- -- -- (2,719,692)
Transfer of 57,128 shares from treasury
stock to management recognition plan -- (953,293) -- --
12,378 shares earned under
management recognition plan -- 206,601 -- 206,601
-------------- ----------- ------------ -------------
Balance, June 30, 1999 $ (1,520,139) $ (746,692) $ (45,388) $ 17,362,217
============== =========== ============ =============
</TABLE>
--------------------------------------------------------------------------------
(Continued)
24
<PAGE>
PEOPLES-SIDNEY FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
Years Ended June 30, 2000, 1999 and 1998
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Additional Unearned
Common Paid-In Retained Treasury ESOP
Stock Capital Earnings Stock Shares
----- ------- -------- ----- ------
<S> <C> <C> <C> <C> <C>
Balance, July 1, 1999 $ 17,854 $ 10,779,941 $ 10,643,040 $ (1,766,399) $ (1,520,139)
Comprehensive income:
Net income for the year ended
June 30, 2000 -- -- 635,598 -- --
Change in unrealized gain (loss) on
securities available for sale, net of
reclassification and tax effects -- -- -- -- --
Total comprehensive income
Cash dividends - $.28 per share -- -- (422,244) -- --
Commitment to release 14,687 employee
stock ownership plan shares -- (25,478) -- -- 172,339
Purchase of 86,307 treasury shares,
at cost -- -- -- (869,896) --
11,425 shares earned under
management recognition plan -- -- -- -- --
---------- -------------- -------------- ------------- -------------
Balance, June 30, 2000 $ 17,854 $ 10,754,463 $ 10,856,394 $ (2,636,295) $ (1,347,800)
========== ============== ============== ============= =============
<CAPTION>
Accumulated
Unearned Other
MRP Comprehensive
Shares Income (Loss) Total
------ ------------- -----
<S> <C> <C> <C>
Balance, July 1, 1999 $ (746,692) $ (45,388) $ 17,362,217
Comprehensive income:
Net income for the year ended
June 30, 2000 -- -- 635,598
Change in unrealized gain (loss) on
securities available for sale, net of
reclassification and tax effects -- (83,387) (83,387)
------------
Total comprehensive income 552,211
Cash dividends - $.28 per share -- -- (422,244)
Commitment to release 14,687 employee
stock ownership plan shares -- -- 146,861
Purchase of 86,307 treasury shares,
at cost -- -- (869,896)
11,425 shares earned under
management recognition plan 190,649 -- 190,649
----------- ------------ ------------
Balance, June 30, 2000 $ (556,043) $ (128,775) $ 16,959,798
=========== ============ ============
</TABLE>
--------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
25
<PAGE>
PEOPLES-SIDNEY FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended June 30, 2000, 1999 and 1998
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
2000 1999 1998
---- ---- ----
Cash flows from operating activities
<S> <C> <C> <C>
Net income $ 635,598 $ 510,376 $ 1,233,309
Adjustments to reconcile net income to net cash
from operating activities
Depreciation 156,886 124,252 51,399
Provision for loan losses 61,503 103,803 41,240
Gain on sale of real estate owned -- (3,086) --
Loss on sale of securities available for sale 15,781 -- --
FHLB stock dividends (67,300) (61,200) (57,000)
Deferred taxes (29,183) (56,025) (1,101)
Compensation expense for ESOP shares 146,861 243,925 249,570
Compensation expense for MRP shares 190,649 186,601 --
Change in:
Accrued interest receivable and other assets (75,939) (28,444) (212,755)
Accrued interest payable and other liabilities (71,249) 291,106 (25,707)
Deferred loan fees 27,339 22,600 37,183
------------ ------------ ------------
Net cash from operating activities 990,946 1,333,908 1,316,138
Cash flows from investing activities
Purchase of securities available for sale (2,997,813) (7,926,777) (2,499,141)
Proceeds from maturities of securities
available for sale 1,000,000 4,000,000 500,000
Principal repayments on mortgage-
backed securities available for sale 287,215 -- --
Proceeds from sale of securities
available for sale 984,219 -- --
Proceeds from maturities of securities
held to maturity -- -- 2,000,000
Purchase of time deposits in other financial
institutions (1,000,000) (900,000) (3,100,000)
Proceeds from maturities of time deposits
in other financial institutions 1,400,000 600,000 8,000,000
Purchase of Federal Home Loan Bank stock (48,000) -- (27,000)
Net increase in loans (11,935,697) (8,939,161) (5,206,615)
Premises and equipment expenditures (62,164) (1,136,457) (269,516)
Proceeds from sale of real estate owned -- 65,530 --
------------ ------------ ------------
Net cash from investing activities (12,372,240) (14,236,865) (602,272)
</TABLE>
--------------------------------------------------------------------------------
(Continued)
26
<PAGE>
PEOPLES-SIDNEY FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended June 30, 2000, 1999 and 1998
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
2000 1999 1998
---- ---- ----
Cash flows from financing activities
<S> <C> <C> <C>
Net change in deposits $ 8,746,449 $ 5,256,806 $ 2,008,256
Proceeds from long-term borrowings 7,000,000 5,000,000 7,000,000
Net change in short-term borrowings (2,800,000) 2,800,000 --
Return of capital distribution -- -- (7,141,500)
Cash dividends paid (422,244) (448,432) (429,195)
Purchase of treasury shares (869,896) (2,719,692) --
-------------- -------------- ---------------
Net cash from financing activities 11,654,309 9,888,682 1,437,561
-------------- -------------- ---------------
Net change in cash and cash equivalents 273,015 (3,014,275) 2,151,427
Cash and cash equivalents at beginning of year 1,932,978 4,947,253 2,795,826
-------------- -------------- ---------------
Cash and cash equivalents at end of year $ 2,205,993 $ 1,932,978 $ 4,947,253
============== ============== ===============
Supplemental disclosures of cash flow information
Cash paid during the year for
Interest $ 5,385,712 $ 4,343,587 $ 3,946,041
Income taxes 448,000 191,000 951,000
Noncash transactions
Transfer from loans to real estate owned -- 62,444 --
Transfer of treasury stock to MRP -- 953,293 --
</TABLE>
--------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
27
<PAGE>
PEOPLES-SIDNEY FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2000, 1999 and 1998
--------------------------------------------------------------------------------
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation: The consolidated financial statements include the
accounts of Peoples-Sidney Financial Corporation ("Peoples") and its
wholly-owned subsidiary, Peoples Federal Savings and Loan Association (the
"Association"), a federal stock savings and loan association, together referred
to as the Corporation. All significant intercompany accounts and transactions
have been eliminated in consolidation.
Nature of Operations: The Corporation provides financial services through its
main office in Sidney, Ohio, and branch offices in Anna and Jackson Center,
Ohio. Its primary deposit products are checking, savings and term certificate
accounts, and its primary lending products are residential mortgage, commercial
and installment loans. Substantially all loans are secured by specific items of
collateral including business assets, consumer assets and real estate.
Commercial loans are expected to be repaid from cash flow from operations of
businesses. Real estate loans are secured by both residential and commercial
real estate. Substantially all revenues and services are derived from financial
institution products and services in Shelby County and contiguous counties.
Management considers the Corporation to operate primarily in one segment,
banking.
Use of Estimates: 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 the 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.
Cash Flows: Cash and cash equivalents are defined as cash, deposits with
financial institutions, overnight deposits and time deposits with original
maturities of 90 days or less. Overnight deposits are sold for one-day periods.
Net cash flows are reported for customer loan and deposit transactions, as well
as short-term borrowings under its cash management line of credit with the
Federal Home Loan Bank of Cincinnati.
Securities: Securities are classified as held to maturity and carried at
amortized cost when management has the positive intent and ability to hold them
to maturity. Securities are classified as available for sale when they might be
sold before maturity. Securities available for sale are carried at fair value,
with unrealized holding gains or losses reported in other comprehensive income.
Other securities such as Federal Home Loan Bank stock are carried at cost.
Interest income includes amortization of premiums and accretion of discounts.
Realized gains and losses on sales of securities are determined using the
amortized cost of the specific security sold. Securities are written down to
fair value when a decline in fair value is not temporary.
Loans: Loans that management has the intent and ability to hold for the
foreseeable future or until maturity or payoff are reported at the principal
balance outstanding, less net deferred loan fees, loans in process and the
allowance for loan losses.
Interest income is reported on the interest method and includes amortization of
net deferred loan fees over the loan term. Interest income is not reported when
full loan repayment is in doubt, typically when the loan is impaired or payments
are past due over 90 days. Payments received on such loans are reported as
principal reductions.
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Allowance for Loan Losses: The allowance for loan losses is a valuation
allowance for probable credit losses, increased by the provision for loan losses
and decreased by charge-offs less recoveries. Management estimates the allowance
balance required based on past loan loss experience, known and inherent risks in
the nature and volume of the portfolio, information about specific borrower
situations and estimated collateral values, economic conditions,
--------------------------------------------------------------------------------
(Continued)
28
<PAGE>
PEOPLES-SIDNEY FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2000, 1999 and 1998
--------------------------------------------------------------------------------
and other factors. Allocations of the allowance may be made for specific loans,
but the entire allowance is available for any loan that, in management's
judgment, should be charged-off.
A loan is impaired when full payment under the loan terms is not expected.
Impairment is evaluated in total for smaller-balance loans of similar nature
such as first mortgage loans secured by one- to four-family residences,
residential construction loans, automobile, home equity and second mortgage
loans. Commercial loans and mortgage loans secured by other properties are
evaluated individually for impairment. If a loan is impaired, a portion of the
allowance for loan losses is allocated so that the loan is reported net, at the
present value of estimated future cash flows using the loan's existing rate or
at the fair value of collateral if repayment is expected solely from the
collateral.
Foreclosed Assets: Assets acquired through or instead of loan foreclosure are
initially recorded at fair value at acquisition, establishing a new cost basis.
Any reduction to fair value from the carrying value of the related loan at the
time the property is acquired is accounted for as a loan charge-off. After
acquisition, a valuation allowance reduces the reported amount to the lower of
the initial amount or fair value less costs to sell. Expenses, gains and losses
on disposition, and changes in the valuation allowance are reported in net gain
or loss on other real estate. The Corporation had no real estate owned at
year-end 2000 or 1999.
Premises and Equipment: Asset cost is reported net of accumulated depreciation.
Depreciation expense is calculated using the straight-line method based on the
estimated useful lives of the assets. These assets are reviewed for impairment
when events indicate the carrying amount may not be recoverable. Maintenance and
repairs are charged to expense as incurred and improvements are capitalized.
Stock Compensation: Employee compensation expense under stock option plans is
reported if options are granted below market price at grant date. Pro forma
disclosures of net income and earnings per share are shown using the fair value
method to measure expense using an option pricing model to estimate fair value.
Employee Stock Ownership Plan: The cost of shares issued to the Employee Stock
Ownership Plan ("ESOP"), but not yet allocated to participants, is shown as a
reduction of shareholders' equity. Compensation expense is based on the market
price of shares as they are committed to be released to participant accounts.
Dividends on allocated ESOP shares reduce retained earnings; dividends on
unearned ESOP shares reduce debt and accrued interest.
Income Taxes: Income tax expense is the total of the current year income tax due
or refundable and the change in deferred tax assets and liabilities. Deferred
tax assets and liabilities are the expected future tax amounts for the temporary
differences between 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.
--------------------------------------------------------------------------------
(Continued)
29
<PAGE>
PEOPLES-SIDNEY FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2000, 1999 and 1998
--------------------------------------------------------------------------------
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Concentration of Credit Risk: The Corporation's loan portfolio consists
principally of long-term conventional loans secured by first mortgage deeds on
single family residences located in its primary lending area of Shelby County
and its contiguous counties. Mortgage loans comprise approximately 95% and 96%
of the Corporation's loan portfolio at June 30, 2000 and 1999.
Financial Instruments: Financial instruments include off-balance sheet credit
instruments, such as commitments to make loans and standby letters of credit,
issued to meet customer financing needs. The face amount for these items
represents the exposure to loss, before considering customer collateral or
ability to repay. Such financial instruments are recorded when they are funded.
Earnings Per Common Share: Basic earnings per common share ("EPS") is based on
net income divided by the weighted average number of common shares outstanding
during the period. ESOP shares are considered outstanding for this calculation
unless unearned. Management recognition plan ("MRP") shares are considered
outstanding as they become vested. Diluted EPS shows the dilutive effect of MRP
shares and the additional common shares issuable under stock options.
Dividend Restriction: Financial institution regulations, which require the
maintenance of certain capital levels, may limit the amount of dividends that
may be paid. For detail on dividend restrictions and regulatory capital
requirements, see a separate Note.
Comprehensive Income: Comprehensive income consists of net income and other
comprehensive income (loss). Other comprehensive income (loss) includes
unrealized gains and losses on securities available for sale, which are also
recognized as a separate component of equity.
Loss Contingencies: Loss contingencies, including claims and legal actions
arising in the ordinary course of business, are recorded as liabilities when the
likelihood of loss is probable and an amount or range of loss can be reasonably
estimated. Management does not believe there now are such matters that will have
a material effect on the financial statements.
Fair Values of Financial Instruments: Fair values of financial instruments are
estimated using relevant market information and other assumptions, as more fully
disclosed separately. Fair value estimates involve uncertainties and matters of
significant judgment regarding interest rates, credit risk, prepayments and
other factors, especially in the absence of broad markets for particular items.
Changes in assumptions or in market conditions could significantly affect the
estimates.
Reclassification: Reclassification of certain amounts in the prior year
consolidated financial statements has been made to conform to the 2000
presentation.
--------------------------------------------------------------------------------
(Continued)
30
<PAGE>
PEOPLES-SIDNEY FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2000, 1999 and 1998
--------------------------------------------------------------------------------
NOTE 2 - SECURITIES AVAILABLE FOR SALE
Securities available for sale at year-end were as follows:
<TABLE>
<CAPTION>
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---- ----- ------ -----
2000
<S> <C> <C> <C> <C>
U.S. Government agencies $ 3,996,736 $ -- $ (100,336) $ 3,896,400
Mortgage-backed securities 4,645,059 -- (94,778) 4,550,281
--------------- ---------- ----------- --------------
Total $ 8,641,795 $ -- $ (195,114) $ 8,446,681
=============== ========== =========== ==============
1999
U.S. Government agencies $ 2,998,229 $ -- $ (41,509) $ 2,956,720
Mortgage-backed securities 4,928,652 -- (27,261) 4,901,391
--------------- ---------- ----------- --------------
Total $ 7,926,881 $ -- $ (68,770) $ 7,858,111
=============== ========== =========== ==============
</TABLE>
Contractual maturities of securities available for sale at year-end 2000 were as
follows. Actual maturities may differ from contractual maturities because
borrowers may have the right to call or prepay obligations with or without call
or prepayment penalties. Securities not due at a single maturity date, primarily
mortgage-backed securities, are shown separately.
Estimated
Amortized Fair
Cost Value
---- -----
Due after one year through five years $ 2,998,835 $ 2,917,810
Due after five years through ten years 997,901 978,590
Mortgage-backed securities 4,645,059 4,550,281
-------------- -------------
$ 8,641,795 $ 8,446,681
============== =============
No securities were pledged as collateral at year-end 2000 or 1999. Proceeds from
the sale of securities available for sale were $984,219 in fiscal 2000. A gross
loss of $15,781 was realized on the sale. No securities were sold during the
years ended June 30, 1999 and 1998.
--------------------------------------------------------------------------------
(Continued)
31
<PAGE>
PEOPLES-SIDNEY FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2000, 1999 and 1998
--------------------------------------------------------------------------------
NOTE 3 - LOANS
Year-end loans were as follows:
2000 1999
---- ----
Mortgage loans:
1-4 family residential $ 92,116,695 $ 84,165,483
Multi-family residential 1,300,151 1,358,906
Commercial real estate 10,047,775 9,407,998
Real estate construction and
development 8,088,290 5,930,241
Land 991,864 866,988
--------------- ----------------
Total mortgage loans 112,544,775 101,729,616
Consumer loans 3,571,071 2,735,885
Commercial loans 2,406,064 1,395,584
--------------- ----------------
Total loans 118,521,910 105,861,085
Less:
Allowance for loan losses (591,350) (528,898)
Loans in process (3,035,548) (2,311,369)
Deferred loan fees (245,312) (217,973)
--------------- ----------------
$ 114,649,700 $ 102,802,845
=============== ================
Activity in the allowance for loan losses was as follows:
2000 1999 1998
---- ---- ----
Balance at beginning of year $ 528,898 $ 425,642 $ 397,159
Provision for losses 61,503 103,803 41,240
Charge-offs -- (22,621) (15,037)
Recoveries 949 22,074 2,280
---------- ---------- ----------
Balance at end of year $ 591,350 $ 528,898 $ 425,642
========== ========== ==========
Nonperforming loans at year-end were as follows:
2000 1999
---- ----
Loans past due over 90 days still on accrual $ 289,000 $ 440,000
Nonaccrual loans 756,000 315,000
Nonperforming loans include smaller balance homogeneous loans, such as
residential mortgage and consumer loans, that are collectively evaluated for
impairment.
As of and for the years ended June 30, 2000, 1999 and 1998, no loans were
required to be evaluated for impairment on an individual loan basis within the
scope of SFAS No. 114.
--------------------------------------------------------------------------------
(Continued)
32
<PAGE>
PEOPLES-SIDNEY FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2000, 1999 and 1998
--------------------------------------------------------------------------------
NOTE 3 - LOANS (Continued)
Loans to executive officers, directors and companies with which they are
affiliated aggregating $60,000 or more to any one related party for the year
ended June 30, 2000, were as follows.
Balance at beginning of period $ 315,227
New loans 240,000
Principal repayments (117,041)
--------------
Balance at end of period $ 438,186
==============
NOTE 4 - ACCRUED INTEREST RECEIVABLE
Year-end accrued interest receivable was as follows:
2000 1999
---- ----
Loans $ 791,454 $ 684,767
Securities 102,115 72,296
Interest-bearing deposits in other
financial institutions -- 2,850
------------ ------------
$ 893,569 $ 759,913
============ ============
NOTE 5 - PREMISES AND EQUIPMENT
Year-end premises and equipment was as follows:
2000 1999
---- ----
Land $ 225,166 $ 225,166
Buildings and improvements 1,785,182 1,769,702
Furniture and equipment 1,173,124 1,148,856
Automobile 22,416 --
------------ ------------
Total cost 3,205,888 3,143,724
Accumulated depreciation 1,315,002 1,158,116
------------ ------------
$ 1,890,886 $ 1,985,608
============ ============
The Jackson Center branch facility is leased under an operating lease that began
in September 1998. The lease term is for ten years. At the conclusion of the
fifth year, the rent shall be adjusted by the cumulative increase in the
Consumer Price Index over the previous five years with a maximum increase of 15%
for the remaining five years of the lease term. Total rental expense was $24,271
and $20,226 for the years ended June 30, 2000 and 1999. The lease agreement
includes an option to purchase the property at any time during the lease term.
--------------------------------------------------------------------------------
(Continued)
33
<PAGE>
PEOPLES-SIDNEY FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2000, 1999 and 1998
--------------------------------------------------------------------------------
NOTE 5 - PREMISES AND EQUIPMENT (Continued)
Rental commitments under this noncancelable operating lease, assuming a maximum
increase of 15% after year five, were:
Year ending June 30,
2001 $ 24,271
2002 24,271
2003 24,271
2004 25,784
2005 26,086
Thereafter 82,606
-----------
$ 207,289
NOTE 6 - FEDERAL INCOME TAXES
Income tax expense was as follows:
2000 1999 1998
---- ---- ----
Current $ 407,580 $ 409,890 $ 707,589
Deferred (29,183) (56,025) (1,101)
----------- ----------- -----------
$ 378,397 $ 353,865 $ 706,488
=========== =========== ===========
Year-end deferred tax assets and deferred tax liabilities were due to the
following:
2000 1999
---- ----
Items giving rise to deferred tax assets
Deferred loan fees $ 67,630 $ 55,688
Reserve for delinquent interest 5,372 2,132
Allowance for loan losses 69,034 15,198
Accrued ESOP expense 19,548 12,385
Accrued MRP expense 5,401 5,401
Unrealized loss on securities available for sale 66,339 23,381
---------- ----------
Total deferred tax assets 233,324 114,185
Items giving rise to deferred tax liabilities
Depreciation (74,779) (50,663)
Federal Home Loan Bank
stock dividends (137,122) (114,240)
---------- ----------
Total deferred tax liabilities (211,901) (164,903)
---------- ----------
Net deferred tax asset (liability) $ 21,423 $ (50,718)
========== ==========
--------------------------------------------------------------------------------
(Continued)
34
<PAGE>
PEOPLES-SIDNEY FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2000, 1999 and 1998
--------------------------------------------------------------------------------
NOTE 6 - FEDERAL INCOME TAXES (Continued)
Effective tax rates differ from federal statutory rates applied to financial
statement income due to the following:
<TABLE>
<CAPTION>
2000 1999 1998
---- ---- ----
<S> <C> <C> <C>
Income taxes computed at the statutory
tax rate on pretax income $ 344,758 $ 293,842 $ 659,531
Add tax effect of:
ESOP fair value in excess of tax deduction 8,082 39,481 46,546
MRP cost in excess of fair value 25,102 19,884 --
Nondeductible expenses and other 455 658 411
----------- ----------- -----------
$ 378,397 $ 353,865 $ 706,488
=========== =========== ===========
Statutory tax rate 34.0% 34.0% 34.0%
=========== ========== ===========
Effective tax rate 37.3% 40.9% 36.4%
=========== ========== ===========
</TABLE>
In August 1996, legislation was enacted that repeals 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 that exceeds the amount that could have
been taken under the experience method for tax years beginning after December
31, 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 is occurring over a six-year
period, the commencement of which was delayed until the first taxable year
beginning after December 31, 1997, because the Association met certain
residential lending requirements. At June 30, 2000 and 1999, the Association had
approximately $387,000 and $484,000 in bad debt reserves subject to recapture
for federal income tax purposes. The deferred tax liability related to the
recapture has been previously established. In fiscal 2000 and 1999, $97,000 bad
debt reserves were recaptured.
Retained earnings at June 30, 2000 and 1999 included approximately $2,174,000
for which no provision for federal income taxes had been made. This amount
represents the qualifying and nonqualifying tax bad debt reserve as of December
31, 1987, which is the end of the Association's base year for purposes of
calculating the bad debt deduction for tax purposes. The related amount of
unrecognized deferred tax liability was approximately $739,000 at June 30, 2000
and 1999. If this portion of retained earnings is used in the future for any
purpose other than to absorb bad debts, it will be added to future taxable
income.
NOTE 7 - DEPOSITS
Year-end deposits were as follows:
2000 1999
---- ----
Noninterest-bearing
demand deposits $ 870,734 $ 649,972
NOW accounts 4,940,258 4,873,938
Money market accounts 1,562,590 1,845,923
Savings accounts 18,888,875 19,544,387
Certificates of deposit 66,794,484 57,396,272
--------------- ----------------
$ 93,056,941 $ 84,310,492
=============== ================
NOTE 7 - DEPOSITS (Continued)
The aggregate amount of certificates of deposit with a minimum denomination of
$100,000 was $6,312,000 and $4,463,000 at June 30, 2000 and 1999, respectively.
Deposits more than $100,000 are not insured by the FDIC.
--------------------------------------------------------------------------------
(Continued)
35
<PAGE>
PEOPLES-SIDNEY FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2000, 1999 and 1998
--------------------------------------------------------------------------------
The scheduled maturities of certificates of deposit as of June 30, 2000 were as
follows:
Year ended June 30,
2001 $ 44,699,597
2002 10,531,613
2003 8,433,824
2004 2,305,765
2005 823,685
-----------------
$ 66,794,484
=================
NOTE 8 - BORROWED FUNDS
At June 30, 2000, the Association had a cash management line of credit enabling
it to borrow up to $8,000,000 from the Federal Home Loan Bank of Cincinnati
("FHLB"). All cash management advances have an original maturity of 90 days. The
line of credit must be renewed on an annual basis. There were no borrowings
outstanding on this line of credit at June 30, 2000. Borrowings outstanding on
this line of credit at June 30, 1999 were $2,800,000.
As a member of the FHLB system, the Association has the ability to obtain
borrowings up to a maximum total of $20,460,000, including the cash management
line-of-credit. Advances from the Federal Home Loan Bank at year-end were as
follows:
2000 1999
---- ----
4.90% FHLB cash management advance,
due September 17, 1999 $ -- $ 2,300,000
4.90% FHLB cash management advance,
due September 22, 1999 -- 300,000
6.02% FHLB cash management advance,
due September 28, 1999 -- 200,000
7.15% FHLB fixed-rate advance, due May 2, 2001 2,500,000 --
7.41% FHLB fixed-rate advance, due May 15, 2001 2,000,000 --
7.40% FHLB fixed-rate advance, due May 2, 2002 2,500,000 --
6.13% FHLB fixed-rate advance, due June 25, 2008 7,000,000 7,000,000
6.00% FHLB fixed-rate advance, due June 11, 2009 5,000,000 5,000,000
------------ -------------
$ 19,000,000 $ 14,800,000
============ =============
The maximum month-end balance of advances outstanding was $19,800,000 in 2000
and $14,800,000 in 1999. Average balances of borrowings outstanding during 2000
and 1999 were $17,603,000 and $7,764,000. Advances under the borrowing
agreements are collateralized by a blanket pledge of the Association's
residential mortgage loan portfolio and its FHLB stock.
NOTE 9 - RETIREMENT PLANS
The Corporation maintains a 401(k) profit sharing. With certain exceptions, all
employees who have attained the age of 21 and who have completed one year of
employment, during which they worked at least 1,000 hours, are eligible to
participate in the plan. The Corporation provides a matching contribution on
behalf of participants who make elective compensation deferrals at the rate of
50% of the first 6% of participant contributions up to a maximum match of 3% of
the participant's compensation. The Corporation may also contribute additional
amounts at its discretion. Employee contributions are vested at all times and
the Corporation's matching contributions vest evenly over 5 years of service.
The cash contribution and related expense included in salaries and employee
benefits was $25,172, $15,951 and $18,440 for the years ended June 30, 2000,
1999 and 1998.
--------------------------------------------------------------------------------
(Continued)
36
<PAGE>
PEOPLES-SIDNEY FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2000, 1999 and 1998
--------------------------------------------------------------------------------
NOTE 10 - EMPLOYEE STOCK OWNERSHIP PLAN
The Corporation offers an employee stock ownership plan ("ESOP") for the benefit
of substantially all employees of the Corporation. 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 Peoples in order to acquire common shares of Peoples. The
loan is secured by the shares purchased with the loan proceeds and will be
repaid by the 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. When loan payments are made,
ESOP shares are allocated to participants based on relative compensation.
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.
ESOP compensation expense was $146,861, $243,925 and $249,570 for the years
ended June 30, 2000, 1999 and 1998.
Year-end ESOP shares were as follows:
2000 1999
---- ----
Allocated shares 53,966 39,279
Unreleased shares 114,864 129,551
--------------- ----------------
Total ESOP shares 168,830 168,830
=============== ================
Fair value of unreleased shares $ 976,344 $ 1,295,510
=============== ==============
--------------------------------------------------------------------------------
(Continued)
37
<PAGE>
PEOPLES-SIDNEY FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2000, 1999 and 1998
--------------------------------------------------------------------------------
NOTE 11 - STOCK OPTION AND INCENTIVE PLAN
The Stock Option and Incentive Plan was approved by the shareholders of the
Corporation on May 22, 1998. The Board of Directors has granted options to
purchase shares of common stock at an exercise price ranging from $16.01 to
$18.75 to certain employees, officers and directors of the Corporation. The
exercise price for 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.
A summary of the activity in the plan was as follows:
<TABLE>
<CAPTION>
2000 1999 1998
---- ---- ----
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
------ ----- ------ ----- ------ -----
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of year 141,824 $ 16.03 142,824 $ 16.03 -- $ --
Granted -- -- -- -- 142,824 16.03
Exercised -- -- -- -- -- --
Forfeited (1,000) 16.01 (1,000) 16.01 -- --
---------- -------- ---------- ------- ---------- ------
Outstanding at end of year 140,824 $ 16.03 141,824 $ 16.03 142,824 $ 16.03
========== ======== ========== ======= ========== =======
Options exercisable at year-end 56,330 $ 16.03 28,365 $ 16.03 -- $ --
Remaining shares available
for grant 37,714 36,714 35,714
</TABLE>
Options outstanding at year-end were as follows:
Weighted Average
Remaining
Exercise Number Contractual Number
Prices Outstanding Life Exercisable
-------- ----------- ---------------- -----------
$16.01 139,579 7.89 yrs 55,832
$18.75 1,245 7.95 yrs 498
----------- --------- ----------
Outstanding at year-end 140,824 7.89 yrs 56,330
=========== ========= ==========
The fair value of options granted in 1998 was estimated using the Black-Scholes
options pricing model with the following weighted-average information: risk-free
interest rate of 5.44%, expected life of 10 years, expected volatility of stock
price of 32.65% and expected dividend rate of 1.47%. Based on these assumptions,
the estimated fair value per share of options granted in 1998 was $8.89.
--------------------------------------------------------------------------------
(Continued)
38
<PAGE>
PEOPLES-SIDNEY FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2000, 1999 and 1998
--------------------------------------------------------------------------------
NOTE 11 - STOCK OPTION AND INCENTIVE PLAN (Continued)
The following pro forma information presents net income and earnings per share
for 2000, 1999 and 1998 had Statement of Financial Accounting Standards No. 123
fair value method been used to measure compensation cost for stock options
granted. No compensation expense was recognized for the year ended June 30,
2000, 1999 and 1998.
2000 1999 1998
---- ---- ----
Net income as reported $ 635,598 $ 510,376 $ 1,233,309
Pro forma net income 425,988 297,210 1,215,385
Basic earnings per share as reported .43 .32 .74
Pro forma basic earnings per share .29 .19 .73
Diluted earnings per share as reported .43 .32 .74
Pro forma diluted earnings per share .29 .19 .73
NOTE 12 - 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 is used as a means of providing
directors and certain key employees of the Corporation with an ownership
interest in the Corporation in a manner designed to compensate such directors
and key employees for services to the 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 Corporation. No shares had been previously awarded. One-fifth of such shares
is earned and nonforfeitable on each of the first five anniversaries of the date
of the award. At June 30, 2000, 22,851 shares have vested. In the event of the
death or disability of a participant or a change in control of the Corporation,
however, the participant's shares will be deemed earned and nonforfeitable upon
such date. At June 30, 2000, there were 14,287 shares reserved for future awards
and held as treasury stock. Compensation expense related to MRP shares is based
upon the cost of the shares, which approximates fair value at the date of grant.
For the years ended June 30, 2000, 1999 and 1998, compensation expense totaled
$190,649, $186,601 and $20,000.
NOTE 13 - REGULATORY MATTERS
The Association is subject to various regulatory capital requirements
administered by the federal regulatory agencies. Under capital adequacy
guidelines and the regulatory framework for prompt corrective action, the
Association must meet specific capital guidelines that involve quantitative
measures of the Association's assets, liabilities and certain off-balance-sheet
items as calculated under regulatory accounting practices. Capital amounts and
classifications are also subject to qualitative judgments by the regulators.
Failure to meet minimum capital requirements can initiate regulatory action.
Prompt corrective action regulations provide five classifications: well
capitalized, adequately capitalized, undercapitalized, significantly
undercapitalized, and critically undercapitalized, although these terms are not
used to represent overall financial condition. If adequately capitalized,
regulatory approval is required to accept brokered deposits. If
undercapitalized, capital distributions are limited, as is asset growth and
expansion, and capital restoration plans are required.
NOTE 13 - REGULATORY MATTERS (Continued)
At June 30, 2000 and 1999, management believes the Association complies with all
regulatory capital requirements. Based on the Association's computed regulatory
capital ratios, the Association is considered well capitalized under
--------------------------------------------------------------------------------
(Continued)
39
<PAGE>
PEOPLES-SIDNEY FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2000, 1999 and 1998
--------------------------------------------------------------------------------
the Federal Deposit Insurance Act at June 30, 2000 and 1999. No conditions or
events have occurred subsequent to the last notification by regulators that
management believes would have changed the Association's category.
At year-end 2000 and 1999, the Association's actual capital levels and minimum
required levels were:
<TABLE>
<CAPTION>
Minimum Required
To Be Well
Minimum Required Capitalized Under
For Capital Prompt Corrective-
Actual Adequacy Purposes Action Regulations
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
(Dollars in thousands)
2000
<S> <C> <C> <C> <C> <C> <C>
Total capital (to risk-weighted assets) $ 14,773 17.2% $ 6,858 8.0% $ 8,572 10.0%
Tier 1 (core) capital (to risk-weighted
assets) 14,183 16.5 3,429 4.0 5,143 6.0
Tier 1 (core) capital (to adjusted
total assets) 14,183 10.9 5,183 4.0 6,479 5.0
Tangible capital (to adjusted total assets) 14,183 10.9 1,944 1.5 N/A
1999
Total capital (to risk-weighted assets) $ 13,634 18.0% $ 6,069 8.0% $ 7,586 10.0%
Tier 1 (core) capital (to risk-weighted
assets) 13,152 17.3 3,035 4.0 4,552 6.0
Tier 1 (core) capital (to adjusted
total assets) 13,152 11.2 4,677 4.0 5,847 5.0
Tangible capital (to adjusted total assets) 13,152 11.2 1,754 1.5 N/A
</TABLE>
The Qualified Thrift Lender test requires at least 65% of assets be maintained
in housing-related finance and other specified areas. If this test is not met,
limits are placed on growth, branching, new investments, FHLB advances and
dividends, or the Association must convert to a commercial bank charter.
Management believes that this test is met.
The Association converted from a mutual to a stock institution, and a
"liquidation account" was established at $9,307,000, which was net worth
reported in the conversion prospectus. Eligible depositors who have maintained
their accounts, less annual reductions to the extent they have reduced their
deposits, would receive a distribution from this account if the Association
liquidated. Dividends may not reduce shareholders' equity below the required
liquidation account balance.
OTS regulations limit capital distributions by savings associations. Generally,
capital distributions are limited to the current year to date undistributed net
income and prior two years' undistributed net income, as long as the institution
remains well capitalized after the proposed distribution. At year-end 2000, no
amount is available to pay dividends to the holding company without prior
approval from the OTS.
NOTE 14 - OFF-BALANCE-SHEET ACTIVITIES
Some financial instruments, such as loan commitments, credit lines, letters of
credit and overdraft protection, are issued to meet customer financing needs.
These are agreements to provide credit or to support the credit of others, as
long as conditions established in the contract are met, and usually have
expiration dates. Commitments may expire without being used. Off-balance-sheet
risk to credit loss exists up to the face amount of these instruments, although
material losses are not anticipated. The same credit policies are used to make
such commitments as are used for loans, including obtaining collateral at
exercise of the commitment.
--------------------------------------------------------------------------------
(Continued)
40
<PAGE>
PEOPLES-SIDNEY FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2000, 1999 and 1998
--------------------------------------------------------------------------------
The contractual amount of financial instruments with off-balance-sheet risk was
as follows at year end.
2000 1999
---- ----
Fixed Variable Fixed Variable
Rate Rate Rate Rate
---- ---- ---- ----
Residential real estate $ 15,000 $ 879,000 $ 375,000 $ 394,000
Interest rates 9.00% 8.25-9.50% 7.00-7.75% 7.00-7.75%
Commitments to make loans are generally made for a period of 30 days or less.
Maturities for fixed-rate loan commitments range from 10 years to 20 years.
The Corporation also had unused lines of credit approximating $2,200,000 and
$1,434,000 at year-end 2000 and 1999.
At June 30, 2000 and 1999, the Association was required to have $419,000 and
$532,000 on deposit with its correspondent banks as a compensating clearing
requirement.
The Association entered into employment agreements with certain officers of the
Corporation. The agreements provide for a term of one to three years and a
salary and performance review by the Board of Directors not less often than
annually, 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.
--------------------------------------------------------------------------------
(Continued)
41
<PAGE>
PEOPLES-SIDNEY FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2000, 1999 and 1998
--------------------------------------------------------------------------------
NOTE 15 - DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
Financial instruments at year-end were as follows:
<TABLE>
<CAPTION>
2000 1999
---- ----
Estimated Estimated
Carrying Fair Carrying Fair
Value Value Value Value
----- ----- ----- -----
Financial assets:
<S> <C> <C> <C> <C>
Cash and cash equivalents $ 2,205,993 $ 2,206,000 $ 1,932,978 $ 1,933,000
Time deposits in other
financial institutions -- -- 400,000 400,000
Securities available for sale 8,446,681 8,447,000 7,858,111 7,858,000
Federal Home Loan Bank stock 1,023,000 1,023,000 907,700 908,000
Loans, net 114,649,700 111,633,000 102,802,845 102,621,000
Accrued interest receivable 893,569 894,000 759,913 760,000
Financial liabilities:
Deposits (93,056,941) (92,484,000) (84,310,492) (84,877,000)
Borrowed funds (19,000,000) (17,736,000) (14,800,000) (13,659,000)
Accrued interest payable (34,682) (35,000) (44,091) (44,000)
</TABLE>
The estimated fair value approximates carrying amounts for all items except
those described below. Security fair values are based on market prices or dealer
quotes, and if no such information is available, on the rate and term of the
security and information about the issuer. For fixed rate loans or deposits and
for variable rate loans or deposits with infrequent repricing or repricing
limits, fair value is based on discounted cash flows using current market rates
applied to the estimated life and credit risk. Fair values for impaired loans
are estimated using discounted cash flow analysis or underlying collateral
values. Fair value of debt is based on current rates for similar financing. The
fair value of off-balance-sheet items is based on the current fees or cost that
would be charged to enter into or terminate such arrangements, which are not
material.
NOTE 16 - EARNINGS PER SHARE
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>
2000 1999 1998
---- ---- ----
Basic Earnings Per Common Share
<S> <C> <C> <C>
Numerator
Net income $ 635,598 $ 510,376 $ 1,233,309
=========== =========== ===========
Denominator
Weighted average common shares
outstanding 1,635,106 1,777,192 1,785,375
Less: Average unallocated ESOP shares (122,208) (137,176) (127,831)
Less: Average nonvested MRP shares (39,037) (50,463) --
----------- ----------- -----------
Weighted average common shares
outstanding for basis earnings per
common share 1,473,861 1,589,553 1,657,544
=========== =========== ===========
Basic earnings per common share $ .43 $ .32 $ .74
=========== =========== ==========
</TABLE>
--------------------------------------------------------------------------------
(Continued)
42
<PAGE>
PEOPLES-SIDNEY FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2000, 1999 and 1998
--------------------------------------------------------------------------------
NOTE 16 - EARNINGS PER SHARE (Continued)
<TABLE>
<CAPTION>
2000 1999 1998
---- ---- ----
Diluted Earnings Per Common Share
<S> <C> <C> <C>
Numerator
Net income $ 635,598 $ 510,376 $ 1,233,309
=========== =========== ===========
Denominator
Weighted average common shares
outstanding for basic earnings per
common share 1,473,861 1,589,553 1,657,544
Add: Dilutive effects of average
nonvested MRP shares -- -- --
Add: Dilutive effects of assumed
exercises of stock options -- -- --
----------- ----------- -----------
Weighted average common shares
and dilutive potential common
shares outstanding 1,473,861 1,589,553 1,657,544
=========== =========== ===========
Diluted earnings per common share $ .43 $ .32 $ .74
=========== =========== ==========
</TABLE>
Stock options granted did not have a dilutive effect on EPS for the years ended
June 30, 2000, 1999 and 1998, as the exercise price of outstanding options was
greater than the average market price for the period. As of June 30, 2000, 1999
and 1998, there were 140,824, 141,824 and 142,824 options outstanding that were
not dilutive. Unearned MRP shares did not have a dilutive effect on EPS for the
year ended June 30, 2000 and 1999, as the fair value of MRP shares on the date
of grant was greater than the average market price for the period. No MRP shares
had been purchased as of June 30, 1998.
NOTE 17 - OTHER COMPREHENSIVE INCOME (LOSS)
Other comprehensive income (loss) components and related taxes were as follows:
<TABLE>
<CAPTION>
2000 1999 1998
---- ---- ----
<S> <C> <C> <C>
Unrealized holding gains and (losses) on
available-for-sale securities $ (142,125) $ (85,724) $ 3,212
Reclassification adjustments for (gains) and
losses later recognized in income 15,781 -- --
----------- ----------- -----------
Net unrealized gains and losses (126,344) (85,724) 3,212
Tax effect 42,957 29,147 (1,093)
----------- ----------- -----------
Other comprehensive income (loss) $ (83,387) $ (56,577) $ 2,119
=========== =========== ===========
</TABLE>
--------------------------------------------------------------------------------
(Continued)
43
<PAGE>
PEOPLES-SIDNEY FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2000, 1999 and 1998
--------------------------------------------------------------------------------
NOTE 18 - PARENT COMPANY ONLY CONDENSED FINANCIAL INFORMATION
Following is condensed financial information of Peoples-Sidney Financial
Corporation as of June 30, 2000 and 1999, and for the periods ended June 30,
2000, 1999 and 1998:
CONDENSED BALANCE SHEETS
June 30, 2000 and 1999
<TABLE>
<CAPTION>
2000 1999
---- ----
Assets
<S> <C> <C>
Cash and cash equivalents $ 1,975,217 $ 3,154,168
Investment in subsidiary 14,054,239 13,107,093
Loans receivable from ESOP 1,020,214 1,122,236
Other assets -- 16,145
--------------- ---------------
Total assets $ 17,049,670 $ 17,399,642
=============== ===============
Liabilities
Other liabilities $ 89,872 $ 37,425
Shareholders' Equity 16,959,798 17,362,217
--------------- ---------------
Total liabilities and shareholders' equity $ 17,049,670 $ 17,399,642
=============== ===============
<CAPTION>
CONDENSED STATEMENTS OF INCOME
2000 1999 1998
---- ---- ----
Income:
<S> <C> <C> <C>
Dividend income from subsidiary $ -- $ 5,250,000 $ --
Interest on loans 78,497 85,399 515,584
-------------- ------------- -----------
78,497 5,335,399 515,584
Other expenses 112,955 122,303 100,294
-------------- ------------- -----------
Income (loss) before taxes and undistributed earnings
of subsidiary (34,458) 5,213,096 415,290
Income tax expense (benefit) (13,307) (12,548) 139,211
-------------- ------------- -----------
Income (loss) before undistributed earnings
of subsidiary (21,151) 5,225,644 276,079
Equity in undistributed earnings of subsidiary
(distributions in excess of earnings) 656,749 (4,715,268) 957,230
-------------- ------------- -----------
Net income $ 635,598 $ 510,376 $ 1,233,309
============== ============= ===========
</TABLE>
--------------------------------------------------------------------------------
(Continued)
44
<PAGE>
PEOPLES-SIDNEY FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2000, 1999 and 1998
--------------------------------------------------------------------------------
NOTE 18 - PARENT COMPANY ONLY CONDENSED FINANCIAL INFORMATION (Continued)
CONDENSED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
2000 1999 1998
---- ---- ----
Cash flows from operating activities
<S> <C> <C> <C>
Net income $ 635,598 $ 510,376 $ 1,233,309
Adjustments to reconcile net income to cash
provided by operations:
(Equity in undistributed income of subsidiary)
distributions in excess of earnings (656,749) 4,715,268 (957,230)
Net change in other assets and liabilities 68,592 34,365 (15,845)
------------- ------------- --------------
Net cash from operating activities 47,441 5,260,009 260,234
Cash flows from investing activities
Proceeds from loan principal repayments 102,022 102,021 7,102,022
------------- ------------- --------------
Net cash from investing activities 102,022 102,021 7,102,022
Cash flows from financing activities
Return of capital distribution -- -- (7,141,500)
Purchase of treasury shares (869,896) (2,719,692) --
57,128 shares contributed to MRP from treasury -- 953,293 --
Cash dividends paid (422,244) (448,432) (429,195)
Dividends on unallocated ESOP shares (36,274) (40,404) (35,003)
------------- ------------- --------------
Net cash from financing activities (1,328,414) (2,255,235) (7,605,698)
------------- ------------- --------------
Net change in cash and cash equivalents (1,178,951) 3,106,795 (243,442)
Cash and cash equivalents at beginning of year 3,154,168 47,373 290,815
------------- ------------- --------------
Cash at end of year $ 1,975,217 $ 3,154,168 $ 47,373
============= ============= ==============
</TABLE>
--------------------------------------------------------------------------------
(Continued)
45
<PAGE>
PEOPLES-SIDNEY FINANCIAL CORPORATION
SHAREHOLDER INFORMATION
ANNUAL MEETING
The Annual Meeting of Shareholders will be held at 11:00 a.m., Sidney, Ohio on
October 13, 2000 at the Holiday Inn, I-75 and S.R. 47, Sidney, Ohio.
STOCK LISTING
Peoples-Sidney Financial Corporation common stock is traded on the NASDAQ
National Market under the symbol "PSFC."
SHAREHOLDERS AND GENERAL INQUIRIES TRANSFER AGENT
Douglas Stewart, President Registrar and Transfer Co.
Peoples-Sidney Financial Corporation 10 Commerce Drive
101 East Court Street Cranford, NJ 07016
P.O. Box 727
Sidney, Ohio 45365-3021
(937) 492-6129
ANNUAL AND OTHER REPORTS
A copy of Peoples-Sidney Financial Corporation's Annual Report on Form 10-KSB
for the year ended June 30, 2000, as filed with the Securities and Exchange
Commission, may be obtained without charge by contacting Douglas Stewart,
President and Chief Executive Officer, Peoples-Sidney Financial Corporation, 101
East Court Street, P.O. Box 727, Sidney, Ohio 45365-3021.
--------------------------------------------------------------------------------
(Continued)
46
<PAGE>
PEOPLES-SIDNEY FINANCIAL CORPORATION
CORPORATE INFORMATION
CORPORATION AND ASSOCIATION ADDRESS
101 East Court Street Telephone: (937) 492-6129
P.O. Box 727 Fax: (937) 498-4554
Sidney, Ohio 45365-3021
DIRECTORS OF THE BOARD
Douglas Stewart
President and Chief Executive Officer of Peoples
Federal Savings and Loan Association
Robert W. Bertsch
Retired Treasurer of Peoples Federal Savings and
Loan Association
John W. Sargeant
Part Owner of Sidney Tool and Die Co. and BenSar
Development, a warehouse provider
Richard T. Martin (Chairman of the Board)
Certified Public Accountant, in private practice
Harry N. Faulkner
Partner in the law firm of Faulkner, Garmhausen,
Keister & Shenk LPA
James W. Kerber
Owner of James W. Kerber CPA, a private practice
accounting firm
Officers of the Corporation and the Association:
-----------------------------------------------
Douglas Stewart, President & CEO
David R. Fogt, VP Financial Services and
Operations
Gary N. Fullenkamp, VP Mortgage Loans
and Corporate Secretary
Debra A. Geuy, Chief Financial Officer
Special Counsel Independent Auditors
--------------- --------------------
Silver, Freedman & Taff, L.L.P. Crowe, Chizek and Company LLP
1100 New York Avenue, N.W. One Columbus
Washington, D.C. 20005-3934 10 West Broad Street
Columbus, Ohio 43215
--------------------------------------------------------------------------------
(Continued)
47
