Peoples Sidney Financial (PPSF) 10QSB 2007 Q1 Quarterly report (small business)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-QSB

(Mark One)

x QUARTERLY REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES  EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2006

o REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT

For the transition period from __________ to ____________.

Commission File Number 0-22223

PEOPLES-SIDNEY FINANCIAL CORPORATION

(Exact name of small business issuer as specified in its charter)

Delaware	31-1499862
(State or other jurisdiction of	(IRS Employer
incorporation or organization)	Identification No.)

101 E. Court Street, Sidney, Ohio 45365

(Address of principal executive offices)

(937) 492-6129

(Issuer’s telephone number)

Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months, and (2) has been subject to such filing requirements for the past 90 days.

YesýNoo

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

YesoNoý

As of November 1, 2006, the latest practicable date, 1,371,268 shares of the issuer’s common shares, $.01 par value, were issued and outstanding.

Transitional Small Business Disclosure Format (Check One):

YesoNoý

PEOPLES-SIDNEY FINANCIAL CORPORATION

INDEX

		Page
PART I - FINANCIAL INFORMATION
Item 1.	Financial Statements (Unaudited)
	Consolidated Balance Sheets	3
	Consolidated Statements of Income	4
	Consolidated Statements of Comprehensive Income	5
	Condensed Consolidated Statements of Changes in Shareholders’ Equity	6
	Consolidated Statements of Cash Flows	7
	Notes to Consolidated Financial Statements	8
Item 2.	Management’s Discussion and Analysis	15
Item 3.	Controls and Procedures	21
PART II - OTHER INFORMATION
Item 1.	Legal Proceedings	22
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	22
Item 3.	Defaults Upon Senior Securities	22
Item 4.	Submission of Matters to a Vote of Security Holders	22
Item 5.	Other Information	22
Item 6.	Exhibits	22
SIGNATURES		23
INDEX TO EXHIBITS		24

PEOPLES-SIDNEY FINANCIAL CORPORATION

CONSOLIDATED BALANCE SHEETS

Item 1. Financial Statements

	September 30,			June 30,
	2006			2006
	(Unaudited)
ASSETS
Cash and due from financial institutions	$	1,094,832		$	899,313
Interest-bearing deposits in other financial institutions		4,347,266			3,815,616
Total cash and cash equivalents		5,442,098			4,714,929
Securities available for sale		5,345,325			5,250,170
Federal Home Loan Bank stock		1,793,700			1,768,100
Loans, net of allowance of $840,000 and $893,600		124,245,432			124,171,193
Accrued interest receivable		844,710			827,725
Premises and equipment, net		1,938,444			1,974,672
Other real estate owned		--			100,421
Other assets		131,216			240,258
Total assets	$	139,740,925		$	139,047,468
LIABILITIES AND SHAREHOLDERS’ EQUITY
Deposits	$	80,648,432		$	82,819,038
Borrowed funds		41,382,518			38,511,268
Accrued interest payable and other liabilities		404,091			460,821
Total liabilities		122,435,041			121,791,127
Common stock in ESOP subject to repurchase obligation		1,768,620			1,756,829
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		16,675			16,675
Additional paid-in capital		9,061,824			9,065,163
Retained earnings		11,837,021			11,764,118
Treasury stock, 401,107 and 392,727 shares, at cost		(4,850,978	)		(4,725,278	)
Unearned employee stock ownership plan shares		(426,457	)		(457,602	)
Accumulated other comprehensive loss		(100,821	)		(163,564	)
Total shareholders’ equity		15,537,264			15,499,512
Total liabilities and shareholders’ equity	$	139,740,925		$	139,047,468

See accompanying notes to consolidated financial statements.

3.

PEOPLES-SIDNEY FINANCIAL CORPORATION

CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)

	Three Months Ended
	September 30,
	2006			2005
Interest income
Loans, including fees	$	2,100,108		$	1,947,843
Securities		55,590			53,034
Demand, time and overnight deposits		27,808			25,222
Dividends on Federal Home Loan Bank Stock		25,625			20,568
Total interest income		2,209,131			2,046,667
Interest expense
Deposits		495,019			433,651
Borrowed funds		530,833			433,122
Total interest expense		1,025,852			866,773
Net interest income		1,183,279			1,179,894
Provision for loan losses		(47,952	)		16,914
Net interest income after provision for loan losses		1,231,231			1,162,980
Noninterest income
Service fees and other charges		32,361			34,650
Gain (loss) on sale of real estate owned		(120	)		657
Total noninterest income		32,241			35,307
Noninterest expense
Compensation and benefits		436,091			427,819
Director fees		24,300			24,300
Occupancy and equipment		89,051			101,018
Computer processing		90,997			86,768
Professional fees		44,208			53,224
State franchise taxes		54,450			49,763
Other		77,388			80,427
Total noninterest expense		816,485			823,319
Income before income taxes		446,987			374,968
Income tax expense		157,500			135,400
Net income	$	289,487		$	239,568
Earnings per common share - basic	$	0.21		$	0.17
Earnings per common share - diluted	$	0.21		$	0.17

(Continued)

4.

PEOPLES-SIDNEY FINANCIAL CORPORATION

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited)

	Three Months Ended
	September 30,
	2006			2005
Net income	$	289,487		$	239,568
Other comprehensive income (loss)
Unrealized holding gains and (losses) on
available-for-sale securities		95,065			(73,530	)
Tax effect		(32,322	)		25,000
Other comprehensive income (loss)		62,743			(48,530	)
Comprehensive income	$	352,230		$	191,038

(Continued)

5.

PEOPLES-SIDNEY FINANCIAL CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN

SHAREHOLDERS’ EQUITY

(Unaudited)

	Three Months Ended
	September 30,
	2006			2005
Balance, beginning of period	$	15,499,512		$	17,761,391
Net income for period		289,487			239,568
Cash dividends, $.16 and $.15 per share for
the three months ended September 30, 2006
and 2005.		(216,584	)		(206,244	)
Purchase of 8,380 and 7,500 shares of
treasury stock for the three months
ended September 30, 2006 and 2005, at cost		(125,700	)		(104,062	)
Commitment to release 2,654 and 2,799
employee stock ownership plan shares for the
three months ended September 30, 2006 and 2005,
at fair value		39,597			40,344
Change in fair value of common stock subject
to repurchase obligation		(11,791	)		--
Change in fair value on securities available for
sale, net of tax		62,743			(48,530	)
Balance, end of period	$	15,537,264		$	17,682,467

(Continued)

6.

PEOPLES-SIDNEY FINANCIAL CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

	Three Months Ended
	September 30,
	2006			2005
Cash flows from operating activities
Net income	$	289,487		$	239,568
Adjustments to reconcile net income to net cash from
operating activities
Depreciation		40,438			45,447
Provision for loan losses		(47,952	)		16,914
Net accretion on securities		(90	)		(90	)
(Gain) loss on sale of real estate owned		120			(657	)
FHLB stock dividends		(25,600	)		(20,500	)
Compensation expense for ESOP shares		39,597			40,344
Change in:
Accrued interest receivable and other assets		92,057			60,612
Accrued expense and other liabilities		(89,052	)		(54,804	)
Deferred loan fees		(12,867	)		8,211
Net cash from operating activities		286,138			335,045
Cash flows from investing activities
Net change in loans		(13,420	)		(1,184,634	)
Premises and equipment expenditures		(4,210	)		(3,411	)
Proceeds from sale of real estate owned		100,301			49,940
Net cash from investing activities		82,671			(1,138,105	)
Cash flows from financing activities
Net change in deposits		(2,170,606	)		(420,863	)
Net change in short-term FHLB advances		3,250,000			--
Repayments of long-term FHLB advances		(378,750	)		(435,205	)
Proceeds from long-term FHLB advances		--			2,000,000
Cash dividends paid		(216,584	)		(206,244	)
Purchase of treasury stock		(125,700	)		(104,062	)
Net cash from financing activities		358,360			833,626
Net change in cash and cash equivalents		727,169			30,566
Cash and cash equivalents at beginning of period		4,714,929			5,321,196
Cash and cash equivalents at end of period	$	5,442,098		$	5,351,762
Supplemental disclosures of cash flow information
Cash paid during the period for
Interest	$	1,009,129		$	862,997
Income taxes		65,000			--
Noncash transactions
Transfer from loans to other real estate owned	$	--		$	49,283

See accompanying notes to consolidated financial statements.

7.

PEOPLES-SIDNEY FINANCIAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Principles of Consolidation: The accompanying consolidated financial statements include accounts of Peoples-Sidney Financial Corporation (“Peoples”) and its wholly-owned subsidiary, Peoples Federal Savings and Loan Association (“Association”), a federal stock savings and loan association, together referred to as the Corporation. All significant intercompany transactions and balances have been eliminated.

These interim consolidated financial statements are prepared without audit and reflect all adjustments which, in the opinion of management, are necessary to present fairly the financial position of the Corporation at September 30, 2006 and its results of operations and cash flows for the periods presented. All such adjustments are normal and recurring in nature. The accompanying consolidated financial statements have been prepared in accordance with the instructions for Form 10-QSB and, therefore, do not purport to contain all the necessary financial disclosures required by U.S. generally accepted accounting principles that might otherwise be necessary in the circumstances, and should be read in conjunction with the consolidated financial statements and notes thereto of the Corporation for the fiscal year ended June 30, 2006, included in the Corporation’s 2006 Annual Report on Form 10-KSB for the fiscal year ended June 30, 2006. Reference is made to the accounting policies of the Corporation described in the notes to consolidated financial statements contained in such report. The Corporation has consistently followed these policies in preparing this Form 10-QSB.

Nature of Operations: The Corporation provides financial services through its main office in Sidney, Ohio, and branch offices in Sidney, 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 commercial and residential real estate. Commercial loans are expected to be repaid from cash flow from operations of businesses. 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 U.S. generally accepted accounting principles, management makes estimates and assumptions based on available information. These estimates and assumptions affect the amounts reported in the financial statements and disclosures provided, and actual results could differ. The allowance for loan losses and fair values of financial instruments are particularly subject to change.

Income Taxes: Income tax expense is based on the effective tax rate expected to be applicable for the entire year. 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 the carrying amounts and tax basis of assets and liabilities, computed using enacted tax rates. A valuation allowance, if needed, reduces deferred tax assets to the amount expected to be realized.

(Continued)

8.

PEOPLES-SIDNEY FINANCIAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Earnings Per Common Share: Basic earnings per common share (“EPS”) is net income divided by the weighted average number of common shares outstanding during the period. Employee stock ownership plan (“ESOP”) shares are considered outstanding for this calculation unless unearned. Diluted EPS shows the dilutive effect of additional common shares upon exercise of stock options.

Stock - Based Compensation: Employee compensation expense under stock options is reported using the fair value recognition provisions of FASB Statement 123 (revised 2004) (FAS 123R), Share Based Payment. The Corporation has adopted FAS 123R using the modified prospective method. Under this method, compensation expense will be recognized for the unvested portion of previously issued awards that remained outstanding as of July 1, 2005 and for any future awards. Prior interim periods and fiscal year results will not be restated. For the three months ended September 30, 2006 and 2005, no compensation expense was recognized in the income statement as all outstanding options were fully vested prior to June 30, 2005 and no options have been granted since the adoption of FAS 123R.

NOTE 2 - SECURITIES AVAILABLE FOR SALE

Securities available for sale were as follows.

			Gross		Gross
	Fair		Unrealized		Unrealized
	Value		Gains		Losses
September 30, 2006
U.S. Government agencies	$	5,345,325	$	--	$	(152,759	)
June 30, 2006
U.S. Government agencies	$	5,250,170	$	--	$	(247,824	)

Contractual maturities of securities available for sale at September 30, 2006 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.

	Fair
	Value
Due in one year or less	$	499,375
Due after one year through five years		2,962,190
Due after five years through ten years		1,883,760
	$	5,345,325

There were no sales of securities available for sale during the three months ended September 30, 2006 or 2005. No securities were pledged as collateral at September 30, 2006 or June 30, 2006.

(Continued)

9.

PEOPLES-SIDNEY FINANCIAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 2 - SECURITIES AVAILABLE FOR SALE (Continued) 

Securities with unrealized losses at September 30, 2006 and June 30, 2006, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, are as follows.

	Less than 12 Months					12 Months or More					Total
	Fair		Unrealized			Fair		Unrealized			Fair		Unrealized
Description of Securities	Value		Loss			Value		Loss			Value		Loss
September 30, 2006
U.S. Government agencies	$	499,375	$	(625	)	$	4,845,950	$	(152,134	)	$	5,345,325	$	(152,759	)
June 30, 2006
U.S. Government agencies	$	497,970	$	(2,030	)	$	4,752,200	$	(245,794	)	$	5,250,170	$	(247,824	)

Unrealized losses on the investment securities have not been recognized into income because the securities are of high credit quality, management has the intent and ability to hold for the foreseeable future, and the decline in fair value is largely due to changes in interest rates. The fair value is expected to recover as the securities approach their maturity date or reset date.

NOTE 3 - LOANS

Loans were as follows.

	September 30,			June 30,
	2006			2006
Mortgage loans:
1-4 family residential	$	90,317,180		$	90,115,467
Multi-family residential		3,005,714			2,861,027
Commercial real estate		13,048,134			12,972,451
Real estate construction and
development		2,165,907			2,982,155
Land		2,655,717			2,362,925
Total mortgage loans		111,192,652			111,294,025
Consumer loans		5,754,661			6,402,995
Commercial loans		8,510,607			7,753,128
Total loans		125,457,920			125,450,148
Less:
Allowance for loan losses		(840,000	)		(893,600	)
Deferred loan fees		(372,488	)		(385,355	)
	$	124,245,432		$	124,171,193

(Continued)

10.

PEOPLES-SIDNEY FINANCIAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 3 - LOANS (Continued)

Activity in the allowance for loan losses is summarized as follows.

	Three Months Ended
	September 30,
	2006			2005
Balance at beginning of period	$	893,600		$	835,500
Provision for losses		(47,952	)		16,914
Charge-offs		(6,000	)		(111	)
Recoveries		352			97
Balance at end of period	$	840,000		$	852,400

Impaired loans were as follows.

	September 30,		June 30,
	2006		2006
Period-end impaired loans with no allowance for loan losses allocated	$	--	$	--
Period-end impaired loans with allowance for loan losses allocated		161,000		232,000
Amount of the allowance allocated to impaired loans		135,000		209,000

	Three Months Ended
	September 30,
	2006		2005
Average of impaired loans during the period	$	167,000	$	186,000
Interest income recognized during the period		1,699		3,274
Cash-basis interest income recognized		1,699		1,126

Nonperforming loans were as follows.

	September 30,		June 30,
	2006		2006
Loans past due over 90 days still on accrual	$	138,000	$	375,000
Nonaccrual loans		1,729,000		1,525,000

Nonperforming loans include smaller balance homogeneous loans, such as residential mortgage and consumer loans that are collectively evaluated for impairment and individually classified impaired loans.

(Continued)

11.

PEOPLES-SIDNEY FINANCIAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 4 - BORROWED FUNDS

At September 30, 2006 and June 30, 2006, 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. Outstanding borrowings on this line of credit were $6,750,000 at September 30, 2006 and $3,500,000 at June 30, 2006.

As a member of the FHLB system, the Association has the ability to obtain borrowings up to a maximum total of $63.8 million including the cash management line of credit as of September 30, 2006. Advances from the Federal Home Loan Bank were as follows.

	September 30,		June 30,
	2006		2006
Cash management advance, variable rate 5.50%
at September 30, 2006 and 5.43% at June 30, 2006	$	6,750,000	$	3,500,000
4.88% FHLB fixed-rate advance, due January 25, 2008		2,000,000		2,000,000
6.13% FHLB fixed-rate advance, due June 25, 2008		7,000,000		7,000,000
5.16% FHLB fixed-rate advance, due March 13, 2009		3,000,000		3,000,000
6.00% FHLB convertible advance, fixed-rate until
December 2006, due June 11, 2009		5,000,000		5,000,000
4.42% FHLB fixed-rate advance, due July 9, 2010		2,000,000		2,000,000
6.27% FHLB convertible advance, fixed-rate until
December 2006, due September 8, 2010		5,000,000		5,000,000
5.30% select pay mortgage-matched advance, final
maturity May 1, 2011		628,850		658,357
5.35% select pay mortgage-matched advance, final
maturity July 1, 2011		1,298,580		1,507,849
3.92% select pay mortgage-matched advance, final
maturity November 1, 2012		567,654		587,902
3.55% select pay mortgage-matched advance, final
maturity March 1, 2013		689,513		712,991
4.10% select pay mortgage-matched advance, final
maturity March 1, 2015		699,844		716,967
4.09% select pay mortgage-matched advance, final
maturity November 1, 2017		582,822		593,068
3.31% select pay mortgage-matched advance, final
maturity April 1, 2019		628,890		638,925
4.72% select pay mortgage-matched advance, final
maturity November 1, 2022		2,246,955		2,269,998
4.38% select pay mortgage-matched advance, final
maturity December 1, 2022		748,071		755,928
3.92% select pay mortgage-matched advance, final
maturity December 1, 2022		631,951		638,874
3.64% select pay mortgage-matched advance, final
maturity March 1, 2023		1,909,388		1,930,409
	$	41,382,518	$	38,511,268

Advances under the borrowing agreements are collateralized by a blanket pledge of the Association’s residential mortgage loan portfolio and its FHLB stock.

(Continued)

12.

PEOPLES-SIDNEY FINANCIAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 4 - BORROWED FUNDS (Continued)

The interest rates on the convertible advances are fixed for a specified number of years, then convertible to a variable rate at the option of the FHLB. If the convertible option is exercised, the advance may be prepaid without prepayment fee. The select pay mortgage-matched advances require monthly principal and interest payments and annual additional principal payments.

Maturities of FHLB advances for the next five years and thereafter were as follows.

Year ended September 30,
2007	$	8,522,709
2008		10,560,361
2009		9,378,268
2010		8,221,737
2011		1,026,558
Thereafter		3,672,885
	$	41,382,518

NOTE 5 - OFF-BALANCE-SHEET ACTIVITIES

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.

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 of 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.

The contractual amount of financial instruments with off-balance-sheet risk was as follows.

	September 30,		June 30,
	2006		2006
1-4 family residential real estate - fixed rate	$	162,000	$	239,000
1-4 family residential real estate - variable rate		189,000		448,000
Commercial lines of credit - variable rate		4,577,000		4,213,000
Home equity lines of credit - variable rate		966,000		913,000

The interest rate on the fixed-rate commitment was 6.63% at September 30, 2006 and 6.38% to 8.00% at June 30, 2006. Commitments to make loans are generally made for a period of 30 days or less. The maximum maturity for fixed-rate commitments range from 10 years to 20 years.

At September 30, 2006 and June 30, 2006, the Corporation was required to have $163,000 and $241,000 on deposit with its correspondent banks as a compensating clearing requirement.

(Continued)

13.

PEOPLES-SIDNEY FINANCIAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 5 - OFF-BALANCE-SHEET ACTIVITIES (Continued)

The Corporation entered into employment agreements with certain of its officers. 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.

The Association entered into a five-year lease for a branch in the Super Wal-Mart in Sidney that commenced in June 2001. The lease term was renewed for five years at $39,750 annually. The lease has another five-year renewal option at $49,688 annually.

NOTE 6 - EARNINGS PER SHARE

The factors used in the earnings per share computation follow.

	Three Months Ended
	September 30,
	2006			2005
Basic Earnings Per Common Share
Net income	$	289,487		$	239,568
Weighted average common shares
outstanding		1,386,636			1,427,349
Less: Average unallocated ESOP shares		(37,669	)		(48,791	)
Weighted average common shares
outstanding for basic earnings
per common share		1,348,967			1,378,558
Basic earnings per common share	$	0.21		$	0.17
Diluted Earnings Per Common Share
Net income	$	289,487		$	239,568
Weighted average common shares
outstanding for basic earnings
per common share		1,348,967			1,378,558
Add: Dilutive effects of assumed
exercises of stock options		--			--
Weighted average common shares
and dilutive potential common
shares outstanding		1,348,967			1,378,558
Diluted earnings per common share	$	0.21		$	0.17
Stock options not considered in calculation
because they were not dilutive		128,898			128,898

(Continued)

14.

PEOPLES-SIDNEY FINANCIAL CORPORATION

MANAGEMENT’S DISCUSSION AND ANALYSIS

(Unaudited)

Item 2. Management’s Discussion and Analysis

Introduction

In the following pages, management presents an analysis of the consolidated financial condition of the Corporation as of September 30, 2006, compared to June 30, 2006, and results of operations for the three months ended September 30, 2006, compared with the same period in 2005. This discussion is designed to provide a more comprehensive review of operating results and financial position than could be obtained from an examination of the financial statements alone. This analysis should be read in conjunction with the interim financial statements and related footnotes included herein.

Overview and Outlook

The first quarter of the 2007 fiscal year reflected a general slow down in the local economy with lower loan demand even though the availability of housing in the market increased. With the Federal Reserve maintaining interest rates at higher levels, interest in home purchases and refinancing remained flat.

Management continued to pursue retail deposits while additionally pricing wholesale advances to maintain an acceptable cost of funds level. Continued pressure by competition made deposit attraction very difficult. Management’s policy of maintaining an acceptable interest rate margin to continue to enhance our profitability will remain on the forefront of our growth strategy. We will continue to monitor our local market closely during the coming months.

Forward-Looking Statements

When used in this filing 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 but not limited to 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 does not undertake, and specifically disclaims, any obligation to publicly release the result of any revisions that 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 September 30, 2006 were $139.7 million compared to $139.0 million at June 30, 2006, an increase of $0.7 million. The increase in total assets was primarily due to an increase in cash and cash equivalents of $0.7 million, funded by borrowed funds, which increased by $2.9 million. The increase in borrowed funds was partially offset by a decrease in deposits of $2.2 million.

Cash and cash equivalents increased $0.7 million from $4.7 million at June 30, 2006 to $5.4 million at September 30, 2006. Most of the increase was attributed to an increase of $0.5 million in interest-bearing deposits that we hold in other financial institutions.

(Continued)

15.

PEOPLES-SIDNEY FINANCIAL CORPORATION

MANAGEMENT’S DISCUSSION AND ANALYSIS

(Unaudited)

The securities portfolio, which is classified as available for sale, increased $95,000 from $5,250,000 at June 30, 2006 to $5,345,000 at September 30, 2006. The increase is related to a increase in the fair value of the securities during the reporting period as no securities transactions occurred. See Note 2 of Notes to Consolidated Financial Statements.

Federal Home Loan Bank stock increased $26,000 from $1,768,000 at June 30, 2006 to $1,794,000 at September 30, 2006 as a result of normal dividend payments received in the form of additional stock.

Total loans remained flat at $124.2 million at September 30, 2006 and June 30, 2006. However, there were changes between the various loan categories in the portfolio. The most significant changes occurred in real estate construction and development and consumer loans, which decreased $816,000 and $648,000, respectively. Commercial loans increased $757,000 as well as land and one-to four-family residential loans, which increased $293,000 and $202,000, respectively. Other loan categories had nominal increases which combined totaled $221,000. These changes resulted primarily from the general slow down in new construction and consumer spending offset by an increase in commercial activity and existing home purchases. During a recent exam, the Office of Thrift of Supervision recommended reclassification of approximately $2.8 million one-to four-family residential loans to multi-family and commercial loans as a result of a different interpretation of the definition regarding the collateral or purpose of these loans. The June 30, 2006 balances of the affected loan categories have been revised to reflect this reclassification to more accurately represent the activity in the loan portfolio for the current reporting period. See Note 3 of Notes to Consolidated Financial Statements.

Premises and equipment decreased $37,000 from $1,975,000 at June 30, 2006 to $1,938,000 at September 30, 2006. This decrease resulted from normal depreciation of existing assets partially offset by equipment purchases and routine improvements to the office building.

Other real estate owned decreased $100,000 to zero at September 30, 2006 as a result of the sale of a one-to four-family residential property that was purchased at sheriff’s sale during fiscal 2006. The sale resulted in a loss of $120. No other activity occurred during the three-month period from June 30, 2006 to September 30, 2006.

Total deposits decreased $2.2 million from $82.8 million at June 30, 2006 to $80.6 million at September 30, 2006, primarily due to a decrease of $1.5 million and $0.7 million in savings accounts and certificates of deposit respectively. Money market accounts also decreased $0.4 million. We attribute these decreases to local competition, the renewed attractiveness of the stock market as well as economic demands on the cash flow of our depositor base. These decreases were partially offset by increases of $0.3 million in commercial checking accounts and an increase of $55,000 in demand accounts.

Borrowed funds increased $2.9 million from $38.5 million at June 30, 2006 to $41.4 million at September 30, 2006. This increase was the result of the addition of $3.2 million in variable-rate cash management advances offset in part by the scheduled repayments of mortgage-matched advances. The increase in FHLB advances was used to offset the decrease in deposits. Borrowed funds represent a significant portion of our liabilities, and we expect this mix of deposits and borrowed funds will continue for the foreseeable future. See Note 4 of Notes to Consolidated Financial Statements.

Results of Operations

Our operating results are affected by general economic conditions, monetary and fiscal policies of federal agencies and regulatory policies of agencies that regulate financial institutions. Our cost of funds is influenced by interest rates on competing investments and general market rates of interest. All these factors affect the demand for real estate loans and other types of loans, which directly influence the volume of our lending activities.

(Continued)

16.

PEOPLES-SIDNEY FINANCIAL CORPORATION

MANAGEMENT’S DISCUSSION AND ANALYSIS

(Unaudited)

Our net income primarily depends on its net interest income, which is the difference between interest income earned on interest-earning assets, such as loans and securities and interest expense incurred on interest-bearing liabilities, such as deposits and borrowings. The level of net interest income is dependent on the interest rate environment and volume and composition of interest-earning assets and interest-bearing liabilities. Net income is also affected by provisions for loan losses, service charges, gains on the sale of assets and other income, noninterest expense and income taxes.

Three Months Ended September 30, 2006 Compared to the Three Months Ended September 30, 2005

Net Income. The Corporation earned net income of $289,000 for the three months ended September 30, 2006 compared to $240,000 for the three months ended September 30, 2005. The most significant change occurred in the provision for loan losses, which decreased. Various components of our income statement are discussed as follows.

Net Interest Income. Net interest income, which essentially remained flat, totaled $1,183,000 for the three months ended September 30, 2006 compared to $1,180,000 for the three months ended September 30, 2005, representing an increase of $3,000. The increase was the result of an increase in the total of net earning assets partially offset by a decrease in the net interest rate spread between interest earning assets and interest bearing liabilities during the current period.

Interest and fees on loans increased $152,000 from $1,948,000 for the three months ended September 30, 2005 to $2,100,000 for the three months ended September 30, 2006. The increase in interest income was due primarily to a higher average balance of loans coupled with an increase in the average yield earned. The average balance of loans increased to $124.0 million with an average yield of 6.78% for the three months ended September 30, 2006 compared to an average balance of $121.4 million with an average yield of 6.42% for the same three month period last year.

Interest on securities increased $3,000 due to an increase in the average yield earned during the current period. Interest on demand, time and overnight deposits increased $3,000 to $28,000 for the three months ended September 30, 2006 as compared to $25,000 for the same period last year. The increase in interest earned on deposits with other financial institutions was the result of a higher average yield earned on such deposits partially offset by a decrease in the average balance.

Dividends on FHLB stock increased $5,000 over the comparable period due to an increase in the dividend rate paid by the FHLB coupled with a higher average balance.

Interest paid on deposits increased $61,000 from $434,000 for the three months ended September 30, 2005 to $495,000 for the three months ended September 30, 2006. The increase resulted from an increase in the average interest rate paid on deposits partially offset by a decrease in the average balance of deposits. The average balance of deposits for the three months ended September 30, 2006 was $79.8 million at an average cost of 2.46% compared to an average balance of $84.6 million at an average cost of 2.03% for the three months ended September 30, 2005.

Interest paid on borrowed funds totaled $531,000 for the three months ended September 30, 2006 compared to $433,000 for the three months ended September 30, 2005. The increase of $98,000 in interest expense on borrowed funds resulted from an increase in the average balance of borrowed funds coupled with an increase in the average cost of these borrowings. The average balance of borrowed funds for the three months ended September 30, 2006 was $39.6 million at an average cost of 5.31% compared to an average balance of $33.0 million at an average cost of 5.20% for the three months ended September 30, 2005.

(Continued)

17.

PEOPLES-SIDNEY FINANCIAL CORPORATION

MANAGEMENT’S DISCUSSION AND ANALYSIS

(Unaudited)

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 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 that is considered adequate to absorb probable incurred losses in the loan portfolio. The amount of the provision is based on management’s monthly review of the loan portfolio and consideration of such factors as historical loss experience, general prevailing economic conditions, changes in 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 decreased $65,000 from $17,000 for the three months ended September 30, 2005 to a negative provision of $48,000 for the three months ended September 30, 2006. The negative provision was primarily the result of the positive resolution of a commercial loan that had a specific loss allocation of $80,000 at June 30, 2006. Additionally, the Corporation had slower growth in the loan portfolio during the current period as compared to a year ago. These factors that resulted in a negative provision for loan losses were partially offset by an increase in nonperforming loans for the three months ended September 30, 2006 as compared to the same period last year. The level of nonperforming loans at September 30, 2006 was $1,867,000 compared to $1,441,000 at September 30, 2005. The allowance for loan losses totaled $840,000, or 0.67% of gross loans receivable net of deferred loan origination fees and 45.0% of total nonperforming loans at September 30, 2006. This compares to $852,000, or 0.69% of gross loans receivable, net of deferred loan origination fees and 59.2% of total nonperforming loans at September 30, 2005. Overall, the Corporation’s charge-off history remains very modest and 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 80% 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, which includes service fees, other miscellaneous income and the net gain or loss on the sale of real estate owned, decreased $3,000 from $35,000 for the three months ended September 30, 2005 to $32,000 for the three months ended September 30, 2006. This is primarily due to a $3,000 decrease in fee income on NOW accounts. Even though total demand deposits increased, there was a decrease in the higher fee-based regular NOW accounts, which resulted in the decrease in fee income for the current period.

Noninterest expense. Noninterest expense totaled $816,000 for the three months ended September 30, 2006 compared to $823,000 for the three months ended September 30, 2005, a decrease of $7,000. The most significant change occurred in occupancy and equipment expense, which decreased $12,000 primarily due to a decrease in depreciation expense.

Income Tax Expense. Income tax expense totaled $158,000 for the three-month period ended September 30, 2006 and $135,000 for the three-month period ended September 30, 2005. The increase in income tax is reflective of a increase in income before income taxes for the current period. The effective tax rate was 35.2% and 36.1% for the three months ended September 30, 2006 and 2005.

(Continued)

18.

PEOPLES-SIDNEY FINANCIAL CORPORATION

MANAGEMENT’S DISCUSSION AND ANALYSIS

(Unaudited)

Liquidity and Capital Resources

The Corporation’s liquidity, primarily represented by cash and cash equivalents, is a result of operating, investing and financing activities. These activities are summarized below for the three months ended September 30, 2006 and 2005.

	Three Months
	Ended September 30,
	2006			2005
	(Dollars in thousands)
Net income	$	289		$	240
Adjustments to reconcile net income to net cash from
operating activities		(3	)		95
Net cash from operating activities		286			335
Net cash from investing activities		83			(1,138	)
Net cash from financing activities		358			834
Net change in cash and cash equivalents		727			31
Cash and cash equivalents at beginning of period		4,715			5,321
Cash and cash equivalents at end of period	$	5,442		$	5,352

The Corporation’s principal sources of funds are deposits, borrowings, loan repayments, maturities of securities and other funds provided by operations. While scheduled loan repayments and maturing investments are relatively predictable, deposit flows and early loan prepayments are influenced by interest rates, general economic conditions and competition and therefore are somewhat less predictable. The Corporation maintains investments in liquid assets based on management’s assessment of the (1) need for funds, (2) expected deposit flows, (3) yields available on short-term liquid assets and (4) objectives of the asset/liability management program. Management believes that loan repayments and other sources of funds will be adequate to meet the Corporation’s foreseeable liquidity needs.

The Corporation also has the ability to borrow from the FHLB up to a maximum total of $63.8 million including the cash management line of credit. See Note 4 of the Notes to Consolidated Financial Statements for a detail of the Corporation’s borrowings from the FHLB at September 30, 2006.

At September 30, 2006, the Corporation had commitments to originate fixed-rate loans totaling $162,000 and variable-rate loans totaling $189,000. Loan commitments are generally extended for 30 days. See Note 5 of the Notes to Consolidated Financial Statements for a detail of the Corporation’s loan commitments at September 30, 2006. The Office of Thrift Supervision regulations require the Corporation’s insured subsidiary to maintain a safe and sound level of liquid assets. The Corporation considers its liquidity and capital reserves sufficient to meet its outstanding short and long-term needs, and believes it is in compliance with regulatory requirements.

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 result in regulatory action.

(Continued)

19.

PEOPLES-SIDNEY FINANCIAL CORPORATION

MANAGEMENT’S DISCUSSION AND ANALYSIS

(Unaudited)

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.

At September 30, 2006 and June 30, 2006, management believes the Association complies with all regulatory capital requirements, and is considered well-capitalized under the Federal Deposit Insurance Act. To the best of management’s knowledge, no conditions or events have occurred subsequent to the last notification by regulators that management believes would have changed the Association’s category.

At September 30, 2006 and June 30, 2006, the Association’s actual capital levels, minimum required levels and levels to be considered “well-capitalized” were as follows.

											To Be
											Well-Capitalized
						For Capital					Under Prompt Corrective
	Actual					Adequacy Purposes					Action Regulations
	Amount		Ratio			Amount		Ratio			Amount		Ratio
	(Dollars in Thousands)
September 30, 2006
Total capital (to risk-
weighted assets)	$	16,432		18.8	%	$	6,988		8.0	%	$	8,735		10.0	%
Tier 1 (core) capital (to
risk-weighted assets)		15,716		18.0			3,494		4.0			5,241		6.0
Tier 1 (core) capital (to
adjusted total assets)		15,716		11.2			5,603		4.0			7,004		5.0
Tangible capital (to
adjusted total assets)		15,716		11.2			2,101		1.5			N/A
June 30, 2006
Total capital (to risk-
weighted assets)	$	16,048		18.9	%	$	6,779		8.0	%	$	8,473		10.0	%
Tier 1 (core) capital (to
risk-weighted assets)		15,368		18.1			3,389		4.0			5,084		6.0
Tier 1 (core) capital (to
adjusted total assets)		15,368		11.0			5,576		4.0			6,970		5.0
Tangible capital (to
adjusted total assets)		15,368		11.0			2,091		1.5			N/A

(Continued)

20.

PEOPLES-SIDNEY FINANCIAL CORPORATION

CONTROLS AND PROCEDURES

Item 3. Controls and Procedures

Any control system, no matter how well designed and operated, can provide only reasonable (not absolute) assurance that its objectives will be met. Furthermore, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, have been detected.

Disclosure Controls

The Company’s management, with the participation of the Company’s Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of the Company’s disclosure controls and procedures, as such term is defined in Rules 13a - 15(e) and 15d - 15(e) of the Securities Exchange Act of 1934 (Exchange Act) as of the end of the period covered by the report.

Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that as of March 31, 2006 our disclosure controls and procedures were effective to provide reasonable assurance that (i) the information required to be disclosed by us in this Report was recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms, and (ii) information required to be disclosed by us in our reports that we file or submit under the Exchange Act is accumulated and communicated to our management, including our principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.

21.

PEOPLES-SIDNEY FINANCIAL CORPORATION

PART II - OTHER INFORMATION

Item 1. Legal Proceedings

The Company is not involved in any pending legal proceedings other than routine legal proceedings occurring in the ordinary course of business, which, in the aggregate, involved amounts which are believed to be immaterial to the consolidated financial condition and operations of the Company.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

The following table illustrates the repurchase of the Corporation’s common stock during the period ended September 30, 2006.

Period	Total Number of Shares Purchased	Average Price Paid Per Share	Total Number of Shares Purchased As Part of Publicly Announced Plans Or programs	Maximum Number of Shares That May Yet Be Purchased Under The Plan or Programs
July 1, 2006 - July 31, 2006	8,380	$15.00	8,380	23,220
August l, 2006 - August 31, 2006
September 1, 2006 - September 30, 2006
Total	8,380	$15.00	8,380	23,220

 

On April 19, 2005, the registrant announced that its Board of Directors had authorized management to repurchase up to 5% of the Registrant’s common stock both through the open market and through unsolicited negotiated transactions. The authorization, which is for 71,600 shares, may be suspended or discontinued at any time.

Item 3. Defaults Upon Senior Securities

Not applicable.

Item 4. Submission of Matters to a Vote of Security Holders

None

Item 5. Other Information

None.

Item 6.        Exhibits

(a) (1) Exhibit 11: Computation of Earnings per Share

(2) Exhibits 31.1 and 31.2: Section 302 Certifications

(3) Exhibit 32: Section 906 Certifications

All other Exhibits previously filed

22.

PEOPLES-SIDNEY FINANCIAL CORPORATION

SIGNATURES

Pursuant to the requirement of the Securities Exchange Act of 1934, the small business issuer has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

Date:	November 14, 2006	/s/ Douglas Stewart
		Douglas Stewart
		President and Chief Executive Officer
Date:	November 14, 2006	/s/ Debra Geuy
		Debra Geuy
		Chief Financial Officer

23.

PEOPLES-SIDNEY FINANCIAL CORPORATION

INDEX TO EXHIBITS

EXHIBIT NUMBER	DESCRIPTION
3.1	Articles of Incorporation of Peoples-Sidney Financial Corporation	Incorporated by reference to the Registration Statement on Form S-1 filed by Peoples-Sidney Financial Corporation on January 27, 1997 (the “S-1”) with the Securities and Exchange Commission (the “SEC”), Exhibit 3.1.
3.2	Bylaws of Peoples-Sidney Financial Corporation	Incorporated by reference to the S-1, Exhibit 3.2.
10.1	Employee Stock Ownership Plan	Incorporated by reference to the S-1, Exhibit 10.1
10.2	Form of Employment Agreement with Douglas Stewart	Incorporated by Pre-Effective Amendment No. 1 to the S-1 filed with the SEC on March 12, 1997, Exhibit 10.2
10.3	Form of Employment Agreements with David R. Fogt, Gary N. Fullenkamp and Debra A. Geuy	Incorporated by Pre-Effective Amendment No. 1 to the S-1 filed with the SEC on March 12, 1997, Exhibit 10.3
10.4	Form of Severance Agreement with Steve Goins	Incorporated by Pre-Effective Amendment No. 1 to the S-1 filed with the SEC on March 12, 1997, Exhibit 10.4
10.5	401 (k) Plan	Incorporated by Pre-Effective Amendment No. 1 to the S-1 filed with the SEC on March 12, 1997, Exhibit 10.5
10.6	Peoples-Sidney Financial Corporation Amended and Restated 1998 Stock Option and Incentive Plan	Filed as an exhibit to the Registrant’s Annual Report on Form 10-KSB for the fiscal year ended June 30, 1999 (File No. 0-22223) and incorporate herein by reference.
10.7	Peoples-Sidney Financial Corporation Amended and Restated 1998 Management Recognition Plan	Filed as an exhibit to the Registrant’s Annual Report on Form 10-KSB for the fiscal year ended June 30, 1999 (File No. 0-22223) and incorporate herein by reference.
11	Statement Regarding Computation of Earnings per Share	See Notes 1 and 6 to the consolidated financial statements, which are incorporated herein by reference.
31.1	Certification of Principal Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2	Certification of Principal Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32	Certifications of the Chief Executive Officer and the Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

24.