Peoples Sidney Financial (PPSF) 10QSB 2008 Q3 Quarterly report (small business)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.  20549

FORM 10-QSB

(Mark One)

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

For the quarterly period ended March 31, 2008

£ TRANSITION 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 incorporation or organization)	(IRS Employer 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.

Yes  T No  £

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

Yes  £ No  T

As of May 12, 2008 the latest practicable date, 1,361,048 shares of the issuer’s common shares, $.01 par value, were issued and outstanding.

Transitional Small Business Disclosure Format (Check One):

Yes  £ No  T

1.

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	16
Item 3.	Controls and Procedures	24
PART II - OTHER INFORMATION
Item 1.	Legal Proceedings	25
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	25
Item 3.	Defaults Upon Senior Securities	25
Item 4.	Submission of Matters to a Vote of Security Holders	25
Item 5.	Other Information	25
Item 6.	Exhibits	25
SIGNATURES		26
INDEX TO EXHIBITS		27

2.

PEOPLES-SIDNEY FINANCIAL CORPORATION

CONSOLIDATED BALANCE SHEETS

MARCH 31, 2008 AND JUNE 30, 2007

Item 1.  Financial Statements

	March 31,			June 30,
	2008			2007
	(Unaudited)
ASSETS
Cash and due from financial institutions	$	1,541,809		$	1,065,054
Interest-bearing deposits in other financial institutions		4,610,133			4,117,144
Overnight deposits		2,200,000			2,000,000
Total cash and cash equivalents		8,351,942			7,182,198
Time deposits		1,000,000			--
Securities available for sale		2,056,260			4,847,820
Federal Home Loan Bank stock		1,844,500			1,820,800
Loans, net of allowance of $603,100 and $664,800		120,249,845			121,487,075
Accrued interest receivable		937,546			795,326
Premises and equipment, net		1,803,658			1,864,053
Other real estate owned and repossessions		438,463			143,482
Other assets		161,237			167,540
Total assets	$	136,843,451		$	138,308,294
LIABILITIES AND SHAREHOLDERS’ EQUITY
Deposits	$	82,327,778		$	82,479,470
Borrowed funds		36,908,791			38,189,030
Accrued interest payable and other liabilities		591,913			704,238
Total liabilities		119,828,482			121,372,738
Common stock in ESOP subject to repurchase obligation		1,542,288			1,677,238
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		16,569			16,569
Additional paid-in capital		9,306,291			9,169,858
Retained earnings		11,554,822			11,702,607
Treasury stock, 424,327 shares, at cost		(5,198,322	)		(5,198,322	)
Unearned employee stock ownership plan shares		(244,666	)		(333,042	)
Accumulated other comprehensive loss		37,987			(99,352	)
Total shareholders’ equity		15,472,681			15,258,318
Total liabilities and shareholders’ equity	$	136,843,451		$	138,308,294

See accompanying notes to consolidated financial statements.

3.

PEOPLES-SIDNEY FINANCIAL CORPORATION

CONSOLIDATED STATEMENTS OF INCOME

THREE AND NINE MONTHS ENDED MARCH 31, 2008 AND 2007

(Unaudited)

	Three Months Ended				Nine Months Ended
	March 31,				March 31,
	2008		2007		2008		2007
Interest income
Loans, including fees	$	2,133,826	$	2,146,657	$	6,417,947	$	6,384,618
Securities		32,562		50,089		140,911		158,825
Demand, time and overnight deposits		42,382		37,938		141,377		96,959
Dividends on Federal Home Loan Bank stock		23,767		28,621		85,724		81,373
Total interest income		2,232,537		2,263,305		6,785,959		6,721,775
Interest expense
Deposits		592,206		545,128		1,778,726		1,558,338
Borrowed funds		488,080		510,693		1,501,412		1,586,333
Total interest expense		1,080,286		1,055,821		3,280,138		3,144,671
Net interest income		1,152,251		1,207,484		3,505,821		3,577,104
Provision for loan losses		10,501		210		93,770		(68,887	)
Net interest income after provision for loan losses		1,141,750		1,207,274		3,412,051		3,645,991
Noninterest income
Service fees and other charges		26,882		29,360		81,902		94,292
Gain (loss) on sale of REO and repossessions		2,316		816		6,870		696
Mortgage banking income		45		2,346		9,677		2,346
Total noninterest income		29,243		32,522		98,449		97,334
Noninterest expense
Compensation and benefits		436,935		439,936		1,298,490		1,303,476
Director fees		24,300		24,300		72,900		72,900
Occupancy and equipment		98,345		103,529		289,899		280,825
Computer processing		98,172		89,473		290,519		272,160
Professional services		81,551		47,247		180,690		129,460
State franchise taxes		46,185		51,194		149,021		160,094
Other		83,079		86,874		254,417		245,388
Total noninterest expense		868,567		842,553		2,535,936		2,464,303
Income before income taxes		302,426		397,243		974,564		1,279,022
Income tax expense		108,800		142,000		349,400		454,300
Net income	$	193,626	$	255,243	$	625,164	$	824,722
Earnings per common share - basic	$	0.14	$	0.19	$	0.47	$	0.62
Earnings per common share - diluted	$	0.14	$	0.19	$	0.47	$	0.62

 See accompanying notes to consolidated financial statements.

4.

PEOPLES-SIDNEY FINANCIAL CORPORATION

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

THREE AND NINE MONTHS ENDED MARCH 31, 2008 AND 2007

(Unaudited)

	Three Months Ended						Nine Months Ended
	March 31,						March 31,
	2008			2007			2008			2007
Net income	$	193,626		$	255,243		$	625,164		$	824,722
Other comprehensive income
Unrealized holding gains on available-for-sale securities		54,629			35,210			208,086			138,000
Tax effect		(18,573	)		(11,972	)		(70,747	)		(46,920	)
Other comprehensive income		36,056			23,238			137,339			91,080
Comprehensive income	$	229,682		$	278,481		$	762,503		$	915,802

See accompanying notes to consolidated financial statements.

5.

PEOPLES-SIDNEY FINANCIAL CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN

SHAREHOLDERS’ EQUITY

THREE AND NINE MONTHS ENDED MARCH 31, 2008 AND 2007

(Unaudited)

	Three Months Ended						Nine Months Ended
	March 31,						March 31,
	2008			2007			2008			2007
Balance, beginning of period	$	15,581,632		$	15,261,059		$	15,258,318		$	15,499,512
Net income for period		193,626			255,243			625,164			824,722
Cash dividends, $.16 per share for the three months ended March 31, 2008and 2007, $.58 per share for the nine months ended March 31, 2008 and 2007		(213,227	)		(211,528	)		(772,949	)		(777,883	)
Purchase of 31,600 shares of treasury stock for the nine months ended March 31, 2007, at cost		--			--			--			(473,044	)
Commitment to release 2,512 and 2,654 employee stock ownership plan shares for the three months ended March 31, 2008 and 2007, and 7,532 and 7,962 employee stock ownership plan shares for the nine month sended March 31, 2008 and 2007, at fair value		28,823			36,277			89,859			115,008
Change in fair value of common stock subject to repurchase obligation for the three and nine months ended March 31, 2008 and 2007		(154,229	)		109,654			134,950			194,548
Change in fair value on securities available for sale, net of tax		36,056			23,238			137,339			91,080
Balance, end of period	$	15,472,681		$	15,473,943		$	15,472,681		$	15,473,943

See accompanying notes to consolidated financial statements.

6.

PEOPLES-SIDNEY FINANCIAL CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

NINE MONTHS ENDED MARCH 31, 2008 AND 2007

(Unaudited)

	Nine Months Ended March 31,
	2008			2007
Cash flows from operating activities
Net income	$	625,164		$	824,722
Adjustments to reconcile net income to net cash from operating activities
Depreciation		126,842			121,945
Provision for loan losses		93,770			(68,887	)
Net accretion on securities		(354	)		(270	)
Proceeds from sale of loans in secondary market		351,993			82,356
Loans disbursed for sale in secondary market		(347,404	)		(81,851	)
Gain on sale of loans		(9,671	)		(1,989	)
Amortization of mortgage servicing rights		504			28
Gain on sale of REO and repossessions		(6,870	)		(696	)
FHLB stock dividends		(23,700	)		(52,700	)
Compensation expense for ESOP shares		89,859			115,008
Change in:
Accrued interest receivable and other assets		(131,339	)		(17,257	)
Accrued expense and other liabilities		(183,072	)		(26,399	)
Deferred loan fees		(31,007	)		(21,321	)
Net cash from operating activities		554,715			872,689
Cash flows from investing activities
Purchase of time deposit		(1,000,000	)		--
Proceeds from maturities of available for sale securities		3,000,000			500,000
Net change in loans		647,804			1,364,542
Premises and equipment expenditures		(66,447	)		(26,928	)
Proceeds from sale REO and repossessions		238,552			109,117
Net cash from investing activities		2,819,909			1,946,731
Cash flows from financing activities
Net change in deposits		(151,692	)		(119,594	)
Net change in short-term FHLB advances		2,000,000			(3,500,000	)
Repayments of long-term FHLB advances		(3,280,239	)		(1,453,038	)
Proceeds from long-term FHLB advances		--			5,000,000
Cash dividends paid		(772,949	)		(777,883	)
Purchase of treasury stock		--			(473,044	)
Net cash from financing activities		(2,204,880	)		(1,323,559	)
Net change in cash and cash equivalents		1,169,744			1,495,861
Cash and cash equivalents at beginning of period		7,182,198			4,714,929
Cash and cash equivalents at end of period	$	8,351,942		$	6,210,790
Supplemental disclosures of cash flow information
Cash paid during the period for
Interest	$	3,264,763		$	3,125,613
Income taxes		355,000			395,000
Noncash transactions
Transfer from loans to other real estate owned	$	526,663		$	262,341

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 March 31, 2008 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, 2007, included in the Corporation’s 2007 Annual Report on Form 10-KSB for the fiscal year ended June 30, 2007.  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.  There are no significant concentrations of loans to any one industry or customer.  However, the customers’ ability to repay their loans is dependent on the real estate and general economic conditions in the area. 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.

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.

(Continued)

8.

PEOPLES-SIDNEY FINANCIAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Adoption of New Accounting Standards:  In February, 2006, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 155, “Accounting for Certain Hybrid Financial Instruments”.  This statement clarifies the treatment of derivatives that are freestanding or embedded as part of a beneficial interest in a securitized financial asset.  This statement was effective July 1, 2007.  The adoption of this pronouncement did not have a material impact on the consolidated financial statements.

In March, 2006, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 156, “Accounting for Servicing of Financial Assets”.  This statement allows the entity to choose the amortization method or the fair value method to account for each separately recognized servicing asset or liability.  This statement was effective July 1, 2007.  The adoption of this pronouncement did not have a material impact on the consolidated financial statements.

In June 2006, the FASB issued Interpretation (“FIN”) No. 48, “Accounting for Uncertainty in Income Taxes – an Interpretation of FASB Statement No. 109”, which clarifies the accounting for uncertainty in income taxes recognized in a company’s financial statements in accordance with SFAS 109, Accounting for Income Taxes.  FIN 48 prescribes a recognition and measurement threshold for a tax position taken or expected to be taken in a tax return.  FIN 48 also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition.  FIN 48 was effective July 1, 2007.  The impact of adopting FIN 48 was not material to the consolidated financial statements.

The Corporation and its subsidiary are subject to U.S. federal income tax.  The Corporation is no longer subject to examination by taxing authorities for fiscal years prior to June 30, 2003.  The Corporation does not expect the total amount of unrecognized tax benefit to significantly increase in the next twelve months.

The Corporation recognizes interest related to income tax matters as interest expense and penalties related in income tax matters as other expense.  The Corporation did not have any amounts accrued for interest and penalties at either July 1, 2007 or March 31, 2008.

Effect of Newly Issued But Not Yet Effective Accounting Standards:  In September 2006, FASB issued SFAS Statement No. 157, Fair Value Measurement (“SFAS No. 157”).  SFAS No. 157 defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles, and expands disclosures about fair value measurements.  SFAS No. 157 does not require any new fair value measurements.  This statement is effective for fiscal years beginning after November 15, 2007 and interim periods within those fiscal years.  The Corporation has not yet determined the effect, if any, that the application of SFAS No. 157 will have on its consolidated financial statements.

In February 2007, the FASB issued SFAS Statement No. 159, The Fair Value Option for Financial Assets and Financial Liabilities – Including an Amendment of FASB Statement No. 115, (“SFAS No. 159”).  SFAS No. 159 permits entities to choose to measure many financial instruments and certain other items at fair value at specified election dates.  If the fair value option is elected, a business entity shall report unrealized gains and losses on elected items in earnings at each subsequent reporting date.  Upon initial adoption of this Statement, an entity is permitted to elect the fair value option for available-for-sale and held-to-maturity securities previously accounted for under SFAS Statement No. 115, Accounting for Certain Investments in Debt and Equity Securities (“SFAS No. 115”).  The effect of reclassifying those securities into the trading category should be included in a cumulative-effect adjustment of retained earnings and not in current-period earnings and should be separately disclosed.  SFAS No. 159 is effective as of the beginning of the first fiscal year that begins after November 15, 2007.  The Corporation has not yet determined the effect, if any, that the application of SFAS No. 159 will have on its consolidated financial statements.

(Continued)

9.

PEOPLES-SIDNEY FINANCIAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 2 – SECURITIES AVAILABLE FOR SALE

Securities available for sale were as follows.

			Gross		Gross
	Fair		Unrealized		Unrealized
	Value		Gains		Losses
March 31, 2008
U.S. Government agencies	$	2,056,260	$	57,552	$	--
June 30, 2007
U.S. Government agencies	$	4,847,820	$	--	$	(150,534	)

Contractual maturities of securities available for sale at March 31, 2008 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 less than one year	$	--
Due after one year through five years		--
Due after five years through ten years		2,056,260
	$	2,056,260

A security pledged to secure public deposits and repurchase agreements had a carrying amount of $2,056,000 at March 31, 2008 and $1,863,000 at June 30, 2007.  There were no sales of securities available for sale during the nine months ended March 31, 2008 or 2007.

No securities at March 31, 2008 were in an unrealized loss position.  Securities with unrealized losses at June 30, 2007, 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
June 30, 2007
U.S. Government agencies	$	--	$	--	$	4,847,820	$	(150,534	)	$	4,847,820	$	(150,534	)

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.

(Continued)

10.

PEOPLES-SIDNEY FINANCIAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 3 - LOANS

Loans were as follows.

	March 31,			June 30,
	2008			2007
Mortgage loans:
1-4 family residential	$	84,645,904		$	86,555,451
Multi-family residential		4,545,338			4,232,326
Commercial real estate		14,912,222			13,893,048
Real estate construction and development		497,701			1,522,448
Land		2,781,030			2,891,359
Total mortgage loans		107,382,195			109,094,632
Consumer loans		4,950,882			5,357,102
Commercial loans		8,837,859			8,049,139
Total loans		121,170,936			122,500,873
Less:
Allowance for loan losses		(603,100	)		(664,800	)
Deferred loan fees		(317,991	)		(348,998	)
	$	120,249,845		$	121,487,075

At March 31, 2008 and June 30, 2007, there were no loans held for sale.  Mortgage loans serviced for others are not reported as assets.  The principal balance of these loans was $502,465 at March 31, 2008 and $159,819 at June 30, 2007.  Servicing rights associated with the serviced loans totaled $6,723 at March 31, 2008 and $2,145 at June 30, 2007.

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

	Three Months Ended						Nine Months Ended
	March 31,						March 31,
	2008			2007			2008			2007
Balance at beginning of period	$	737,900		$	696,000		$	664,800		$	893,600
Provision for losses		10,501			210			93,770			(68,887	)
Charge-offs		(153,638	)		(70,596	)		(169,447	)		(200,307	)
Recoveries		8,337			2,386			13,977			3,594
Balance at end of period	$	603,100		$	628,000		$	603,100		$	628,000

(Continued)

11.

PEOPLES-SIDNEY FINANCIAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 3 – LOANS (Continued)

Impaired loans were as follows.

	March 31,		June 30,
	2008		2007
Period-end impaired loans with no allowance for loan losses allocated	$	--	$	--
Period-end impaired loans with allowance for loan losses allocated		78,000		246,000
Amount of the allowance allocated to impaired loans		10,000		35,000

	Three Months Ended				Nine Months Ended
	March 31,				March 31,
	2008		2007		2008		2007
Average of impaired loans during the period	$	40,000	$	70,000	$	274,000	$	90,000
Interest income recognized during the period		440		335		15,760		2,206
Cash-basis interest income recognized		440		335		15,760		2,206

Nonperforming loans were as follows.

	March 31,		June 30,
	2008		2007
Loans past due over 90 days still on accrual	$	961,000	$	69,000
Nonaccrual loans		877,000		1,772,000

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)

12.

PEOPLES-SIDNEY FINANCIAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 4 - BORROWED FUNDS

At March 31, 2008 and June 30, 2007, 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”).  The Association has the option of selecting a variable rate of interest for up to 90 days or a fixed rate for a maximum of 30 days on the cash management advances.  The line of credit must be renewed on an annual basis.  There were no outstanding borrowings on this line of credit at June 30, 2007 and $2,000,000 outstanding at March 31, 2008.

As a member of the FHLB system, the Association has the ability to obtain borrowings up to a maximum total of $58.1 million including the cash management line of credit as of March 31, 2008.  Advances from the Federal Home Loan Bank were as follows.

	March 31,		June 30,
	2008		2007
Cash management advance, variable rate 2.40%	$	2,000,000	$	--
4.88% FHLB fixed-rate advance, due January 25, 2008		--		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 March 2008, 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 March 2008, due September 8, 2010		5,000,000		5,000,000
5.12% FHLB fixed-rate advance, due October 31, 2011		5,000,000		5,000,000
5.30% select pay mortgage-matched advance, final maturity May 1, 2011		399,040		484,157
5.35% select pay mortgage-matched advance, final maturity July 1, 2011		837,721		1,118,371
3.92% select pay mortgage-matched advance, final maturity November 1, 2012		398,827		480,421
3.55% select pay mortgage-matched advance, final maturity March 1, 2013		544,193		617,819
4.10% select pay mortgage-matched advance, final maturity March 1, 2015		379,742		517,930
4.09% select pay mortgage-matched advance, final maturity November 1, 2017		420,468		496,302
3.31% select pay mortgage-matched advance, final maturity April 1, 2019		481,876		508,543
4.72% select pay mortgage-matched advance, final maturity November 1, 2022		1,897,821		2,067,366
4.38% select pay mortgage-matched advance, final maturity December 1, 2022		630,918		687,777
3.92% select pay mortgage-matched advance, final maturity December 1, 2022		477,061		549,696
3.64% select pay mortgage-matched advance, final maturity March 1, 2023		1,441,124		1,660,648
	$	36,908,791	$	38,189,030

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

(Continued)

13.

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 March 31,
2009	$	13,455,183
2010		6,288,063
2011		8,143,987
2012		5,820,892
2013		648,344
Thereafter		2,552,322
	$	36,908,791

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.

	March 31,		June 30,
	2008		2007
1-4 family residential real estate – fixed rate	$	687,000	$	219,000
1-4 family residential real estate – variable rate		375,000		366,000
Commercial real estate – fixed rate		51,000		232,000
Commercial real estate – variable rate		342,000		--
Commercial lines of credit – variable rate		3,828,000		5,324,000
Home equity lines of credit – variable rate		893,000		974,000

The interest rate on fixed-rate commitments were 5.88% to 7.00% at March 31, 2008 and 7.25% to 8.13% at June 30, 2007.  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 March 31, 2008 and June 30, 2007, the Corporation was required to have $251,000 and $295,000 on deposit with its correspondent banks as a compensating clearing requirement.

(Continued)

14.

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 in June 2006 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						Nine Months Ended
	March 31,						March 31,
	2008			2007			2008			2007
Basic Earnings Per Common Share
Net income	$	193,626		$	255,243		$	625,164		$	824,722
Weighted average common shares outstanding		1,361,048			1,361,048			1,361,048			1,372,877
Less:  Average unallocated ESOP shares		(22,104	)		(32,361	)		(24,614	)		(35,015	)
Weighted average common shares outstanding for basic earnings per common share		1,338,944			1,328,687			1,336,434			1,337,862
Basic earnings per common share	$	0.14		$	0.19		$	0.47		$	0.62
Diluted Earnings Per Common Share
Net income	$	193,626		$	255,243		$	625,164		$	824,722
Weighted average common shares outstanding for basic earnings per common share		1,338,944			1,328,687			1,336,434			1,337,862
Add:  Dilutive effects of assumed exercises of stock options		--			--			--			--
Weighted average common shares and dilutive potential common shares outstanding		1,338,944			1,328,687			1,336,434			1,337,862
Diluted earnings per common share	$	0.14		$	0.19		$	0.47		$	0.62
Average stock options not considered in calculation because they were not dilutive		119,972			121,063			119,972			126,324

(Continued)

15.

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 March 31, 2008, compared to June 30, 2007, and results of operations for the three and nine months ended March 31, 2008, compared with the same periods in 2007.  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 consolidated financial statements alone.  This analysis should be read in conjunction with the interim consolidated financial statements and related footnotes included herein.

Overview and Outlook

The current local housing market and the economy in general remain depressed.  Houses are taking longer periods to sell.  Our county unemployment rate, however, remains stable at 5.2%.  Even with the recent interest rate cuts, we are seeing limited housing activity in all price ranges.  Foreclosures have declined, however, many foreclosed properties remain vacant and are listed for sale.  Typically, purchasers of properties have very little cash to use for major purchases and disposable income continues to narrow as everyday consumer costs continue to increase.

Lower interest rates also compound the problem of attracting retail deposits.  We continue to compare wholesale advance rates verses retail deposit rates to attract funds at the lowest cost reasonably attainable.  We expect these trends to continue during the balance of 2008.

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 March 31, 2008 were $136.8 million compared to $138.3 million at June 30, 2007, a decrease of $1.5 million.  The decrease in total assets was primarily due to a decrease in loans of $1.2 million.  Securities available for sale also decreased $2.8 million partially offset by increases in cash and cash equivalents and time deposits of $1.2 million and $1.0 million respectively.

Cash and cash equivalents increased $1.2 million from $7.2 million at June 30, 2007 to $8.4 million at March 31, 2008.  The increase in cash and equivalents resulted from a decrease in securities. The securities portfolio, which is classified as available for sale, decreased $2.8 million from $4.8 million at June 30, 2007 to $2.0 million at March 31, 2008.  The decrease was due to calls by the issuers of $3.0 million in securities, in accordance with their terms,

(Continued)

16.

PEOPLES-SIDNEY FINANCIAL CORPORATION

MANAGEMENT’S DISCUSSION AND ANALYSIS

(Unaudited)

partially offset by an increase in the fair value of the remaining security during the reporting period.  See Note 2 of Notes to Consolidated Financial Statements.

Time deposits increased $1.0 million resulting from the partial reinvestment of the proceeds from the security calls during the period.

Total loans decreased $1.2 million from $121.5 million at June 30, 2007 to $120.3 million at March 31, 2008.  The most significant changes occurred in one- to four-family residential loans and real estate construction and development loans, which decreased $1.9 million and $1.0 million respectively, partially offset by an increase of $1.0 million in commercial real estate loans.  Non-mortgage loans provided a net increase of $0.4 million with an increase of $0.8 million in commercial non-mortgage loans partially offset by a $0.4 million decrease in consumer loans.  The remaining loan categories had nominal changes that combined for a net increase of $0.2 million.  The decrease in the loan portfolio resulted primarily from the general slow down in the residential housing market.  The increase in commercial lending resulted primarily from increased activity in agricultural farm loans and commercial business loans.  See Note 3 of Notes to Consolidated Financial Statements.

Premises and equipment decreased $60,000 from $1,864,000 at June 30, 2007 to $1,804,000 at March 31, 2008.  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 increased $295,000 to $438,000 at March 31, 2008 as a result of the addition of four one- to four-family residential properties totaling $527,000 acquired through deed-in-lieu of foreclosure since June 30, 2007.  Three properties were sold during the nine months ended March 31, 2008 generating total proceeds of $239,000 and net gains of $6,900.

Total deposits decreased $0.2 million from $82.5 million at June 30, 2007 to $82.3 million at March 31, 2008.  The most significant changes occurred in certificate accounts, which increased $1.4 million.  However, money market and savings accounts decreased $0.6 million and $0.4 million, respectively and NOW and commercial checking accounts also decreased $0.3 million and $0.2 million respectively.  Local competition and economic demands continue to limit the availability of deposit funds.

Borrowed funds decreased $1.3 million from $38.2 million at June 30, 2007 to $36.9 million at March 31, 2008.  This decrease was the result of scheduled repayments of mortgage-matched advances and a maturity of a $2.0 million fixed-rate advance partially offset by a $2.0 net increase in cash management advances.  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 5 of Notes to Consolidated Financial Statements.

(Continued)

17.

PEOPLES-SIDNEY FINANCIAL CORPORATION

MANAGEMENT’S DISCUSSION AND ANALYSIS

(Unaudited)

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.

Our net income is dependent on 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 March 31, 2008 Compared to the Three Months Ended March 31, 2007

Net Income.  The Corporation earned net income of $194,000 for the three months ended March 31, 2008 compared to $255,000 for the three months ended March 31, 2007.  The most significant changes occurred in net interest income, which decreased $55,000 coupled with an increase of $26,000 in noninterest expense.  These decreases to net income were partially offset by a decrease of $33,000 in income tax expense.  Various components of our income statement are discussed as follows.

Net Interest Income.  Net interest income totaled $1,152,000 for the three months ended March 31, 2008 compared to $1,207,000 for the three months ended March 31, 2007, representing a decrease of $55,000.  The decrease was the result of a decrease in the total of average net earning assets coupled with a decrease in the net interest margin during the current period.  This resulted in a decrease in total interest income and an increase in total interest expense as compared to a year ago.

Interest and fees on loans decreased $13,000 from $2,147,000 for the three months ended March 31, 2007 to $2,134,000 for the three months ended March 31, 2008.  The decrease in interest income was due primarily to a decrease in the average balance of loans partially offset by a higher average yield earned.  The average balance of loans decreased to $120.8 million with an average yield of 7.07% for the three months ended March 31, 2008 compared to an average balance of $123.0 million with an average yield of 6.98% for the same three month period last year.

Interest on securities decreased $18,000 due to a decrease in the average balance partially offset by an increase in the average yield earned during the current period.  Interest on demand, time and overnight deposits increased $4,000 to $42,000 for the three months ended March 31, 2008 as compared to $38,000 for the same period last year.  The increase in interest earned on deposits with other financial institutions was the result of an increase in the average balance partially offset by a lower average yield earned on such deposits.

Dividends on FHLB stock decreased $5,000 over the comparable period due to an decrease in the dividend rate paid by the FHLB partially offset by a higher average balance.

Interest paid on deposits increased $47,000 from $545,000 for the three months ended March 31, 2007 to $592,000 for the three months ended March 31, 2008.  The increase resulted from an increase in the average interest rate paid on deposits coupled with an increase in the average balance of deposits.  The average balance of deposits for the three months ended March 31, 2008 was $80.8 million at an average cost of 2.95% compared to an average balance of $80.4 million at an average cost of 2.75% for the three months ended March 31, 2007.

(Continued)

18.

PEOPLES-SIDNEY FINANCIAL CORPORATION

MANAGEMENT’S DISCUSSION AND ANALYSIS

(Unaudited)

Interest paid on borrowed funds totaled $488,000 for the three months ended March 31, 2008 compared to $511,000 for the three months ended March 31, 2007.  The decrease of $23,000 in interest expense on borrowed funds resulted from a decrease in the average balance of borrowed funds partially coupled with a decrease in the average rate.  The average balance of borrowed funds for the three months ended March 31, 2008 was $37.1 million at an average cost of 5.28% compared to an average balance of $38.9 million at an average cost of 5.32% for the three months ended March 31, 2007.

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 increased $10,000 from a provision of $210 for the three months ended March 31, 2007 to a provision of $10,000 for the three months ended March 31, 2008.  The provision for loan losses of $10,000 during the current three-month period is due to an increase in nonperforming loans and related provisions on current impaired loans.  Nonperforming loans increased from $1.5 million at December 31, 2007 to $1.8 million at March 31, 2008. The Corporation realized charge offs of $154,000 in impaired loans during the current three-month period.  However, this probable loss had already been included in the allowance for loan losses at 100% of its outstanding balance during prior periods.  Therefore the charge off had no affect on the provision for loan losses during the March 2008 quarter.  Additional provisions of $8,000 were required for the remaining as well as newly identified impaired loans during the current period.  Impaired loans were $293,000 with $165,000 in related provisions at December 31, 2007 and $78,000 with $10,000 in related provisions at March 31, 2008.  During the prior year three-month period the Corporation experienced charges offs of $68,000 in commercial and consumer loans.  However, decreases in the total loan portfolio and decreases in total nonperforming and classified loans offset the additional provisions associated with these loans during the period.  Also, as a result of the charge offs the allowance allocated to impaired loans actually decreased $9,000.  Impaired loans were $28,000 with loan loss reserves of $12,000 at March 31, 2007 compared to impaired loans of $33,000 with loan loss reserves of $21,000 at December 31, 2006.

The allowance for loan losses totaled $603,000, or 0.50% of gross loans receivable net of deferred loan origination fees and 32.8% of total nonperforming loans at March 31, 2008.  This compares to $628,000, or 0.51% of gross loans receivable, net of deferred loan origination fees and 62.7% of total nonperforming loans at March 31, 2007.

Noninterest income.  Noninterest income, which includes service fees, other miscellaneous income, the net gain or loss on the sale of real estate owned and mortgage banking income, decreased $4,000 from $33,000 for the three months ended March 31, 2007 to $29,000 for the three months ended March 31, 2008.  This is primarily due to a decrease in fee income on NOW accounts resulting from a decrease in the average balance as compared to last year.

(Continued)

19.

PEOPLES-SIDNEY FINANCIAL CORPORATION

MANAGEMENT’S DISCUSSION AND ANALYSIS

(Unaudited)

Noninterest expense.  Noninterest expense totaled $869,000 for the three months ended March 31, 2008 compared to $843,000 for the three months ended March 31, 2007, an increase of $26,000.  The most significant changes occurred in professional services, which increased $34,000 and computer processing expense, which increased $9,000.  The increase in professional services is related to cost associated with the going private transaction which was announced in a press release dated April 14, 2008.  The increase in computer processing expense resulted from the processing cost associated with the addition of internet banking.  Other categories of noninterest expense combined for a decrease of $17,000.

Income Tax Expense.  Income tax expense totaled $109,000 for the three-month period ended March 31, 2008 and $142,000 for the three-month period ended March 31, 2007.  The decrease in income tax is reflective of a decrease in income before income taxes for the current period.  The effective tax rate was 36.0% and 35.7% for the three months ended March 31, 2008 and 2007.

Nine Months Ended March 31, 2008 Compared to the Nine Months Ended March 31, 2007

Net Income.  The Corporation earned net income of $625,000 for the nine months ended March 31, 2008 compared to $825,000 for the nine months ended March 31, 2007, representing a decrease of $200,000. The most significant factor contributing to the decrease in net income for the current nine-month period was an increase in provision for loan losses and a decrease in net interest income, which was partially offset by a decrease in income tax expense.

Net Interest Income.  Net interest income totaled $3,506,000 for the nine months ended March 31, 2008 compared to $3,577,000 for the nine months ended March 31, 2007, a decrease of $71,000.  The decrease was the result of a decline in the total of average net earning assets.  This equates to a smaller increase in interest income on loans and other sources of interest income compared to the increase in expense on deposits and borrowed money.

Interest and fees on loans increased $33,000, or 0.5% from $6,385,000 for the nine months ended March 31, 2007 to $6,418,000 for the nine months ended March 31, 2008.  The increase in interest income was due primarily to a higher average yield earned on loans due to the increasing interest rate environment during the majority of the current nine-month period offset by a decrease in the average balance.  The average balance of loans decreased to $121.0 million with an average yield of 7.07% for the nine months ended March 31, 2008 compared to an average balance of $123.6 million with an average yield of 6.88% for the same nine month period last year.

Interest on securities decreased $18,000 from $159,000 for the nine months ended March 31, 2007 to $141,000 for the nine months ended March 31, 2008.  The decrease resulted from a decrease in the average balance partially offset by an increase in the interest rate during the current period as compared to last year.

Interest on demand, time and overnight deposits increased $44,000 from $97,000 for the nine months ended March 31, 2007 to $141,000 for the nine months ended March 31, 2008.  The increase resulted from an increase in the average balance of these deposits partially offset by a decrease in the average rate.

Dividends on FHLB stock increased $4,000 as compared to the same period a year ago due to an increase in the dividend rate paid by the FHLB coupled with a higher average balance.

Interest paid on deposits increased $221,000, or 14.2% from $1,558,000 for the nine months ended March 31, 2007 to $1,779,000 for the nine months ended March 31, 2008.  The increase resulted from a higher average interest rate coupled with a higher average balance of deposits. The average balance of deposits for the nine months ended March 31, 2008 was $80.6 million at an average cost of 2.94% compared to an average balance of $79.7 million at an average cost of 2.60% for the nine months ended March 31, 2007.

(Continued)

20.

PEOPLES-SIDNEY FINANCIAL CORPORATION

MANAGEMENT’S DISCUSSION AND ANALYSIS

(Unaudited)

Interest paid on borrowed funds totaled $1,501,000 for the nine months ended March 31, 2008 compared to $1,586,000 for the nine months ended March 31, 2007.  The decrease of $85,000 in interest expense on borrowed funds resulted from a decrease in the average balance of borrowed funds.  The average balance of borrowings for the nine months ended March 31, 2008 was $37.6 million compared to an average balance of $39.7 million for the nine months ended March 31, 2007.  The average cost of these borrowings remained the same for both the current and prior period at 5.32%.

Provision for Loan Losses.  The provision for loan losses for the nine months ended March 31, 2008 totaled $94,000 compared to a negative provision of $69,000 for the nine months ended March 31, 2007.  The increase of $163,000 in the provision for losses was due primarily to an increase in the allowance allocation for probable losses on impaired loans during the current nine-month period.  Impaired loans increased during the current nine months to a high of $293,000 at December 31, 2007 from $246,000 at June 30, 2007 to an ending balance at March 31, 2008 of $78,000.  The resulting provision for loan losses on impaired loans increased $138,000 for the nine months ended March 31, 2008.  Also during this period the Corporation charged off $167,000 in impaired loans.  This increase to provision for loan losses was partially offset by a decrease in total classified loans coupled with an overall decrease in the loan portfolio balance since June 30, 2007.  Classified loans totaled $1.8 million at June 30, 2007 compared to $1.2 million at March 31, 2008.  The negative provision of $69,000 that occurred during the nine months ended March 31, 2008 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 a decline in the loan portfolio balance during the nine-month period a year ago.

Noninterest income.  Noninterest income includes service fees, other miscellaneous income, the gain or loss realized on the sale of real estate owed and mortgage banking income increased $1,000 from $97,000 for the nine months ended March 31, 2007 to $98,000 for the nine months ended March 31, 2008.  This is primarily due to a $6,000 increase in the gain on the sale of REO during the current nine-month period.  A $12,000 decrease in service fees was offset by an increase of $7,000 in mortgage banking income for the comparable period.

Noninterest expense.Noninterest expense totaled $2,536,000 for the nine months ended March 31, 2008 compared to $2,464,000 for the nine months ended March 31, 2007, an increase of $72,000.  Professional fees increased $51,000 resulting from expenses incurred relating to the going private transaction.  Computer processing expense increased $18,000, occupancy and equipment expense increased $9,000, and other expenses increased $9,000.  Other than the increase in computer processing expense relating to the preparation costs associated with the addition of internet banking there were no other individual significant items that contributed to the increases in occupancy and equipment and other expenses.  State franchise tax decreased $11,000 resulting from the tax savings associated with the payment of dividends by the Association to the Corporation.

Income Tax Expense.  Income tax expense totaled $349,000 for the nine months ended March 31, 2008 compared to $454,000 for the nine months ended March 31, 2007, representing a decrease of $105,000.  The decrease in income tax expense is reflective of a decrease in income before tax.  The effective tax rate was 35.9% and 35.5% for the nine months ended March 31, 2008 and 2007.

(Continued)

21.

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 nine months ended March 31, 2008 and 2007.

	Nine Months Ended
	March 31,
	2008			2007
	(Dollars in thousands)
Net income	$	625		$	825
Adjustments to reconcile net income to net cash from operating activities		(70	)		48
Net cash from operating activities		555			873
Net cash from investing activities		2,820			1,947
Net cash from financing activities		(2,205	)		(1,324	)
Net change in cash and cash equivalents		1,170			1,496
Cash and cash equivalents at beginning of period		7,182			4,715
Cash and cash equivalents at end of period	$	8,352		$	6,211

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 $58.1 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 March 31, 2008.

At March 31, 2008, the Corporation had commitments to originate fixed-rate loans totaling $738,000 and variable-rate loans totaling $717,000.  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 March 31, 2008.  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 sufficient to meet its outstanding short and long-term needs.

(Continued)

22.

PEOPLES-SIDNEY FINANCIAL CORPORATION

MANAGEMENT’S DISCUSSION AND ANALYSIS

(Unaudited)

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.

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 March 31, 2008 and June 30, 2007, 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 March 31, 2008 and June 30, 2007, the Association’s actual capital levels, minimum required levels and levels to be considered “well-capitalized” were as follows.

	Actual					For Capital Adequacy Purposes					To Be Well-Capitalized Under Prompt Corrective Action Regulations
	Amount		Ratio			Amount		Ratio			Amount		Ratio
	(Dollars in Thousands)
March 31, 2008
Total capital to risk-weighted assets	$	14,941		17.2	%	$	6,965		8.0	%	$	8,706		10.0	%
Tier 1 (core) capital to risk-weighted assets		14,348		16.5			3,482		4.0			5,223		6.0
Tier 1 (core) capital to adjusted total assets		14,348		10.5			5,471		4.0			6,839		5.0
Tangible capital to adjusted total assets		14,348		10.5			2,052		1.5			N/A
June 30, 2007
Total capital to risk-weighted assets	$	13,989		16.1	%	$	6,930		8.0	%	$	8,663		10.0	%
Tier 1 (core) capital to risk-weighted assets		13,572		15.7			3,465		4.0			5,198		6.0
Tier 1 (core) capital to adjusted total assets		13,572		9.8			5,541		4.0			6,926		5.0
Tangible capital to adjusted total assets		13,572		9.8			2,078		1.5			N/A

23.

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, 2008 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.

24.

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

None

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 included in Note 6 to the consolidated financial statements.

(2) Exhibits 31.1 and 31.2: Section 302 Certifications

(3) Exhibit 32: Section 906 Certifications

All other Exhibits previously filed

25.

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:	May 15, 2008	/s/ Douglas Stewart
		Douglas Stewart
		President and Chief Executive Officer
Date:	May 15, 2008	/s/ Debra Geuy
		Debra Geuy
		Chief Financial Officer

26.

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

27.