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, 2004
|_| 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 (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.
Yes |X| No |_|
As of November 5, 2004, the latest practicable date, 1,432,648 shares of the
issuer's common shares, $.01 par value, were issued and outstanding.
Transitional Small Business Disclosure Format (Check One):
Yes |_| No |X|
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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 or Plan or Operation........................ 16
Item 3. Controls and Procedures.......................................................... 22
PART II - OTHER INFORMATION
Item 1. Legal Proceedings................................................................ 23
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds...................... 23
Item 3. Defaults Upon Senior Securities.................................................. 23
Item 4. Submission of Matters to a Vote of Security Holders.............................. 23
Item 5. Other Information................................................................ 23
Item 6. Exhibits and Reports on Form 8-K................................................. 23
SIGNATURES ................................................................................ 24
INDEX TO EXHIBITS.......................................................................... 25
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2.
PEOPLES-SIDNEY FINANCIAL CORPORATION
CONSOLIDATED BALANCE SHEETS
(Unaudited)
- --------------------------------------------------------------------------------
Item 1. Financial Statements
--------------------
September 30, June 30,
2004 2004
---- ----
ASSETS
Cash and due from financial institutions $ 1,221,953 $ 1,327,745
Interest-bearing deposits in other financial institutions 5,559,638 4,705,943
Overnight deposits 1,000,000 4,000,000
------------- -------------
Total cash and cash equivalents 7,781,591 10,033,688
Securities available for sale 5,409,215 5,288,280
Federal Home Loan Bank stock 1,618,500 1,601,400
Loans, net of allowance of $777,000 and $752,900 116,932,987 115,651,910
Accrued interest receivable 743,813 670,521
Premises and equipment, net 2,090,406 2,124,986
Real estate owned 99,085 99,085
Other assets 117,516 301,160
------------- -------------
Total assets $ 134,793,113 $ 135,771,030
============= =============
LIABILITIES
Deposits $ 86,205,406 $ 86,764,253
Borrowed funds 30,665,578 31,140,388
Accrued interest payable and other liabilities 316,148 435,476
------------- -------------
Total liabilities 117,187,132 118,340,117
SHAREHOLDERS' EQUITY
Preferred stock, $.01 par value, 500,000 shares
authorized, none issued and outstanding -- --
Common stock, $.01 par value, 3,500,000 shares
authorized, 1,785,375 shares issued 17,854 17,854
Additional paid-in capital 10,761,634 10,748,851
Retained earnings 11,690,960 11,642,982
Treasury stock, 352,727 shares, at cost (4,113,716) (4,113,716)
Unearned employee stock ownership plan shares (692,572) (727,121)
Accumulated other comprehensive loss (58,179) (137,937)
------------- -------------
Total shareholders' equity 17,605,981 17,430,913
------------- -------------
Total liabilities and shareholders' equity $ 134,793,113 $ 135,771,030
============= =============
- --------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
3.
PEOPLES-SIDNEY FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
- --------------------------------------------------------------------------------
Three Months Ended
September 30,
2004 2003
---- ----
Interest income
Loans, including fees $1,837,810 $1,951,798
Securities 45,590 70,329
Demand, time and overnight deposits 10,883 16,843
Dividends on FHLB Stock 17,108 15,516
---------- ----------
Total interest income 1,911,391 2,054,486
Interest expense
Deposits 369,897 509,212
Borrowed funds 410,863 425,874
---------- ----------
Total interest expense 780,760 935,086
---------- ----------
Net interest income 1,130,631 1,119,400
Provision for loan losses 26,769 14,051
---------- ----------
Net interest income after provision for loan losses 1,103,862 1,105,349
Noninterest income
Service fees and other charges 31,677 34,132
---------- ----------
Total noninterest income 31,677 34,132
Noninterest expense
Compensation and benefits 409,737 388,112
Director fees 24,300 24,300
Occupancy and equipment 102,616 100,972
Computer processing 58,942 61,821
Professional fees 28,394 27,816
State franchise taxes 52,798 48,558
Other 83,578 92,716
---------- ----------
Total noninterest expense 760,365 744,295
---------- ----------
Income before income taxes 375,174 395,186
Income tax expense 135,300 146,600
---------- ----------
Net income $ 239,874 $ 248,586
========== ==========
Earnings per common share - basic $ 0.17 $ 0.18
========== ==========
Earnings per common share - diluted $ 0.17 $ 0.18
========== ==========
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See accompanying notes to consolidated financial statements.
4.
PEOPLES-SIDNEY FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
Three Months Ended
September 30,
-------------
2004 2003
---- ----
Net income $ 239,874 $ 248,586
Other comprehensive income (loss)
Unrealized holding gains and (losses) on
available-for-sale securities 120,845 (98,745)
Tax effect (41,087) 33,574
--------- ---------
Other comprehensive income (loss) 79,758 (65,171)
--------- ---------
Comprehensive income $ 319,632 $ 183,415
========= =========
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See accompanying notes to consolidated financial statements.
5.
PEOPLES-SIDNEY FINANCIAL CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN
SHAREHOLDERS' EQUITY
(Unaudited)
- --------------------------------------------------------------------------------
Three Months Ended
September 30,
-------------
2004 2003
---- ----
Balance, beginning of period $ 17,430,913 $ 17,384,280
Net income for period 239,874 248,586
Cash dividends, $.14 and $.13 per share for the three
months ended September 30, 2004 and 2003 (191,895) (177,472)
Commitment to release 2,944 and 3,091 employee stock
ownership plan shares for the three months ended
September 30, 2004 and 2003, at fair value 47,331 42,045
Change in fair value on securities available for
sale, net of tax 79,758 (65,171)
------------ ------------
Balance, end of period $ 17,605,981 $ 17,432,268
============ ============
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See accompanying notes to consolidated financial statements.
6.
PEOPLES-SIDNEY FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
- --------------------------------------------------------------------------------
Three Months Ended
September 30,
-------------
2004 2003
---- ----
Cash flows from operating activities
Net income $ 239,874 $ 248,586
Adjustments to reconcile net income to net cash from
operating activities
Depreciation 43,876 44,779
Provision for loan losses 26,769 14,051
FHLB stock dividends (17,100) (15,500)
Compensation expense for ESOP shares 47,331 42,045
Change in:
Accrued interest receivable and other assets 110,262 86,677
Accrued expense and other liabilities (160,415) (204,556)
Deferred loan fees (701) 20,265
------------ ------------
Net cash from operating activities 289,896 236,347
Cash flows from investing activities
Proceeds from maturities/calls of securities available for sale -- 4,000,000
Net change in loans (1,307,145) (1,651,496)
Premises and equipment expenditures (9,296) (390,023)
------------ ------------
Net cash from investing activities (1,316,441) 1,958,481
Cash flows from financing activities
Net change in deposits (558,847) (2,182,972)
Repayments of long-term FHLB advances (474,810) (528,131)
Cash dividends paid (191,895) (177,472)
------------ ------------
Net cash from financing activities (1,225,552) (2,888,575)
------------ ------------
Net change in cash and cash equivalents (2,252,097) (693,747)
Cash and cash equivalents at beginning of period 10,033,688 12,300,598
------------ ------------
Cash and cash equivalents at end of period $ 7,781,591 $ 11,606,851
============ ============
Supplemental disclosures of cash flow information
Cash paid during the period for
Interest $ 783,897 $ 947,180
Income taxes 15,000 15,000
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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, 2004
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 accounting principles generally accepted in
the United States of America 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, 2004, included in the Corporation's 2004 Annual Report on Form 10-KSB for
the fiscal year ended June 30, 2004. 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 accounting
principles generally accepted in the United States of America, 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.
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(Continued)
8.
PEOPLES-SIDNEY FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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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. Management recognition plan ("MRP") shares
are considered outstanding as they become vested. Diluted EPS shows the dilutive
effect of additional common shares upon exercise of stock options.
Stock-Based Compensation: Employee compensation expense under stock option plans
is reported using the intrinsic value method. No stock-based compensation cost
is reflected in net income, as all options granted had an exercise price equal
to or greater than the market price of the underlying common stock at the date
of grant. All outstanding options finished vesting during the year ended June
30, 2003.
NOTE 2 - SECURITIES AVAILABLE FOR SALE
Securities available for sale were as follows.
Gross Gross
Fair Unrealized Unrealized
Value Gains Losses
----- ----- ------
September 30, 2004
- ------------------
U.S. Government agencies $ 5,409,215 $ 17,518 $ (105,668)
============= ============ =============
June 30, 2004
- -------------
U.S. Government agencies $ 5,288,280 $ 13,280 $ (222,275)
============= ============ =============
Contractual maturities of securities available for sale at September 30, 2004
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 after one year through five years $ 2,517,035
Due after five years through ten years 2,892,180
--------------
$ 5,409,215
==============
There were no sales of securities during the three months ended September 30,
2004 or 2003. No securities were pledged as collateral at September 30, 2004 or
June 30, 2004.
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(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, 2004, 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
- ------------------------- ----- ---- ----- ---- ----- ----
U.S. Government agencies $ -- $ (--) $ 2,892,180 $ (105,668) $ 2,892,180 $ (105,668)
============ ======== ============ =========== ============ ===========
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,
2004 2004
---- ----
Mortgage loans:
1-4 family residential $ 90,081,060 $ 89,974,734
Multi-family residential 1,322,455 1,330,844
Commercial real estate 11,573,548 11,847,794
Real estate construction and
development 4,348,435 3,056,172
Land 1,067,179 1,694,844
------------- -------------
Total mortgage loans 108,392,677 107,904,388
Consumer loans 4,553,271 4,211,193
Commercial loans 5,136,179 4,662,070
------------- -------------
Total loans 118,082,127 116,777,651
Less:
Allowance for loan losses (777,000) (752,900)
Deferred loan fees (372,140) (372,841)
------------- -------------
$ 116,932,987 $ 115,651,910
============= =============
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(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,
-------------
2004 2003
---- ----
Balance at beginning of period $ 752,900 $ 766,000
Provision for losses 26,769 14,051
Charge-offs (2,669) (30,490)
Recoveries -- 439
--------- ---------
Balance at end of period $ 777,000 $ 750,000
========= =========
Impaired loans were as follows.
September 30, June 30,
2004 2004
---- ----
Period-end impaired loans with no allowance for loan losses allocated $ -- $ --
Period-end impaired loans with allowance for loan losses allocated 129,000 129,000
Amount of the allowance allocated to impaired loans 129,000 129,000
Three Months Ended
September 30,
-------------
2004 2003
---- ----
Average of impaired loans during the period $ 129,000 $ --
Interest income recognized during the period 3,182 --
Cash-basis interest income recognized 530 --
Nonperforming loans were as follows.
September 30, June 30,
2004 2004
---- ----
Loans past due over 90 days still on accrual $ 835,000 $ 587,000
Nonaccrual loans 705,000 624,000
Nonperforming loans include smaller balance homogeneous loans, such as
residential mortgage and consumer loans that are collectively evaluated for
impairment.
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(Continued)
11.
PEOPLES-SIDNEY FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
- --------------------------------------------------------------------------------
NOTE 4 - BORROWED FUNDS
At September 30, 2004 and June 30, 2004, the Association had a cash management
line of credit enabling it to borrow up to $8,000,000 from the Federal Home Loan
Bank of Cincinnati ("FHLB"). All cash management advances have an original
maturity of 90 days. The line of credit must be renewed on an annual basis.
There were no outstanding borrowings on this line of credit at September 30,
2004 and June 30, 2004.
As a member of the FHLB system, the Association has the ability to obtain
borrowings up to a maximum total of $66.1 million including the cash management
line of credit. Advances from the Federal Home Loan Bank were as follows.
September 30, June 30,
2004 2004
---- ----
6.13% FHLB fixed-rate advance, due June 25, 2008 $ 7,000,000 $ 7,000,000
6.00% FHLB convertible advance, fixed-rate until
June 2004, due June 11, 2009 5,000,000 5,000,000
6.27% FHLB convertible advance, fixed-rate until
September 2006, due September 8, 2010 5,000,000 5,000,000
5.30% select pay mortgage-matched advance, final
maturity May 1, 2011 1,054,733 1,087,505
5.35% select pay mortgage-matched advance, final
maturity July 1, 2011 2,154,704 2,466,217
3.92% select pay mortgage-matched advance, final
maturity November 1, 2012 802,467 823,214
3.55% select pay mortgage-matched advance, final
maturity March 1, 2013 871,636 893,507
4.09% select pay mortgage-matched advance, final
maturity November 1, 2017 817,208 828,866
3.31% select pay mortgage-matched advance, final
maturity April 1, 2019 978,393 991,393
4.72% select pay mortgage-matched advance, final
maturity November 1, 2022 2,685,784 2,709,021
4.38% select pay mortgage-matched advance, final
maturity December 1, 2022 895,946 903,923
3.92% select pay mortgage-matched advance, final
maturity December 1, 2022 846,271 854,173
3.64% select pay mortgage-matched advance, final
maturity March 1, 2023 2,558,436 2,582,569
----------- -----------
$30,665,578 $31,140,388
=========== ===========
Advances under the borrowing agreements are collateralized by a blanket pledge
of the Association's residential mortgage loan portfolio and its FHLB stock.
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.
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(Continued)
12.
PEOPLES-SIDNEY FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
- --------------------------------------------------------------------------------
NOTE 4 - BORROWED FUNDS (Continued)
Maturities of FHLB advances for the next five years and thereafter were as
follows.
Year ended September 30,
2005 $ 1,971,183
2006 1,761,721
2007 1,576,525
2008 8,412,778
2009 6,268,005
Thereafter 10,675,366
------------
$ 30,665,578
------------
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,
2004 2004
---- ----
1-4 family residential real estate - fixed rate $ 66,000 $ 299,000
1-4 family residential real estate - variable rate 631,000 212,000
Commercial real estate - variable rate -- 265,000
Commercial lines of credit 2,863,000 3,186,000
Home equity lines of credit 835,000 823,000
The interest rate on fixed-rate commitments was 6.00% at September 30, 2004 and
ranged from 5.88% to 6.75% at June 30, 2004. 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, 2004 and June 30, 2004, the Corporation was required to have
$2,793,000 and $3,454,000 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.
NOTE 6 - EARNINGS PER SHARE
The factors used in the earnings per share computation follow.
Three Months Ended
September 30,
-------------
2004 2003
---- ----
Basic Earnings Per Common Share
Net income $ 239,874 $ 248,586
=========== ===========
Weighted average common shares
outstanding 1,432,648 1,439,501
Less: Average unallocated ESOP shares (60,494) (72,785)
----------- -----------
Weighted average common shares
outstanding for basic earnings
per common share 1,372,154 1,366,716
=========== ===========
Basic earnings per common share $ 0.17 $ 0.18
=========== ===========
Diluted Earnings Per Common Share
Net income $ 239,874 $ 248,586
=========== ===========
Weighted average common shares
outstanding for basic earnings
per common share 1,372,154 1,366,716
Add: Dilutive effects of assumed
exercises of stock options 542 --
----------- -----------
Weighted average common shares
and dilutive potential common
shares outstanding 1,372,696 1,366,716
=========== ===========
Diluted earnings per common share $ 0.17 $ 0.18
=========== ===========
- --------------------------------------------------------------------------------
(Continued)
14.
PEOPLES-SIDNEY FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 6 - EARNINGS PER SHARE (Continued)
1,245 of the outstanding stock options at September 30, 2004 were antidilutive
for the three months ended September 30, 2004 as the exercise price of those
options was greater than the average market price for the period. All stock
options outstanding at September 30, 2003 were antidilutive for the three months
ended September 30, 2003 as the exercise price of outstanding options was
greater than the average market price for the period.
- --------------------------------------------------------------------------------
(Continued)
15.
PEOPLES-SIDNEY FINANCIAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS
- --------------------------------------------------------------------------------
Item 2. Management's Discussion and Analysis
------------------------------------
Introduction
In the following pages, management presents an analysis of the consolidated
financial condition of the Corporation as of September 30, 2004, compared to
June 30, 2004, and results of operations for the three months ended September
30, 2004, compared with the same period in 2003. 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.
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 regional and national economic
conditions, changes in levels of market interest rates, credit risks of lending
activities and competitive and regulatory factors, could affect the
Corporation's financial performance and could cause the Corporation's actual
results for future periods to differ materially from those anticipated or
projected.
The Corporation is not aware of any trends, events or uncertainties that will
have or are reasonably likely to have a material effect on its liquidity,
capital resources or operations except as discussed herein. The Corporation is
not aware of any current recommendations by regulatory authorities that would
have such effect if implemented.
The Corporation does not undertake, and specifically disclaims, any obligation
to publicly release the result of any revisions 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, 2004 were $134.8 million compared to $135.8
million at June 30, 2004, a decrease of $1.0 million. The decrease in total
assets was primarily due to a decrease in cash and cash equivalents resulting
from a decrease in deposits and FHLB advances.
As the economy begins to slowly recover and interest rates move upward,
Management will continue to focus on interest rate spread. Loan demand is
gradually increasing, however, the refinancing activity which occurred last year
when interest rates reached their lowest levels has now subsided. Loan activity
for the purchase or construction of single family dwellings is increasing, as is
activity for development loans for extensions of existing subdivisions.
Management continues to anticipate an increase in deposit balances as interest
rates begin to rise and customers begin to move funds into higher yielding
certificates of deposit versus the more liquid types of accounts.
- --------------------------------------------------------------------------------
(Continued)
16.
PEOPLES-SIDNEY FINANCIAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS
Cash and cash equivalents decreased $2.2 million from $10.0 million at June 30,
2004 to $7.8 million at September 30, 2004. These funds were used to offset the
decrease in deposits and borrowed money and fund the increase in loans.
The securities portfolio, which is classified as available for sale, increased
$0.1 million, from $5.3 million at June 30, 2004 to $5.4 million at September
30, 2004. The increase is related to an increase in the fair market value of the
securities during the reporting period as no securities transactions occurred.
Loans increased $1.3 million from $115.6 million at June 30, 2004 to $116.9
million at September 30, 2004. The most significant change was in real estate
construction and development loans which increased $1.3 million from $3.0
million at June 30, 2004 to $4.3 million at September 30, 2004. This increase
resulted as the borrowers of the related construction projects requested funds
from the previously undrawn amounts of existing loans. Consumer and commercial
loans also provided increases to the loan portfolio with increases of $0.3
million and $0.5 million respectively from June 30, 2004 to September 30, 2004.
Significant decreases in the loan portfolio were in land loans which decreased
$0.6 million from $1.7 million at June 30, 2004 to $1.1 million at September 30,
2004 and commercial real estate loans which decreased $0.3 million during the
same period. Other loan categories had nominal changes.
Premises and equipment decreased $35,000 from $2,125,000 at June 30, 2004 to
$2,090,000 at September 30, 2004. This decrease resulted from the normal
depreciation of existing assets.
Total deposits decreased $0.6 million from $86.8 million at June 30, 2004 to
$86.2 million at September 30, 2004 due to decreases in certificates of deposit
and money market accounts, partially offset by increases in savings, NOW
accounts and non-interest bearing commercial demand accounts. Certificates of
deposit decreased $1.4 million resulting from matured certificates, which were
not renewed due to the low interest rate environment. This prompted a partial
shift of funds to more liquid savings and NOW accounts, which increased $271,000
and $362,000, respectively from June 30, 2004 to September 30, 2004.
Non-interest bearing commercial demand increased $248,000 since June 30, 2004.
The overall decrease in deposits occurred as customers searched for higher
returns or elected to spend rather than save or invest.
Borrowed funds decreased $475,000 from $31,140,000 at June 30, 2004 to
$30,665,000 at September 30, 2004. This decrease was the result of scheduled
repayments of the long-term advances.
Results of Operations
The operating results of the Corporation are affected by general economic
conditions, monetary and fiscal policies of federal agencies and regulatory
policies of agencies that regulate financial institutions. The Corporation's
cost of funds is influenced by interest rates on competing investments and
general market rates of interest. Lending activities are influenced by demand
for real estate loans and other types of loans, which in turn is affected by
interest rates at which such loans are made, general economic conditions and
availability of funds for lending activities.
The Corporation's net income primarily depends on its net interest income, which
is the difference between interest income earned on interest-earning assets,
such as loans and securities and interest expense incurred on interest-bearing
liabilities, such as deposits and 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, 2004 Compared to the Three Months Ended
September 30, 2003
- --------------------------------------------------------------------------------
(Continued)
17.
PEOPLES-SIDNEY FINANCIAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS
- --------------------------------------------------------------------------------
Net Income. The Corporation earned net income of $240,000 for the three months
ended September 30, 2004 compared to $249,000 for the three months ended
September 30, 2003. The decrease of $9,000 in net income was primarily due to an
increase in noninterest expense coupled with an increase in the provision for
loan losses partially offset by an increase in net interest income and a
decrease in income tax expense.
Net Interest Income. Net interest income totaled $1,131,000 for the three months
ended September 30, 2004 compared to $1,119,000 for the three months ended
September 30, 2003, representing an increase of $12,000. The increase was the
result of a larger decrease in interest expense on deposits and borrowed money
compared to the decline in interest income on loans and other sources of
interest income.
Interest and fees on loans decreased $114,000, or 5.8% from $1,952,000 for the
three months ended September 30, 2003 to $1,838,000 for the three months ended
September 30, 2004. The decrease in interest income was due primarily to a lower
average yield earned on loans due to the lower interest rate environment
partially offset by an increase in the average balance. The yield on loans
declined from 6.75% for the three months ended September 30, 2003 to 6.30% for
the three months ended September 30, 2004.
Interest on securities decreased $25,000 due to a lower average balance for the
current three-month period partially offset by a slightly higher average
interest rate.
Interest paid on deposits decreased $139,000, or 27.4% from $509,000 for the
three months ended September 30, 2003 to $370,000 for the three months ended
September 30, 2004. The decrease resulted from a lower average interest rate
coupled with a lower average balance of deposits. The average cost of deposits
declined from 2.21% for the three months ended September 30, 2003 to 1.73% for
the three months ended September 30, 2004.
Interest paid on borrowed funds totaled $411,000 for the three months ended
September 30, 2004 compared to $426,000 for the three months ended September 30,
2003. The decrease in interest expense on borrowed funds resulted from a
decrease in the average balance of borrowed funds.
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 for the three months ended September 30, 2004
totaled $27,000 compared to $14,000 for the three months ended September 30,
2003. The increase of $13,000 in the provision for losses was due to an increase
in the total outstanding balance of loans coupled with an increae in
nonperforming loans during the current three-month period compared to the same
period a year ago. The allowance for loan losses totaled $777,000, or 0.66% of
gross loans receivable net of deferred loan origination fees and 50.5% of total
nonperforming loans at September 30, 2004, compared with $753,000, or 0.65% of
gross loans receivable, net of deferred loan origination fees and 62.2% of total
nonperforming loans at June 30, 2004. The Corporation experienced $3,000 in
charge offs during the
- --------------------------------------------------------------------------------
(Continued)
18.
PEOPLES-SIDNEY FINANCIAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS
- --------------------------------------------------------------------------------
current period primarily related to consumer loans. 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 includes service fees and other
miscellaneous income and decreased $2,000 from $34,000 for the three months
ended September 30, 2003 to $32,000 for the three months ended September 30,
2004.
Noninterest expense. Noninterest expense totaled $760,000 for the three months
ended September 30, 2004 compared to $744,000 for the three months ended
September 30, 2003, an increase of $16,000. This increase was partially due to
normal increases in compensation plus the impact of the Corporation's increased
stock price on the ESOP plan. Also affecting the increase in compensation was a
$21,000 decrease in the amount of compensation expense that was deferred for
loan origination costs during the current quarter as compared to the same period
a year ago due to the slowdown of mortgage loan refinancings.
Income Tax Expense. Income tax expense totaled $135,000 for the three months
ended September 30, 2004 compared to $147,000 for the three months ended
September 30, 2003, representing a decrease of $12,000. The decrease in income
tax expense is reflective of the decrease in net income before income taxes. The
effective tax rate was 36.1% and 37.1% for the three months ended September 30,
2004 and 2003 respectively.
- --------------------------------------------------------------------------------
(Continued)
19.
PEOPLES-SIDNEY FINANCIAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS
- --------------------------------------------------------------------------------
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, 2004 and 2003.
Three Months
Ended September 30,
-------------------
2004 2003
---- ----
(Dollars in thousands)
Net income $ 240 $ 249
Adjustments to reconcile net income to net cash from
operating activities 50 (13)
-------- --------
Net cash from operating activities 290 236
Net cash from investing activities (1,316) 1,958
Net cash from financing activities (1,226) (2,888)
-------- --------
Net change in cash and cash equivalents (2,252) (694)
Cash and cash equivalents at beginning of period 10,034 12,301
-------- --------
Cash and cash equivalents at end of period $ 7,782 $ 11,607
======== ========
The Corporation's principal sources of funds are deposits, 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 more influenced by interest rates, general
economic conditions and competition. 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 $66.1 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 September 30, 2004.
At September 30, 2004, the Corporation had commitments to originate fixed-rate
residential real estate loans totaling $66,000 and variable-rate residential
real estate loans totaling $631,000. Loan commitments are generally 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, 2004. 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 initiate regulatory action.
- --------------------------------------------------------------------------------
(Continued)
20.
PEOPLES-SIDNEY FINANCIAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS
- --------------------------------------------------------------------------------
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, 2004 and June 30, 2004, management believes the Association
complies with all regulatory capital requirements. Based on the Association's
computed regulatory capital ratios, the Association is considered well
capitalized under the Federal Deposit Insurance Act at September 30, 2004 and
June 30, 2004. 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, 2004 and June 30, 2004, 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, 2004
- ------------------
Total capital (to risk-
weighted assets) $ 15,791 20.3% $ 6,219 8.0% $ 7,774 10.0%
Tier 1 (core) capital (to
risk-weighted assets) 15,158 19.5 3,110 4.0 4,664 6.0
Tier 1 (core) capital (to
adjusted total assets) 15,158 11.2 5,401 4.0 6,751 5.0
Tangible capital (to
adjusted total assets) 15,158 11.2 2,025 1.5 N/A
June 30, 2004
- -------------
Total capital (to risk-
weighted assets) $ 15,448 20.0% $ 6,176 8.0% $ 7,720 10.0%
Tier 1 (core) capital (to
risk-weighted assets) 14,855 19.2 3,088 4.0 4,632 6.0
Tier 1 (core) capital (to
adjusted total assets) 14,855 10.9 5,440 4.0 6,801 5.0
Tangible capital (to
adjusted total assets) 14,855 10.9 2,040 1.5 N/A
- --------------------------------------------------------------------------------
(Continued)
21.
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 and Procedures
The Corporation's management, with the participation of the Corporation's Chief
Executive Officer and Chief Financial Officer, has evaluated the effectiveness
of its disclosure controls and procedures (as such term is defined in Rules
13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 (Exchange
Act)) as of the end of the period covered by this report. Based on such
evaluation, the Corporation's Chief Executive Officer and Chief Financial
Officer have concluded that, as of the end of such period, the Corporation's
disclosure controls and procedures are effective in recording, processing,
summarizing and reporting, on a timely basis, information required to be
disclosed by the Corporation in the reports that it files or submits under the
Exchange Act.
Internal Control Over Financial Reporting
There have not been any changes in the Corporation's internal control over
financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f)
under the Exchange Act) during the fiscal quarter to which this report relates
that have materially affected, or are reasonably likely to materially affect,
the Corporation's internal control over financial reporting.
- --------------------------------------------------------------------------------
(Continued)
22.
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 and Reports on Form 8-K
--------------------------------
(a) (1) Exhibits 31.1 and 31.2: Section 302 Certifications
(2) Exhibit 32: Section 906 Certifications
(b) Form 8-K was furnished on July 21, 2004. Under Item 5, Other
Events, the Corporation reported the issuance of a press
release to announce the quarterly and year to date earnings
for the period ending June 30, 2004 and declare a regular
dividend. The Coporation also announced the date of the 2004
Annual Meeting of Shareholders.
- --------------------------------------------------------------------------------
23.
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 15, 2004 /s/ Douglas Stewart
-------------------- -------------------------------------
Douglas Stewart
President and Chief Executive Officer
Date: November 15, 2004 /s/ Debra Geuy
-------------------- -------------------------------------
Debra Geuy
Chief Financial Officer
- --------------------------------------------------------------------------------
24.
PEOPLES-SIDNEY FINANCIAL CORPORATION
INDEX TO EXHIBITS
EXHIBIT
NUMBER DESCRIPTION
------ -----------
3.1 Articles of Incorporation of Incorporated by reference to the Registration
Peoples-Sidney Financial Corporation Statement on Form S-1 filed by Peopl(e)s-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 Incorporated by reference to the S-1, Exhibit 3.2.
Corporation
10.1 Employee Stock Ownership Plan Incorporated by reference to the S-1, Exhibit 10.1
10.2 Form of Employment Agreement with Incorporated by Pre-Effective Amendment No. 1 to
Douglas Stewart the S-1 filed with the SEC on March 12, 1997,
Exhibit 10.2
10.3 Form of Employment Agreements with Incorporated by Pre-Effective Amendment No. 1 to
David R. Fogt, Gary N. Fullenkamp and the S-1 filed with the SEC on March 12, 1997,
Debra A. Geuy Exhibit 10.3
10.4 Form of Severance Agreement with Steve Incorporated by Pre-Effective Amendment No. 1 to
Goins 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 Filed as an exhibit to the Registrant's Annual
Amended and Restated 1998 Stock Option Report on Form 10-KSB for the fiscal year ended
and Incentive Plan June 30, 1999 (File No. 0-22223) and incorporate
herein by reference.
10.7 Peoples-Sidney Financial Corporation Filed as an exhibit to the Registrant's Annual
Amended and Restated 1998 Management Report on Form 10-KSB for the fiscal year ended
Recognition Plan June 30, 1999 (File No. 0-22223) and incorporate
herein by reference.
11 Statement Regarding Computation of See Note 6 to the consolidated financial
Earnings per Share statements.
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
- --------------------------------------------------------------------------------
25.
PEOPLES-SIDNEY FINANCIAL CORPORATION
INDEX TO EXHIBITS
- --------------------------------------------------------------------------------
EXHIBIT
NUMBER DESCRIPTION
------ -----------
32 Certifications of the Chief Executive
Officer and the Chief Financial
Officer Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
- --------------------------------------------------------------------------------
26.