**PEOPLES-SIDNEY
        FINANCIAL CORPORATION**
 Sidney,
        Ohio
 
 **ANNUAL
        REPORT**
 June
        30,
        2006
  
 
 
  PEOPLES-SIDNEY
        FINANCIAL CORPORATION









ANNUAL
      REPORT


June
      30,
      2006

















CONTENTS











TO
                OUR SHAREHOLDERS
            
            2BUSINESS
                OF PEOPLES-SIDNEY FINANCIAL
                CORPORATION
            
            4MARKET
                PRICE OF THE CORPORATION’S COMMON
                SHARESAND
                RELATED SHAREHOLDER
                MATTERS
            
            4SELECTED
                CONSOLIDATED FINANCIAL INFORMATIONAND
                OTHER DATA
            
            6MANAGEMENT’S
                DISCUSSION AND ANALYSIS OF FINANCIALCONDITION
                AND RESULTS OF OPERATIONS
            
            8REPORT
                OF INDEPENDENT REGISTERED
                PUBLIC ACCOUNTING FIRM
            
            21CONSOLIDATED
                FINANCIAL
                STATEMENTSConsolidated
                Balance Sheets
            
            22Consolidated
                Statements of Income
            
            23Consolidated
                Statements of Changes in
                Shareholders’ Equity
            
            24Consolidated
                Statements of Cash Flows
            
            27Notes
                to Consolidated Financial Statements
            
            28SHAREHOLDER
                INFORMATION
            
            49CORPORATE
                INFORMATION
            
            50











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Peoples Sidney Financial CorporationDouglas Stewart
              Dear
                Shareholder:
                
                We
                  are pleased to present the tenth annual report of our Company.
                  A complete
                  review of this report will reflect our progress during our fiscal
                  year.
                  However, I would like to highlight some key results in this
                  letter.
                
                ·**Our
                  Financial Results**
                Our
                  Company’s net income rose to $1,039,000, an increase of $61,000 over our
                  previous year. This is an equivalent of $0.76 per share compared
                  with
                  $0.71 the prior year. Our shareholders were also rewarded by our
                  increase
                  in income by receiving $0.72 per share in dividends from our Company,
                  compared to $0.67 the previous year.
                
                ·**Our
                  Financial Condition**
                Assets
                  grew 1.7% during the year and totaled $139,047,000 at year-end.
                  This
                  compares to $136,695,000 at the prior fiscal year end.
                
                Net
                  loans totaled $124,171,000 at year-end. This represents a 2.5%
                  increase.
                
                Deposit
                  totals decreased from $85,931,000 at June 30, 2005 to $82,819,000
                  at June
                  30, 2006. While we remained competitive with pricing throughout
                  the year,
                  customers elected to shift funds to other investments offering
                  higher
                  yields than the current rates being offered across the teller
                  window.
                
                ·**Shareholder
                  Value**
                During
                  the fiscal year ended June 30, 2006, shareholders realized a gain
                  in value
                  of their shares. The closing stock price at year end was $14.90
                  compared
                  to $14.02 the prior year end. The Company also re-purchased 40,000
                  shares
                  during the fiscal year at current market prices. Shareholders’ equity in
                  our Company was $15,500,000 at year end.
                
                As
                  we progress forward, we are concerned what the cost of new government
                  regulations and the Sarbanes-Oxley legislation will be and how
                  it will
                  ultimately impact our operations and profit margins. Our management
                  team
                  will continue to be vigilant in making sound decisions and watching
                  our
                  income and expense ratios closely to benefit our Company and our
                  shareholders.
                
                I
                  would personally like to thank John W. Sargeant who is retiring
                  as a
                  director of our Company effective at the Annual Meeting. John’s dedication
                  and integrity have served our Company well. Many of our successes
                  can be
                  attributed to his personal interest in our business. We wish him
                  good
                  health and much happiness in the years ahead.
                
                In
                  summary, our 2006 fiscal year was a good one for our Company and
                  our
                  shareholders. We thank you for your continued support and look
                  forward to
                  doing business with you.
                
                Sincerely,
                
                **/s/
                  Douglas Stewart**
                Douglas
                  Stewart
                President
                  - CEO
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Peoples Sidney Financial Corporation










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**BUSINESS
      OF PEOPLES-SIDNEY FINANCIAL CORPORATION**





Peoples-Sidney
      Financial Corporation, a unitary thrift holding company incorporated under
      the
      laws of the State of Delaware (“Peoples”), owns all of the issued and
      outstanding capital stock of Peoples Federal Savings and Loan Association,
      a
      savings and loan association chartered under the laws of the United States
      (the
“Association” and, together with Peoples, the “Corporation”). On April 25, 1997,
      Peoples acquired all of the common stock issued by the Association upon its
      conversion from a mutual savings and loan association to a stock savings and
      loan association (“Conversion”). Peoples’ activities have been limited primarily
      to holding the common shares of the Association.





Serving
      the Sidney, Ohio area since 1886, the Association conducts business from its
      main office at 101 East Court Street, Sidney, Ohio and three full-service
      branches in Sidney, Anna, and Jackson Center, Ohio. The Association’s business
      involves attracting deposits from the general public and using such deposits
      as
      well as borrowings from the Federal Home Loan Bank to originate one- to
      four-family permanent and construction residential mortgages and, to a lesser
      extent, commercial real estate, consumer, land, multi-family and commercial
      business loans in its market area, which consists primarily of Shelby County
      and
      contiguous counties in Ohio. The Association also invests in securities
      consisting primarily of U.S. government obligations, mortgage-backed and related
      securities and various types of short-term liquid assets.





As
      a
      savings and loan holding company, Peoples is subject to regulation, supervision
      and examination by the Office of Thrift Supervision of the United States
      Department of the Treasury (“OTS”). As a savings and loan association chartered
      under the laws of the United States, the Association is subject to regulation,
      supervision and examination by the OTS and the Federal Deposit Insurance
      Corporation (“FDIC”). The FDIC insures deposits in the Association up to
      applicable limits. The Association is also a member of the Federal Home Loan
      Bank of Cincinnati (“FHLB”).








**MARKET
      PRICE OF THE CORPORATION’S COMMON SHARES AND**


**RELATED
      SHAREHOLDER MATTERS**





The
      Corporation had 1,384,268 common shares outstanding on August 31, 2006, which
      were held of record by 763 shareholders. As of January 1, 2006, price
      information with respect to the Corporation’s common stock is quoted on the OTC
      Bulletin Board under the symbol “PSFC”. Prior to that, the Corporation’s common
      stock was quoted on The NASDAQ National Market System under the symbol “PSFC”.
      The high and low daily closing prices for the common shares of the Corporation
      as quoted by The NASDAQ Stock Market, Inc. through December 31, 2005 and by
      the
      OTC Bulletin Board thereafter, and cash dividends paid by quarter, are shown
      below.





**September
                30,**
            
            **December
                31,**
            
            **March
                31,**
            
            **June
                30,****2005**
            
            **2005**
            
            **2006**
            
            **2006**High
            
            $
            17.35
            
            $
            16.48
            
            $
            15.10
            
            $
            15.25Low
            
            
            13.44
            
            
            14.11
            
            
            14.56
            
            
            14.50Cash
                Dividends
            
            
            0.15
            
            
            0.25
            
            
            0.16
            
            
            0.16





**September
                30,**
            
            **December
                31,**
            
            **March
                31,**
            
            **June
                30,****2004**
            
            **2004**
            
            **2005**
            
            **2005**High
            
            $
            17.91
            
            $
            15.75
            
            $
            15.49
            
            $
            15.70Low
            
            
            14.76
            
            
            14.09
            
            
            13.40
            
            
            13.10Cash
                Dividends
            
            
            0.14
            
            
            0.24
            
            
            0.14
            
            
            0.15





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Peoples’
      pays dividends to shareholders using primarily funds received as dividends
      from
      the Association. In addition to certain federal income tax considerations,
      OTS
      regulations impose limitations on the payment of dividends and other capital
      distributions by savings associations. Under OTS regulations applicable to
      converted savings associations, the Association is not permitted to pay a cash
      dividend on its common shares if its regulatory capital would, as a result
      of
      such dividend payment, be reduced below the amount required for the Liquidation
      Account (the account established for the purpose of granting a limited priority
      claim on the assets of the Association in the event of complete liquidation
      to
      those members of the Association before the Conversion who maintain a savings
      account at the Association after the Conversion), or applicable regulatory
      capital requirements prescribed by the OTS.





A
      subsidiary of a savings and loan holding company must file a notice or an
      application with the OTS before it can declare and pay a dividend (1) if the
      proposed distribution would cause total distributions for that calendar year
      to
      exceed net income for that year to date plus the savings association’s retained
      net income for the preceding two years; (2) if the savings association will
      not
      be at least adequately capitalized following the capital distribution; (3)
      if
      the proposed distribution would violate a prohibition contained in any
      applicable statute, regulations or agreement between the savings association
      and
      the OTS (or the FDIC), or a condition imposed on the savings association in
      an
      OTS-approved application or notice; or, (4) if the savings association has
      not received certain favorable examination ratings from the OTS. If a savings
      association subsidiary of a holding company is not required to file an
      application, it must typically file a notice with the OTS, unless it is both
      well-capitalized and meets the income test described above. In addition to
      earnings for the fiscal year ending June 30, 2007, approximately $94,000 is
      available to pay dividends to the holding company during the fiscal year without
      prior regulatory approval.











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**SELECTED
      CONSOLIDATED FINANCIAL**


**INFORMATION
      AND OTHER DATA**





The
      following tables set forth certain information concerning the consolidated
      financial condition and earnings of, and other data regarding, the Corporation
      at the dates and for the periods indicated.








Selected
                Financial Condition
            
            At
                June 30,and
                Other Data:
            
            2006
            
            2005
            
            2004
            
            2003
            
            2002(In
                thousands)Total
                amount of:Assets
            
            $
            139,047
            
            $
            136,695
            
            $
            135,771
            
            $
            143,568
            
            $
            134,854Securities
                available for sale
            
            
            5,250
            
            
            5,434
            
            
            5,288
            
            
            11,517
            
            
            3,526FHLB
                stock
            
            
            1,768
            
            
            1,674
            
            
            1,601
            
            
            1,539
            
            
            1,475Loans,
                net (1)
            
            
            124,171
            
            
            121,110
            
            
            115,652
            
            
            115,260
            
            
            121,225Deposits
            
            
            82,819
            
            
            85,931
            
            
            86,764
            
            
            93,452
            
            
            94,787Borrowed
                funds
            
            
            38,511
            
            
            32,589
            
            
            31,140
            
            
            32,190
            
            
            22,456Shareholders’
                equity
            
            
            15,500
            
            
            17,761
            
            
            17,431
            
            
            17,384
            
            
            17,194Adjusted
                shareholders’ equity (7)
            
            
            17,256
            
            
            17,761
            
            
            17,431
            
            
            17,384
            
            
            17,194





Year
                ended June 30,Selected
                Operations Data:
            
            2006
            
            2005
            
            2004
            
            2003
            
            2002(In
                thousands)Interest
                income
            
            $
            8,415
            
            $
            7,803
            
            $
            7,910
            
            $
            8,782
            
            $
            9,667Interest
                expense
            
            
            3,628
            
            
            3,189
            
            
            3,404
            
            
            4,423
            
            
            5,579Net
                interest income
            
            
            4,787
            
            
            4,614
            
            
            4,506
            
            
            4,359
            
            
            4,088Provision
                for loan losses
            
            
            72
            
            
            92
            
            
            53
            
            
            69
            
            
            52Net
                interest income afterprovision
                for loan losses
            
            
            4,715
            
            
            4,522
            
            
            4,453
            
            
            4,290
            
            
            4,036Noninterest
                income
            
            
            134
            
            
            105
            
            
            131
            
            
            139
            
            
            130Noninterest
                expense
            
            
            3,223
            
            
            3,098
            
            
            3,035
            
            
            3,118
            
            
            3,066Income
                before income taxes
            
            
            1,626
            
            
            1,529
            
            
            1,549
            
            
            1,311
            
            
            1,100Income
                tax expense
            
            
            587
            
            
            551
            
            
            574
            
            
            475
            
            
            393Net
                income
            
            $
            1,039
            
            $
            978
            
            $
            975
            
            $
            836
            
            $
            707Earnings
                per commonshare
                - basic
            
            $
            .76
            
            $
            .71
            
            $
            .71
            
            $
            .61
            
            $
            .51Earnings
                per commonshare
                - diluted
            
            $
            .76
            
            $
            .71
            
            $
            .71
            
            $
            .61
            
            $
            .51Dividends
                declared per share
            
            $
            .72
            
            $
            .67
            
            $
            .64
            
            $
            .49
            
            $
            .35





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Selected
                Financial Ratios and Other Data:Performance
                Ratios:
            
            2006
            
            2005
            
            2004
            
            2003
            
            2002Return
                on assets (ratio of netincome
                to average total assets)
            
            
            0.75
            %
            
            0.72
            %
            
            0.70
            %
            
            0.60
            %
            
            0.52
            %Return
                on equity (ratio of netincome
                to average equity) (8)
            
            
            5.99
            
            
            5.58
            
            
            5.65
            
            
            4.85
            
            
            4.15Dividend
                payout ratio (6)
            
            
            94.74
            
            
            94.37
            
            
            90.14
            
            
            80.33
            
            
            68.63Interest
                rate spread (2)
            
            
            3.24
            
            
            3.20
            
            
            3.05
            
            
            2.83
            
            
            2.57Net
                interest margin (3)
            
            
            3.58
            
            
            3.51
            
            
            3.36
            
            
            3.23
            
            
            3.09Ratio
                of operating expense toaverage
                total assets
            
            
            2.34
            
            
            2.29
            
            
            2.19
            
            
            2.24
            
            
            2.25Ratio
                of average interest-earningassets
                to average interest-bearingliabilities
            
            
            1.13
            x
            
            1.13
            x
            
            1.12
            x
            
            1.12
            x
            
            1.12
            xQuality
                Ratios:Nonperforming
                assets to totalassets
                at end of period (4)
            
            
            1.44
            %
            
            1.22
            %
            
            0.96
            %
            
            1.47
            %
            
            0.79
            %Allowance
                for loan losses tononperforming
                loans
            
            
            47.03
            
            
            50.12
            
            
            62.17
            
            
            38.26
            
            
            66.12Allowance
                for loan losses togross
                loans (5)
            
            
            0.71
            
            
            0.69
            
            
            0.65
            
            
            0.66
            
            
            0.58Capital
                Ratios:Shareholders’
                equity to totalassets
                at end of period
            
            
            11.15
            
            
            12.99
            
            
            12.84
            
            
            12.11
            
            
            12.75Shareholders’
                equity to totalassets
                at end of period (7)
            
            
            12.41
            
            
            12.99
            
            
            12.84
            
            
            12.11
            
            
            12.75Average
                equity to average assets (8)
            
            
            12.74
            
            
            12.94
            
            
            12.47
            
            
            12.39
            
            
            12.49Other
                Data:Number
                of full service offices
            
            
            4
            
            
            4
            
            
            4
            
            
            4
            
            
            4




(1)
                Loans
                    are shown net of net deferred loan fees, loans in process and
                    the
                    allowance for loan losses.(2)
                The
                    average interest rate spread represents the difference between
                    the
                    weighted average yield on interest-earning assets and the weighted
                    average
                    cost of interest-bearing liabilities.(3)
                The
                    net interest margin represents net interest income as a percent
                    of average
                    interest-earning assets.(4)
                Nonperforming
                    assets consist of nonperforming loans and foreclosed assets.
                    Nonperforming
                    loans consist of all accruing loans 90 days or more past due
                    and all
                    nonaccrual loans.(5)
                Gross
                    loans are stated at unpaid principal balances, net of deferred
                    loan
                    fees.(6)
                Dividends
                    declared per share divided by basic earnings per common
                    share.(7)
                Includes
                    common stock in ESOP subject to repurchase obligation of $1,757
                    at June
                    30, 2006. The presentation is consistent with the Corporation’s belief
                    that it is unlikely that the Corporation would be required to
                    satisfy the
                    contingent repurchase obligation.(8)
                Includes
                    average amount of common stock in ESOP subject to repurchase
                    obligation.
                    The presentation is consistent with the Corporation’s belief that it is
                    unlikely that the Corporation would be required to satisfy the
                    contingent
                    repurchase obligation.










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**MANAGEMENT’S
      DISCUSSION AND ANALYSIS OF**


**FINANCIAL
      CONDITION AND RESULTS OF OPERATIONS**





**General**





The
      following is management’s analysis of the Corporation’s consolidated financial
      condition and consolidated results of operations as of and for the year ended
      June 30, 2006, compared to prior years. This discussion is designed to provide
      a
      more comprehensive review of the operating results and financial position than
      could otherwise be obtained from an examination of the consolidated financial
      statements alone. This analysis should be read in conjunction with the
      consolidated financial statements and related footnotes and the selected
      financial data included elsewhere in this report.





The
      Corporation provides financial services through its main office in Sidney,
      Ohio,
      and three full-service branch offices in Sidney, Anna, and Jackson Center,
      Ohio.
      The Corporation’s primary deposit products are checking, savings and term
      certificate accounts. Its primary lending products are residential mortgage,
      commercial and installment loans. Substantially all loans are secured by
      specific items of collateral including business assets, consumer assets and
      real
      estate. Commercial loans are expected to be repaid from cash flow from
      operations of businesses. Real estate loans are secured by both residential
      and
      commercial real estate. Substantially all revenues and services are derived
      from
      financial institution products and services in Shelby County and contiguous
      counties.








**Overview
      and Outlook**





The
      local
      market for attracting deposits and granting loans during the 2006 fiscal year
      remained somewhat mixed, consistent with the prior year.





As
      the
      Federal Reserve continued to increase market interest rates to combat
      inflationary pressures, we began to see a slow down in requests for one-to-four
      family residential mortgages. This was a result of both rate increases and
      a
      general slow down in the local economy. To help remain competitive, we initiated
      a plan during the fourth quarter, to add a new 15 and 30 year fixed rate
      program, offered at secondary market rates, which should supplement and build
      our mortgage loan offerings.





Management
      continues to price “wholesale funding advances” vs. retail deposits in an effort
      to acquire funds at the lowest cost. While we have remained competitive with
      local deposit rates, the money market funds, as well as the stock market have
      become fierce competitors for the generation of deposit dollars. Because
      interest rates are generally rising, we look at fiscal year 2007 to continue
      to
      be a great challenge in attracting funds at a reasonable cost. We will continue
      to monitor local interest rates closely throughout the year.








**Forward-Looking
      Statements**





When
      used
      in this discussion or future filings by the Corporation with the Securities
      and
      Exchange Commission (“SEC”), 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





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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.








**Comparison
      of Financial Condition at June 30, 2006 and June 30, 2005**





Total
      assets at June 30, 2006 were $139.0 million compared to $136.7 million at June
      30, 2005, an increase of $2.3 million. The increase in total assets was due
      primarily to an increase in loans of $3.1 million, funded by cash and cash
      equivalents, which decreased $0.6 million and borrowed funds which increased
      $5.9 million.





Cash
      and
      cash equivalents decreased $0.6 million from $5.3 million at June 30, 2005
      to
      $4.7 million at June 30, 2006. These funds were used to fund the increase in
      loans and decrease in deposits.





The
      securities portfolio, which is classified as available for sale, decreased
      $0.1
      million from $5.4 million at June 30, 2005 to $5.3 million at June 30, 2006.
      The
      decrease is related to a decrease in the fair market value of the securities
      during the current reporting period as no security transactions occurred. See
      Note 2 of Notes to Consolidated Financial Statements.





Federal
      Home Loan Bank stock increased $94,000 from June 30, 2005 to June 30, 2006
      due
      to dividends received during the period.





Loans
      increased $3.1 million from $121.1 million at June 30, 2005 to $124.2 million
      at
      June 30, 2006, an increase of 2.5%. The most significant increases in mortgage
      loans were real estate construction and development loans and land loans, which
      increased $1.5 million and $1.2 million, respectively. Consumer and commercial
      loans combined for an increase of $2.3 million while multi-family residential
      and commercial real estate mortgage categories increased $0.3 million in total.
      The only decline was one-to-four family residential loans, which decreased
      $2.2
      million. The increases in the loan portfolio were consistent with the new
      construction and development in the local housing market that occurred during
      the fiscal year while the decrease in one-to-four family residential loans
      is
      indicative of the highly competitive pressures from mortgage brokers for
      permanent financing.





Premises
      and equipment decreased $121,000 from $2,096,000 at June 30, 2005 to $1,975,000
      at June 30, 2006. This decrease resulted from normal depreciation of existing
      assets partially offset by equipment purchases and routine improvements to
      the
      office building.





Total
      deposits decreased $3.1 million, or 3.6%, from $85.9 million at June 30, 2005
      to
      $82.8 million at June 30, 2006 due to decreases in certificates of deposit,
      savings and NOW accounts, partially offset by increases in money market and
      noninterest-bearing demand accounts. The most significant changes occurred
      in
      savings and certificates of deposit accounts, which decreased $2.6, and $1.0
      million, respectively since June 30, 2005, while NOW accounts decreased $0.1
      million. The combination of money market and commercial checking accounts
      increased $0.6 million. We attribute the overall decrease in deposits to local
      competition, the renewed attractiveness of the stock market as well as
      economic





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demands
      on the cash flow of our depositor base. See Note 7 of Notes to Consolidated
      Financial Statements.





Borrowed
      funds increased $5.9 million, or 18.2% from $32.6 million at June 30, 2005
      to
      $38.5 million at June 30, 2006. This increase was the result of the addition
      of
      $1.0 million in short-term cash management advances and $7.0 million in
      fixed-rate term advances. The increase was offset by the scheduled repayments
      of
      long-term advances. FHLB advances were used to offset the decline in deposits
      and assist in funding loan increases. See Note 8 of Notes to Consolidated
      Financial Statements.





Shareholders’
      equity decreased $2,262,000 from June 30, 2005 to June 30, 2006. This decrease
      is due to the payment of dividends equal to 94.1% of the Corporation’s earnings
      for fiscal 2006, the purchase of 40,000 shares of common stock for treasury,
      the
      after tax impact of the decline in fair value of the Corporation’s available for
      sale security portfolio and the transfer of the fair value of common stock
      in
      the ESOP subject to the repurchase obligation out of permanent capital.




Under
      federal income tax regulations, employer securities that are held by
      participants in an employee stock ownership plan (“ESOP”) and that are not
      readily tradeable on an established market must include a put option. The put
      option is a right to demand that the sponsor redeem shares of employer stock
      held by the participant, for which there is no market, for an established cash
      price. The Over the Counter Bulletin Board listing which the Corporation
      transferred to on January 1, 2006 from the NASDAQ National Market System does
      not meet the Internal Revenue Code requirements to be readily tradable on an
      established securities market. The Securities Exchange Commission's Accounting
      Series Release 268 requires securities held by an ESOP (whether or not
      allocated) to be reported outside of permanent equity if, by their terms, they
      can be put to the sponsor for cash. As a result, the Corporation made this
      transfer. Although Accounting Series Release 268 requires reclassification
      of an
      amount from permanent equity into temporary equity equal to the amount related
      to the number of shares subject to the put option, temporary equity is
      considered stockholders’ equity even though it is required by the Securities
      Exchange Commission to be displayed outside of the permanent equity
      section.








**Comparison
      of Results of Operations for the**


**Year
      Ended June 30, 2006 and June 30, 2005**





**Net
      Income.**  The
      Corporation earned net income of $1,039,000 for the year ended June 30, 2006
      compared to net income of $978,000 for the year ended June 30, 2005. The
      increase in net income was due primarily to an increase in net interest income
      coupled with an increase in noninterest income and a decrease in the provision
      for loan losses. This increase was partially offset by an increase in
      noninterest expense and federal  income
      tax expense .





**Net
      Interest Income.**  Net
      interest income totaled $4,787,000 for the year ended June 30, 2006 compared
      to
      $4,614,000 for the year ended June 30, 2005, an increase of $173,000, or 3.8%.
      The increase was the result of an increase in the net interest spread between
      interest earning assets and interest bearing liabilities during the current
      fiscal year combined with a higher average balance of interest earning
      assets.





Interest
      and fees on loans increased $518,000, or 6.9%, from $7,472,000 for the year
      ended June 30, 2005 to $7,990,000 for the year ended June 30, 2006. The increase
      in interest income was due primarily to higher average interest rates on loans
      coupled with an increase in average loans receivable during fiscal 2006. The
      yield earned on loans increased from 6.30% for fiscal 2005 to 6.52% for fiscal
      2006.





Interest
      earned on securities increased $18,000 to $211,000 for the year ended June
      30,
      2006 compared to $193,000 for the year ended June 30, 2005. The increase in
      interest on securities was the result of an increase in the average yield
      earned. Interest on interest-bearing demand, time and overnight
      deposits





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 10.
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with
      other financial institutions increased $55,000 to $120,000 for the year ended
      June 30, 2006 compared to $65,000 for the year ended June 30, 2005. The increase
      in interest earned on deposits with other financial institutions was the result
      of a higher average yield earned on such investments partially offset by a
      decrease in the average balance.





Dividends
      on FHLB stock increased over the comparable period due to an increase in the
      dividend rate paid by FHLB.





Interest
      paid on deposits increased $218,000, or 14.0% for the year ended June 30, 2006
      compared to the year ended June 30, 2005. The increase resulted from an increase
      in the average interest rate paid on deposits partially offset by a lower
      average balance of deposits. The average balance of deposits for the year ended
      June 30, 2005 was $85.5 million at an average cost of 1.82% compared to an
      average balance of deposits for the year ended June 30, 2006 of $83.1 million
      at
      an average cost of 2.13%.





Interest
      paid on borrowed funds increased $221,000 from $1,633,000 for the year ended
      June 30, 2005 to $1,854,000 for the year ended June 30, 2006. This increase
      was
      caused by a higher average balance of borrowings partially offset by a lower
      average cost of borrowed funds. The average balance of borrowings for the year
      ended June 30, 2005 was $30.8 million at an average cost of 5.30% compared
      to an
      average balance of $35.4 million at an average cost of 5.24% for the year ended
      June 30, 2006. For further discussion about the Corporation’s interest-rate risk
      management, see the Asset and Liability Management section.





**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 incurred 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, specific borrower considerations, including
      the ability of the borrower to repay the loan and the estimated value of the
      underlying collateral and observations from regulatory authorities.





The
      provision for loan losses for the year ended June 30, 2006 totaled $73,000
      compared to $91,000 for the year ended June 30, 2005, a decrease of $18,000.
      The
      allowance for loan losses totaled $894,000, or 0.71% of loans receivable and
      47.0% of total nonperforming loans at June 30, 2006, compared with $836,000,
      or
      0.69% of loans receivable and 50.1% of total nonperforming loans at June 30,
      2005. Nonaccrual loans increased $207,000 from $1,318,000 at June 30, 2005
      to
      $1,525,000 at June 30, 2006. The Corporation experienced $14,000 in net
      charge-offs during the current fiscal year compared to $9,000 in net charge-offs
      in the prior fiscal year primarily related to consumer loans. The decrease
      in
      the provision for loan losses was due to a decrease in loan growth. Loans grew
      during the current fiscal year by 2.5% as compared to loan growth of 4.7% for
      the prior fiscal year. This decrease in loan growth more than offset the
      previously mentioned negative trends. The Corporation’s low historical
      charge-off history is the product of a variety of factors, including the
      Corporation’s underwriting guidelines, which generally require a loan-to-value
      or projected completed value ratio of 90% for purchase or construction of one-
      to four-family residential properties and 75% for commercial real estate and
      land loans, established income information and defined ratios of debt to income.





**Noninterest
      income.**  Noninterest
      income, which includes service fees and other miscellaneous income and gains
      or
      losses on sale of real estate owned, increased $29,000, from $105,000 for the
      year ended June





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 11.
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30,
      2005
      to $134,000 for the year ended June 30, 2006. This increase resulted primarily
      from a pre-tax loss of $25,000 related to the sale of property held in real
      estate owned during the prior fiscal year compared to a $3,000 gain in the
      current fiscal year.





**Noninterest
      expense.**  Noninterest
      expense totaled $3,223,000 for the year ended June 30, 2006 compared to
      $3,098,000 for the year ended June 30, 2005, an increase of $125,000.
      Compensation and benefits expense increased $86,000 from $1,628,000 for the
      year
      ended June 30, 2005 to $1,714,000 for the year ended June 30, 2006. The increase
      is due to normal increases in compensation and benefits expense. Computer
      processing increased $71,000 from $275,000 for the year ended June 30, 2005
      to
      $346,000 for the year ended June 30, 2006. This increase was related to an
      increase in data processing services as a result of the conversion that occurred
      during the fourth quarter of fiscal 2005. Professional services also increased
      $31,000 for the year ended June 30, 2006 resulting from new government
      regulations and requirements. These increases were partially offset by a
      decrease of $40,000 in occupancy and equipment expense largely related to a
      decrease in equipment expense coupled with a decrease in telephone expense
      resulting from an upgrade in communication service. Other expenses also
      decreased $27,000 from $349,000 for the year ended June 30, 2005 to $322,000
      for
      the year ended June 30, 2006 primarily due to a savings of $12,000 as a result
      of delisting from the NASDAQ market as of January 1, 2006.





**Income
      Tax Expense.**  The
      volatility of income tax expense is primarily attributable to income before
      income taxes. Income tax expense totaled $587,000 for the year ended June 30,
      2006 compared to $552,000 for the year ended June 30, 2005, an increase of
      $35,000. The effective tax rates were 36.1% for both years ended June 30, 2006
      and 2005.








**Comparison
      of Results of Operations for the**


**Year
      Ended June 30, 2005 and June 30, 2004**





**Net
      Income.**  The
      Corporation earned net income of $978,000 for the year ended June 30, 2005
      compared to net income of $975,000 for the year ended June 30, 2004. The
      increase in net income was due primarily to an increase in net interest income
      coupled with a decrease in federal income tax expense. This increase was
      partially offset by a decrease in noninterest income and an increase in
      noninterest expense and the provision for loan losses.





**Net
      Interest Income.**  Net
      interest income totaled $4,614,000 for the year ended June 30, 2005 compared
      to
      $4,506,000 for the year ended June 30, 2004, an increase of $108,000, or 2.4%.
      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
      securities with the exception of interest income on demand deposits and
      dividends on Federal Home Loan Bank stock, which increased.





Interest
      and fees on loans decreased $102,000, or 1.4%, from $7,574,000 for the year
      ended June 30, 2004 to $7,472,000 for the year ended June 30, 2005. The decrease
      in interest income was due primarily to lower interest rates on loans partially
      offset by an increase in average loans receivable during fiscal 2005. The yield
      earned on loans decreased from 6.50% for fiscal 2004 to 6.30% for fiscal
      2005.





Interest
      earned on securities decreased $42,000 to $193,000 for the year ended June
      30,
      2005 compared to $235,000 for the year ended June 30, 2004. The decrease in
      interest on securities was the result of a decrease in the average balance
      partially offset by an increase in the average yield earned. Interest on
      interest-bearing demand, time and overnight deposits with other financial
      institutions increased $26,000 to $65,000 for the year ended June 30, 2005
      compared to $39,000 for the year ended June 30, 2004. The increase in interest
      earned on deposits with other financial institutions was the result of a higher
      average yield earned on such investments partially offset by a decrease in
      the
      average balance.





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 12.
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Dividends
      on FHLB stock increased over the comparable period due to an increase in the
      dividend rate paid by FHLB.





Interest
      paid on deposits decreased $172,000, or 10.0% for the year ended June 30, 2005
      compared to the year ended June 30, 2004. The decrease resulted from a decline
      in the average interest rate paid on deposits combined with lower average
      balance of deposits. The average balance of deposits for the year ended June
      30,
      2004 was $88.3 million at an average cost of 1.96% compared to an average
      balance of deposits for the year ended June 30, 2005 of $85.5 million at an
      average cost of 1.82%.





Interest
      paid on borrowed funds decreased $43,000 from $1,676,000 for the year ended
      June
      30, 2004 to $1,633,000 for the year ended June 30, 2005. This decrease was
      caused by a lower average balance of borrowings coupled with a lower average
      cost of borrowed funds resulting from the lower interest rate environment that
      continued during fiscal 2005. For further discussion about the Corporation’s
      interest-rate risk management, see the Asset and Liability Management
      section.





**Provision
      for Loan Losses.** The
      provision for loan losses for the year ended June 30, 2005 totaled $91,000
      compared to $53,000 for the year ended June 30, 2004, an increase of $38,000.
      The allowance for loan losses totaled $836,000, or 0.69% of loans receivable
      and
      50.1% of total nonperforming loans at June 30, 2005, compared with $753,000,
      or
      0.65% of loans receivable and 62.2% of total nonperforming loans at June 30,
      2004. The increase in the provision for loan losses was due to an increase
      in
      the total outstanding balance of loans coupled with an increase in the balance
      of loans placed on nonaccrual as compared to the prior year. Nonaccrual loans
      increased $694,000 from $624,000 at June 30, 2004 to $1,318,000 at June 30,
      2005. The Corporation experienced $8,900 in net charge-offs during the current
      fiscal year primarily related to consumer loans.





**Noninterest
      income.**  Noninterest
      income, which includes service fees and other miscellaneous income and gains
      or
      losses on sale of real estate owned, decreased $26,000, from $131,000 for the
      year ended June 30, 2004 to $105,000 for the year ended June 30, 2005. This
      decrease resulted primarily from a loss on the sale of a property held in real
      estate owned during the current fiscal year.





**Noninterest
      expense.**  Noninterest
      expense totaled $3,098,000 for the year ended June 30, 2005 compared to
      $3,035,000 for the year ended June 30, 2004, an increase of $63,000.
      Compensation and benefits expense increased $24,000 from $1,604,000 for the
      year
      ended June 30, 2004 to $1,628,000 for the year ended June 30, 2005. The increase
      is due to normal increases in compensation and benefits expense. Occupancy
      and
      equipment expense also increased $12,000 from $405,000 for the year ended June
      30, 2004 to $417,000 for the year ended June 30, 2005. Computer processing
      increased $26,000 from $249,000 for the year ended June 30, 2004 to $275,000
      for
      the year ended June 30, 2005. This increase was related to the data processing
      conversion that occurred during the most recent quarter. Other expense decreased
      $6,000 from $355,000 for the year ended June 30, 2004 to $349,000 for the year
      ended June 30, 2005, primarily due to decreases in expenses on other real estate
      owned.





**Income
      Tax Expense.**  The
      volatility of income tax expense is primarily attributable to income before
      income taxes. Income tax expense totaled $552,000 for the year ended June 30,
      2005 compared to $574,000 for the year ended June 30, 2004, a decrease of
      $22,000. The effective tax rates were 36.1% and 37.1% for the years ended June
      30, 2005 and 2004, respectively. The decrease in the effective tax rate
      primarily relates to the Corporation’s stock-based benefit plans and their
      related tax impact .





**Yields
      Earned and Rates Paid.**  The
      following table sets forth certain information relating to the Corporation’s
      average balance sheet and reflects the average yield on interest-earning assets
      and the average cost of interest-bearing liabilities for the periods indicated.
      Such yields and costs are derived by dividing income or expense by the average
      balances of interest-earning assets or interest-bearing liabilities,
      respectively, for the periods presented. Average balances are derived from
      average daily balances. Nonaccruing loans have been included in the table as
      loans carrying a zero yield.





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Year
                    ended June 30,2006
                
                2005
                
                2004Average
                
                Interest
                
                
                
                Average
                
                Interest
                
                
                
                Average
                
                Interestoutstanding
                earned/
                
                Yield/
                outstanding
                earned/
                
                Yield/
                outstanding
                earned/
                
                Yield/balance
                
                paid
                
                rate
                
                balance
                
                paid
                
                rate
                
                balance
                
                paid
                
                rate(Dollars
                    in thousands)**ASSETS:**Interest-earning
                    assets:Interest-earning
                    deposits
                
                $
                3,965
                
                $
                120
                
                
                3.04
                %
                $
                5,729
                
                $
                65
                
                
                1.14
                %
                $
                8,869
                
                $
                39
                
                
                0.44
                %Securities
                    available for sale (1)
                
                
                5,337
                
                
                211
                
                
                3.84
                
                
                5,386
                
                
                193
                
                
                3.51
                
                
                7,091
                
                
                235
                
                
                3.24Loans
                    (2)
                
                
                122,468
                
                
                7,990
                
                
                6.52
                
                
                118,550
                
                
                7,472
                
                
                6.3
                
                
                116,607
                
                
                7,574
                
                
                6.5FHLB
                    stock
                
                
                1,708
                
                
                94
                
                
                5.53
                
                
                1,628
                
                
                73
                
                
                4.46
                
                
                1,562
                
                
                62
                
                
                4Total
                    interest-earning
                    assets
                
                
                133,478
                
                
                8,415
                
                
                6.3
                
                
                131,293
                
                
                7,803
                
                
                5.94
                
                
                134,129
                
                
                7,910
                
                
                5.89Noninterest-earningassets:Cash
                    and due from banks
                
                
                1,119
                
                
                
                
                
                
                
                
                1,095
                
                
                
                
                
                
                
                
                1,072Premises
                    and equipment, net
                
                
                2,039
                
                
                
                
                
                
                
                
                2,097
                
                
                
                
                
                
                
                
                2,080Accrued
                    interest and other assets
                
                
                1,032
                
                
                
                
                
                
                
                
                979
                
                
                
                
                
                
                
                
                1,135Total
                    noninterest-earning assets
                
                
                4,190
                
                
                
                
                
                
                
                
                4,171
                
                
                
                
                
                
                
                
                4,287Total
                    assets
                
                $
                137,668
                
                
                
                
                
                
                
                $
                135,464
                
                
                
                
                
                
                
                $
                138,416**LIABILITIES
                    AND****SHAREHOLDERS’
                    EQUITY:**Interest-bearingliabilities:Savings
                    deposits
                
                $
                27,139
                
                $
                203
                
                
                0.75
                %
                $
                29,975
                
                $
                225
                
                
                0.75
                %
                $
                29,460
                
                $
                219
                
                
                0.75
                %Demand
                    and NOW deposits
                
                
                13,277
                
                
                139
                
                
                1.05
                
                
                11,785
                
                
                67
                
                
                0.57
                
                
                11,020
                
                
                42
                
                
                0.38Certificate
                    accounts
                
                
                42,708
                
                
                1,432
                
                
                3.35
                
                
                43,780
                
                
                1,264
                
                
                2.89
                
                
                47,826
                
                
                1,467
                
                
                3.07Total
                    deposits
                
                
                83,124
                
                
                1,774
                
                
                2.13
                
                
                85,540
                
                
                1,556
                
                
                1.82
                
                
                88,306
                
                
                1,728
                
                
                1.96Borrowed
                    funds
                
                
                35,412
                
                
                1,854
                
                
                5.24
                
                
                30,792
                
                
                1,633
                
                
                5.3
                
                
                31,379
                
                
                1,676
                
                
                5.34Total
                    interest-bearing liabilities
                
                
                118,536
                
                
                3,628
                
                
                3.06
                
                
                116,332
                
                
                3,189
                
                
                2.74
                
                
                119,685
                
                
                3,404
                
                
                2.84Noninterest-bearing
                    liabilitiesDemand
                    deposits
                
                
                1,250
                
                
                
                
                
                
                
                
                1,150
                
                
                
                
                
                
                
                
                910Accrued
                    interest payable andother liabilities
                
                
                538
                
                
                
                
                
                
                
                
                450
                
                
                
                
                
                
                
                
                557Total
                    noninterest-bearingliabilities
                
                
                1,788
                
                
                
                
                
                
                
                
                1,600
                
                
                
                
                
                
                
                
                1,467Total
                    liabilities
                
                
                120,324
                
                
                
                
                
                
                
                
                117,932
                
                
                
                
                
                
                
                
                121,152Total
                    shareholders’ equity (5)
                
                
                17,344
                
                
                
                
                
                
                
                
                17,532
                
                
                
                
                
                
                
                
                17,264Total
                    liabilities andshareholders’
                    equity
                
                $
                137,668
                
                
                
                
                
                
                
                $
                135,464
                
                
                
                
                
                
                
                $
                138,416Net
                    interest income;interest
                    rate spread (3)
                
                
                
                
                $
                4,787
                
                
                3.24
                %
                
                
                
                $
                4,614
                
                
                3.20
                %
                
                
                
                $
                4,506
                
                
                3.05
                %Net
                    earning assets
                
                $
                14,942
                
                
                
                
                
                
                
                $
                14,961
                
                
                
                
                
                
                
                $
                14,444Net
                    interest margin (4)
                
                
                
                
                
                
                
                
                3.58
                %
                
                
                
                
                
                
                
                3.51
                %
                
                
                
                
                
                
                
                3.36
                %Average
                    interest-earning assetsto
                    interest- bearing liabilities
                
                
                1.13
                x
                
                
                
                
                
                
                
                1.13
                x
                
                
                
                
                
                
                
                1.12
                x





(1)
            Average
                balance includes unrealized gains and losses while yield is based
                on
                amortized cost.


(2)
            Calculated
                net of deferred loan fees, loan discounts, loans in process and allowance
                for loan losses and includes nonperforming
                loans.


(3)
            Net
                interest rate spread represents the difference between the yield
                on
                interest-earning assets and the cost of interest-bearing
                liabilities.


(4)
            Net
                interest margin represents net interest income divided by average
                interest-earning assets.


(5)
            Includes
                common stock in ESOP subject to repurchase obligation. The presentation
                is
                consistent with the Corporation’s belief that it is unlikely that the
                Corporation would be required to satisfy the contingent repurchase
                obligation.





(Continued)
 14.
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            to Table of Contents*





The
      table
      below describes the extent to which changes in interest rates and changes in
      volume of interest-earning assets and interest-bearing liabilities have affected
      the Corporation’s interest income and expense during the years indicated. For
      each category of interest-earning assets and interest-bearing liabilities,
      information is provided on changes attributable to (1) changes in volume
      (multiplied by prior year rate), (2) changes in rate (multiplied by prior year
      volume) and (3) total changes in rate and volume. The combined effects of
      changes in both volume and rate, that are not separately identified, have been
      allocated proportionately to the change due to volume and change due to
      rate:





Year
                ended June 30,2006
                vs. 2005
            
            2005
                vs. 2004Increase
            
            
            
            Increase(decrease)
            
            
            
            (decrease)due
                to
            
            
            
            due
                toVolume
            
            Rate
            
            Total
            
            Volume
            
            Rate
            
            Total(In
                thousands)Interest
                income attributable to:Interest-earning
                deposits
            
            $
            (25
            )
            $
            80
            
            $
            55
            
            $
            (18
            )
            $
            44
            
            $
            26Securities
                available for sale
            
            
            --
            
            
            18
            
            
            18
            
            
            (60
            )
            
            18
            
            
            (42
            )Loans
                receivable
            
            
            251
            
            
            267
            
            
            518
            
            
            125
            
            
            (227
            )
            
            (102
            )FHLB
                stock
            
            
            3
            
            
            18
            
            
            21
            
            
            3
            
            
            8
            
            
            11Total
                interest-earning assets
            
            $
            229
            
            $
            383
            
            $
            612
            
            $
            50
            
            $
            (157
            )
            $
            (107
            )Interest
                expense attributable to:Savings
                deposits
            
            $
            (22
            )
            $
            --
            
            $
            (22
            )
            $
            4
            
            $
            2
            
            $
            6Demand
                and NOW deposits
            
            
            10
            
            
            62
            
            
            72
            
            
            3
            
            
            22
            
            
            25Certificates
                accounts
            
            
            (31
            )
            
            199
            
            
            168
            
            
            (120
            )
            
            (83
            )
            
            (203
            )Borrowed
                funds
            
            
            242
            
            
            (21
            )
            
            221
            
            
            (31
            )
            
            (12
            )
            
            (43
            )Total
                interest-bearing liabilities
            
            $
            199
            
            $
            240
            
            $
            439
            
            $
            (144
            )
            $
            (71
            )
            
            (215
            )Net
                interest income
            
            
            
            
            
            
            
            $
            173
            
            
            
            
            
            
            
            $
            108





**Asset
      and Liability Management**





The
      Association, like other financial institutions, is subject to interest rate
      risk
      to the extent that its interest-earning assets reprice differently than its
      interest-bearing liabilities. As part of its effort to monitor and manage
      interest rate risk, the Association uses the “net portfolio value” (“NPV”)
      methodology adopted by the OTS as part of its capital regulations. Although
      the
      Association is not currently subject to NPV regulation because such regulation
      does not apply to institutions with less than $300 million in assets and
      risk-based capital in excess of 12%, application of NPV methodology may
      illustrate the Association’s interest rate risk.





Generally,
      NPV is the discounted present value of the difference between incoming cash
      flows on interest-earning and other assets and outgoing cash flows on
      interest-bearing and other liabilities. The application of the methodology
      attempts to quantify interest rate risk as the change in the NPV that would
      result from a theoretical 200 basis point (1 basis point equals 0.01%) change
      in
      market interest rates. Both a 200 basis point increase in market interest rates
      and a 200 basis point decrease in market interest rates are
      considered.





(Continued)
 15.
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Presented
      below, as of March 31, 2006, is an analysis of the Association’s interest-rate
      risk as measured by changes in the NPV for instantaneous and sustained parallel
      shifts of 100 basis points in market interest rates. The table below represents
      the Thrift Bulletin 13a reporting requirements and the target limits set by
      the
      Association. Although the Association would experience a greater decline in
      market value equity should interest rates increase 200 basis points, the
      Association’s sensitivity measure is currently greater at 200 basis points down
      where it declines 105 basis points (NPV Ratio of 14.05%) than 200 basis points
      up where it declines 80 basis points (NPV Ratio of 14.30%). The interest rate
      sensitivity measure has been shifting towards being more sensitive to rising
      rates at the 200 basis point level and may have reversed this quarter with
      the
      two additional increases by the Federal Reserve. This continues to be the result
      of relatively low interest rates from a historical perspective despite the
      eight
      increases by the Federal Reserve over the past year and eight the previous
      year.
      The Board of Directors and Management continued to monitor interest rates during
      the past year and anticipate the increases the Federal Reserve started in June
      2004 may pause or stop following the increase on June 29, 2006. During the
      preceding 12 months, Management continued efforts to control rising liability
      costs as the result of higher short-term interest rates while being constrained
      on increases in some loan interest rates because of continuing modest changes
      in
      longer term interest rates. Because of the flattening of the yield curve,
      additional Federal Home Loan Bank advances of $2,000,000 for 2 years at 4.88%
      and $3,000,000 for 3 years at 5.16% were secured to help control rising
      liability costs. The continued narrowing of the spread between short-term rates
      and long-term rates will again represent the greatest challenge during the
      coming year. The greatest interest rate sensitivity at March 31, 2006 was a
      105
      basis point decline in the NPV ratio if interest rates decreased 200 basis
      points. This decreased from the 190 basis point decline reported last year
      if
      rates decreased 200 basis points. Management does not consider declining
      interest rates to be a problem in the current interest rate environment with
      interest rates still on the lower end of historical levels and the continued
      increases in short term rates by the Federal Reserve through June 2006. Even
      if
      the Federal Reserve does stop or begin to lower rates during the coming year
      management believes the greater risk remains to rising rates. Management also
      continues to work towards having a proper mix of assets and liabilities in
      order
      to combat the fluctuations in interest rates and market conditions that result
      in non-parallel shifts in interest rates like what has occurred over the last
      12
      months.


March
                  31, 2006Target
                  LimitUnder
                  AssetEconomic
                  Value
              
              NPV
                  Ratio
              
              LiabilityChange
              
              Market
                  Value
              
              Market
                  Value
              
              MVE/
              
              ManagementIn
                  Rates
              
              Equity
              
              Total
                  Assets
              
              MVTA
              
              Policy(Dollars
                  in thousands)+400
              
              $
              *
              
              $
              *
              
              
              *
              
              
              
              4
              %+300
              
              
              18,252
              
              
              134,814
              
              
              13.54
              %
              
              
              4+200
              
              
              19,715
              
              
              137,844
              
              
              14.30
              
              
              
              6+100
              
              
              20,923
              
              
              140,777
              
              
              14.86
              
              
              
              7STATIC
              
              
              21,656
              
              
              143,448
              
              
              15.10-100
              
              
              21,646
              
              
              145,570
              
              
              14.87
              
              
              
              7-200
              
              
              20,624
              
              
              146,839
              
              
              14.05
              
              
              
              6-300
              
              
              *
              
              
              *
              
              
              *
              
              
              
              4-400
              
              
              *
              
              
              *
              
              
              *
              
              
              
              4*Not
                  currently reported by
                  OTS









(Continued)
 16.
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March
                31, 2005Target
                LimitUnder
                AssetEconomic
                Value
            
            NPV
                Ratio
            
            LiabilityChange
            
            Market
                Value
            
            
            Market
                Value
            
            
            MVE/
            
            ManagementIn
                Rates
            
            Equity
            
            
            Total
                Assets
            
            
            MVTA
            
            Policy(Dollars
                in thousands)+400
            
            $
            *
            
            
            $
            *
            
            
            
            *
            
            
            
            4
            %+300
            
            
            19,351
            
            
            
            134,299
            
            
            
            14.41
            %
            
            
            4+200
            
            
            20,749
            
            
            
            137,445
            
            
            
            15.10
            
            
            
            6+100
            
            
            21,746
            
            
            
            140,384
            
            
            
            15.49
            
            
            
            7STATIC
            
            
            22,116
            
            
            
            142,910
            
            
            
            15.48-100
            
            
            21,515
            
            
            
            144,679
            
            
            
            14.87
            
            
            
            7-200
            
            
            19,756
            
            
            
            145,488
            
            
            
            13.58
            
            
            
            6-300
            
            
            *
            
            
            
            *
            
            
            
            *
            
            
            
            4-400
            
            
            *
            
            
            
            *
            
            
            
            *
            
            
            
            4*Not
                currently reported by OTS





As
      with
      any method of measuring interest rate risk, certain shortcomings are inherent
      in
      the NPV approach. For example, although certain assets and liabilities may
      have
      similar maturities or periods of repricing, they may react in different degrees
      to changes in market interest rates. Also, the interest rates on certain types
      of assets and liabilities may fluctuate in advance of changes in market interest
      rates, while interest rates on other types may lag behind changes in market
      rates. Further, in the event of a change in interest rates, expected rates
      of
      prepayment on loans and mortgage-backed securities and early withdrawal levels
      from certificates of deposit would likely deviate significantly from those
      assumed in making risk calculations.








**Liquidity
      and Capital Resources**





The
      Corporation’s liquidity, primarily represented by cash and cash equivalents, is
      a result of its operating, investing and financing activities. These activities
      are summarized below for the years ended June 30, 2006, 2005 and
      2004.


Year
                Ended June 30,2006
            
            2005
            
            2004Net
                income
            
            $
            1,039
            
            $
            978
            
            $
            975Adjustments
                to reconcile net income to netcash
                from operating activities
            
            
            434
            
            
            258
            
            
            401Net
                cash from operating activities
            
            
            1,473
            
            
            1,236
            
            
            1,376Net
                cash from investing activities
            
            
            (3,300
            )
            
            (5,645
            )
            
            5,059Net
                cash from financing activities
            
            
            1,221
            
            
            (304
            )
            
            (8,702
            )Net
                change in cash and cash equivalents
            
            
            (606
            )
            
            (4,713
            )
            
            (2,267
            )Cash
                and cash equivalents at beginning of period
            
            
            5,321
            
            
            10,034
            
            
            12,301Cash
                and cash equivalents at end of period
            
            $
            4,715
            
            $
            5,321
            
            $
            10,034





The
      Corporation’s principal sources of funds are deposits, loan repayments,
      maturities of securities and other funds provided by operations. The Corporation
      also has the ability to borrow from the FHLB. While scheduled loan repayments
      and maturing investments are relatively predictable, deposit flows and early
      loan prepayments are more influenced by interest rates, general economic
      conditions and competition. The Corporation maintains investments in liquid
      assets based upon management’s





(Continued)
 17.
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assessment
      of (1) need for funds; (2) expected deposit flows; (3) yields available on
      short-term liquid assets; and, (4) objectives of the asset/liability management
      program.





The
      Association is subject to various regulatory capital requirements administered
      by the federal regulatory agencies. Under capital adequacy guidelines and the
      regulatory framework for prompt corrective action, the Association must meet
      specific capital guidelines that involve quantitative measures of the
      Association’s assets, liabilities and certain off-balance-sheet items as
      calculated under regulatory accounting practices. The Association’s capital
      amounts and classifications are also subject to qualitative judgments by the
      regulators about the Association’s components, risk weightings and other
      factors. Failure to meet minimum capital requirements can initiate certain
      mandatory actions that, if undertaken, could have a direct material effect
      on
      the Corporation’s financial statements. At June 30, 2006 and 2005, 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 FDIC guidelines at June 30, 2006 and 2005.
      No conditions or events have occurred subsequent to the last notification by
      regulators that management believes would change the Association’s
      category.





The
      following table summarizes the Association’s capital requirements to be well
      capitalized under prompt corrective action regulations and actual capital
      amounts at June 30, 2006.





Excess
                of Actual CapitalWell
                Capitalized
            
            Over
                Well CapitalizedActual
                capital
            
            Requirement
            
            Requirement
            
            ApplicableAmount
            
            Percent
            
            Amount
            
            Percent
            
            Amount
            
            Percent
            
            Asset
                Total(Dollars
                in thousands)Total
                risk-basedcapital
            
            $
            16,048
            
            
            18.9
            %
            $
            8,473
            
            
            10.0
            %
            $
            7,575
            
            
            8.9
            %
            $
            84,734Tier
                1 risk-basedcapital
            
            
            15,368
            
            
            18.1
            
            
            5,084
            
            
            6.0
            
            
            10,284
            
            
            12.1
            
            
            84,734Core
                capital
            
            
            15,368
            
            
            11.0
            
            
            6,970
            
            
            5.0
            
            
            8,398
            
            
            6.0
            
            
            139,406





On
      April
      19, 2005, the Corporation authorized the commencement of a 5% stock repurchase
      program. The plan allows for repurchases of up to 71,600 shares to be made
      from
      time to time at the discretion of management in both the open market and through
      unsolicited negotiated transactions. Purchases will be funded with positive
      operating cash flow and existing cash balances. The repurchase plan may be
      suspended or discontinued at any time, and repurchased shares will be available
      for use in connection with the Corporations existing stock plans and for other
      corporate purposes. As of August 31, 2006, 48,380 shares have been repurchased
      under the plan at an average price of $15.24 per share.








**Impact
      of New Accounting Standards**





In
      March
      2004, the Emerging Issues Task Force (“EITF”) arrived at a Consensus regarding
      EITF 03-1, “The Meaning of Other-Than-Temporary Impairment and its Application
      to Certain Investments”. In November 2005, the Financial Accounting Standards
      Board issued Staff Position (“FSP”) 115-1. This FSP provides additional guidance
      on when an investment in a debt or equity security should be considered impaired
      and when that impairment should be considered other-than-temporary and
      recognized as a loss in earnings. The guidance clarifies that an investor should
      recognize an impairment loss no later than when the impairment is deemed
      other-than-temporary, even if a decision to sell has not been made. The FSP
      also
      requires certain disclosures about unrealized losses that have not been
      recognized as other-than-temporary impairments. Management does not believe
      that
      these recent decisions of the EITF have had or will have a significant impact
      on
      accounting for the Corporation’s investments.





(Continued)
 18.
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In
      May
      2005, the Financial Accounting Standards Board Issued Statement of Financial
      Accounting Standards No. 154, “Accounting Changes and Error Corrections”. This
      statement changes the requirements for the accounting for and reporting of
      a
      change in accounting principle. It is effective for fiscal years beginning
      after
      December 15, 2005 and will apply to the Corporation effective July 1, 2006.
      Management believes that the adoption of this pronouncement will not have a
      material impact on the Corporation’s consolidated financial statements.





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 will be effective July 1, 2007 unless the
      Corporation elects early adoption in which case it would be effective July
      1,
      2006. The adoption of this pronouncement is not expected to 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 will be effective July 1, 2007 unless the Corporation
      elects early adoption in which case it would be effective July 1, 2006. The
      Corporation has no servicing assets as of June 30, 2006.





In
      June
      2006, the FASB issued Interpretation (“FIN”) No. 48, “Accounting for Uncertainty
      in Income Taxes - an Interpretation of FASB Statement No. 106”, 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 will be effective July 1, 2007.
      The
      Corporation has not completed its evaluation of the impact of the adoption
      of
      FIN 48.








**Critical
      Accounting Policies and Estimates**





The
      accounting and reporting policies of the Corporation are in accordance with
      U.S.
      generally accepted accounting principles and conform to general practices within
      the banking industry. The accounting and reporting policy for the allowance
      for
      loan losses is deemed critical since it involves the use of estimates and
      requires significant management judgments. The allowance for loan losses is
      a
      valuation allowance for probable incurred credit losses, increased by the
      provision for loan losses and decreased by charge offs. We estimate the
      allowance balance by considering the nature and volume of the portfolio,
      information about specific borrower situations and estimated collateral values,
      economic conditions and other factors. Allocations of the allowance may be
      made
      for specific loans, but the entire allowance is available for any loan that,
      in
      out judgment, has incurred a loss. Loan losses are charged against the allowance
      when we believe the loan balance cannot be collected. We monitor loan quality
      monthly and consider various factors, including portfolio risk, economic
      environment and loan delinquencies, when determining the level of the provision
      for loan losses. Application of assumptions different than those used by
      management could result in material changes in the Corporation’s financial
      position or results of operations. See Notes 1 (Summary of Significant
      Accounting Policies) and 3 (Loans), which provide detail with regard to the
      Corporation’s methodology and reporting of the allowance for loan losses.











(Continued)
 19.
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**Impact
      of Inflation and Changing Prices**





The
      Consolidated Financial Statements and Notes included herein have been prepared
      in accordance with accounting principles generally accepted in the United States
      of America (“GAAP”). Presently, GAAP requires the Corporation to measure
      financial position and operating results primarily in terms of historic dollars.
      Changes in the relative value of money due to inflation or recession are
      generally not considered.





In
      management’s opinion, changes in interest rates affect the financial condition
      of a financial institution to a far greater degree than changes in the inflation
      rate. While interest rates are greatly influenced by changes in the inflation
      rate, they do not change at the same rate or in the same magnitude as the
      inflation rate. Rather, interest rate volatility is based on changes in the
      expected rate of inflation, as well as on changes in monetary and fiscal
      policies.


















20.
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**Crowe
      Chizek and Company LLC**


Member
      Horwath International














REPORT
      OF
      INDEPENDENT REGISTERED
      PUBLIC ACCOUNTING FIRM











Board
      of
      Directors and Shareholders


Peoples-Sidney
      Financial Corporation


Sidney,
      Ohio








We
      have
      audited the accompanying consolidated balance sheets of Peoples-Sidney Financial
      Corporation as of June 30, 2006 and 2005, and the related consolidated
      statements of income, changes in shareholders’ equity and cash flows for each of
      the three years in the period ended June 30, 2006. These financial statements
      are the responsibility of the Corporation’s management. Our responsibility is to
      express an opinion on these financial statements based on our
      audits.





We
      conducted our audits in accordance with the standards of the Public Company
      Accounting Oversight Board (United States). Those standards require that we
      plan
      and perform the audit to obtain reasonable assurance about whether the financial
      statements are free of material misstatement. An audit includes examining,
      on a
      test basis, evidence supporting the amounts and disclosures in the financial
      statements. An audit also includes assessing the accounting principles used
      and
      significant estimates made by management, as well as evaluating the overall
      financial statement presentation. We believe that our audits provide a
      reasonable basis for our opinion.





In
      our
      opinion, the consolidated financial statements referred to above present fairly,
      in all material respects, the financial position of Peoples-Sidney Financial
      Corporation as of June 30, 2006 and 2005, and the results of its operations
      and
      its cash flows for each of the three years in the period ended June 30, 2006
      in
      conformity with U.S. generally accepted accounting principles.











**/s/
                Crowe Chizek and Company LLC**Crowe
                Chizek and Company LLC








Columbus,
      Ohio


August
      29, 2006








21.
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PEOPLES-SIDNEY
      FINANCIAL CORPORATION


CONSOLIDATED
      BALANCE SHEETS


June
      30,
      2006 and 2005










2006
            
            2005**ASSETS**Cash
                and due from financial institutions
            
            $
            899,313
            
            $
            1,366,825Interest-bearing
                deposits in other financial institutions
            
            
            3,815,616
            
            
            3,954,371Total
                cash and cash equivalents
            
            
            4,714,929
            
            
            5,321,196Securities
                available for sale
            
            
            5,250,170
            
            
            5,433,915Federal
                Home Loan Bank stock
            
            
            1,768,100
            
            
            1,673,900Loans,
                net of allowance of $893,600 and $835,500
            
            
            124,171,193
            
            
            121,110,189Accrued
                interest receivable
            
            
            827,725
            
            
            745,534Premises
                and equipment, net
            
            
            1,974,672
            
            
            2,095,691Other
                real estate owned
            
            
            100,421
            
            
            --Other
                assets
            
            
            240,258
            
            
            314,841Total
                assets
            
            $
            139,047,468
            
            $
            136,695,266**LIABILITIES
                AND SHAREHOLDERS’ EQUITY**Deposits
            
            $
            82,819,038
            
            $
            85,930,737Borrowed
                funds
            
            
            38,511,268
            
            
            32,588,719Accrued
                interest payable and other liabilities
            
            
            460,821
            
            
            414,419Total
                liabilities
            
            
            121,791,127
            
            
            118,933,875Common
                stock in ESOP subject to repurchase obligation
            
            
            1,756,829
            
            
            --Preferred
                stock, $.01 par value, 500,000 shares authorized,none
                issued and outstanding
            
            
            --
            
            
            --Common
                stock, $.01 par value, 3,500,000 shares authorized,1,785,375
                shares issued
            
            
            16,675
            
            
            17,854Additional
                paid-in capital
            
            
            9,065,163
            
            
            10,785,770Retained
                earnings
            
            
            11,764,118
            
            
            11,702,497Treasury
                stock 392,727 and 352,727 shares at cost
            
            
            (4,725,278
            )
            
            (4,113,716
            )Unearned
                employee stock ownership plan shares
            
            
            (457,602
            )
            
            (588,958
            )Accumulated
                other comprehensive loss
            
            
            (163,564
            )
            
            (42,056
            )Total
                shareholders’ equity
            
            
            15,499,512
            
            
            17,761,391Total
                liabilities and shareholders’ equity
            
            $
            139,047,468
            
            $
            136,695,266





See
              accompanying notes to consolidated financial statements.
 22.
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            to Table of Contents*





Years
      Ended June 30, 2006, 2005 and 2004










2006
            
            2005
            
            2004Interest
                incomeLoans,
                including fees
            
            $
            7,989,538
            
            $
            7,471,853
            
            $
            7,573,870Securities
            
            
            211,249
            
            
            193,054
            
            
            234,765Demand,
                time and overnight deposits
            
            
            120,490
            
            
            65,535
            
            
            39,446Dividends
                on Federal Home Loan Bank stock
            
            
            94,486
            
            
            72,648
            
            
            62,575Total
                interest income
            
            
            8,415,763
            
            
            7,803,090
            
            
            7,910,656Interest
                expenseDeposits
            
            
            1,774,181
            
            
            1,556,564
            
            
            1,728,572Borrowed
                funds
            
            
            1,854,265
            
            
            1,632,866
            
            
            1,675,789Total
                interest expense
            
            
            3,628,446
            
            
            3,189,430
            
            
            3,404,361Net
                interest income
            
            
            4,787,317
            
            
            4,613,660
            
            
            4,506,295Provision
                for loan losses
            
            
            72,568
            
            
            91,497
            
            
            53,450Net
                interest income after provision for loan losses
            
            
            4,714,749
            
            
            4,522,163
            
            
            4,452,845Noninterest
                incomeService
                fees and other charges
            
            
            131,033
            
            
            129,966
            
            
            135,414Gain
                (loss) on sale of real estate owned
            
            
            2,912
            
            
            (24,600
            )
            
            (4,379
            )Total
                noninterest income
            
            
            133,945
            
            
            105,366
            
            
            131,035Noninterest
                expenseCompensation
                and benefits
            
            
            1,713,679
            
            
            1,627,546
            
            
            1,603,600Director
                fees
            
            
            97,200
            
            
            97,200
            
            
            97,200Occupancy
                and equipment
            
            
            377,295
            
            
            417,384
            
            
            404,661Computer
                processing
            
            
            346,233
            
            
            275,096
            
            
            249,180Professional
                services
            
            
            158,198
            
            
            126,669
            
            
            120,573State
                franchise taxes
            
            
            208,425
            
            
            205,373
            
            
            204,670Other
            
            
            321,674
            
            
            348,788
            
            
            355,210Total
                noninterest expense
            
            
            3,222,704
            
            
            3,098,056
            
            
            3,035,094Income
                before income taxes
            
            
            1,625,990
            
            
            1,529,473
            
            
            1,548,786Income
                tax expense
            
            
            586,600
            
            
            551,600
            
            
            574,200Net
                income
            
            $
            1,039,390
            
            $
            977,873
            
            $
            974,586Earnings
                per common share - basic
            
            $
            .76
            
            $
            .71
            
            $
            .71Earnings
                per common share - diluted
            
            $
            .76
            
            $
            .71
            
            $
            .71








See
              accompanying notes to consolidated financial statements.
 23.
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            to Table of Contents*








Years
      Ended June 30, 2006, 2005 and 2004










AccumulatedAdditional
            
            
            
            
            
            Unearned
            
            OtherCommon
            
            Paid-In
            
            Retained
            
            Treasury
            
            ESOP
            ComprehensiveStock
            
            Capital
            
            Earnings
            
            Stock
            
            Shares
            Income
                (Loss)
            TotalBalance,
                July 1, 2003
            
            $
            17,854
            
            $
            10,706,209
            
            $
            11,540,186
            
            $
            (4,021,200
            )
            $
            (872,192
            )
            $
            13,423
            
            $
            17,384,280Comprehensive
                income:Net
                income for the year endedJune
                30, 2004
            
            
            --
            
            
            --
            
            
            974,586
            
            
            --
            
            
            --
            
            
            --
            
            
            974,586Change
                in net unrealized gain (loss)on
                securities available for sale,net
                of reclassification and tax effects
            
            
            --
            
            
            --
            
            
            --
            
            
            --
            
            
            --
            
            
            (151,360
            )
            
            (151,360
            )Total
                comprehensive income
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            823,226Cash
                dividends - $.64 per share
            
            
            --
            
            
            --
            
            
            (871,790
            )
            
            --
            
            
            --
            
            
            --
            
            
            (871,790
            )Commitment
                to release 12,364 employeestock
                ownership plan shares
            
            
            --
            
            
            42,642
            
            
            --
            
            
            --
            
            
            145,071
            
            
            --
            
            
            187,713Purchase
                of 6,853 treasury shares,at
                cost
            
            
            --
            
            
            --
            
            
            --
            
            
            (92,516
            )
            
            --
            
            
            --
            
            
            (92,516
            )Balance,
                June 30, 2004
            
            $
            17,854
            
            $
            10,748,851
            
            $
            11,642,982
            
            $
            (4,113,716
            )
            $
            (727,121
            )
            $
            (137,937
            )
            $
            17,430,913














(Continued)
 24.
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            to Table of Contents*








Years
      Ended June 30, 2006, 2005 and 2004













AccumulatedAdditional
            
            
            
            
            
            Unearned
            
            OtherCommon
            
            Paid-In
            
            Retained
            
            Treasury
            
            ESOP
            ComprehensiveStock
            
            Capital
            
            Earnings
            
            Stock
            
            Shares
            Income
                (Loss)
            TotalBalance,
                July 1, 2004
            
            $
            17,854
            
            $
            10,748,851
            
            $
            11,642,982
            
            $
            (4,113,716
            )
            $
            (727,121
            )
            $
            (137,937
            )
            $
            17,430,913Comprehensive
                income:Net
                income for the year endedJune
                30, 2005
            
            
            --
            
            
            --
            
            
            977,873
            
            
            --
            
            
            --
            
            
            --
            
            
            977,873Change
                in net unrealized gain (loss)on
                securities available for sale,net
                of reclassification and tax effects
            
            
            --
            
            
            --
            
            
            --
            
            
            --
            
            
            --
            
            
            95,881
            
            
            95,881Total
                comprehensive income
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            1,073,754Cash
                dividends - $.67 per share
            
            
            --
            
            
            --
            
            
            (918,358
            )
            
            --
            
            
            --
            
            
            --
            
            
            (918,358
            )Commitment
                to release 11,775 employeestock
                ownership plan shares
            
            
            --
            
            
            36,919
            
            
            --
            
            
            --
            
            
            138,163
            
            
            --
            
            
            175,082Balance,
                June 30, 2005
            
            $
            17,854
            
            $
            10,785,770
            
            $
            11,702,497
            
            $
            (4,113,716
            )
            $
            (588,958
            )
            $
            (42,056
            )
            $
            17,761,391














(Continued)
 25.
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            to Table of Contents*








Years
      Ended June 30, 2006, 2005 and 2004










AccumulatedAdditional
            
            
            
            
            
            Unearned
            
            OtherCommon
            
            Paid-In
            
            Retained
            
            Treasury
            
            ESOP
            ComprehensiveStock
            
            Capital
            
            Earnings
            
            Stock
            
            Shares
            Income
                (Loss)
            TotalBalance,
                July 1, 2005
            
            $
            17,854
            
            $
            10,785,770
            
            $
            11,702,497
            
            $
            (4,113,716
            )
            $
            (588,958
            )
            $
            (42,056
            )
            $
            17,761,391Comprehensive
                income:Net
                income for the year endedJune
                30, 2006
            
            
            --
            
            
            --
            
            
            1,039,390
            
            
            --
            
            
            --
            
            
            --
            
            
            1,039,390Change
                in net unrealized gain (loss)on
                securities available for sale,net
                of reclassification and tax effects--
            
            
            --
            
            
            --
            
            
            --
            
            
            --
            
            
            --
            
            
            (121,508
            )
            
            (121,508
            )Total
                comprehensive income
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            917,882Transfer
                of 106,713 common sharessubject
                to repurchase obligation onJanuary
                1, 2006 upon change toOTC
                Bulletin Board
            
            
            (1,067
            )
            
            (1,552,674
            )
            
            --
            
            
            --
            
            
            --
            
            
            --
            
            
            (1,553,741
            )Cash
                dividends - $.72 per share
            
            
            --
            
            
            --
            
            
            (977,769
            )
            
            --
            
            
            --
            
            
            --
            
            
            (977,769
            )Commitment
                to release 11,195 employeestock
                ownership plan shares
            
            
            --
            
            
            35,043
            
            
            --
            
            
            --
            
            
            131,356
            
            
            --
            
            
            166,399Transfer
                of 11,195 common sharessubject
                to repurchase obligation andchange
                in value
            
            
            (112
            )
            
            (202,976
            )
            
            --
            
            
            --
            
            
            --
            
            
            --
            
            
            (203,088
            )Purchase
                of 40,000 treasury shares,at
                cost
            
            
            --
            
            
            --
            
            
            --
            
            
            (611,562
            )
            
            --
            
            
            --
            
            
            (611,562
            )Balance,
                June 30, 2006
            
            $
            16,675
            
            $
            9,065,163
            
            $
            11,764,118
            
            $
            (4,725,278
            )
            $
            (457,602
            )
            $
            (163,564
            )
            $
            15,499,512











See
              accompanying notes to consolidated financial statements.
 26.
 *Back
            to Table of Contents*








Years
      Ended June 30, 2006, 2005 and 2004







2006
              
              2005
              
              2004Cash
                  flows from operating activitiesNet
                  income
              
              $
              1,039,390
              
              $
              977,873
              
              $
              974,586Adjustments
                  to reconcile net income to net cashfrom
                  operating activitiesDepreciation
              
              
              184,279
              
              
              192,512
              
              
              197,281Provision
                  for loan losses
              
              
              72,568
              
              
              91,497
              
              
              53,450Net
                  amortization (accretion) of securities
              
              
              (360
              )
              
              (359
              )
              
              (360
              )(Gain)
                  loss on sale of real estate owned
              
              
              (2,912
              )
              
              24,600
              
              
              4,379FHLB
                  stock dividends
              
              
              (94,200
              )
              
              (72,500
              )
              
              (62,400
              )Deferred
                  taxes
              
              
              (20,211
              )
              
              59,239
              
              
              (3,284
              )Compensation
                  expense for ESOP shares
              
              
              166,399
              
              
              175,082
              
              
              187,713Change
                  in:Accrued
                  interest receivable and other assets
              
              
              (7,608
              )
              
              (88,694
              )
              
              119,756Accrued
                  expense and other liabilities
              
              
              129,210
              
              
              (129,691
              )
              
              (106,003
              )Deferred
                  loan fees
              
              
              6,223
              
              
              6,291
              
              
              10,759Net
                  cash from operating activities
              
              
              1,472,778
              
              
              1,235,850
              
              
              1,375,877Cash
                  flows from investing activitiesProceeds
                  from maturities of securitiesavailable
                  for sale
              
              
              --
              
              
              --
              
              
              4,000,000Proceeds
                  from sale of securitiesavailable
                  for sale
              
              
              --
              
              
              --
              
              
              2,000,000Net
                  change in loans
              
              
              (3,327,007
              )
              
              (5,665,710
              )
              
              (808,689
              )Premises
                  and equipment expenditures
              
              
              (63,260
              )
              
              (163,217
              )
              
              (490,428
              )Proceeds
                  from sale of real estate owned
              
              
              89,703
              
              
              184,128
              
              
              358,250Net
                  cash from investing activities
              
              
              (3,300,564
              )
              
              (5,644,799
              )
              
              5,059,133Cash
                  flows from financing activitiesNet
                  change in deposits
              
              
              (3,111,699
              )
              
              (833,516
              )
              
              (6,687,648
              )Proceeds
                  from long-term FHLB advances
              
              
              7,000,000
              
              
              1,000,000
              
              
              1,000,000Repayments
                  of long-term FHLB advances
              
              
              (2,077,451
              )
              
              (2,051,669
              )
              
              (2,049,966
              )Net
                  change in short-term FHLB advances
              
              
              1,000,000
              
              
              2,500,000
              
              
              --Cash
                  dividends paid
              
              
              (977,769
              )
              
              (918,358
              )
              
              (871,790
              )Purchase
                  of treasury shares
              
              
              (611,562
              )
              
              --
              
              
              (92,516
              )Net
                  cash from financing activities
              
              
              1,221,519
              
              
              (303,543
              )
              
              (8,701,920
              )Net
                  change in cash and cash equivalents
              
              
              (606,267
              )
              
              (4,712,492
              )
              
              (2,266,910
              )Cash
                  and cash equivalents at beginning of year
              
              
              5,321,196
              
              
              10,033,688
              
              
              12,300,598Cash
                  and cash equivalents at end of year
              
              $
              4,714,929
              
              $
              5,321,196
              
              $
              10,033,688Supplemental
                  cash flow informationInterest
                  paid
              
              $
              3,601,688
              
              $
              3,179,028
              
              $
              3,424,342Income
                  taxes paid
              
              
              450,000
              
              
              600,000
              
              
              557,000Supplemental
                  noncash disclosuresTransfer
                  from loans to real estate owned
              
              
              187,212
              
              
              109,643
              
              
              352,411





See
                accompanying notes to consolidated financial statements.
 27.
 *Back
              to Table of Contents*


PEOPLES-SIDNEY
        FINANCIAL CORPORATION
 NOTES
        TO
        CONSOLIDATED FINANCIAL STATEMENTS
 June
        30,
        2006, 2005 and 2004









**NOTE** **1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES**





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





Nature
      of Operations :
      The
      Corporation provides financial services through its main office in Sidney,
      Ohio,
      and branch offices in 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. Other financial instruments, which potentially represent
      concentrations of credit risk, include deposit accounts in other financial
      institutions and overnight deposits. 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 the disclosures provided, and actual
      results could differ. The allowance for loan losses and fair values of financial
      instruments are particularly subject to change.





Cash
      Flows :
      Cash
      and cash equivalents include cash, deposits with financial institutions,
      overnight deposits and time deposits with original maturities of 90 days or
      less. Overnight deposits are sold for one-day periods. Net cash flows are
      reported for loan and deposit transactions, as well as short-term borrowings
      under its cash management line of credit with the Federal Home Loan Bank of
      Cincinnati.





Securities :
      Securities are classified as held to maturity and carried at amortized cost
      when
      management has the positive intent and ability to hold them to maturity.
      Securities are classified as available for sale when they might be sold before
      maturity. Securities available for sale are carried at fair value, with
      unrealized holding gains or losses reported in other comprehensive income,
      net
      of tax.





Interest
      income includes amortization of premiums and accretion of discounts. Realized
      gains and losses on sales of securities are recorded on the trade date and
      determined using the amortized cost of the specific security sold.





Declines
      in the fair value of securities below their cost that are other than temporary
      are reflected as realized losses. In estimating other-than-temporary losses,
      management considers the length of time and extent that fair value has been
      less
      than cost, the financial condition and near term prospects of the issuer, and
      the Corporation’s ability and intent to hold the security for a period
      sufficient to allow for any anticipated recovery in fair value.





Federal
      Home Loan Bank (FHLB) stock :
      The
      Association is a member of the FHLB system. Members are required to own a
      certain amount of stock based on the level of borrowings and other factors,
      and
      may invest in additional amounts. FHLB stock is carried at cost, classified
      as a
      restricted security, and periodically evaluated for impairment based on ultimate
      recovery of par value. Both cash and stock dividends are reported as
      income.





(Continued)
 28.
 *Back
            to Table of Contents*




PEOPLES-SIDNEY
          FINANCIAL CORPORATION
 NOTES
          TO
          CONSOLIDATED FINANCIAL STATEMENTS
 June
          30,
          2006, 2005 and 2004





**NOTE
      1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES**  (Continued)





Loans :
      Loans
      that management has the intent and ability to hold for the foreseeable future
      or
      until maturity or payoff are reported at the principal balance outstanding,
      less
      net deferred loan fees and the allowance for loan losses.





Interest
      income is accrued on the unpaid principal balance using the interest method
      and
      includes amortization of net deferred loan fees over the loan term. Interest
      income on loans is discontinued at the time the loan is 90 days delinquent
      unless the credit is well secured and in process of collection. Past due status
      is based upon the contractual terms of the loan. In all cases, loans are placed
      on nonaccrual or charged-off at an earlier date if collection of principal
      or
      interest is considered doubtful.





All
      interest accrued but not received for loans placed on nonaccrual is reversed
      against interest income. Interest received on such loans is accounted for on
      the
      cash-basis or cost-recovery method, until qualifying for return to accrual.
      Loans are returned to accrual status when all the principal and interest amounts
      contractually due are brought current and future payments are reasonably
      assured.





Allowance
      for Loan Losses :
      The
      allowance for loan losses is a valuation allowance for probable incurred credit
      losses. Loan losses are charged against the allowance when management believes
      the uncollectibility of a loan balance is confirmed. Subsequent recoveries,
      if
      any, are credited to the allowance. Management estimates the allowance balance
      required using past loan loss experience, the nature and volume of the
      portfolio, information about specific borrower situations and estimated
      collateral values, economic conditions, and other factors. Allocations of the
      allowance may be made for specific loans, but the entire allowance is available
      for any loan that, in management’s judgment, should be charged-off.





The
      allowance consists of specific and general components. The specific component
      relates to loans that are individually classified as impaired or loans otherwise
      classified as substandard or doubtful. The general component covers
      non-classified loans and is based on historical loss experience adjusted for
      current factors.





A
      loan is
      impaired when full payment under the loan terms is not expected. Commercial
      and
      commercial real estate loans are individually evaluated for impairment. If
      a
      loan is impaired, a portion of the allowance is allocated so that the loan
      is
      reported, net, at the present value of estimated future cash flows using the
      loan’s existing rate or at the fair value of collateral if repayment is expected
      solely from the collateral. Large groups of smaller balance homogeneous loans,
      such as consumer and residential real estate loans, are collectively evaluated
      for impairment, and accordingly, they are not separately identified for
      impairment disclosures.





Foreclosed
      Assets :
      Assets
      acquired through or instead of loan foreclosure are initially recorded at fair
      value at acquisition, establishing a new cost basis. Any reduction to fair
      value
      from the carrying value of the related loan at the time the property is acquired
      is accounted for as a loan charge-off. After acquisition, a valuation allowance
      reduces the reported amount to the lower of the initial amount or fair value
      less costs to sell. Expenses, gains and losses on disposition, and changes
      in
      the valuation allowance are reported in net gain or loss on other real estate
      owned.





(Continued)
 29.
 *Back
            to Table of Contents*





PEOPLES-SIDNEY
          FINANCIAL CORPORATION
 NOTES
          TO
          CONSOLIDATED FINANCIAL STATEMENTS
 June
          30,
          2006, 2005 and 2004






**NOTE
      1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES**  (Continued)





Premises
      and Equipment :
      Land is
      carried at cost. Premises and equipment are stated at cost less accumulated
      depreciation. Depreciation expense is calculated using the straight-line method
      based on the estimated useful lives of the assets. The useful lives range from
      10 years to 40 years for building and improvements, 3 years to 20 years for
      furniture and equipment and 5 years for automobiles. These assets are reviewed
      for impairment when events indicate the carrying amount may not be recoverable.
      Maintenance and repairs are charged to expense as incurred and improvements
      are
      capitalized .





Income
      Taxes :
      Income
      tax expense is the total of the current year income tax due or refundable and
      the change in deferred tax assets and liabilities. Deferred tax assets and
      liabilities are the expected future tax amounts for the temporary differences
      between carrying amounts and tax basis of assets and liabilities, computed
      using
      enacted tax rates. A valuation allowance, if needed, reduces deferred tax assets
      to the amount expected to be realized.





Employee
      Stock Ownership Plan :
      The
      cost of shares issued to the Employee Stock Ownership Plan (“ESOP”), but not yet
      allocated to participants, is shown as a reduction of shareholders’ equity.
      Compensation expense is based on the market price of shares as they are
      committed to be released to participant accounts. Dividends on allocated ESOP
      shares reduce retained earnings; dividends on unearned ESOP shares reduce debt
      and accrued interest. Participants may exercise a put option and require the
      Corporation to repurchase their ESOP shares upon termination. As a result,
      an
      amount of equity equal to the fair value of the allocated shares is reclassified
      out of shareholders’ equity.





Stock-based
      Compensation :
      Prior
      to July 1, 2005, the Corporation accounted for stock-based compensation expense
      using the intrinsic value method as required by Accounting Principles Board
      Opinion No. 25, “Accounting for Stock Issued to Employees” and as permitted by
      Statement of Financial Accounting Standards (“SFAS”) No. 123, “Accounting for
      Stock-based Compensation.” No stock-based compensation cost was reflected in net
      income for stock options, as all options granted had an exercise price equal
      to
      the market price of the underlying common stock at the date of grant.





On
      July
      1, 2005, the Corporation adopted SFAS No. 123 (revised 2004), “Share Based
      Payment” (“SFAS 123R”), which requires measurement of compensation cost for all
      stock-based awards based on the grant-date fair value and recognition of
      compensation cost over the service period of stock-based awards, which is
      usually the same as the vesting period. The fair value of stock options is
      determined using the Black-Scholes valuation model, which is consistent with
      the
      Corporation’s valuation methodology previously utilized for options in footnote
      disclosures required under SFAS No. 123. The fair value of stock grants will
      also be determined using the Black-Scholes valuation model. The Company has
      adopted SFAS 123R using the modified prospective method, which provides for
      no
      retroactive application to prior periods and no cumulative adjustment to equity.
      It also provides for expense recognition for both new and existing stock-based
      awards as the required services are rendered. SFAS 123R also amends SFAS No.
      95,
“Statement of Cash Flows,” and requires tax benefits related to excess
      stock-based compensation deductions be presented in the statement of cash flows
      as financing cash inflows.





On
      March
      29, 2005, the SEC published Staff Accounting Bulletin No. 107 (“SAB 107”), which
      expressed the views of the Staff regarding the interaction between SFAS 123R
      and
      certain SEC rules and regulations regarding the valuation of stock-based payment
      arrangements for public companies. SAB 107 requires that stock-based
      compensation be classified in the same expense category as cash
      compensation.








(Continued)
 30.
 *Back
            to Table of Contents*





PEOPLES-SIDNEY
          FINANCIAL CORPORATION
 NOTES
          TO
          CONSOLIDATED FINANCIAL STATEMENTS
 June
          30,
          2006, 2005 and 2004






**NOTE
      1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES**  (Continued)





The
      adoption of SFAS 123R had no impact on net income, basic or diluted earnings
      per
      share for the year ended June 30, 2006 related to stock options since there
      were
      no unvested options at July 1, 2005 and no options were granted during the
      year
      ended June 30, 2006. Future option grants will be accounted for in accordance
      with SFAS 123R.





There
      was
      no effect on net income and earnings per share for the years ended June 30,
      2005
      and 2004 if expense would have been measured using the fair value recognition
      provisions of SFAS123R in the prior periods as all outstanding options had
      fully
      vested prior to July 1, 2003.





Advertising
      Costs :
      Advertising costs are generally expensed as incurred. Advertising expense
      included in other noninterest expense totaled $20,188, $16,995 and $18,871
      for
      the years ending June 30, 2006, 2005, and 2004.





Loan
      Commitments and Related Financial Instruments :
      Financial instruments include off-balance sheet credit instruments, such as
      commitments to make loans, issued to meet customer financing needs. The face
      amount for these items represents the exposure to loss, before considering
      customer collateral or ability to repay. Such financial instruments are recorded
      when they are funded.





Earnings
      Per Common Share :
      Basic
      earnings per common share (“EPS”) is net income divided by the weighted average
      number of common shares outstanding during the period. ESOP shares are
      considered outstanding for this calculation unless unearned. Management
      recognition plan (“MRP”) shares are considered outstanding as they become
      vested. Diluted EPS includes the dilutive effect of MRP shares and the
      additional potential common shares issuable under stock options.





Dividend
      Restriction :
      Financial institution regulations require the maintenance of certain capital
      levels and may limit the amount of dividends that may be paid. For detail on
      dividend restrictions and regulatory capital requirements, see Note
      13.





Comprehensive
      Income :
      Comprehensive income consists of net income and other comprehensive income
      (loss), net of tax. Other comprehensive income (loss) includes net unrealized
      gains and losses on securities available for sale, which is also recognized
      as a
      separate component of equity.





Loss
      Contingencies :
      Loss
      contingencies, including claims and legal actions arising in the ordinary course
      of business, are recorded as liabilities when the likelihood of loss is probable
      and an amount or range of loss can be reasonably estimated. Management does
      not
      believe there now are such matters that will have a material effect on the
      financial statements.





Fair
      Values of Financial Instruments :
      Fair
      values of financial instruments are estimated using relevant market information
      and other assumptions, as more fully disclosed in a separate note. Fair value
      estimates involve uncertainties and matters of significant judgment regarding
      interest rates, credit risk, prepayments and other factors, especially in the
      absence of broad markets for particular items. Changes in assumptions or in
      market conditions could significantly affect the estimates.





Reclassifications :
      Reclassification of certain amounts in the prior years consolidated financial
      statements has been made to conform to the current presentation.








(Continued)
 31.
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            to Table of Contents*


PEOPLES-SIDNEY
          FINANCIAL CORPORATION
 NOTES
          TO
          CONSOLIDATED FINANCIAL STATEMENTS
 June
          30,
          2006, 2005 and 2004


**NOTE
      2 - SECURITIES AVAILABLE FOR SALE**





The
      fair
      value of available for sale securities and the related gross unrealized gains
      and losses recognized in accumulated other comprehensive income (loss) were
      as
      follows.





Gross
            
            GrossFair
            
            Unrealized
            
            UnrealizedValue
            
            Gains
            
            Losses2006U.S.
                Government agencies
            
            $
            5,250,170
            
            $
            --
            
            $
            (247,824
            )2005U.S.
                Government agencies
            
            $
            5,433,915
            
            $
            3,905
            
            $
            (67,624
            )







Contractual
      maturities of securities available for sale at year-end 2006 were as follows.
      Actual maturities may differ from contractual maturities because borrowers
      may
      have the right to call or prepay obligations with or without call or prepayment
      penalties.




FairValueDue
                in one year or less
            
            $
            497,970Due
                after one year through five years
            
            
            2,930,940Due
                after five years through ten years
            
            
            1,821,260$
            5,250,170








No
      securities were pledged as collateral at year-end 2006 or 2005. Proceeds from
      the sale of securities available for sale totaled $2,000,000 for 2004. There
      was
      no gain or loss realized on this sale. There were no sales of securities in
      2006
      or 2005.





Securities
      with unrealized losses at year-end 2006 and 2005, 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
            
            TotalFair
            
            Unrealized
            
            Fair
            
            Unrealized
            
            Fair
            
            UnrealizedDescription
                of Securities
            
            Value
            
            Loss
            
            Value
            
            Loss
            
            Value
            
            Loss2006U.S.
                Government agencies
            
            $
            497,970
            
            $
            (2,030
            )
            $
            4,752,200
            
            $
            (245,794
            )
            $
            5,250,170
            
            $
            (247,824
            )2005U.S.
                Government agencies
            
            $
            1,990,000
            
            $
            (9,602
            )
            $
            2,940,010
            
            $
            (58,022
            )
            $
            4,930,010
            
            $
            (67,624
            )





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)
 32.
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            to Table of Contents*


PEOPLES-SIDNEY
          FINANCIAL CORPORATION
 NOTES
          TO
          CONSOLIDATED FINANCIAL STATEMENTS
 June
          30,
          2006, 2005 and 2004


**NOTE
      3 - LOANS**





Year-end
      loans were as follows.





2006
            
            2005Mortgage
                loans:1-4
                family residential
            
            $
            92,407,661
            
            $
            94,593,583Multi-family
                residential
            
            
            1,379,646
            
            
            1,297,418Commercial
                real estate
            
            
            12,801,287
            
            
            12,564,156Real
                estate construction and development
            
            
            2,982,155
            
            
            1,441,815Land
            
            
            3,371,226
            
            
            2,186,890Total
                mortgage loans
            
            
            112,941,975
            
            
            112,083,862Consumer
                loans
            
            
            5,792,608
            
            
            5,056,291Commercial
                loans
            
            
            6,715,565
            
            
            5,184,668Total
                loans
            
            
            125,450,148
            
            
            122,324,821Less:Allowance
                for loan losses
            
            
            (893,600
            )
            
            (835,500
            )Deferred
                loan fees
            
            
            (385,355
            )
            
            (379,132
            )$
            124,171,193
            
            $
            121,110,189





Activity
      in the allowance for loan losses was as follows.





2006
            
            2005
            
            2004Balance
                at beginning of year
            
            $
            835,500
            
            $
            752,900
            
            $
            766,000Provision
                for losses
            
            
            72,568
            
            
            91,497
            
            
            53,450Charge-offs
            
            
            (16,675
            )
            
            (9,353
            )
            
            (67,244
            )Recoveries
            
            
            2,207
            
            
            456
            
            
            694Balance
                at end of year
            
            $
            893,600
            
            $
            835,500
            
            $
            752,900








Impaired
      loans were as follows.





2006
            
            2005Period-end
                impaired loans with no allowance for loan losses allocated
            
            $
            --
            
            $
            --Period-end
                impaired loans with allowance for loan losses allocated
            
            
            232,000
            
            
            161,000Amount
                of the allowance allocated to impaired loans
            
            
            209,000
            
            
            134,000Average
                of impaired loans during the year
            
            
            214,000
            
            
            139,000Interest
                income recognized during the year
            
            
            15,545
            
            
            10,046Cash-basis
                interest income recognized
            
            
            4,846
            
            
            3,875











(Continued)
 33.
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            to Table of Contents*


PEOPLES-SIDNEY
          FINANCIAL CORPORATION
 NOTES
          TO
          CONSOLIDATED FINANCIAL STATEMENTS
 June
          30,
          2006, 2005 and 2004


**NOTE
      3 - LOANS**  (Continued)





Nonperforming
      loans at year-end were as follows.


2006
            
            2005Loans
                past due over 90 days still on accrual
            
            $
            375,000
            
            $
            349,000Nonaccrual
                loans
            
            
            1,525,000
            
            
            1,318,000








Nonperforming
      loans include both smaller balance homogeneous loans that are collectively
      evaluated for impairment and individually classified impaired
      loans.





Activity
      for loans to executive officers, directors and companies with which they are
      affiliated for the year ended June 30, 2006, were as follows.





Balance
                at beginning of period
            
            $
            1,040,438New
                loans
            
            
            53,190Principal
                repayments
            
            
            (73,067
            )Balance
                at end of period
            
            $
            1,020,561








**NOTE
      4 - ACCRUED INTEREST RECEIVABLE**





Year-end
      accrued interest receivable was as follows.





2006
            
            2005Loans
            
            $
            815,725
            
            $
            734,923Securities
            
            
            12,000
            
            
            10,611$
            827,725
            
            $
            745,534











**NOTE
      5 - PREMISES AND EQUIPMENT**





Year-end
      premises and equipment was as follows.





2006
            
            2005Land
            
            $
            225,166
            
            $
            225,166Buildings
                and improvements
            
            
            2,504,154
            
            
            2,456,094Furniture
                and equipment
            
            
            1,656,739
            
            
            1,644,749Automobile
            
            
            22,416
            
            
            22,416Total
                cost
            
            
            4,408,475
            
            
            4,348,425Accumulated
                depreciation
            
            
            (2,433,803
            )
            
            (2,252,734
            )$
            1,974,672
            
            $
            2,095,691








(Continued)
 34.
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            to Table of Contents*


PEOPLES-SIDNEY
          FINANCIAL CORPORATION
 NOTES
          TO
          CONSOLIDATED FINANCIAL STATEMENTS
 June
          30,
          2006, 2005 and 2004


**NOTE
      5 - PREMISES AND EQUIPMENT** **** (Continued)





The
      Jackson Center branch facility had been leased under an operating lease that
      began in September 1998. During 2004, the Association exercised its option
      to
      purchase the property. The Association entered into a lease for a branch in
      the
      Super Wal-Mart in Sidney that commenced in June 2001. The lease term was renewed
      for five years at $39,750 annually. The lease has another five-year renewal
      period at $49,688 annually. Total rental expense was $31,800, $31,800 and
      $35,301 for the years ended June 30, 2006, 2005 and 2004.





Rental
      commitments under the noncancelable operating lease was as follows, before
      considering the renewal option.





Year
                ending June 30,2007
            
            $
            39,7502008
            
            
            39,7502009
            
            
            39,7502010
            
            
            39,7502011
            
            
            39,750$
            198,750








**NOTE
      6 - FEDERAL INCOME TAXES**





Income
      tax expense was as follows.





2006
            
            2005
            
            2004Current
            
            $
            606,811
            
            $
            492,361
            
            $
            577,484Deferred
            
            
            (20,211
            )
            
            59,239
            
            
            (3,284
            )$
            586,600
            
            $
            551,600
            
            $
            574,200







Effective
      tax rates differ from federal statutory rates applied to financial statement
      income due to the following.





2006
            
            2005
            
            2004Income
                taxes computed at the statutorytax
                rate on pretax income
            
            $
            552,837
            
            $
            520,021
            
            $
            526,587Add
                tax effect of:ESOP
                fair value book expense in excessof
                tax deduction
            
            
            24,673
            
            
            25,973
            
            
            28,590Nondeductible
                expenses and other
            
            
            9,090
            
            
            5,606
            
            
            19,023$
            586,600
            
            $
            551,600
            
            $
            574,200Statutory
                tax rate
            
            
            34.0
            %
            
            34.0
            %
            
            34.0
            %Effective
                tax rate
            
            
            36.1
            %
            
            36.1
            %
            
            37.1
            %





(Continued)
 35.
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            to Table of Contents*


PEOPLES-SIDNEY
          FINANCIAL CORPORATION
 NOTES
          TO
          CONSOLIDATED FINANCIAL STATEMENTS
 June
          30,
          2006, 2005 and 2004


**NOTE
      6 - FEDERAL INCOME TAXES**  (Continued)





Year-end
      deferred tax assets and deferred tax liabilities were due to the
      following.





2006
            
            2005Items
                giving rise to deferred tax assetsDeferred
                loan fees
            
            $
            129,516
            
            $
            126,780Reserve
                for delinquent interest
            
            
            21,043
            
            
            14,497Allowance
                for loan losses
            
            
            303,824
            
            
            284,070Accrued
                compensation
            
            
            2,486
            
            
            2,638Unrealized
                loss on securities available for sale
            
            
            84,260
            
            
            21,663Accrued
                ESOP expense
            
            
            27,624
            
            
            30,409Total
                deferred tax assets
            
            
            568,753
            
            
            480,057Items
                giving rise to deferred tax liabilitiesPrepaid
                expenses
            
            
            (54,579
            )
            
            (55,172
            )Securities
                accretion
            
            
            (373
            )
            
            (251
            )Depreciation
            
            
            (77,977
            )
            
            (103,646
            )FHLB
                stock dividends
            
            
            (294,678
            )
            
            (262,650
            )Total
                deferred tax liabilities
            
            
            (427,607
            )
            
            (421,719
            )Net
                deferred tax asset
            
            $
            141,146
            
            $
            58,338





Retained
      earnings at June 30, 2006 and 2005 included approximately $2,174,000 for which
      no provision for federal income taxes had been made. This amount represents
      the
      qualifying and nonqualifying tax bad debt reserve as of December 31, 1987,
      which
      is the end of the Association’s base year for purposes of calculating the bad
      debt deduction for tax purposes. If this portion of retained earnings is used
      in
      the future for any purpose other than to absorb bad debts, it will be added
      to
      future taxable income. The related amount of unrecognized deferred tax liability
      was approximately $739,000 at June 30, 2006 and 2005.











(Continued)
 36.
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            to Table of Contents*


PEOPLES-SIDNEY
          FINANCIAL CORPORATION
 NOTES
          TO
          CONSOLIDATED FINANCIAL STATEMENTS
 June
          30,
          2006, 2005 and 2004


**NOTE
      7 - DEPOSITS**




Year-end
      deposits were as follows.





2006
            
            2005Noninterest-bearingdemand
                deposits
            
            $
            1,194,173
            
            $
            1,073,496NOW
                accounts
            
            
            6,191,480
            
            
            6,290,788Money
                market accounts
            
            
            6,530,593
            
            
            6,016,666Savings
                accounts
            
            
            25,818,593
            
            
            28,432,476Certificates
                of deposit
            
            
            43,084,199
            
            
            44,117,311$
            82,819,038
            
            $
            85,930,737





The
      aggregate amount of certificates of deposit with a minimum denomination of
      $100,000 was $4,408,000 and $4,709,000 at June 30, 2006 and 2005, respectively.
      Deposits more than $100,000 are not insured by the FDIC. Related party deposits
      were $865,000 and $526,000 at June 30, 2006 and 2005.





The
      scheduled maturities of certificates of deposit as of June 30, 2006 were as
      follows.





Year
                ended June 30,2007
            
            $
            21,613,9882008
            
            
            9,148,9922009
            
            
            4,175,9252010
            
            
            2,901,9912011
            
            
            5,243,303$
            43,084,199








**NOTE
      8 - BORROWED FUNDS**





At
      June
      30, 2006, the Association had a cash management line of credit enabling it
      to
      borrow up to $8,000,000 from the Federal Home Loan Bank of Cincinnati (“FHLB”).
      All cash management advances have an original maturity of 90 days. The line
      of
      credit must be renewed on an annual basis. Outstanding borrowings on this line
      of credit were $3,500,000 at June 30, 2006 and $2,500,000 at June 30,
      2005.





At
      June
      30, 2006, based on the Association’s current FHLB stock ownership, total assets
      and pledgable residential mortgage loan portfolio, the Association had the
      ability to obtain borrowings up to a maximum of $66.9 million.








(Continued)
 37.
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            to Table of Contents*


PEOPLES-SIDNEY
          FINANCIAL CORPORATION
 NOTES
          TO
          CONSOLIDATED FINANCIAL STATEMENTS
 June
          30,
          2006, 2005 and 2004


**NOTE
      8 - BORROWED FUNDS** **** (Continued)





Advances
      from the Federal Home Loan Bank at year-end were as follows.





2006
            
            2005Cash
                management advance, variable rate 5.43% atJune 30, 2006 and 3.53% at June 30, 2005
            
            $
            3,500,000
            
            $
            2,500,0004.88%
                fixed-rate advance, due January 25, 2008
            
            
            2,000,000
            
            
            --6.13%
                fixed-rate advance, due June 25, 2008
            
            
            7,000,000
            
            
            7,000,0005.16%
                fixed-rate advance, due March 13, 2009
            
            
            3,000,000
            
            
            --6.00%
                convertible advance, fixed-rate until September2006,
                due June 11, 2009
            
            
            5,000,000
            
            
            5,000,0004.42%
                fixed-rate advance, due July 9, 2010
            
            
            2,000,000
            
            
            --6.27%
                convertible advance, fixed-rate untilSeptember
                2006, due September 8, 2010
            
            
            5,000,000
            
            
            5,000,0005.30%
                select pay mortgage-matched advance, finalmaturity
                May 1, 2011
            
            
            658,357
            
            
            858,3995.35%
                select pay mortgage-matched advance, finalmaturity
                July 1, 2011
            
            
            1,507,849
            
            
            1,954,7523.92%
                select pay mortgage-matched advance, finalmaturity
                November 1, 2012
            
            
            587,902
            
            
            702,0463.55%
                select pay mortgage-matched advance, finalmaturity
                March 1, 2013
            
            
            712,991
            
            
            804,8484.10%
                select pay mortgage-matched advance, finalmaturity
                March 1, 2015
            
            
            716,967
            
            
            979,6644.09%
                select pay mortgage-matched advance, finalmaturity
                November 1, 2017
            
            
            593,068
            
            
            703,3603.31%
                select pay mortgage-matched advance, finalmaturity
                April 1, 2019
            
            
            638,925
            
            
            797,9324.72%
                select pay mortgage-matched advance, finalmaturity
                November 1, 2022
            
            
            2,269,998
            
            
            2,483,6894.38%
                select pay mortgage-matched advance, finalmaturity
                December 1, 2022
            
            
            755,928
            
            
            827,9093.92%
                select pay mortgage-matched advance, finalmaturity
                December 1, 2022
            
            
            638,874
            
            
            739,8843.64%
                select pay mortgage-matched advance, finalmaturity
                March 1, 2023
            
            
            1,930,409
            
            
            2,236,236$
            38,511,268
            
            $
            32,588,719








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








(Continued)
 38.
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PEOPLES-SIDNEY
          FINANCIAL CORPORATION
 NOTES
          TO
          CONSOLIDATED FINANCIAL STATEMENTS
 June
          30,
          2006, 2005 and 2004


**NOTE
      8 - BORROWED FUNDS** **** (Continued)





The
      maximum month-end balance of advances outstanding was $38,511,000 in 2006 and
      $32,589,000 in 2005. Average balances of borrowings outstanding during 2006
      and
      2005 were $35,412,000 and $30,792,000. Advances under the borrowing agreements
      were collateralized by the Association’s FHLB stock owned and $93,575,000 and
      $93,506,000 of qualifying mortgage loans at year-end 2006 and 2005.





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





Year
                ended June 30,2007
            
            $
            5,322,2372008
            
            
            10,603,7392009
            
            
            9,416,1852010
            
            
            1,254,8072011
            
            
            8,108,154Thereafter
            
            
            3,806,146$
            38,511,268








**NOTE
      9 - RETIREMENT PLANS**





The
      Corporation maintains a 401(k) profit sharing plan. With certain exceptions,
      all
      employees who have attained the age of 21 and who have completed one year of
      employment, during which they worked at least 1,000 hours, are eligible to
      participate in the plan. The Corporation provides a matching contribution on
      behalf of participants who make elective compensation deferrals at the rate
      of
      50% of the first 6% of participant contributions up to a maximum match of 3%
      of
      the participant’s compensation. The Corporation may also contribute additional
      amounts at its discretion. Employee contributions are vested at all times and
      the Corporation’s matching contributions vest evenly over 5 years of service.
      The cash contribution and related expense included in salaries and employee
      benefits was $32,045, $29,117 and $33,561 for the years ended June 30, 2006,
      2005 and 2004.











(Continued)
 39.
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PEOPLES-SIDNEY
          FINANCIAL CORPORATION
 NOTES
          TO
          CONSOLIDATED FINANCIAL STATEMENTS
 June
          30,
          2006, 2005 and 2004


**NOTE
      10 - EMPLOYEE STOCK OWNERSHIP PLAN**





The
      Corporation offers an employee stock ownership plan (“ESOP”) for the benefit of
      substantially all employees of the Corporation. The ESOP received a favorable
      determination letter from the Internal Revenue Service on the qualified status
      of the ESOP under applicable provisions of the Internal Revenue Code. The ESOP
      borrowed funds from Peoples in order to acquire common shares of Peoples. The
      loan is secured by the shares purchased with the loan proceeds and will be
      repaid by the ESOP with funds from the Association’s discretionary contributions
      to the ESOP, dividends on unallocated shares received by the ESOP and earnings
      on ESOP assets. When loan payments are made, ESOP shares are allocated to
      participants based on relative compensation. Dividends on allocated shares
      increase participant accounts.





Participants
      receive the shares at the end of employment. A participant may require stock
      received to be repurchased by the Corporation unless the stock is traded on
      an
      established market. The Over the Counter Bulletin Board that the Corporation
      switched to on January 1, 2006 from the NASDAQ National Market System is not
      considered an established market according to the Internal Revenue Code. As
      a
      result, allocated shares are subject to a repurchase obligation.





Contributions
      to the ESOP during 2006, 2005 and 2004 were $137,604, $144,721 and $151,974.
      ESOP compensation expense was $166,399, $175,082 and $187,713 for the years
      ended June 30, 2006, 2005 and 2004.





Year-end
      ESOP shares were as follows.





2006
            
            2005Allocated
                shares
            
            
            117,908
            
            
            113,164Unreleased
                shares
            
            
            38,996
            
            
            50,191Total
                ESOP shares
            
            
            156,904
            
            
            163,355Fair
                value of unreleased shares
            
            $
            581,040
            
            $
            703,678





(Continued)
 40.
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PEOPLES-SIDNEY
          FINANCIAL CORPORATION
 NOTES
          TO
          CONSOLIDATED FINANCIAL STATEMENTS
 June
          30,
          2006, 2005 and 2004


**NOTE
      11 - STOCK OPTION AND INCENTIVE PLAN**





The
      Stock
      Option and Incentive Plan was approved by the shareholders of the Corporation
      on
      May 22, 1998 which provides for the issue of up to 178,538 options. Exercise
      price is the market price at the date of grant. One-fifth of the options awarded
      become first exercisable on each of the first five anniversaries of the date
      of
      grant. The option period expires 10 years from the date of grant.





A
      summary
      of the activity in the plan was as follows.





2006
            
            2005
            
            2004Weighted
            
            
            
            Weighted
            
            
            
            WeightedAverage
            
            
            
            Average
            
            
            
            AverageExercise
            
            
            
            Exercise
            
            
            
            ExerciseShares
            
            Price
            
            Shares
            
            Price
            
            Shares
            
            PriceOutstanding
                at beginning of year
            
            
            131,898
            
            $
            16.04
            
            
            131,898
            
            $
            16.04
            
            
            140,824
            
            $
            16.03Granted
            
            
            --
            
            
            --
            
            
            --
            
            
            --
            
            
            --
            
            
            --Exercised
            
            
            --
            
            
            --
            
            
            --
            
            
            --
            
            
            --
            
            
            --Forfeited
            
            
            (3,000
            )
            
            16.01
            
            
            --
            
            
            --
            
            
            (8,926
            )
            
            16.01Outstanding
                at end of year
            
            
            128,898
            
            $
            16.04
            
            
            131,898
            
            $
            16.04
            
            
            131,898
            
            $
            16.04Options
                exercisable at year-end
            
            
            128,898
            
            $
            16.04
            
            
            131,898
            
            $
            16.04
            
            
            131,898
            
            $
            16.04Remaining
                shares availablefor
                grant
            
            
            49,640
            
            
            
            
            
            46,640
            
            
            
            
            
            46,640





Options
      outstanding at year-end were as follows.





Weighted
                AverageRemainingExercise
            
            Number
            
            Contractual
            
            NumberPrices
            
            Outstanding
            
            Life
            
            Exercisable$16.01
            
            
            127,653
            
            
            1.90
                yrs
            
            
            127,653$18.75
            
            
            1,245
            
            
            1.95
                yrs
            
            
            1,245Outstanding
                at year-end
            
            
            128,898
            
            
            1.90
                yrs
            
            
            128,898





There
      was
      no intrinsic value for the outstanding and exercisable options at June 30,
      2006,
      2005 and 2004.








**NOTE
      12 - MANAGEMENT RECOGNITION PLAN**





A
      Management Recognition Plan (“MRP”) was adopted by the Board of Directors and
      approved by the shareholders of the Corporation on May 22, 1998 to purchase
      71,415 common shares. The MRP is used as a means of providing directors and
      certain key employees of the Corporation with an ownership interest in the
      Corporation in a manner designed to compensate such directors and key employees
      for services to the Corporation.








(Continued)
 41.
 *Back
            to Table of Contents*


PEOPLES-SIDNEY
          FINANCIAL CORPORATION
 NOTES
          TO
          CONSOLIDATED FINANCIAL STATEMENTS
 June
          30,
          2006, 2005 and 2004


**NOTE
      12 - MANAGEMENT RECOGNITION PLAN**  (Continued)





In
      conjunction with the adoption of the MRP on May 22, 1998, the Board of Directors
      awarded 57,128 shares to certain directors, officers and employees of the
      Corporation. No shares had been previously awarded. One-fifth of such shares
      were earned and nonforfeitable on each of the first five anniversaries of the
      date of the award. All MRP shares outstanding fully vested on May 22, 2003.
      At
      June 30, 2006, there were 14,287 shares reserved for future awards and held
      as
      treasury stock. Compensation expense related to MRP shares is based upon the
      cost of the shares, which approximates fair value at the date of grant. There
      was no compensation expense in 2006, 2005 or 2004.








**NOTE
      13 - REGULATORY MATTERS**





The
      Association is subject to various regulatory capital requirements administered
      by the federal regulatory agencies. Under capital adequacy guidelines and the
      regulatory framework for prompt corrective action, the Association must meet
      specific capital guidelines that involve quantitative measures of the
      Association’s assets, liabilities and certain off-balance-sheet items as
      calculated under regulatory accounting practices. Capital amounts and
      classifications are also subject to qualitative judgments by the regulators.
      Failure to meet minimum capital requirements can initiate regulatory
      action.





Prompt
      corrective action regulations provide five classifications: well capitalized,
      adequately capitalized, undercapitalized, significantly undercapitalized, and
      critically undercapitalized, although these terms are not used to represent
      overall financial condition. If adequately capitalized, regulatory approval
      is
      required to accept brokered deposits. If undercapitalized, capital distributions
      are limited, as is asset growth and expansion, and capital restoration plans
      are
      required.





At
      June
      30, 2006 and 2005, management believes the Association complies with all
      regulatory capital requirements. Based on the Association’s computed regulatory
      capital ratios, the Association is considered well capitalized under the Federal
      Deposit Insurance Act at June 30, 2006 and 2005. No conditions or events have
      occurred subsequent to the last notification by regulators that management
      believes would change the Association’s category.








(Continued)
 42.
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            to Table of Contents*


PEOPLES-SIDNEY
          FINANCIAL CORPORATION
 NOTES
          TO
          CONSOLIDATED FINANCIAL STATEMENTS
 June
          30,
          2006, 2005 and 2004


**NOTE
      13 - REGULATORY MATTERS**  (Continued)





At
      year-end 2006 and 2005, the Association’s actual capital levels and minimum
      required levels were as follows.





To
                Be WellCapitalized
                UnderFor
                Capital
            
            Prompt
                Corrective-Actual
            
            Adequacy
                Purposes
            
            Action
                RegulationsAmount
            
            Ratio
            Amount
            
            Ratio
            Amount
            
            Ratio(Dollars
                in thousands)2006Total
                capital (to risk-weighted assets)
            
            $
            16,048
            
            
            18.9
            %
            $
            6,779
            
            
            8.0
            %
            $
            8,473
            
            
            10.0
            %Tier
                1 (core) capital (to risk-weightedassets)
            
            
            15,368
            
            
            18.1
            
            
            3,389
            
            
            4.0
            
            
            5,084
            
            
            6.0Tier
                1 (core) capital (to adjustedtotal
                assets)
            
            
            15,368
            
            
            11.0
            
            
            5,576
            
            
            4.0
            
            
            6,970
            
            
            5.0Tangible
                capital (to adjusted total assets)
            
            
            15,368
            
            
            11.0
            
            
            2,091
            
            
            1.5
            
            
            N/A2005Total
                capital (to risk-weighted assets)
            
            $
            16,909
            
            
            20.7
            %
            $
            6,550
            
            
            8.0
            %
            $
            8,188
            
            
            10.0
            %Tier
                1 (core) capital (to risk-weightedassets)
            
            
            16,083
            
            
            19.6
            
            
            3,275
            
            
            4.0
            
            
            4,913
            
            
            6.0Tier
                1 (core) capital (to adjustedtotal
                assets)
            
            
            16,083
            
            
            11.8
            
            
            5,471
            
            
            4.0
            
            
            6,838
            
            
            5.0Tangible
                capital (to adjusted total assets)
            
            
            16,083
            
            
            11.8
            
            
            2,052
            
            
            1.5
            
            
            N/A





The
      Qualified Thrift Lender test requires at least 65% of assets be maintained in
      housing-related finance and other specified areas. If this test is not met,
      limits are placed on growth, branching, new investments, FHLB advances and
      dividends, or the Association must convert to a commercial bank charter.
      Management believes the Association satisfies this test.





When
      the
      Association converted from a mutual to a stock institution, a “liquidation
      account” was established at $9,307,000, which was net worth reported in the
      conversion prospectus. Eligible depositors who have maintained their accounts,
      less annual reductions to the extent they have reduced their deposits, would
      receive a distribution from this account if the Association liquidated.
      Dividends may not reduce shareholders’ equity below the required liquidation
      account balance.





In
      addition to the liquidation account restriction discussed above, OTS regulations
      limit capital distributions by savings associations. Generally, capital
      distributions are permitted without notice or application to the OTS if the
      distributions are limited to current year to date undistributed net income
      and
      prior two years’ undistributed net income, as long as the institution remains
      well capitalized after the proposed distribution. If dividends to be paid would
      exceed the net income test, an application would be required. In addition to
      current year earnings, approximately $94,000 is available to pay dividends
      to
      the holding company during the fiscal year ending June 30, 2007 without prior
      regulatory approval.





(Continued)
 43.
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            to Table of Contents*




PEOPLES-SIDNEY
          FINANCIAL CORPORATION
 NOTES
          TO
          CONSOLIDATED FINANCIAL STATEMENTS
 June
          30,
          2006, 2005 and 2004


**NOTE
      14 - OFF-BALANCE-SHEET ACTIVITIES**





Some
      financial instruments, such as loan commitments, credit lines, letters of credit
      and overdraft protection, are issued to meet customer financing needs. These
      are
      agreements to provide credit or to support the credit of others, as long as
      conditions established in the contract are met, and usually have expiration
      dates. Commitments may expire without being used. Off-balance-sheet risk to
      credit loss exists up to the face amount of these instruments, although material
      losses are not anticipated. The same credit policies are used to make such
      commitments as are used for loans, including obtaining collateral at exercise
      of
      the commitment.





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





2006
            
            20051-4
                family residential real estate - fixed rate
            
            $
            239,000
            
            $
            407,0001-4
                family residential real estate - variable rate
            
            
            448,000
            
            
            695,000Commercial
                lines of credit - variable rate
            
            
            4,213,000
            
            
            2,592,000Home
                equity lines of credit - variable rate
            
            
            913,000
            
            
            709,000





The
      interest rate on fixed-rate commitments ranged from 6.38% to 8.00% at June
      30,
      2006 and 5.75% to 7.00% at June 30, 2005. 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
      June
      30, 2006 and 2005, the Association was required to have $241,000 and $325,000
      on
      deposit with its correspondent banks as a compensating clearing
      requirement.





The
      Association entered into employment agreements with certain officers of the
      Corporation. The agreements provide for a term of one to three years and a
      set
      salary 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 and include
      provisions that would accelerate certain benefits upon change of
      control.











(Continued)
 44.
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            to Table of Contents*




PEOPLES-SIDNEY
          FINANCIAL CORPORATION
 NOTES
          TO
          CONSOLIDATED FINANCIAL STATEMENTS
 June
          30,
          2006, 2005 and 2004


**NOTE
      15 - DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS**





Carrying
      amounts and estimated fair values of financial instruments at year-end were
      as
      follows.





2006
            
            2005Estimated
            
            
            
            EstimatedCarrying
            
            Fair
            
            Carrying
            
            FairValue
            
            Value
            
            Value
            
            ValueFinancial
                assets:Cash
                and cash equivalents
            
            $
            4,714,929
            
            $
            4,714,929
            
            $
            5,321,196
            
            $
            5,321,196Securities
                available for sale
            
            
            5,250,170
            
            
            5,250,170
            
            
            5,433,915
            
            
            5,433,915Federal
                Home Loan Bank stock
            
            
            1,768,100
            
            
            1,768,100
            
            
            1,673,900
            
            
            1,673,900Loans,
                net
            
            
            124,171,193
            
            
            120,160,678
            
            
            121,110,189
            
            
            120,464,413Accrued
                interest receivable
            
            
            827,725
            
            
            827,725
            
            
            745,534
            
            
            745,534Financial
                liabilities:Deposits
            
            
            (82,819,038
            )
            
            (82,355,616
            )
            
            (85,930,737
            )
            
            (85,888,352
            )Borrowed
                funds
            
            
            (38,511,268
            )
            
            (36,427,921
            )
            
            (32,588,719
            )
            
            (33,233,942
            )Accrued
                interest payable
            
            
            (189,060
            )
            
            (189,060
            )
            
            (162,301
            )
            
            (162,301
            )





The
      estimated fair value approximates carrying amounts for all items except those
      described below. Security fair values are based on market prices or dealer
      quotes, and if no such information is available, on the rate and term of the
      security and information about the issuer. For fixed rate loans or deposits
      and
      for variable rate loans or deposits with infrequent repricing or repricing
      limits, fair value is based on discounted cash flows using current market rates
      applied to the estimated life and credit risk. Fair values for impaired loans
      are estimated using discounted cash flow analysis or underlying collateral
      values. Fair value of debt is based on current rates for similar financing.
      The
      fair value of off-balance-sheet items is based on the current fees or cost
      that
      would be charged to enter into or terminate such arrangements, which are not
      material.








**NOTE
      16 - EARNINGS PER SHARE**





The
      factors used in the earnings per share computation follows.





2006
            
            2005
            
            2004BasicNet
                income
            
            $
            1,039,390
            
            $
            977,873
            
            $
            974,586Weighted
                average common sharesoutstanding
            
            
            1,408,785
            
            
            1,432,648
            
            
            1,435,138Less:
                Average unallocated ESOP shares
            
            
            (44,594
            )
            
            (56,079
            )
            
            (68,148
            )Weighted
                average common sharesoutstanding
                for basic earnings percommon
                share
            
            
            1,364,191
            
            
            1,376,569
            
            
            1,366,990Basic
                earnings per common share
            
            $
            .76
            
            $
            .71
            
            $
            .71








(Continued)
 45.
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            to Table of Contents*


PEOPLES-SIDNEY
          FINANCIAL CORPORATION
 NOTES
          TO
          CONSOLIDATED FINANCIAL STATEMENTS
 June
          30,
          2006, 2005 and 2004


**NOTE
      16 - EARNINGS PER SHARE**  (Continued)





2006
            
            2005
            
            2004DilutedNet
                income
            
            $
            1,039,390
            
            $
            977,873
            
            $
            974,586Weighted
                average common sharesoutstanding
                for basic earnings percommon
                share
            
            
            1,364,191
            
            
            1,376,569
            
            
            1,366,990Add:
                Dilutive effects of assumedexercises
                of stock options
            
            
            --
            
            
            92
            
            
            1,690Weighted
                average common sharesand
                dilutive potential commonshares
                outstanding
            
            
            1,364,191
            
            
            1,376,661
            
            
            1,368,680Diluted
                earnings per common share
            
            $
            .76
            
            $
            .71
            
            $
            .71





For
      each
      of the years ending June 30, 2006, 2005 and 2004, there were 128,898, 1,245
      and
      1,245 stock options outstanding that were not dilutive as the exercise price
      of
      outstanding options was greater than the average market price for the
      periods.








**NOTE
      17 - OTHER COMPREHENSIVE INCOME (LOSS)**





Other
      comprehensive income (loss) components and related taxes were as
      follows.





2006
            
            2005
            
            2004Unrealized
                holding gains and (losses) onavailable-for-sale
                securities
            
            $
            (184,105
            )
            $
            145,276
            
            $
            (229,335
            )Tax
                effect
            
            
            62,597
            
            
            (49,395
            )
            
            77,975Other
                comprehensive income (loss)
            
            $
            (121,508
            )
            $
            95,881
            
            $
            (151,360
            )











(Continued)
 46.
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            to Table of Contents*


PEOPLES-SIDNEY
          FINANCIAL CORPORATION
 NOTES
          TO
          CONSOLIDATED FINANCIAL STATEMENTS
 June
          30,
          2006, 2005 and 2004


**NOTE
      18 - PARENT COMPANY ONLY CONDENSED FINANCIAL INFORMATION**





Following
      is condensed financial information of Peoples-Sidney Financial Corporation
      as of
      June 30, 2006 and 2005, and for the periods ended June 30, 2006, 2005 and
      2004.








CONDENSED
      BALANCE SHEETS


June
      30,
      2006 and 2005





2006
            
            2005AssetsCash
                and cash equivalents
            
            $
            1,651,099
            
            $
            1,216,639Investment
                in subsidiary
            
            
            15,204,495
            
            
            16,041,184Loans
                receivable from ESOP
            
            
            408,086
            
            
            510,107Total
                assets
            
            $
            17,263,680
            
            $
            17,767,930Liabilities
                and shareholders’ equityOther
                liabilities
            
            $
            7,339
            
            $
            6,539Common
                stock in ESOP subject to repurchase obligation
            
            
            1,756,829
            
            
            --Shareholders’
                equity
            
            
            15,499,512
            
            
            17,761,391Total
                liabilities and shareholders’ equity
            
            $
            17,263,680
            
            $
            17,767,930








CONDENSED
      STATEMENTS OF INCOME


Years
      Ended June 30, 2006, 2005 and 2004





2006
            
            2005
            
            2004IncomeDividend
                income from subsidiary
            
            $
            2,000,000
            
            $
            --
            
            $
            2,000,000Interest
                on loans
            
            
            35,583
            
            
            42,700
            
            
            49,9522,035,583
            
            
            42,700
            
            
            2,049,952Other
                expenses
            
            
            100,675
            
            
            94,330
            
            
            93,379Income
                (loss) before taxes and undistributed earningsof
                subsidiary
            
            
            1,934,908
            
            
            (51,630
            )
            
            1,956,573Income
                tax benefit
            
            
            (22,200
            )
            
            (17,600
            )
            
            (14,900
            )Income
                (loss) before undistributed earningsof
                subsidiary
            
            
            1,957,108
            
            
            (34,030
            )
            
            1,971,473Equity
                in undistributed earnings of subsidiary(distributions
                in excess of earnings)
            
            
            (917,718
            )
            
            1,011,903
            
            
            (996,887
            )Net
                income
            
            $
            1,039,390
            
            $
            977,873
            
            $
            974,586








(Continued)
 47.
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            to Table of Contents*


PEOPLES-SIDNEY
          FINANCIAL CORPORATION
 NOTES
          TO
          CONSOLIDATED FINANCIAL STATEMENTS
 June
          30,
          2006, 2005 and 2004


**NOTE
      18 - PARENT COMPANY ONLY CONDENSED FINANCIAL INFORMATION** **** (Continued)





CONDENSED
      STATEMENTS OF CASH FLOWS


Years
      Ended June 30, 2006, 2005 and 2004





2006
            
            2005
            
            2004Cash
                flows from operating activitiesNet
                income
            
            $
            1,039,390
            
            $
            977,873
            
            $
            974,586Adjustments
                to reconcile net income to cashprovided
                by operations:(Equity
                in undistributed income of subsidiary)distributions
                in excess of earnings
            
            
            917,718
            
            
            (1,011,903
            )
            
            996,887Net
                change in other assets and liabilities
            
            
            800
            
            
            (575
            )
            
            300Net
                cash from operating activities
            
            
            1,957,908
            
            
            (34,605
            )
            
            1,971,773Cash
                flows from investing activitiesProceeds
                from loan principal repayments
            
            
            102,021
            
            
            102,022
            
            
            102,021Net
                cash from investing activities
            
            
            102,021
            
            
            102,022
            
            
            102,021Cash
                flows from financing activitiesPurchase
                of treasury shares
            
            
            (611,562
            )
            
            --
            
            
            (92,516
            )Cash
                dividends paid
            
            
            (977,769
            )
            
            (918,358
            )
            
            (871,790
            )Dividends
                on unallocated ESOP shares
            
            
            (36,138
            )
            
            (41,517
            )
            
            (47,572
            )Net
                cash from financing activities
            
            
            (1,625,469
            )
            
            (959,875
            )
            
            (1,011,878
            )Net
                change in cash and cash equivalents
            
            
            434,460
            
            
            (892,458
            )
            
            1,061,916Cash
                and cash equivalents at beginning of year
            
            
            1,216,639
            
            
            2,109,097
            
            
            1,047,181Cash
                at end of year
            
            $
            1,651,099
            
            $
            1,216,639
            
            $
            2,109,097








48.
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            to Table of Contents*





PEOPLES-SIDNEY
      FINANCIAL CORPORATION




**SHAREHOLDER
      INFORMATION**










**ANNUAL
      MEETING**





The
      Annual Meeting of Shareholders will be held at 11:00 a.m., Sidney, Ohio on
      October 13, 2006, at the Holiday Inn, I-75 and S.R. 47, Sidney, Ohio. Further
      information with regard to the meeting can be found in the proxy
      statement .










**STOCK
      LISTING**




Peoples-Sidney
      Financial Corporation common stock is traded on the OTC Bulletin Board under
      the
      symbol “PSFC.”








**SHAREHOLDERS
                AND GENERAL INQUIRIES**
            **TRANSFER
                AGENT**Douglas
                Stewart, President
            Registrar
                and Transfer Co.Peoples-Sidney
                Financial Corporation
            10
                Commerce Drive101
                East Court Street
            Cranford,
                NJ 07016P.O.
                Box 727Sidney,
                Ohio 45365-3021(937)
                492-6129








**ANNUAL
      AND OTHER REPORTS**





A
      copy of
      Peoples-Sidney Financial Corporation’s Annual Report on Form 10-KSB for the year
      ended June 30, 2006, as filed with the Securities and Exchange Commission,
      may
      be obtained without charge by contacting Douglas Stewart, President and Chief
      Executive Officer, Peoples-Sidney Financial Corporation, 101 East Court Street,
      P.O. Box 727, Sidney, Ohio 45365-3021.











49.
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PEOPLES-SIDNEY
        FINANCIAL CORPORATION


**CORPORATE
      INFORMATION**







**CORPORATION
      AND ASSOCIATION ADDRESS**





101
                East Court Street
            Telephone:
            (937)
                492-6129P.O.
                Box 727
            Fax:
            (937)
                498-4554Sidney,
                Ohio 45365-3021











**BOARD
      OF DIRECTORS**





Douglas
                Stewart
              *President
                and Chief Executive Officer of*
              *Peoples
                Federal Savings and Loan Association*
            
            Harry
                N. Faulkner
              *Partner
                in the law firm of Faulkner, Garmhausen,*
              *Keister
                & Shenk LPA*John
                W. Sargeant
              *Part
                Owner of Sidney Tool and Die Co. and*
              *BenSar
                Development, a warehouse provider*
            
            James
                W. Kerber
              *Owner
                of James W. Kerber CPA, a private practice*
              *accounting
                firm*Richard
                T. Martin (Chairman of the Board)
              *Certified
                Public Accountant, in private*
              *practice***OFFICERS
                OF THE CORPORATION AND THE ASSOCIATION**
              
              Douglas
                Stewart, President & CEO
              David
                R. Fogt, VP Financial Services and
              Operations
              Gary
                N. Fullenkamp, VP Mortgage Loans
              and
                Corporate Secretary
              Debra
                A. Geuy, Chief Financial Officer and
              Treasurer**SPECIAL
                COUNSEL**
            
            **INDEPENDENT
                AUDITORS**Katten
                Muchin Rosenman LLP
              1025
                Thomas Jefferson Street, N.W.
              East
                Lobby, Suite 700
              Washington,
                D.C. 20007-5201
            
            Crowe
                Chizek and Company LLC
              One
                Columbus
              10
                West Broad Street
              Columbus,
                Ohio 43215














50.