**Exhibit 13**

 

**PEOPLESCOMMUNITY BANCORP, INC.**

** **

** **

**2004ANNUAL REPORT**

** **

** **

**TOSTOCKHOLDERS**

 

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**TABLE OFCONTENTS**

 
| President’s Letter to Stockholders                                                     | 1      |
|---------------------------------------------------------------------------------------------|--------|
|                                                                                        |   |
| Business of Peoples  Community Bancorp, Inc                                                 | 2      |
|                                                                                        |   |
| Market  Price of Peoples Community Common Shares and Related Stockholder Matters            | 3      |
|                                                                                        |   |
| Selected  Consolidated Financial and Other Data                                             | 4      |
|                                                                                        |   |
| Management’s  Discussion and Analysis of Financial Condition and Results of Operations | 10     |
|                                                                                        |   |
| Consolidated  Financial Statements:                                                         |   |
| Report  of Registered Independent Public Accounting Firm                                    | 20     |
| Report of Registered  Independent Public Accounting Firm                                    | 21     |
| Consolidated  Statements of Financial Condition                                             | 22     |
| Consolidated  Statements of Earnings                                                        | 23     |
| Consolidated  Statements of Comprehensive Income                                            | 24     |
| Consolidated  Statements of Stockholders’ Equity                                       | 25     |
| Consolidated  Statements of Cash Flows                                                      | 26     |
| Notes to  Consolidated Financial Statements                                                 | 28     |
|                                                                                        |   |
| Directors and Executive Officers                                                            | 60     |
|                                                                                        |   |
| Banking  Locations                                                                          | 61     |
|                                                                                        |   |
| Stockholder  Information                                                                    | 61     |

 

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Dear Stockholders:

 

On behalf of PeoplesCommunity Bancorp, Inc., I am pleased to present our Annual Report toStockholders for fiscal year 2004. During fiscal 2004 we continued to grow and expand our franchiseconsistent with our previously stated plans and goals.  As a result of acquisitions and internal growth,the Company has grown significantly from $320.6 million in total assets as ofSeptember 30, 2000 to $889.1 million in total assets as of September 30, 2004,with $472.4 million in total deposits and $75.8 million in stockholders’equity.

 

During fiscal year 2004, theBank continued to transition from a relatively small financial institution to alarger independent community bank. However, the Bank has experienced costs associated with thistransformation.  In fiscal 2004, netearnings decreased $855,000, or 23.0% compared to fiscal year 2003.  The decrease in earnings resulted primarilyfrom a $3.2 million increase in general, administrative and other expense ofwhich $2.3 million was due to increased employee compensation andbenefits.  The acquisition of two Ohiobranch offices in September 2003 resulted in approximately 16 additional staffmembers.  Additionally, we upgraded ourinternal audit, loan review and compliance staff to ensure that adequatemonitoring and control systems are in place. Further, in June, 2004, the Bank completed a core processing conversionto provide improved and additional services for our customers, which isreflective of our transition to a full-service, independent communitybank.  This resulted in a one-timeexpense of approximately $488,000.

 

The foregoing increases inexpenses were partially offset by a $1.3 million increase in net interestincome in fiscal 2004 compared to 2003. Continued strong loan origination, despite the ongoing low interest rateenvironment, as well as the purchase of $147.0 million in adjustable-ratemortgage-backed securities, generated an increase of $3.0 million, or 8.1%, intotal interest income for the year ended September 30, 2004 compared to 2003.

 

We continued to experienceasset growth with an increase of $150.4 million, or 20.7% from September 30,2003.  This growth was primarily drivenby an increase in loans of $45.1 million or 8.1% and a $94.3 million or 70.4%increase in mortgage-backed securities. We have continued to diversify our balance sheet with a loan portfolioof multi-family residential loans, nonresidential real estate loans,construction loans and unsecured commercial loans.  These loans inherently have a higher degreeof risk than traditional one-to-four family lending and, as a result, theallowance for loan losses was increased by $1.3 million to a total of $11.0million.  The allowance for loan lossesrepresented 1.64% of total loans and 182.9% of nonperforming loans at September30, 2004, compared to 1.57% and 134.2%, at September 30, 2003, respectively.

 

Deposits have increased from$151.4 million at September 30, 2000 to $472.4 million at September 30,2004.  The Company continues to place anemphasis on deposit generation through additional branch locations and competitivemarket pricing.  In October 2004, a15,000 square-foot office in the Voice of America Centre in Butler County wasopened. In addition to a branch retail site, this office will house a portionof the Company’s corporate staff, with approximately 50% of the building leasedto a local Chamber of Commerce.  

 

During fiscal 2004, wesuccessfully completed a secondary stock offering generating $26.8 million innet proceeds.  We were very pleased withthe participation by our shareholders and the interest from the generalpublic.  The net proceeds from theoffering, as well as continued earnings from operations, will facilitate ourgrowth strategy and provide further financial flexibility.  In conjunction with the offering, the Boardof Directors declared a quarterly cash dividend of $0.15 per share beginningwith the quarter ending June 30, 2004. As we look forward to fiscal year 2005, we will complete two new branchrelocations on the west side of Cincinnati. We have also entered into a definitive agreement to purchase anIndiana-chartered commercial bank with three branches in Southeast Indiana andtotal assets at September 30, 2004 of $67.5 million.  Subject to regulatory approval, we anticipatethis transaction will close in the third fiscal quarter of 2005.

 

Over the past five years, wehave structured our Bank to take advantage of the opportunities presented byour increasing market presence, the growth potential of the Tri-state region,and the potential for an increasing rate environment. We are committed to beinga premier independent community bank, providing superior products and servicesto our customers and, ultimately, enhancing value to our shareholders.  On behalf of the Directors and Staff, wethank you for your continued support.

 
|   | Sincerely,            |
|--------|-----------------------|
|   |                  |
|   | /s/ Jerry D. Williams |   |
|   | Jerry D. Williams     |
|   | President             |

 

1

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**PeoplesCommunity Bancorp, Inc.**

** **

**BUSINESSOF PEOPLES BANCORP**

 

Peoples CommunityBancorp, Inc., a Maryland corporation (“Peoples Bancorp” or the “Company”), isa unitary savings and loan holding company which owns all of the outstandingcommon shares of Peoples Community Bank (“Peoples Bank” or the “Bank”), afederally chartered savings bank.

 

The Company was formed in December 1999 inconnection with the mutual to stock conversion of the Bank, and the sale of1,190,000 shares of common stock to depositors and members of thecommunity.  The Bank conducts itsbusiness from thirteen full service offices in Hamilton, Warren and Butlercounties in Southwest Ohio.  The Bank’sbusiness is conducted through an aggressive marketing and selling effort of itslending products and services to the communities in its market area and throughthe continued development of innovative lending programs that give Peoples Banka competitive advantage.  The Bank offersa wide variety of loan products, including single and multi-family residentialloans, nonresidential real estate and land loans and construction loans.  In addition, the Bank invests insecurities.  The funds for the Bank’slending and investment activities are primarily provided by deposits andborrowings.  At September 30, 2004, theCompany had $889.1 million in total assets, $472.4 million in deposits, $324.5million in borrowings (excluding subordinated debentures) and $75.8 million ofstockholders’ equity.  The Company’sprincipal executive office is located at 6100 West Chester Road, P.O. Box 1130,West Chester, Ohio 45071-1130.  TheCompany’s telephone number is (513) 870-3530. 

 

As a result of acquisitions and internalgrowth, the Company has grown significantly from $320.6 million in total assetsas of September 30, 2000 to $889.1 million in total assets as of September 30,2004.  Since the completion of the initialpublic offering in March 2000, the Company has acquired three financialinstitutions with aggregate total assets as of the time of acquisition of$231.2 million.  In addition, inSeptember 2003, the Company purchased $32.8 million in loans and assumed $55.6million in deposits in connection with the acquisition of two branch officesfrom another financial institution.  TheCompany has supplemented this growth from acquisitions with loan generationsecured primarily by real estate in its market area.  Loan originations increased from $73.7million in fiscal 2000, to $241.1 million in fiscal 2001, $261.6 million infiscal 2002, $278.6 million in fiscal 2003 and $289.5 million in fiscal2004.  Loans receivable, net increasedfrom $196.5 million at September 30, 2000 to $599.5 million at September 30,2004.  In addition, since September 30,2000, the Company has expanded its franchise through the opening of four fullservice branch offices, including the Voice of America branch office in ButlerCounty opened in October 2004.  These newbranch offices, as well as acquired branch offices, have expanded the Company’smarket presence and facilitated its loan production growth.  The Company’s loan growth has been funded inpart by deposits.  The Company has placedan emphasis on deposit generation both internally and through whole bank andbranch acquisitions.  Deposits haveincreased from $151.4 million at September 30, 2000 to $472.4 million atSeptember 30, 2004.

** **

The Company intends to continue to pursuegrowth both internally and through strategic acquisitions.  The Company believes its internal growth willcontinue to come from loan originations, and, in particular, multi-familyresidential loans, nonresidential real estate and land loans and construction loans.  These loan types complement its single-familylending, diversify its loan portfolio and are expected to increase its yield oninterest-earning assets.  The Company’sprimary funding vehicle will continue to be deposits.  The Company intends to increase its depositgeneration by expanding its products and services, increasing its branchnetwork and cross-selling its current and prospective business customers.  The expansion of its market share throughselective branching and opportunistic acquisitions will depend on market andeconomic conditions.

 

Peoples Bancorp is subjectto regulation, supervision and examination by the Office of Thrift Supervisionof the U.S. Department of Treasury (the “OTS”). Peoples Bank is subject to regulation, supervision and examination bythe OTS as its primary federal regulator and the Federal Deposit InsuranceCorporation (the “FDIC”), which administers the Savings Association InsuranceFund.  The FDIC insures deposits inPeoples Bank up to applicable limits.

 

2

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**PeoplesCommunity Bancorp, Inc.**

** **

**MARKET PRICE OF PEOPLES BANCORPCOMMON SHARES**

**ANDRELATED STOCKHOLDER MATTERS**

 

PeoplesBancorp’s common shares have been listed on the Nasdaq National Market (“Nasdaq”)since March 29, 2000, under the symbol “PCBI.”  Presented below are the high and low tradingprices for Peoples Bancorp’s common shares for the three years ended September30, 2004.  Such prices do not includeretail financial markups, markdowns or commissions.  Information relating to prices has beenobtained from Nasdaq.  In addition,Peoples Bancorp initiated a quarterly cash dividend of $.15 per share effectivefor the quarter ended June 30, 2004. Peoples Bancorp did not pay any dividends in fiscal 2003 or fiscal 2002.

 

 
| **Fiscal 2004**     | ** ** | **High** | ** ** | **Low** | ** ** | **Dividends** | ** ** |
|---------------------|------------|----------|------------|---------|------------|---------------|------------|
|                |       |     |       |    |       |          |       |
| Quarter ended:      |       |     |       |    |       |          |       |
| September 30,  2004 |       | $        | 24.35      |    | $          | 22.10         |       | $ | .15 |   |
| June 30, 2004       |       | 24.50    |       | 19.90   |       | .15           |       |
| March 31, 2004      |       | 24.31    |       | 19.83   |       | —        |       |
| December 31,  2003  |       | 24.50    |       | 20.44   |       | —        |       |
|                     |            |          |            |         |            |               |            |  |  |  |

** **
| **Fiscal 2003**     | ** ** | **High** | ** ** | **Low** | ** ** | **Dividends** | ** ** |
|---------------------|------------|----------|------------|---------|------------|---------------|------------|
|                |       |     |       |    |       |          |       |
| Quarter ended:      |       |     |       |    |       |          |       |
| September 30,  2003 |       | $        | 24.24      |    | $          | 21.50         |       | $ | — |   |
| June 30, 2003       |       | 25.25    |       | 20.51   |       | —        |       |
| March 31, 2003      |       | 22.90    |       | 20.88   |       | —        |       |
| December 31,  2002  |       | 23.50    |       | 20.95   |       | —        |       |
|                     |            |          |            |         |            |               |            |  |  |  |

** **
| **Fiscal 2002**     | ** ** | **High**   | ** ** | **Low**    | ** ** | **Dividends** | ** ** |
|---------------------|------------|------------|------------|------------|------------|---------------|------------|
| ** **          | ** ** | ** ** | ** ** | ** ** | ** ** | ** **    | ** ** |
| Quarter ended:      |       |       |       |       |       |          |       |
| September 30,  2002 |       | $          | 23.73      |       | $          | 19.90         |       | $ | — |   |
| June 30, 2002       |       | 22.73      |       | 20.05      |       | —        |       |
| March 31, 2002      |       | 20.80      |       | 18.75      |       | —        |       |
| December 31,  2001  |       | 20.70      |       | 15.50      |       | —        |       |
|                     |            |            |            |            |            |               |            |  |  |  |

** **

As of December 23, 2004, Peoples Bancorp had3,899,118 common shares outstanding held of record by approximately 1,191stockholders.  The number of stockholdersdoes not reflect the number of persons or entities who may hold stock innominee or “street” name through brokerage firms or others. 

 

3

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**PeoplesCommunity Bancorp, Inc.**

** **

**SELECTED CONSOLIDATED FINANCIALAND OTHER DATA**

 

Thefollowing selected consolidated financial and other data does not purport to becomplete and is qualified in its entirety by reference to the more detailedfinancial information, including the Consolidated Financial Statements andrelated notes, appearing elsewhere herein.

 

 
| **Selected Consolidated Financial**                                | ** ** | **At September 30,**                      | ** ** |
|--------------------------------------------------------------------|------------|-------------------------------------------|------------|
| **Condition Data:****(1)**                                         | ** ** | **2004**                                  | ** ** | **2003** | ** ** | **2002** | ** ** | **2001** | ** ** | **2000** | ** ** |
| ** **                                                         | ** ** | **(In thousands)**                        | ** ** |
|                                                               |       |                                      |       |   |   |   |   |   |   |   |   |
| Total assets                                                       |       | $                                         | 889,121    |   | $ | 738,683 |   | $ | 581,632 |   | $ | 415,970 |   | $ | 320,620 |   |
| Cash and cash  equivalents                                         |       | 14,430                                    |       | 10,244 |   | 26,637 |   | 14,595 |   | 4,627 |   |
| Investment  securities available for sale                          |       | 1,069                                     |       | 2,156 |   | 1,231 |   | 1,364 |   | 8,211 |   |
| Mortgage-backed  securities available for sale                     |       | 228,085                                   |       | 133,828 |   | 18,763 |   | — |   | 94,050 |   |
| Loans  receivable, net                                             |       | 599,466                                   |       | 554,351 |   | 504,012 |   | 377,727 |   | 196,485 |   |
| Deposits                                                           |       | 472,436                                   |       | 455,900 |   | 369,080 |   | 233,063 |   | 151,353 |   |
| Advances from  the Federal Home Loan Bank and other borrowed money |       | 324,500                                   |       | 232,400 |   | 165,450 |   | 140,000 |   | 134,500 |   |
| Stockholders’  equity (2)                                     |       | 75,775                                    |       | 46,699 |   | 42,990 |   | 38,778 |   | 31,664 |   |
|                                                               |       |                                      |       |   |   |   |   |   |   |   |   |
| **Selected Consolidated Operating**                                | ** ** | **Year Ended September 30,**              | ** ** |
| **Data:****(1)**                                                   | ** ** | **2004**                                  | ** ** | **2003** | ** ** | **2002** | ** ** | **2001** | ** ** | **2000** | ** ** |
| ** **                                                         | ** ** | **(In thousands, except per share data)** | ** ** |
|                                                               |       |                                      |       |   |   |   |   |   |   |   |   |
| Interest income                                                    |       | $                                         | 40,171     |   | $ | 37,169 |   | $ | 33,712 |   | $ | 25,897 |   | $ | 15,429 |   |
| Interest expense                                                   |       | 19,813                                    |       | 18,072 |   | 15,598 |   | 15,543 |   | 10,091 |   |
| Net interest  income                                               |       | 20,358                                    |       | 19,097 |   | 18,114 |   | 10,354 |   | 5,338 |   |
|                                                               |       |                                      |       |   |   |   |   |   |   |   |   |
| Provision for  losses on loans                                     |       | 3,600                                     |       | 4,198 |   | 5,265 |   | 2,449 |   | 156 |   |
| Net interest  income after provision for losses on loans           |       | 16,758                                    |       | 14,899 |   | 12,849 |   | 7,905 |   | 5,182 |   |
| Other income                                                       |       | 1,181                                     |       | 1,251 |   | 2,509 |   | 4,847 |   | 101 |   |
| General, administrative  and other expense                         |       | 13,750                                    |       | 10,504 |   | 9,817 |   | 8,124 |   | 4,273 |   |
|                                                               |       |                                      |       |   |   |   |   |   |   |   |   |
| Earnings before  income taxes                                      |       | 4,198                                     |       | 5,646 |   | 5,541 |   | 4,628 |   | 1,010 |   |
| Federal income  taxes                                              |       | 1,320                                     |       | 1,922 |   | 2,392 |   | 2,304 |   | 462 |   |
| Net earnings                                                       | ** ** | **$**                                     | **2,869**  | ** ** | **$** | **3,724** | ** ** | **$** | **3,149** | ** ** | **$** | **2,324** | ** ** | **$** | **548** | ** ** |
|                                                               |       |                                      |       |   |   |   |   |   |   |   |   |
| Earnings per  share                                                |       |                                      |       |   |   |   |   |   |   |   |   |
| Basic                                                              | ** ** | **$**                                     | **0.92**   | ** ** | **$** | **1.51** | ** ** | **$** | **1.29** | ** ** | **$** | **1.08** | ** ** | **N/A** | ** ** |
| Diluted                                                            | ** ** | **$**                                     | **0.91**   | ** ** | **$** | **1.48** | ** ** | **$** | **1.27** | ** ** | **$** | **1.08** | ** ** | **N/A** | ** ** |

 

(Seefootnotes on next page)

 

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| ** **                                                               | ** ** | **At or for the year ended September 30,** | ** ** |
|--------------------------------------------------------------------------|------------|--------------------------------------------|------------|
| **Key Operating Ratios:****(1)**                                         | ** ** | **2004**                                   | ** ** | **2003** | ** ** | **2002** | ** ** | **2001** | ** ** | **2000** | ** ** |
|                                                                     |       |                                       |       |   |   |   |   |   |   |   |   |
| **Performance  Ratios: (1)**                                             |       |                                       |       |   |   |   |   |   |   |   |   |
| Return on  average assets                                                |       | .34                                        | %          | .59 | % | .67 | % | .65 | % | .26 | % |
| Return on  average equity                                                |       | 4.97                                       |       | 8.28 |   | 8.09 |   | 6.46 |   | 2.41 |   |
| Average  interest-earning assets to average interest-bearing liabilities |       | 104.82                                     |       | 105.83 |   | 107.27 |   | 110.13 |   | 110.39 |   |
| Interest rate  spread (2)                                                |       | 2.40                                       |       | 2.96 |   | 3.74 |   | 2.57 |   | 2.12 |   |
| Net interest  margin (2)                                                 |       | 2.52                                       |       | 3.13 |   | 3.99 |   | 3.03 |   | 2.63 |   |
| General,  administrative and other expense to average assets             |       | 1.61                                       |       | 1.65 |   | 2.07 |   | 2.26 |   | 2.04 |   |
|                                                                     |       |                                       |       |   |   |   |   |   |   |   |   |
| **Asset  Quality Ratios:**                                               | ** ** | ** **                                 | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Nonperforming  assets to total assets at end of period (3)          |       | .71                                        | %          | 1.16 | % | 1.30 | % | .19 | % | .43 | % |
| Allowance for  loan losses to nonperforming loans at end of period       |       | 182.87                                     |       | 134.15 |   | 102.19 |   | 467.69 |   | 60.67 |   |
| Allowance for  loan losses to total loans at end of period               |       | 1.64                                       |       | 1.57 |   | 1.37 |   | .87 |   | .36 |   |
|                                                                     |       |                                       |       |   |   |   |   |   |   |   |   |
| **Capital  and Other Ratios:**                                           |       |                                       |       |   |   |   |   |   |   |   |   |
| Average  stockholders’ equity to average assets                     |       | 6.77                                       | %          | 7.07 | % | 8.22 | % | 10.00 | % | 10.84 | % |
| Tangible  stockholders’ equity to tangible assets                   |       | 8.38                                       |       | 7.51 |   | 8.75 |   | 8.60 |   | 8.10 |   |
| Total capital to  risk-weighted assets                                   |       | 13.79                                      |       | 11.94 |   | 13.69 |   | 14.01 |   | 18.05 |   |

 

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(1)                                  Allratios are based on average monthly balances during the respective periodsprior to fiscal year ended September 2004. With respect to the fiscal year ended September 30, 2004, all ratios arebased on average daily balances.

 

(2)                                  Interestrate spread represents the difference between the weighted-average yield oninterest-earning assets and the weighted-average cost of interest-bearingliabilities.  Net interest marginrepresents net interest income as a percentage of average interest-earningassets.

 

(3)                                  Nonperformingassets consist of non-accrual loans, loans past due 90 days or more and stillaccruing interest and real estate acquired through foreclosure or bydeed-in-lieu thereof.

 

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**PeoplesCommunity Bancorp, Inc.**

 

###### **General**

 

Peoples Bancorp’sprofitability depends primarily on net interest income, which is the differencebetween interest and dividend income on interest-earning assets, principallyloans, mortgage-backed securities, investment securities and interest-earningdeposits in other financial institutions, and interest expense, principally oninterest-bearing deposits and borrowings from the Federal Home Loan Bank ofCincinnati.  Net interest income isdependent upon the level of interest rates and the extent to which such ratesare changing.  Peoples Bancorp’sprofitability also depends, to a lesser extent, on the level of other income,the provision for losses on loans, general, administrative and other expensesand federal income taxes. 

 

Peoples Bancorp’s operationsand profitability are subject to changes in interest rates, applicable statutesand regulations and general economic conditions, as well as other factorsbeyond management’s control.

 

During the period between September 30, 2002and September 30, 2004, total assets increased $307.5 million or 52.9% from$581.6 million to $889.1 million. Peoples Bancorp’s growth has been funded primarily by deposits andsupplemented by advances from the Federal Home Loan Bank of Cincinnati.  Net income for fiscal 2004, 2003 and 2002amounted to $2.9 million, $3.7 million and $3.1 million, respectively.  Net income decreased during fiscal 2004compared to 2003 primarily due to an increase in general, administrative andother expense as Peoples Bancorp continued to pursue its growth and expansiongoals.

** **

**Critical Accounting Policies**

 

The “Management’s Discussion and Analysis ofFinancial Condition and Results of Operations,” as well as disclosures foundelsewhere in this annual report, are based upon the Company’s consolidatedfinancial statements, which are prepared in accordance with US GAAP.  The preparation of these financial statementsrequires management to make estimates and judgments that affect the reportedamounts of assets, liabilities, revenues and expenses.  Several factors are considered in determiningwhether or not a policy is critical in the preparation of financialstatements.  These factors include, amongother things, whether the estimates are significant to the financialstatements, the nature of the estimates, the ability to readily validate theestimates with other information, including third parties or available prices,and sensitivity of the estimates to changes in economic conditions and whetheralternative accounting methods may be utilized under US GAAP.  

 

Material estimates that are particularlysusceptible to significant change in the near term relate to the determinationof the allowance for loan losses and goodwill impairment.  Actual results could differ from thoseestimates. 

 

**Allowance for Loan Losses.**  Theprocedures for assessing the adequacy of the allowance for loan losses reflectmanagement’s evaluation of credit risk after consideration of all informationavailable.  In developing this assessment,management must rely on estimates and exercise judgment regarding matters wherethe ultimate outcome is unknown, such as economic factors, developmentsaffecting companies in specific industries and issues with respect to singleborrowers.  Depending on changes incircumstances, future assessments of credit risk may yield materially differentresults, which may require an increase or a decrease in the allowance for loanlosses.

 

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The allowance is regularly reviewed bymanagement to determine whether the amount is considered adequate to absorbprobable losses.  This evaluationincludes specific loss estimates on certain individually reviewed loans,statistical loss estimates for loan pools that are based on historical lossexperience, and general loss estimates that are based upon the size, quality,and concentration characteristics of the various loan portfolios, adversesituations that may affect a borrower’s ability to repay, and current economicand industry conditions.  Also consideredas part of that judgment is a review of the Bank’s trends in delinquencies andloan losses, as well as trends in delinquencies and losses for the region andnationally, and economic factors. 

 

**Goodwill.**  TheCompany has developed procedures to test goodwill for impairment on an annualbasis using September 30 financial data. The evaluation of possible impairment is outsourced to a thirdparty.  This evaluation is based on theanalysis set forth below.

 

The test involves assigning tangible assetsand liabilities, identified intangible assets and goodwill of the Bank (whichis the Company’s reporting unit as defined under SFAS No. 142) and comparingthe fair value of this reporting unit to its carrying value including goodwill.  The value is determined assuming a freelynegotiated transaction between a willing buyer and a willing seller, neitherbeing under any compulsion to buy or sell and both having reasonable knowledgeof relevant facts.  The third partyselected by management utilizes the following common approaches to valuingbusiness combination transactions involving financial institutions to derivethe fair value of the reporting unit: (1) the comparable transactions approach which is specifically based onearnings, book value, assets and deposit premium multiples received in recentsales of comparable bank franchises; and (2) the discounted cash flow (“DCF”)approach.  The application of thevaluation techniques takes into account the reporting unit’s operating history,the current market environment and future prospects.  As of the most recent evaluation, the onlyreporting unit carrying goodwill is the Bank.

 

If the fair value of a reporting unit exceedsits carrying amount, goodwill of the reporting unit is considered not impairedand no second step is required.  If thefair value does not exceed the carrying amount, a second test is required tomeasure the amount of goodwill impairment. The second test of the overall goodwill impairment compares the impliedfair value of the reporting unit goodwill with the carrying amount of thegoodwill.  The impairment loss shallequal the excess of carrying value over fair value.  

 

After each testing period, the third partycompiles a summary of the test that is then provided to the audit committee forreview.

 

**Forward-Looking Statements Are Subject to Change**

 

Certain statements are madein this document as to what management expects may happen in the future.  These statements usually contain the words “believe,”“estimate,” “project,” “expect,” “anticipate,” “intend” or similarexpressions.  Because these statementslook to the future, they are based on management’s current expectations andbeliefs.  Actual results or events maydiffer materially from those reflected in the forward-looking statements.  Management’s current expectations and beliefsas to future events are subject to change at any time, and no assurances can beprovided that the future events will actually occur.

 

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AVERAGE BALANCES, NETINTEREST INCOME AND YIELDS EARNED AND RATES PAID

 

The following table presents for the periods indicated the total dollaramount of interest income from average interest-earning assets and theresultant yields, as well as interest expense on average interest-bearingliabilities, expressed both in dollars and rates, and the net interest margin.Average balances for fiscal year end September 30, 2004 are based on dailybalances. Fiscal year end September 30, 2003 and 2002 average balances arebased on monthly balances.  Managementdoes not believe that the monthly averages differ significantly from the dailyaverage balances.

 
| ** **                                                               | ** ** | **Year  ended September 30,**     | ** **  |
|--------------------------------------------------------------------------|------------|-----------------------------------|-------------|
| ** **                                                               | ** ** | **2004**                          | ** **  | **2003** | ** ** | **2002** | ** ** |
| ** **                                                               | ** ** | **Average  outstanding  balance** | ** **  | **Interest  earned/  paid** | ** ** | **Yield/  rate** | ** ** | **Average  outstanding  balance** | ** ** | **Interest  earned/  paid** | ** ** | **Yield/  rate** | ** ** | **Average  outstanding  balance** | ** ** | **Interest  earned/  paid** | ** ** | **Yield/  rate** | ** ** |
| ** **                                                               | ** ** | **(Dollars  in thousands)**       | ** **  |
| Interest-earning  assets:                                                |       |                              |        |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Loans receivable  (1)                                                    |       | $                                 | 588,251     |   | $ | 34,712 |   | 5.90 | % | $ | 520,647 |   | $ | 34,952 |   | 6.71 | % | $ | 425,318 |   | $ | 32,790 |   | 7.71 | % |
| Mortgage-backed securities                                               |       | 203,638                           |        | 4,908 |   | 2.41 |   | 62,688 |   | 1,568 |   | 2.50 |   | 12,239 |   | 361 |   | 2.95 |   |
| Investment  securities (2)                                               |       | 12,509                            |        | 480 |   | 3.84 |   | 12,079 |   | 479 |   | 3.97 |   | 9,688 |   | 446 |   | 4.60 |   |
| Interest-earning  deposits                                               |       | 4,175                             |        | 71 |   | 1.70 |   | 15,089 |   | 170 |   | 1.13 |   | 6,224 |   | 115 |   | 1.85 |   |
|                                                                     |       |                              |        |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Total  interest-earning assets                                           |       | 808,573                           |        | 40,171 |   | 4.97 |   | 610,503 |   | 37,169 |   | 6.09 |   | 453,469 |   | 33,712 |   | 7.43 |   |
|                                                                     |       |                              |        |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Non-interest-earning  assets                                             |       | 43,683                            |        |   |   |   |   | 25,514 |   |   |   |   |   | 19,949 |   |   |   |   |   |
|                                                                     |       |                              |        |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Total assets                                                             | ** ** | **$**                             | **852,256** | ** ** | ** ** | ** ** | ** ** | ** ** | **$** | **636,017** | ** ** | ** ** | ** ** | ** ** | ** ** | **$** | **473,418** | ** ** | ** ** | ** ** | ** ** | ** ** |
|                                                                     |       |                              |        |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Interest-bearing  liabilities:                                           |       |                              |        |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Savings and  checking accounts                                           |       | $                                 | 151,613     |   | 2,790 |   | 1.84 |   | $ | 135,640 |   | 2,666 |   | 1.97 |   | $ | 53,741 |   | 1,610 |   | 3.00 |   |
| Money market  deposit accounts                                           |       | 33,482                            |        | 407 |   | 1.22 |   | 30,653 |   | 604 |   | 1.97 |   | 28,252 |   | 776 |   | 2.75 |   |
| Certificates of  deposit                                                 |       | 273,428                           |        | 8,275 |   | 3.03 |   | 223,390 |   | 7,990 |   | 3.58 |   | 177,229 |   | 8,078 |   | 4.56 |   |
| FHLB advances and  other borrowings                                      |       | 300,324                           |        | 7,702 |   | 2.56 |   | 174,677 |   | 6,263 |   | 3.59 |   | 153,108 |   | 4,384 |   | 2.86 |   |
| Subordinated  debentures                                                 |       | 12,566                            |        | 639 |   | 5.09 |   | 12,500 |   | 549 |   | 4.39 |   | 10,417 |   | 750 |   | 7.20 |   |
|                                                                     |       |                              |        |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Total  interest-bearing liabilities                                      |       | 771,413                           |        | 19,813 |   | 2.57 |   | 576,860 |   | 18,072 |   | 3.13 |   | 422,747 |   | 15,598 |   | 3.69 |   |
|                                                                     |       |                              |        |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Non-interest-bearing  liabilities                                        |       | 23,107                            |        |   |   |   |   | 14,202 |   |   |   |   |   | 11,735 |   |   |   |   |   |
|                                                                     |       |                              |        |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Total liabilities                                                        |       | 794,520                           |        |   |   |   |   | 591,062 |   |   |   |   |   | 434,482 |   |   |   |   |   |
|                                                                     |       |                              |        |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Stockholders’  equity                                               |       | 57,736                            |        |   |   |   |   | 44,955 |   |   |   |   |   | 38,936 |   |   |   |   |   |
|                                                                     |       |                              |        |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Total liabilities  and stockholders’ equity                         | ** ** | **$**                             | **852,256** | ** ** | ** ** | ** ** | ** ** |   | **$** | **636,017** |   |   |   |   |   | **$** | **473,418** |   |   |   |   |   |
|                                                                     |       |                              |        |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Net interest  income                                                     | ** ** | ** **                        | ** **  | **$** | **20,358** | ** ** | ** ** |   |   |   | **$** | **19,097** |   |   |   |   |   | **$** | **18,114** |   |   |   |
|                                                                     |       |                              |        |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Interest rate  spread                                                    | ** ** | ** **                        | ** **  | ** ** | ** ** | **2.40** | **%** |   |   |   |   | **2.96** | **%** |   |   |   |   | **3.74** | % |
|                                                                     |       |                              |        |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Net interest  margin (3)                                                 | ** ** | ** **                        | ** **  | ** ** | ** ** | **2.52** | **%** |   |   |   |   | **3.13** | **%** |   |   |   |   | **3.99** | % |
|                                                                     |       |                              |        |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Average  interest-earning assets to average interest-bearing liabilities | ** ** | ** **                        | ** **  | ** ** | ** ** | **104.82** | **%** |   |   |   |   | **105.83** | **%** |   |   |   |   | **107.27** | % |

 

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(1)                                  Includesnon-accruing loans.

 

(2)                                  IncludesFederal Home Loan Bank and Federal Home Loan Mortgage Corp. stock and otherequity securities.

 

(3)                                  Equalsnet interest income divided by average interest-earning assets.

 

8

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Rate/Volume Analysis

 

The following table shows the extent to which changes in interest ratesand changes in volume of interest-related assets and liabilities affectedPeoples Bancorp’s interest income and expense during the periodsindicated.  For each category ofinterest-earning assets and interest-bearing liabilities, information isprovided on changes attributable to (i) changes in volume (change involume multiplied by prior year rate), and (ii) changes in rate (change in ratemultiplied by prior year volume).  Thecombined effect of changes in both rate and volume has been allocatedproportionately to the change due to rate and the change due to volume.

 
| ** **                          | ** ** | **Year ended September 30,**     | ** ** |
|-------------------------------------|------------|----------------------------------|------------|
| ** **                          | ** ** | **2004 vs. 2003**                | ** ** | ** ** | ** ** | **2003 vs. 2002** | ** ** | ** ** | ** ** |
| ** **                          | ** ** | **Increase  (decrease)  due to** | ** ** | ** ** | ** ** | **Increase  (decrease)  due to** | ** ** | ** ** | ** ** |
| ** **                          | ** ** | **Rate**                         | ** ** | **Volume** | ** ** | **Total** | ** ** | **Rate** | ** ** | **Volume** | ** ** | **Total** | ** ** |
| ** **                          | ** ** | **(In thousands)**               | ** ** |
| Interest-earning  assets:           |       |                             |       |   |   |   |   |   |   |   |   |   |   |
| Loans receivable                    |       | $                                | (4,480     | ) | $ | 4,240 |   | $ | (240 | ) | $ | (4,253 | ) | $ | 6,415 |   | $ | 2,162 |   |
| Mortgage-backed  securities         |       | (56                              | )          | 3,396 |   | 3,340 |   | (55 | ) | 1,262 |   | 1,207 |   |
| Investment  securities (1)          |       | (16                              | )          | 17 |   | 1 |   | (61 | ) | 94 |   | 33 |   |
| Interest-earning  deposits          |       | 61                               |       | (160 | ) | (99 | ) | (45 | ) | 100 |   | 55 |   |
| Total  interest-earning assets      |       | (4,491                           | )          | 7,493 |   | 3,002 |   | (4,414 | ) | 7,871 |   | 3,457 |   |
|                                |       |                             |       |   |   |   |   |   |   |   |   |   |   |
| Interest-bearing  liabilities:      |       |                             |       |   |   |   |   |   |   |   |   |   |   |
| Savings and  checking accounts      |       | (182                             | )          | 306 |   | 124 |   | (556 | ) | 1,612 |   | 1,056 |   |
| Money market  deposit accounts      |       | (248                             | )          | 51 |   | (197 | ) | (220 | ) | 48 |   | (172 | ) |
| Certificates of  deposit            |       | (1,340                           | )          | 1,625 |   | 285 |   | (1,739 | ) | 1,651 |   | (88 | ) |
| FHLB advances  and other borrowings |       | (2,167                           | )          | 3,606 |   | 1,439 |   | 1,110 |   | 769 |   | 1,879 |   |
| Subordinated  debentures            |       | 88                               |       | 2 |   | 90 |   | (292 | ) | 91 |   | (201 | ) |
| Total  interest-bearing liabilities |       | (3,849                           | )          | 5,590 |   | 1,741 |   | (1,697 | ) | 4,171 |   | 2,474 |   |
|                                |       |                             |       |   |   |   |   |   |   |   |   |   |   |
| Increase in net  interest income    | ** ** | **$**                            | **(642**   | **)** | **$** | **1,903** | ** ** | **$** | **1,261** | ** ** | **$** | **(2,717** | **)** | **$** | **3,700** | ** ** | **$** | **983** | ** ** |

 

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(1)           IncludesFederal Home Loan Bank stock and certificates of deposit at other institutions.

 

9

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**Discussionof Financial Condition Changes from September 30, 2003 to September 30, 2004**

 

At September 30, 2004, Peoples Bancorp’stotal assets amounted to $889.1 million, an increase of $150.4 million, or20.4%, compared to the $738.7 million total at September 30, 2003.  The increase in assets was comprisedprimarily of a $45.1 million increase in loans and a $94.3 million increase inmortgage-backed securities. The increase in assets was funded by growth in depositsof $16.5 million, an increase in advances from the Federal Home Loan Bank andother borrowings totaling $104.6 million, and proceeds from the secondary stockoffering totaling $26.8 million.

 

Liquid assets (i.e. cash and interest-bearing deposits) totaled $14.4million at September 30, 2004, an increase of $4.2 million, or 40.9%, comparedto the amount at September 30, 2003. Investment securities totaled $1.1 million at September 30, 2004, adecrease of $1.1 million, or 50.4%, from September 30, 2003 levels.

 

Mortgage-backed securities totaled $228.1million at September 30, 2004, an increase of $94.3 million, or 70.4%, over theamount at September 30, 2003.  TheCompany purchased $147.0 million in adjustable rate mortgage-backed securitiesduring fiscal 2004 as a tool to manage interest rate risk, as well as toprovide interest income with minimal credit risk, due to the implicit guaranteeof government sponsored agencies.  Duringfiscal 2004, principal repayments on mortgage-backed securities totaled $51.5million.  The proceeds from repayment ofmortgage-backed securities were generally used to purchase mortgage-backedsecurities and fund loan originations during the period.

 

Loans receivable totaled $599.5 million atSeptember 30, 2004, an increase of $45.1 million, or 8.1%, over September 30,2003 levels. Loan disbursements amounted to $299.4 million during fiscal 2004,which were partially offset by principal repayments of $236.4 million and loansand participations sold totaling $14.9 million. The overall growth in the loan portfolio during the year was comprisedprimarily of $8.3 million in loans secured by multi-family residential realestate, $23.1 million in loans secured by nonresidential real estate and land,and $23.6 million in commercial and consumer loans, which were partially offsetby a decrease of $10.1 million in single-family residential real estate loans.Over the past four fiscal years, the Bank has placed an increasing emphasis onmulti-family residential loans, nonresidential real estate and land loans,construction loans, unsecured commercial loans and consumer loans.  As a result, as a percentage of the totalloan portfolio, single-family residential loans have decreased from 72.7% atSeptember 30, 2000 to 34.4% at September 30, 2004, while multi-familyresidential loans, nonresidential real estate and land loans, constructionloans, commercial loans and consumer loans have increased during the same timeperiod from 4.3% to 16.7%, 9.7% to 24.1%, 12.8% to 14.5%, 0.0% to 5.4% and 0.1%to 4.3%, respectively.  Nonresidentialreal estate lending and unsecured commercial lending are generally consideredto involve a higher degree of risk than residential real estate lending due tothe relatively larger loan amounts and the effect of general economicconditions on the successful operation of the related business and/orincome-producing properties.  PeoplesBank has endeavored to reduce such risk by evaluating the credit history andpast performance of the borrower, the location of the real estate, the qualityof the borrowers’ management, the debt service ratio, the quality andcharacteristics of the income stream generated by the business or the propertyand appraisals supporting the property’s valuation, as applicable.

 

The allowance for loan losses totaled $11.0million at September 30, 2004, an increase of $1.3 million, or 13.1%, comparedto the allowance at September 30, 2003. Loans charged-off amounted to $2.4 million during fiscal 2004 and $3.6million was added through the provision for losses on loans, due primarily tothe overall growth in the loan portfolio from September 30, 2003, as well asthe changes in the composition of the loan portfolio and the level ofcharge-offs and nonperforming loans.

 

The allowance for loan losses represented1.64% and 1.57% of total loans at September 30, 2004 and 2003,respectively.  The allowance for loanlosses represented 182.9% and 134.2% of nonperforming loans at September 30,2002 and 2003, respectively. Nonperforming and impaired loans totaled $6.6 million and $9.6 millionat September 30, 2004 and 2003, respectively. Nonperforming multi-family residential loans, totaling $2.5 million, or42.0%, of total nonperforming loans, consisted primarily of a $2.1 million loanin the process of foreclosure. Nonperforming construction loans totaling $1.0 million, or 17.2% oftotal nonperforming loans, consisted primarily of a series of condominium loansaggregating $805,000 to a financially troubled builder.  The Bank is closely monitoring the constructionprogress.  Management has consideredthese loan concentrations as a part of its overall evaluation of the adequacyof the Bank’s allowance for loan losses. Although management believes that its allowance for loan losses atSeptember 30, 2004 was appropriate based upon the available facts andcircumstances, there can be no assurance that additions to such allowance willnot be necessary in future periods, which would adversely affect the Bank’sresults of operations.

 

10

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Deposits totaled $472.4 million at September30, 2004, an increase of $16.5 million, or 3.6%, over the total at September30, 2003.  Total demand, transaction andsavings deposits increased to $211.6 million at September 30, 2004, from $211.0million at September 30, 2003, while total certificates of deposit increasedfrom $244.9 million to $260.8 million, respectively.  The increase in deposits was primarilyattributable to management’s efforts to maintain deposit growth throughcompetitive pricing strategies on all deposit products.  Proceeds from deposit growth were generallyused to fund new loan originations, to purchase mortgage-backed securities andto repay advances from the Federal Home Loan Bank.

 

Advances from the Federal Home Loan Bank andother borrowings totaled $324.5 million at September 30, 2004, an increase of$104.6 million, or 47.6%, compared to September 30, 2003 totals.  Borrowings totaling $106.2 million wererepaid during fiscal 2004, primarily with proceeds from deposit growth,principal repayments on loans and proceeds from the secondary stockoffering.  However, in order to offsetthis repayment of borrowings, complement deposits as a funding source andcontinue to fund its operations, including the origination of loans and thepurchase of mortgage-backed securities, the Company obtained additionalborrowings during fiscal 2004 of $210.8 million.

 

Stockholders’ equity totaled $75.8 million atSeptember 30, 2004, an increase of $29.1 million, or 62.3%, over the amount atSeptember 30, 2003.  The increase resultedprimarily from $26.8 million in proceeds received for 1,365,674 shares ofcommon stock sold in connection with the Company’s secondary stock offeringcompleted in April 2004, net earnings of $2.9 million, the amortization effectsof the stock benefit and option plans totaling $905,000 and a $356,000 decreasein net unrealized losses on available for sale securities which were partiallyoffset by dividends paid on common stock totaling $1.2 million and sharesacquired for the Employee Stock Ownership Plan totaling $700,000.

 

**Comparison of Results of Operations for the FiscalYears Ended September 30, 2004 and 2003**

 

**General**

 

The inclusion of the accounts of two branchlocations of Ameriana Bank and Trust, which the Company acquired in September2003, in a transaction accounted for using the purchase method of accounting,contributed to the increases in the level of income and expense during thefiscal year ended September 30, 2004, compared to fiscal 2003.  In accordance with the purchase method of accounting,the consolidated statement of earnings for the fiscal year ended September 30,2003 was not restated for the acquisition.

 

Peoples Bancorp recorded net earnings of $2.9million for the fiscal year ended September 30, 2004, a decrease of $855,000, or23.0%, compared to fiscal 2003.  Thedecrease in earnings resulted primarily from a $3.2 million increase ingeneral, administrative and other expense and a $70,000 decrease in otherincome, which were partially offset by a $1.3 million increase in net interestincome, a $598,000 decrease in the provision for losses on loans and a $602,000decrease in federal income taxes.

 

**Net Interest Income**

 

Total interest income amounted to $40.2million for the fiscal year ended September 30, 2004, a $3.0 million, or 8.1%,increase over fiscal 2003.  The increasewas due to a $198.1 million, or 32.4%, increase in average interest-earningassets, partially offset by a 112 basis point decline in the average yield yearto year.

 

11

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Interest income on loans totaled $34.7million for the fiscal year ended September 30, 2004, a decrease of $240,000,or .7%, from fiscal 2003.  This decreasewas due primarily to an 81 basis point decline in the weighted-average yield,to 5.90% for fiscal 2004, which was partially offset by a $67.6 million, or13.0%, increase in the average portfolio balance outstanding year to year. Theincrease in the average balance was due to continued strong loan originationactivity, particularly with respect to single-family residential loans andnonresidential real estate and land loans. The decrease in the Bank’s yield on its loan portfolio was due primarilyto a decrease in market interest rates, through the repricing of itsadjustable-rate loans and refinancing of the portfolio at lower rates. Interestincome on mortgage-backed securities totaled $4.9 million for fiscal 2004, anincrease of $3.3 million, or 213.0%, over fiscal 2003, due primarily to a$141.0 million, or 224.8%, increase in the average balance outstanding year toyear.** **TheCompany purchased $147.0 million in adjustable rate mortgage-backed securitiesduring fiscal 2004 as a tool to manage interest rate risk, as well as toprovide interest income with minimal credit risk, due to the implicit guaranteeof government sponsored agencies. Interest income on investment securities and interest-bearing depositsand other totaled $551,000, a decrease of $98,000, or 15.1%, due primarily toan $10.5 million, or 38.6%, decrease in the average balance of the relatedassets, partially offset by a 91 basis point increase in the weighted-averageyield year to year.

 

Interest expense on deposits totaled $11.5million for the fiscal year ended September 30, 2004, an increase of $212,000,or 1.9%, over the $11.3 million recorded in fiscal 2003.  The increase was due primarily to a $68.9million, or 17.7%, increase in the average balance of deposits outstanding yearto year, partially offset by a decrease in the weighted-average cost ofdeposits of 39 basis points, to 2.50% for fiscal 2004.  The increase in the average balance was dueto the acquisition of $55.6 million in deposits from another financialinstitution, as well as management’s efforts to maintain deposit growth throughcompetitive pricing strategies on all deposit products.  The decrease in the average cost of depositswas primarily due to the decrease in market interest rates and an $8.4 millionor 90.4% increase in non-interest bearing checking accounts year to year.

 

Interest expense on borrowings totaled $8.3million for fiscal 2004, an increase of $1.5 million, or 22.4%, compared tofiscal 2003, due primarily to a $125.6 million, or 71.9%, increase in theaverage balance of borrowings outstanding, which was partially offset by a 103basis point decrease in the average cost of borrowings, to 2.56% for fiscal2004.  The decrease in the average costresulted from the utilization of overnight adjustable-rate advances from theFederal Home Loan Bank to provide a more favorable interest rate. The increasein the average balance was due to the use of borrowings as an additional sourceof funds for investment in mortgage-backed securities and the origination ofloans.

 

As a result of the foregoing changes ininterest income and interest expense, net interest income increased by $1.3million, or 6.6%, during the fiscal year ended September 30, 2004, compared tofiscal 2003.  The interest rate spreadamounted to 2.40% for fiscal 2004 compared to 2.96% for fiscal 2003.  The net interest margin totaled 2.52% and3.13% for the fiscal years ended September 30, 2004 and 2003, respectively.

 

**Provision for Losses on Loans**

 

A provision for losses on loans is charged toearnings to bring the total allowance for loan losses to a level consideredappropriate by management based on historical loss experience, the volume andtype of lending conducted by the Bank, the status of past due principal andinterest payments, general economic conditions, particularly as such conditionsrelate to the Bank’s market area, and other factors related to thecollectibility of the Bank’s loan portfolio. After considering the above factors, management recorded a provision forlosses on loans totaling $3.6 million and $4.2 million for the fiscal yearsended September 30, 2004 and 2003, respectively.  The provision recorded during the fiscal 2004period was predicated primarily upon the $45.1 million, or 8.1%, of growth inthe gross loan portfolio, as well as the increase in loans secured by multi-familyand nonresidential real estate, the origination of approximately $23.1 millionin unsecured commercial lines of credit during fiscal 2004 and an increase inthe level of charge-offs year to year. Such types of lending are generally considered to involve a higherdegree of risk than one- to four-family residential lending.  There can be no assurance that the allowancefor loan losses will be sufficient to cover losses on nonperforming loans inthe future.

 

12

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**Other Income**

 

Other income totaled $1.2 million for thefiscal year ended September 30, 2004, a decrease of $70,000, or 5.6%, comparedto fiscal 2003.  The decrease was dueprimarily to a $474,000, or 96.1%, decrease in gain on the sale of mortgage-backedand investment securities, which was partially offset by a $223,000 increase ingain on sale of branch premises, deposits and loans and a $181,000, or 29.7%,increase in other operating income during fiscal 2004.  The increase in other operating incomeresulted primarily from increases in fees related to the growth of loan anddeposit transactions from year to year. During fiscal 2004 the Bank sold twoformer branch locations for a total gain of $352,000.

 

**General, Administrative and Other Expense**

 

General, administrative and other expense totaled $13.8 million for thefiscal year ended September 30, 2004, an increase of $3.2 million, or 30.9%,compared to fiscal 2003.  This increaseresulted primarily from a $2.3 million, or 44.3%, increase in employeecompensation and benefits, a $103,000, or 5.35%, increase in occupancy andequipment expense, a $111,000, or 18.7%, increase in franchise tax, a $433,000,or 69.4%, increase in data processing, and a $292,000, or 13.6%, increase inother operating expense.

 

As previously noted, the addition of theaccounts of the Ameriana branches, which the Company acquired in September2003, contributed to the increases in the level of expenses during the fiscalyear ended September 30, 2004, compared to fiscal 2003. A full year of expenseson these acquired assets and liabilities was recognized in fiscal 2004 comparedto a portion of one month in fiscal 2003. Of the $3.2 million increase ingeneral, administrative and other expenses recorded in fiscal 2004,approximately $1.1 million was directly associated with the inclusion ofaccounts, staff and branches acquired in the Ameriana acquisition.

 

The Bank employed approximately 142 and 117full-time employees as of September 30, 2004 and 2003, respectively. Sixteenfull-time employees were obtained in the two branch office acquisitions fromAmeriana in September, 2003. The increase in employee compensation and benefitswas due to the increase in staffing levels to support growth in the overallinfrastructure of the Company, as well as normal merit increases and increasesin health insurance and other benefit costs.

 

Theincrease in occupancy and equipment expense primarily reflects increaseddepreciation and maintenance costs associated with the Company’s new branchoffices. Two new offices replacing existing branchbuildings were opened in the third and fourth quarter of fiscal 2003. Theseprojects reflect the effects of the Company’s ongoing commitment to expand itsbranch office network through acquisition and construction of new branchfacilities.  The increase in data processing reflectscontinued growth in loan and deposit accounts, as well as expenses related tothe conversion of systems for the accounts acquired from Ameriana and theoverall costs associated with a full data conversion to a new core processor inJune 2004.  Nonrecurring costs associatedwith these conversions totaled approximately $630,000, with $150,000 of thesecosts to be incurred during the first quarter of fiscal 2005.  The increase in franchise taxes reflects thecontinued growth and profitability of the Company.  The increase in other operating expense wasdue primarily to an increase in costs related to maintaining real estateacquired through foreclosure, and an increase in other operating costsassociated with the Company’s overall growth year to year.

 

DuringJanuary 2004, the Company entered into an agreement to change its dataprocessing provider, based upon a nine-month evaluation of availablealternatives.  The conversion to this newsystem was completed in June 2004.  The newsystem provides an enhanced framework for expanded products and services andcontinued growth.

 

**Federal Income Taxes**

 

Peoples Bancorp recorded a tax provisiontotaling $1.3 million for the fiscal year ended September 30, 2004, compared toa provision of $1.9 million for fiscal 2003. The effective tax rates were 31.5% and 34.0% for the fiscal years endedSeptember 30, 2004 and 2003, respectively. The decrease in the tax provision from year to year was due

 

13

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to lower pre-tax income in 2004 and adecrease in the effective tax rate.

 

**Comparison of Results of Operations for the FiscalYears Ended September 30, 2003 and 2002**

 

**General**

 

The inclusion of the accounts of Kenwood,which the Company acquired in April 2002, in a transaction accounted for usingthe purchase method of accounting, contributed to the increases in the level ofincome and expense during the fiscal year ended September 30, 2003, compared tofiscal 2002.  In accordance with thepurchase method of accounting, the consolidated statement of earnings for thefiscal year ended September 30, 2002 was not restated for the acquisition.

 

Peoples Bancorp recorded net earnings of $3.7million for the fiscal year ended September 30, 2003, an increase of $575,000,or 18.3%, compared to fiscal 2002.  Theincrease in earnings resulted primarily from a $983,000 increase in netinterest income, a $1.1 million decrease in the provision for losses on loansand a $470,000 decrease in federal income taxes, which were partially offset bya $1.3 million decrease in other income and a $687,000 increase in general,administrative and other expense.

 

**Net Interest Income**

 

Total interest income amounted to $37.2million for the fiscal year ended September 30, 2003, a $3.5 million, or 10.3%,increase over fiscal 2002.  The increasewas due to a $157.0 million, or 34.6%, increase in average interest-earningassets, partially offset by a 134 basis point decline in the average yield yearto year.  Approximately $29.1 million, or6.8%, of the growth in average interest-earning assets resulted from theacquisition of Kenwood Savings Bank in fiscal 2002.

 

Interest income on loans totaled $35.0million for the fiscal year ended September 30, 2003, an increase of $2.2million, or 6.6%, over fiscal 2002.  Thisincrease was due primarily to a $95.3 million, or 22.4%, increase in theaverage portfolio balance outstanding year to year, partially offset by a 100basis point decline in the weighted-average yield, to 6.71% for fiscal2003.  The increase in the averagebalance was due to continued strong loan origination activity, particularlywith respect to single and multi-family residential loans, construction andnonresidential real estate and land loans. The impact on the Bank’s yield on its loan portfolio from the increasedemphasis on higher yielding multi-family and nonresidential real estate, aswell as unsecured commercial loans was offset by the decrease in marketinterest rates, such as the repricing of its adjustable-rate loans andrefinancing at lower rates. Interest income on mortgage-backed securitiestotaled $1.6 million for fiscal 2003, an increase of $1.2 million, or 334.3%,over fiscal 2002, due primarily to a $50.4 million, or 412.2%, increase in theaverage balance outstanding year to year. Interest income on investment securities and interest-bearing depositsand other totaled $649,000, an increase of $88,000, or 15.7%, due primarily toan $11.3 million, or 70.7%, increase in the average balance of the relatedassets, partially offset by a decrease in the weighted-average yield year toyear.

 

Interest expense on deposits totaled $11.3million for the fiscal year ended September 30, 2003, an increase of $796,000,or 7.6%, over the $10.5 million recorded in fiscal 2002.  The increase was due primarily to a $130.5million, or 50.3%, increase in the average balance of deposits outstanding yearto year, partially offset by a decrease in the weighted-average cost ofdeposits of 115 basis points, to 2.89% for fiscal 2003.  The decrease in the average cost of depositswas primarily due to the decrease in market interest rates.  Approximately $26.5 million, or 10.2%, of thegrowth in the average balance of deposits resulted from the acquisition ofKenwood Savings Bank in fiscal 2002.

 

Interest expense on borrowings totaled $6.8million for fiscal 2003, an increase of $1.7 million, or 32.7%, compared tofiscal 2002, due primarily to a $23.7 million, or 14.5%, increase in theaverage balance of borrowings outstanding, and a 50 basis point increase in theaverage cost of borrowings, to 3.64% for fiscal 2003.  The increase in the average cost resultedfrom management converting existing short-term adjustable-rate advances fromthe Federal Home Loan Bank to fixed-rate long-term advances to provide a morefavorable interest rate risk position. The increase in the average balance was due to the use of borrowings asan additional source of funds for investment in mortgage-backed securities andthe origination of loans.  During fiscal2003, approximately $119,000 of interest was paid on FHLB advances assumed inthe Kenwood Savings Bank acquisition in fiscal 2002.

 

14

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As a result of the foregoing changes ininterest income and interest expense, net interest income increased by$983,000, or 5.4%, during the fiscal year ended September 30, 2003, compared tofiscal 2002.  The interest rate spreadamounted to 2.96% for fiscal 2003 compared to 3.74% for fiscal 2002.  The net interest margin totaled 3.13% and3.99% for the fiscal years ended September 30, 2003 and 2002, respectively.

 

**Provision for Losses on Loans**

 

A provision for losses on loans is charged toearnings to bring the total allowance for loan losses to a level consideredappropriate by management based on historical loss experience, the volume andtype of lending conducted by the Bank, the status of past due principal andinterest payments, general economic conditions, particularly as such conditionsrelate to the Bank’s market area, and other factors related to thecollectibility of the Bank’s loan portfolio. After considering the above factors, management recorded a provision forlosses on loans totaling $4.2 million and $5.3 million for the fiscal yearsended September 30, 2003 and 2002, respectively.  The provision recorded during the fiscal 2003period was predicated primarily upon the $65.2 million, or 11.7%, of growth inthe gross loan portfolio, as well as the increase in loans secured by multi-familyand nonresidential real estate, the origination of approximately $25.7 millionin unsecured commercial lines of credit during fiscal 2003 and an increase inthe level of charge-offs and impaired and nonperforming loans year toyear.  Such types of lending aregenerally considered to involve a higher degree of risk than one- tofour-family residential lending.  Therecan be no assurance that the allowance for loan losses will be sufficient tocover losses on nonperforming loans in the future.

 

**Other Income**

 

Other income totaled $1.3 million for thefiscal year ended September 30, 2003, a decrease of $1.3 million, or 50.1%,compared to fiscal 2002.  The decreasewas due primarily to a $2.0 million, or 93.1%, decrease in gain on the sale ofbranch premises, deposits and loans, which was partially offset by a $496,000increase in gain on sale of investment and mortgage-backed securities and a$238,000, or 64.0%, increase in other operating income during fiscal 2003.  In January 2002, the Bank sold $11.0 millionin total loans and $9.9 million in total deposits associated with itsBlanchester branch office.  The increasein other operating income resulted primarily from increases in fees related tothe growth of loan and deposit transactions from year to year.  Approximately $31,000, or 8.3%, of the growthin other operating income resulted from the acquisition of deposit and loanaccounts in the Kenwood Savings Bank transaction in fiscal 2002.

 

**General, Administrative and Other Expense**

 

General, administrative and other expense totaled $10.5 million for thefiscal year ended September 30, 2003, an increase of $687,000, or 7.0%,compared to fiscal 2002.  This increaseresulted primarily from a $1.4 million, or 37.7%, increase in employeecompensation and benefits, a $329,000, or 20.6%, increase in occupancy andequipment expense, a $199,000, or 50.4%, increase in franchise tax, and a$259,000, or 71.0%, increase in data processing, which were partially offset bya $70,000, or 3.1%, decrease in other operating expense and a $1.5 milliondecrease in goodwill amortization and related charges.

 

As previously noted, the inclusion of theaccounts of Kenwood, which the Company acquired in April 2002, contributed tothe increases in the level of expenses during the fiscal year ended September30, 2003, compared to fiscal 2002. A full year of expenses on these acquiredassets and liabilities was recognized in fiscal 2003 compared to 5 months ofexpenses recognized in fiscal 2002. Of the $687,000 increase in general,administrative and other expenses recorded in fiscal 2003, approximately$525,000 was directly associated with the inclusion of accounts, staff andbranches acquired in the Kenwood acquisition.

 

15

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The Bank employed approximately 117 and 94full-time employees as of September 30, 2003 and 2002, respectively. Elevenfull-time employees were obtained in the acquisition of Kenwood in April, 2002and approximately 16 full-time employees were acquired in the two branch officeacquisition from Ameriana Bank in September, 2003. The increase in employeecompensation and benefits was due to the increase in staffing levels to supportgrowth in the overall infrastructure of the Company, as well as normal meritincreases and increases in health insurance and other benefit costs.

 

The increase in occupancy and equipmentexpense primarily reflects increased depreciation and maintenance costsassociated with the Company’s new branch offices. Twonew offices replacing existing branch buildings were opened in the third and fourthquarter of fiscal 2003.  These projects reflect the effects of theCompany’s ongoing commitment to expand its branch office network throughacquisition and construction of new branch facilities.  Theincrease in franchise taxes was due to the Company’s growth year to year, aswell as the tax of approximately $45,000 recorded on Kenwood Savings Bank forfiscal 2003. The increase in data processing reflects continued growth in loanand deposit accounts, including expenses of $137,000 in data processingexpenses for the accounts acquired through the acquisition of Kenwood SavingsBank.  The decrease in goodwillamortization reflects the Company’s adoption of SFAS No. 142 effectiveOctober 1, 2002.  Pursuant to SFASNo. 142, goodwill is no longer amortized, but is subject to a periodicimpairment evaluation.

 

**Federal Income Taxes**

 

Peoples Bancorp recorded a tax provision totaling $1.9 million for thefiscal year ended September 30, 2003, compared to a provision of $2.4 millionfor fiscal 2002.  The effective tax rateswere 34.0% and 43.2% for the fiscal years ended September 30, 2003 and 2002,respectively.  The higher effective taxrate for fiscal 2002 was primarily due to nondeductible amortization and othercharges related to goodwill.

 

**Exposure to Changes in Interest Rates**

 

Peoples Bancorp’s ability to maintain netinterest income depends upon its ability to earn a higher yield oninterest-earning assets than the rates paid on deposits and borrowings.  Peoples Bank’s ability to maintain a positivespread between the interest earned on assets and the interest paid on depositsand borrowings can be adversely affected when market rates of interestrise.  Historically long-term, fixed-ratemortgage loans made up the dominant portion of Peoples Bank’s interest-earningassets.  A predominance of long-termfixed rate loans would make Peoples Bank particularly susceptible to the riskof changing interest rates.  However,during fiscal 2000, Peoples Bank began to emphasize the origination ofadjustable-rate mortgage (“ARM”) loans and shorter-term loans such asnon-residential real estate loans, construction loans, commercial loans andconsumer loans, in an effort to improve its interest rate risk position.  As a result, at September 30, 2004,approximately $168.1 million, or 28.0%, of the Company’s loan portfolioconsisted of loans with fixed rates of interest and approximately $431.4million, or 72.0%, had adjustable rates of interest.  During fiscal year 2004, management purchased$147.0 million in adjustable-rate mortgage-backed securities as a tool tomanage liquidity and interest rate risk, as well as to provide interest incomewith minimal credit risk, due to the implicit guarantee of government sponsoredagencies.  Further, nonresidentialreal-estate and land loans, construction loans, commercial loans and consumerloans totalled $338.9 million or 50.4% of the total loan portfolio at September30, 2004 compared to $48.8 million or 23.1% of the total loan portfolio atSeptember 30, 2000.

 

16

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**Quantitative Analysis**

** **

TheOTS provides a quarterly report on the potential impact of interest ratechanges upon the market value of portfolio equity.  Management reviews the quarterly reports fromthe OTS that show the impact of changing interest rates on net portfoliovalue.  Net portfolio value is thedifference between incoming and outgoing discounted cash flows from assets,liabilities, and off-balance sheet contracts. The application of the methodology attempts to quantify interest raterisk and the change in NPV which would result from a theoretical 100, 200 and300 basis point increase in market interest rates and a theoretical 100 basispoint decrease in market interest rates.

 

The following tables presentPeoples Bank’s net portfolio value as of September 30, 2004 and 2003, ascalculated by the OTS, based on information provided to the OTS by PeoplesBank.  The information presented is basedon the feature in Peoples Bank’s mortgage loans which permits the loans to becalled any time after three years from the date of origination and the assumedrepricing of called loans at a higher rate in a rising rate environment.

 
| **September 30, 2004**                                       | ** ** |
|--------------------------------------------------------------|------------|
| **Change in  Interest Rates  In Basis Points  (Rate Shock)** | ** ** | **Amount** | ** ** | **Net Portfolio  Value $ Change** | ** ** | **% Change** | ** ** | **Net Portfolio  Value as a% of  Portfolio Value  of Assets** | ** ** | **Change in  Net Portfolio  Value as a% of  Portfolio Value  of Assets** | ** ** |
| ** **                                                   | ** ** | **(Dollars in thousands)** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
|                                                         |       |   |   |   |   |   |   |   |   |   |   |
| 300                                                          | bp         | $ | 81,064 |   | $ | (8,030 | ) | (9 | )% | 9.21 | % | (59 | )bp |
| 200                                                          |       | 86,333 |   | (2,761 | ) | (3 | ) | 9.68 |   | (12 | ) |
| 100                                                          |       | 89,396 |   | 302 |   | 0 |   | 9.92 |   | 12 |   |
| 0                                                            |       | 89,094 |   | — |   | — |   | 9.80 |   | — |   |
| (100                                                         | )          | 84,957 |   | (4,137 | ) | (5 | ) | 9.29 |   | (51 | ) |
|                                                         |       |   |   |   |   |   |   |   |   |   |   |
| **September 30, 2003**                                       | ** ** |
| **Change in  Interest Rates  In Basis Points  (Rate Shock)** | ** ** | **Amount** | ** ** | **Net Portfolio  Value $ Change** | ** ** | **% Change** | ** ** | **Net Portfolio  Value as a % of  Portfolio Value  of Assets** | ** ** | **Change in  Net Portfolio  Value as a % of  Portfolio Value  of Assets** | ** ** |
| ** **                                                   | ** ** | **(Dollars in thousands)** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
|                                                         |       |   |   |   |   |   |   |   |   |   |   |
| 300                                                          | bp         | $ | 59,047 |   | $ | (548 | ) | (1 | )% | 8.09 | % | 21 | bp |
| 200                                                          |       | 62,184 |   | 2,589 |   | 4 |   | 8.39 |   | 51 |   |
| 100                                                          |       | 62,625 |   | 3,030 |   | 5 |   | 8.35 |   | 47 |   |
| 0                                                            |       | 59,595 |   | — |   | — |   | 7.88 |   | — |   |
| (100                                                         | )          | 54,391 |   | (5,204 | ) | (9 | ) | 7.15 |   | (74 | ) |
|                                                              |            |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

As shown by the 2004 tableabove, a 100 basis point increase in interest rates would result in an increasein Peoples Bank’s net portfolio value based on OTS calculations as of September30, 2004, primarily due to Peoples Bank’s efforts to originate adjustable-rateloans and shorter-term fixed-rate loans in recent periods.  The table also indicates a decrease in netportfolio value at a 200 and 300 basis point increase in interest rates.  The instantaneous shock as indicated in thetable is subject to periodic interest rate adjustments and caps as dictated bythe underlying notes.

 

17

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Peoples Bank’s fixed-rateloans help its profitability if interest rates are stable or declining, sincethese loans have yields that exceed its cost of funds.  However, if interest rates increase, PeoplesBank would have to pay more on its deposits and new borrowings, which wouldadversely affect its interest rate spread. Historically, Peoples Bank has been able to maintain relatively stablelevels of net interest income despite the interest rate risk inherent in itsoperations.  Peoples Bank attempts tomitigate potential exposure to interest rate risk by:

 

(1)           Originating one-year and three-yearadjustable-rate mortgage loans;

 

(2)           Increasing originations of nonresidential real estate mortgage loans,which generally have higher yields and shorter terms to maturity thansingle-family residential mortgage loans;

 

(3)           Originating home equity lines of credit with interest rates that adjustmonthly based on an index;

 

(4)           Originating unsecured lines of credit with interest rates that adjustmonthly based on an index;

 

(5)           Purchasing adjustable-rate mortgage-backedsecurities;

 

(6)           Utilizing fixed-rate longer-term advancesoffered by the Federal Home Loan Bank; and

 

(7)           Developing a strong core deposit base.

** **

**Liquidity and Capital Resources**

 

Peoples, like otherfinancial institutions, is required under applicable federal regulations tomaintain sufficient funds to meet deposit withdrawals, loan commitments andexpenses.  Liquid assets consist of cashand interest-bearing deposits in other financial institutions, investments andmortgage-backed securities.  Managementmonitors and assesses liquidity needs daily in order to meet depositwithdrawals, loan commitments and expenses.

 

The primary sources of funds includedeposits, principal and interest repayments on loans and on mortgage-backedsecurities and borrowings.  The Bank’sfirst preference is to fund liquidity needs with core deposits, if available,in the marketplace.  Core depositsinclude noninterest-bearing and interest-bearing retail deposits.  Other funding sources include Federal HomeLoan Bank advances.

 

Liquid assets as of September 30, 2004,include cash and deposits in other financial institutions totaling $14.4million, in addition to investment securities and mortgage-backed securitiesavailable for sale at a total market value of $229.2 million.  These liquid assets as well as the ability toborrow funds, sell loan participations and attract deposits through localpricing or through brokers will allow the Bank to meet its obligations andcommitments as indicated in the table below. Any future excess liquidity generated via operations will be utilized torepay borrowings or purchase investment and mortgage-backed securities.

 

18

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The following table sets forth informationregarding the Bank’s obligations and commitments to make future payments undercontract as of September 30, 2004.

 
| ** **                                                     | ** ** | **Payments due by period** | ** **  |
|----------------------------------------------------------------|------------|----------------------------|-------------|
| ** **                                                     | ** ** | **Less  than  1 year**     | ** **  | **1-3  years** | ** ** | **3-5  years** | ** ** | **More  than  5 years** | ** ** | **Total** | ** ** |
| ** **                                                     | ** ** | **(In thousands)**         | ** **  |
|                                                           |       |                       |        |   |   |   |   |   |   |   |   |
| Contractual  obligations:                                      |       |                       |        |   |   |   |   |   |   |   |   |
| Operating lease  obligations                                   |       | $                          | 24          |   | $ | 31 |   | $ | — |   | $ | — |   | $ | 55 |   |
| Contracts to  purchase office premises                         |       | 1,500                      |        | — |   | — |   | — |   | 1,500 |   |
| Advances from  the Federal Home Loan Bank and other borrowings |       | 172,000                    |        | — |   | 1,500 |   | 151,000 |   | 324,500 |   |
| Certificates of  deposit                                       |       | 119,542                    |        | 90,584 |   | 50,675 |   | — |   | 260,801 |   |
|                                                           |       |                       |        |   |   |   |   |   |   |   |   |
| Amount of  commitments expiration per period                   |       |                       |        |   |   |   |   |   |   |   |   |
| Commitments to  originate loans:                               |       |                       |        |   |   |   |   |   |   |   |   |
|   Consumer  lines of credit                          |       | 33,102                     |        | — |   | — |   | — |   | 33,102 |   |
|   Commercial  lines of credit                        |       | 9,225                      |        | — |   | — |   | — |   | 9,225 |   |
|   One-  to four-family and multi-family loans        |       | 3,907                      |        | — |   | — |   | — |   | 3,907 |   |
|   Non-residential  real estate and land loans        |       | 367                        |        | — |   | — |   | — |   | 367 |   |
| Commitments to  purchase mortgage-backed securities            |       | 30,250                     |        | — |   | — |   | — |   | 30,250 |   |
|                                                           |       |                       |        |   |   |   |   |   |   |   |   |
| Total  contractual obligations                                 | ** ** | **$**                      | **369,917** | ** ** | **$** | **90,615** | ** ** | **$** | **52,175** | ** ** | **$** | **151,000** | ** ** | **$** | **663,707** | ** ** |

 

Peoples Bank is required tomaintain regulatory capital sufficient to meet tangible, core and risk-basedcapital ratios of at least 1.5%, 4.0% and 8.0%, respectively.  At September 30, 2004, Peoples Bank exceededeach of the capital requirements with tangible, core and risk-based capitalratios of 8.3%, 12.5% and 13.8%, respectively.

 

**Impact of Inflation and Changing Prices**

 

The consolidated financialstatements and related financial data presented herein regarding PeoplesBancorp have been prepared in accordance with accounting principles generallyaccepted in the United States of America, which generally require themeasurement of financial position and operating results in terms of historicaldollars, without considering changes in relative purchasing power over time dueto inflation.  Unlike most industrialcompanies, virtually all of Peoples Bancorp’s assets and liabilities aremonetary in nature.  As a result,interest rates generally have a more significant impact on Peoples Bancorp’sperformance than does the effect of inflation. Interest rates do not necessarily move in the same direction or in thesame magnitude as the prices of goods and services, since such prices areaffected by inflation to a larger extent than interest rates.

 

19

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**REPORTOF REGISTERED INDEPENDENT PUBLIC ACCOUNTING FIRM**

** **

Board of Directors

Peoples Community Bancorp, Inc.

 

We have audited the consolidated statements of financial condition ofPeoples Community Bancorp, Inc. as of September 30, 2003 and 2002, and the relatedconsolidated statements of earnings, comprehensive income, stockholders’ equityand cash flows for each of the years in the three year period ended September30, 2003.  These consolidated financialstatements are the responsibility of the Corporation’s management.   Our responsibility is to express an opinionon these consolidated financial statements based on our audits.

 

We conducted our audits in accordance with auditing standards generallyaccepted in the United States of America. Those standards require that we planand perform the audit to obtain reasonable assurance about whether thefinancial statements are free of material misstatement.  An audit includes examining, on a test basis,evidence supporting the amounts and disclosures in the financialstatements.  An audit also includesassessing the accounting principles used and significant estimates made bymanagement, as well as evaluating the overall financial statement presentation.  We believe that our audits provide areasonable basis for our opinion.

 

In our opinion, the financial statements referred to above presentfairly, in all material respects, the consolidated financial position ofPeoples Community Bancorp, Inc. as of September 30, 2003 and 2002, and theconsolidated results of its operations and its cash flows for each of the yearsin the three year period ended September 30, 2003, in conformity withaccounting principles generally accepted in the United States of America.

 
| /s/Grant Thornton LLP |   |
|-----------------------|--------|
| Cincinnati, Ohio      |
| October 30, 2003      |

 

20

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**REPORT OFREGISTERED INDEPENDENT PUBLICACCOUNTING FIRM**

 

 

Audit Committee, Board of Directors and Stockholders

Peoples Community Bancorp, Inc.

West Chester, Ohio

 

We have audited theconsolidated statement of financial condition of Peoples Community Bancorp,Inc. as of September 30, 2004, and the related consolidated statements ofearnings, comprehensive income, stockholders’ equity and cash flows for theyear then ended.  These consolidatedfinancial statements are the responsibility of the Corporation’smanagement.  Our responsibility is toexpress an opinion on these consolidated financial statements based on ouraudit.

 

We conducted our auditin accordance with standards of the Public Company Accounting Oversight Board(United States).  Those standards requirethat we plan and perform the audit to obtain reasonable assurance about whetherthe financial statements are free of material misstatement.  An audit includes examining, on a test basis,evidence supporting the amounts and disclosures in the financialstatements.  An audit also includesassessing the accounting principles used and significant estimates made bymanagement, as well as evaluating the overall financial statementpresentation.  We believe that our auditprovides a reasonable basis for our opinion.

 

In our opinion, thefinancial statements referred to above present fairly, in all materialrespects, the consolidated financial position of Peoples Community Bancorp,Inc. as of September 30, 2004, and the consolidated results of its operationsand its cash flows for the year then ended, in conformity with accountingprinciples generally accepted in the United States of America.

 

 
|                                                                                 |   |
|---------------------------------------------------------------------------------|--------|
| Cincinnati,  Ohio                                                               |
| November 12, 2004, except for Note P as to which the date is  December 20, 2004 |

 

 

 

21

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**PEOPLES COMMUNITY BANCORP, INC.**

** **

**CONSOLIDATED STATEMENTS OFFINANCIAL CONDITION**

** **

September30, 2004 and 2003

(In thousands, exceptshare data)

 
| ** **                                                                                                                                          | ** ** | **2004**   | ** **  | **2003**   | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------|-------------|------------|------------|
| **ASSETS**                                                                                                                                          |       |       |        |       |       |
|                                                                                                                                                |       |       |        |       |       |
| Cash and due  from banks                                                                                                                            |       | $          | 10,807      |       | $          | 4,905 |   |
| Interest-bearing  deposits in other financial institutions                                                                                          |       | 3,623      |        | 5,339      |       |
| Cash and cash  equivalents                                                                                                                          |       | 14,430     |        | 10,244     |       |
|                                                                                                                                                |       |       |        |       |       |
| Investment  securities designated as available for sale at fair value                                                                               |       | 1,069      |        | 2,156      |       |
| Mortgage-backed  securities designated as available for sale at fair value                                                                          |       | 228,085    |        | 133,828    |       |
| Loans receivable  - net                                                                                                                             |       | 599,466    |        | 554,351    |       |
| Office premises  and equipment                                                                                                                      |       | 17,816     |        | 13,056     |       |
| Real estate  acquired through foreclosure                                                                                                           |       | 301        |        | 1,293      |       |
| Federal Home  Loan Bank stock                                                                                                                       |       | 10,841     |        | 10,221     |       |
| Accrued interest  receivable on loans                                                                                                               |       | 2,721      |        | 2,089      |       |
| Accrued interest  receivable on mortgage-backed securities and other investments                                                                    |       | 878        |        | 480        |       |
| Prepaid expenses  and other assets                                                                                                                  |       | 1,206      |        | 488        |       |
| Goodwill                                                                                                                                            |       | 6,089      |        | 6,089      |       |
| Prepaid federal  income taxes                                                                                                                       |       | 2,114      |        | 1,506      |       |
| Deferred federal  income taxes                                                                                                                      |       | 4,105      |        | 2,882      |       |
|                                                                                                                                                |       |       |        |       |       |
| Total assets                                                                                                                                        | ** ** | **$**      | **889,121** | ** ** | **$**      | **738,683** | ** ** |
|                                                                                                                                                |       |       |        |       |       |
| **LIABILITIES  AND STOCKHOLDERS’ EQUITY**                                                                                                      | ** ** | ** ** | ** **  | ** ** | ** ** |
|                                                                                                                                                |       |       |        |       |       |
| Deposits                                                                                                                                            |       | $          | 472,436     |       | $          | 455,900 |   |
| Advances from  the Federal Home Loan Bank                                                                                                           |       | 324,500    |        | 218,500    |       |
| Other borrowed  money                                                                                                                               |       | —     |        | 1,400      |       |
| Guaranteed  preferred beneficial interests in junior subordinated debentures                                                                        |       | 12,887     |        | 12,500     |       |
| Accrued interest  payable                                                                                                                           |       | 228        |        | 709        |       |
| Other  liabilities                                                                                                                                  |       | 3,295      |        | 2,975      |       |
| Total  liabilities                                                                                                                                  |       | 813,346    |        | 691,984    |       |
|                                                                                                                                                |       |       |        |       |       |
| Commitments and  contingent liabilities                                                                                                             |       | —     |        | —     |       |
|                                                                                                                                                |       |       |        |       |       |
| Stockholders’  equity                                                                                                                          |       |       |        |       |       |
| Common stock -  15,000,000 shares of $.01 par value authorized; 3,898,910 and 2,522,088  shares issued at September 30, 2004 and 2003, respectively |       | 39         |        | 25         |       |
| Additional  paid-in capital                                                                                                                         |       | 51,901     |        | 24,478     |       |
| Retained  earnings                                                                                                                                  |       | 24,891     |        | 23,171     |       |
| Shares acquired  by stock benefit plan                                                                                                              |       | (723       | )           | (286       | )          |
| Accumulated  comprehensive income (loss), unrealized losses on securities designated as  available for sale, net of related tax effects             |       | (333       | )           | (689       | )          |
| Total  stockholders’ equity                                                                                                                    |       | 75,775     |        | 46,699     |       |
|                                                                                                                                                |       |       |        |       |       |
| Total  liabilities and stockholders’ equity                                                                                                    | ** ** | **$**      | **889,121** | ** ** | **$**      | **738,683** | ** ** |

 

The accompanying notes are an integral part of these statements.

 

22

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**PEOPLES COMMUNITY BANCORP, INC.**

** **

**CONSOLIDATED STATEMENTS OFEARNINGS**

** **

Years ended September 30,2004, 2003 and 2002

(In thousands, exceptshare data)

 
| ** **                                                         | ** ** | **2004** | ** ** | **2003**   | ** ** | **2002**  | ** ** |
|--------------------------------------------------------------------|------------|----------|------------|------------|------------|-----------|------------|
|                                                               |       |     |       |       |       |      |       |
| Interest income                                                    |       |     |       |       |       |      |       |
| Loans                                                              |       | $        | 34,712     |       | $          | 34,952    |       | $ | 32,790 |   |
| Mortgage-backed  securities                                        |       | 4,908    |       | 1,568      |       | 361       |       |
| Investment  securities                                             |       | 480      |       | 479        |       | 446       |       |
| Interest-bearing  deposits and other                               |       | 71       |       | 170        |       | 115       |       |
| Total interest  income                                             |       | 40,171   |       | 37,169     |       | 33,712    |       |
|                                                               |       |     |       |       |       |      |       |
| Interest expense                                                   |       |     |       |       |       |      |       |
| Deposits                                                           |       | 11,472   |       | 11,260     |       | 10,464    |       |
| Borrowings                                                         |       | 8,341    |       | 6,812      |       | 5,134     |       |
| Total interest  expense                                            |       | 19,813   |       | 18,072     |       | 15,598    |       |
|                                                               |       |     |       |       |       |      |       |
| Net interest  income                                               |       | 20,358   |       | 19,097     |       | 18,114    |       |
|                                                               |       |     |       |       |       |      |       |
| Provision for  losses on loans                                     |       | 3,600    |       | 4,198      |       | 5,265     |       |
|                                                               |       |     |       |       |       |      |       |
| Net interest  income after provision for losses on loans           |       | 16,758   |       | 14,899     |       | 12,849    |       |
|                                                               |       |     |       |       |       |      |       |
| Other income                                                       |       |     |       |       |       |      |       |
| Gain (loss) on  sale of investments and mortgage-backed securities |       | 19       |       | 493        |       | (3        | )          |
| Gain on sale of  branch premises, deposits and loans               |       | 371      |       | 148        |       | 2,140     |       |
| Other operating                                                    |       | 791      |       | 610        |       | 372       |       |
| Total other  income                                                |       | 1,181    |       | 1,251      |       | 2,509     |       |
|                                                               |       |     |       |       |       |      |       |
| General,  administrative and other expense                         |       |     |       |       |       |      |       |
| Employee  compensation and benefits                                |       | 7,513    |       | 5,206      |       | 3,780     |       |
| Occupancy and  equipment                                           |       | 2,029    |       | 1,926      |       | 1,597     |       |
| Franchise taxes                                                    |       | 705      |       | 594        |       | 395       |       |
| Data processing                                                    |       | 1,057    |       | 624        |       | 365       |       |
| Other operating                                                    |       | 2,446    |       | 2,154      |       | 2,224     |       |
| Amortization and  other charges related to goodwill                |       | —   |       | —     |       | 1,456     |       |
| Total general,  administrative and other expense                   |       | 13,750   |       | 10,504     |       | 9,817     |       |
|                                                               |       |     |       |       |       |      |       |
| Earnings before  income taxes                                      |       | 4,189    |       | 5,646      |       | 5,541     |       |
|                                                               |       |     |       |       |       |      |       |
| Federal income  taxes                                              |       |     |       |       |       |      |       |
| Current                                                            |       | 2,265    |       | 2,800      |       | 4,761     |       |
| Deferred                                                           |       | (845     | )          | (878       | )          | (2,369    | )          |
| Total federal  income taxes                                        |       | 1,320    |       | 1,922      |       | 2,392     |       |
|                                                               |       |     |       |       |       |      |       |
| NET EARNINGS                                                       | ** ** | **$**    | **2,869**  | ** ** | **$**      | **3,724** | ** ** | **$** | **3,149** | ** ** |
|                                                               |       |     |       |       |       |      |       |
| EARNINGS PER  SHARE                                                |       |     |       |       |       |      |       |
| Basic                                                              | ** ** | **$**    | **.92**    | ** ** | **$**      | **1.51**  | ** ** | **$** | **1.29** | ** ** |
|                                                               |       |     |       |       |       |      |       |
| Diluted                                                            | ** ** | **$**    | **.91**    | ** ** | **$**      | **1.48**  | ** ** | **$** | **1.27** | ** ** |

 

The accompanying notes are an integral part of these statements.

 

23

----

 

**PEOPLES COMMUNITY BANCORP, INC.**

** **

CONSOLIDATEDSTATEMENTS OF COMPREHENSIVE INCOME

 

Yearsended September 30, 2004, 2003 and 2002

(In thousands)

 
| ** **                                                                                                                                                          | ** ** | **2004** | ** ** | **2003**   | ** ** | **2002**  | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|----------|------------|------------|------------|-----------|------------|
|                                                                                                                                                                |       |     |       |       |       |      |       |
| Net earnings                                                                                                                                                        |       | $        | 2,869      |       | $          | 3,724     |       | $ | 3,149 |   |
|                                                                                                                                                                |       |     |       |       |       |      |       |
| Other  comprehensive income, net of tax:                                                                                                                            |       |     |       |       |       |      |       |
| Unrealized  holding gains (losses) on securities during the year, net of tax effects  (benefits) of $(177), $(220) and $41 in 2004, 2003 and 2002, respectively     |       | (343     | )          | (427       | )          | 79        |       |
|                                                                                                                                                                |       |     |       |       |       |      |       |
| Reclassification  adjustment for realized (gains) losses included in earnings, net of taxes  (benefits) of ($6), ($168) and $1 in 2004, 2003 and 2002, respectively |       | (13      | )          | (325       | )          | 2         |       |
|                                                                                                                                                                |       |     |       |       |       |      |       |
| Comprehensive  income                                                                                                                                               | ** ** | **$**    | **2,513**  | ** ** | **$**      | **2,972** | ** ** | **$** | **3,230** | ** ** |
|                                                                                                                                                                |       |     |       |       |       |      |       |
| Accumulated  comprehensive income (loss)                                                                                                                            | ** ** | **$**    | **(333**   | **)**      | **$**      | **(689**  | **)**      | **$** | **63** | ** ** |

 

The accompanying notes are an integral part of these statements.

 

24

----

 

**PEOPLES COMMUNITY BANCORP, INC.**

** **

**CONSOLIDATED STATEMENTS OFSTOCKHOLDERS’ EQUITY**

** **

Years ended September 30,2004, 2003 and 2002

(Inthousands)

 
| ** **                                                                                     | ** ** | **Common  stock** | ** ** | **Additional  paid-in  capital** | ** ** | **Retained  earnings** | ** ** | **Shares  acquired  by stock  benefit  plan** | ** ** | **Unrealized  gains (losses)  on securities  designated  as available  for sale** | ** ** | **Total**  | ** ** |
|------------------------------------------------------------------------------------------------|------------|-------------------|------------|----------------------------------|------------|------------------------|------------|-----------------------------------------------|------------|-----------------------------------------------------------------------------------|------------|------------|------------|
|                                                                                           |       |              |       |                             |       |                   |       |                                          |       |                                                                              |       |       |       |
| Balance at  October 1, 2002                                                                    |       | $                 | 25         |                             | $          | 23,139                 |       | $                                             | 16,298     |                                                                              | $          | (666       | )          | $ | (18 | ) | $ | 38,778 |   |
|                                                                                           |       |              |       |                             |       |                   |       |                                          |       |                                                                              |       |       |       |
| Amortization expense  of stock benefit plan                                                    |       | —            |       | 649                              |       | —                 |       | 190                                           |       | —                                                                            |       | 839        |       |
| Compensation  expense relating to vested stock options                                         |       | —            |       | 143                              |       | —                 |       | —                                        |       | —                                                                            |       | 143        |       |
| Net earnings for  the year ended September 30, 2002                                            |       | —            |       | —                           |       | 3,149                  |       | —                                        |       | —                                                                            |       | 3,149      |       |
| Unrealized gains  on securities designated as available for sale, net of related tax effects   |       | —            |       | —                           |       | —                 |       | —                                        |       | 81                                                                                |       | 81         |       |
|                                                                                           |       |              |       |                             |       |                   |       |                                          |       |                                                                              |       |       |       |
| Balance at  September 30, 2002                                                                 |       | 25                |       | 23,931                           |       | 19,447                 |       | (476                                          | )          | 63                                                                                |       | 42,990     |       |
|                                                                                           |       |              |       |                             |       |                   |       |                                          |       |                                                                              |       |       |       |
| Amortization  expense of stock benefit plan                                                    |       | —            |       | 391                              |       | —                 |       | 190                                           |       | —                                                                            |       | 581        |       |
| Compensation  expense relating to vested stock options                                         |       | —            |       | 149                              |       | —                 |       | —                                        |       | —                                                                            |       | 149        |       |
| Exercise of  stock options                                                                     |       | —            |       | 7                                |       | —                 |       | —                                        |       | —                                                                            |       | 7          |       |
| Net earnings for  the year ended September 30, 2003                                            |       | —            |       | —                           |       | 3,724                  |       | —                                        |       | —                                                                            |       | 3,724      |       |
| Unrealized  losses on securities designated as available for sale, net of related tax  effects |       | —            |       | —                           |       | —                 |       | —                                        |       | (752                                                                              | )          | (752       | )          |
|                                                                                           |       |              |       |                             |       |                   |       |                                          |       |                                                                              |       |       |       |
| Balance at  September 30, 2003                                                                 |       | 25                |       | 24,478                           |       | 23,171                 |       | (286                                          | )          | (689                                                                              | )          | 46,699     |       |
| ** **                                                                                     | ** ** | ** **        | ** ** | ** **                       | ** ** | ** **             | ** ** | ** **                                    | ** ** | ** **                                                                        | ** ** | ** ** | ** ** |
| Amortization expense  of stock benefit plans                                                   |       | —            |       | 432                              |       | 19                     |       | 263                                           |       | —                                                                            |       | 714        |       |
| Compensation  expense relating to vested stock options                                         |       | —            |       | 191                              |       | —                 |       | —                                        |       | —                                                                            |       | 191        |       |
| Issuance of  common shares                                                                     |       | 14                |       | 26,800                           |       | —                 |       | (700                                          | )          | —                                                                            |       | 26,114     |       |
| Net earnings for  the year ended September 30, 2004                                            |       | —            |       | —                           |       | 2,869                  |       | —                                        |       | —                                                                            |       | 2,869      |       |
| Dividends paid  of $.30 per common share                                                       |       | —            |       | —                           |       | (1,168                 | )          | —                                        |       | —                                                                            |       | (1,168     | )          |
| Unrealized gains  on securities designated as available for sale, net of related tax effects   |       | —            |       | —                           |       | —                 |       | —                                        |       | 356                                                                               |       | 356        |       |
|                                                                                           |       |              |       |                             |       |                   |       |                                          |       |                                                                              |       |       |       |
| Balance at  September 30, 2004                                                                 | ** ** | **$**             | **39**     | ** **                       | **$**      | **51,901**             | ** ** | **$**                                         | **24,891** | ** **                                                                        | **$**      | **(723**   | **)**      | **$** | **(333** | **)** | **$** | **75,775** | ** ** |

 

The accompanying notes are an integral part of these statements.

 

25

----

 

**PEOPLES COMMUNITY BANCORP, INC.**

** **

**CONSOLIDATED STATEMENTS OF CASHFLOWS**

** **

Years ended September 30,2004, 2003 and 2002

(In thousands)

 
| ** **                                                                                      | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** |
|-------------------------------------------------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
|                                                                                            |       |     |       |     |       |     |       |
| Cash flows  provided by (used in) operating activities:                                         |       |     |       |     |       |     |       |
| Net earnings for  the year                                                                      |       | $        | 2,869      |     | $          | 3,724    |       | $ | 3,149 |   |
| Adjustments to  reconcile net earnings to net cash provided by (used in) operating  activities: |       |     |       |     |       |     |       |
| Amortization of  premiums and discounts on investment and mortgage-backed securities, net       |       | 1,493    |       | 1,058    |       | 264      |       |
| Amortization of  deferred loan origination fees                                                 |       | (1,761   | )          | (1,574   | )          | (716     | )          |
| Amortization  expense of stock benefit plan                                                     |       | 714      |       | 581      |       | 839      |       |
| Compensation  expense related to vested stock options                                           |       | 191      |       | 149      |       | 143      |       |
| Amortization and  other charges related to goodwill                                             |       | —   |       | —   |       | 1,456    |       |
| Reduction of  goodwill associated with sale of loans and deposits                               |       | —   |       | 1,650    |       | —   |       |
| Depreciation and  amortization                                                                  |       | 1,924    |       | 879      |       | 967      |       |
| Provision for  losses on loans                                                                  |       | 3,600    |       | 4,198    |       | 5,265    |       |
| Federal Home  Loan Bank stock dividends                                                         |       | (424     | )          | (414     | )          | (430     | )          |
| Mutual funds  dividends                                                                         |       | (51      | )          | (39      | )          | —   |       |
| (Gain) loss on  sale of securities                                                              |       | (19      | )          | (493     | )          | 3        |       |
| Gain on sale of  branch premises and deposits                                                   |       | (261     | )          | (148     | )          | (2,140   | )          |
| Gain on sale of  loans                                                                          |       | (110     | )          | —   |       | —   |       |
| Proceeds from  sale of loans in the secondary market                                            |       | 10,013   |       | —   |       | —   |       |
| Loans originated  for sale in the secondary market                                              |       | (9,903   | )          | —   |       | —   |       |
| Increase  (decrease) in cash, net of acquisition of Kenwood Bancorp, Inc., due to  changes in:  |       |     |       |     |       |     |       |
| Accrued interest  receivable on loans                                                           |       | (632     | )          | 316      |       | (179     | )          |
| Accrued interest  receivable on investments and mortgage-backed securities                      |       | (398     | )          | (403     | )          | (58      | )          |
| Prepaid expenses  and other assets                                                              |       | (331     | )          | 134      |       | (3,916   | )          |
| Accrued interest  payable                                                                       |       | (481     | )          | (134     | )          | 652      |       |
| Other  liabilities                                                                              |       | 393      |       | (119     | )          | (132     | )          |
| Federal income  taxes                                                                           |       |     |       |     |       |     |       |
| Current                                                                                         |       | (1,169   | )          | (1,657   | )          | 3,583    |       |
| Deferred                                                                                        |       | (845     | )          | (878     | )          | (2,369   | )          |
| Net cash  provided by operating activities                                                      |       | 4,812    |       | 6,830    |       | 6,381    |       |
|                                                                                            |       |     |       |     |       |     |       |
| Cash flows  provided by (used in) investing activities:                                         |       |     |       |     |       |     |       |
| Purchases of  investment securities                                                             |       | —   |       | (1,000   | )          | —   |       |
| Proceeds from  sale of investment securities designated as available for sale                   |       | 1,410    |       | 32       |       | —   |       |
| Purchase of  mortgage-backed securities                                                         |       | (146,953 | )          | (208,079 | )          | (20,264  | )          |
| Principal  repayments on mortgage-backed securities                                             |       | 51,489   |       | 23,032   |       | 1,730    |       |
| Proceeds from  sale of mortgage-backed securities designated as available for sale              |       | —   |       | 68,357   |       | 3,520    |       |
| Proceeds from  sale of loans and loan participations                                            |       | 5,003    |       | 10,180   |       | 6,738    |       |
| Principal  repayments on loans                                                                  |       | 236,398  |       | 247,086  |       | 153,207  |       |
| Loan  disbursements                                                                             |       | (289,465 | )          | (278,573 | )          | (261,576 | )          |
| Purchase of  office premises and equipment                                                      |       | (6,380   | )          | (2,132   | )          | (2,002   | )          |
| Proceeds from  sale of branch premises and deposits                                             |       | 988      |       | —   |       | 3,572    |       |
| Purchase of  Federal Home Loan Bank stock                                                       |       | (196     | )          | —   |       | (970     | )          |
| Proceeds from  sale of real estate acquired through foreclosure                                 |       | 1,071    |       | 65       |       | —   |       |
| Sale of Federal  Home Loan Bank stock                                                           |       | —   |       | 100      |       | —   |       |
| Cash received in  branch acquisition transaction-net                                            |       | —   |       | 19,730   |       | —   |       |
| Cash received in  acquisition of Kenwood Bancorp, Inc. - net                                    |       | —   |       | —   |       | 2,042    |       |
| Net cash used in  investing activities                                                          |       | (146,635 | )          | (121,202 | )          | (114,003 | )          |
|                                                                                            |       |     |       |     |       |     |       |
| Net cash used in  operating and investing activities  (balance brought forward)                 |       | $        | (141,823   | )        | $          | (114,372 | )          | $ | (107,622 | ) |

 

The accompanying notes are an integral part of these statements.

 

26

----

 
| ** **                                                                                             | ** ** | **2004**   | ** ** | **2003**   | ** ** | **2002**   | ** ** |
|--------------------------------------------------------------------------------------------------------|------------|------------|------------|------------|------------|------------|------------|
|                                                                                                   |       |       |       |       |       |       |       |
| Net cash used in  operating and investing activities (balance brought forward)                         |       | $          | (141,823   | )          | $          | (114,372   | )          | $ | (107,622 | ) |
|                                                                                                   |       |       |       |       |       |       |       |
| Cash flows provided  by (used in) financing activities:                                                |       |       |       |       |       |       |       |
| Net increase in  deposit accounts                                                                      |       | 16,536     |       | 31,209     |       | 97,551     |       |
| Proceeds from  Federal Home Loan Bank advances and other borrowings                                    |       | 210,800    |       | 162,950    |       | 79,250     |       |
| Repayment of  Federal Home Loan Bank advances and other borrowings                                     |       | (106,200   | )          | (96,000    | )          | (69,289    | )          |
| Proceeds from  issuance of junior subordinated debentures                                              |       | —     |       | —     |       | 12,500     |       |
| Net decrease in  advances for taxes and insurance                                                      |       | (73        | )          | (187       | )          | (348       | )          |
| Proceeds from  issuance of common stock                                                                |       | 26,814     |       | —     |       | —     |       |
| Dividends paid  on common stock                                                                        |       | (1,168     | )          | —     |       | —     |       |
| Proceeds from  exercise of stock options                                                               |       | —     |       | 7          |       | —     |       |
| Shares acquired  by ESOP                                                                               |       | (700       | )          | —     |       | —     |       |
| Net cash  provided by financing activities                                                             |       | 146,009    |       | 97,979     |       | 119,664    |       |
|                                                                                                   |       |       |       |       |       |       |       |
| Net increase  (decrease) in cash and cash equivalents                                                  |       | 4,186      |       | (16,393    | )          | 12,042     |       |
|                                                                                                   |       |       |       |       |       |       |       |
| Cash and cash  equivalents at beginning of year                                                        |       | 10,244     |       | 26,637     |       | 14,595     |       |
|                                                                                                   |       |       |       |       |       |       |       |
| Cash and cash  equivalents at end of year                                                              | ** ** | **$**      | **14,430** | ** ** | **$**      | **10,244** | ** ** | **$** | **26,637** | ** ** |
| ** **                                                                                             | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Supplemental  disclosure of cash flow information:                                                     |       |       |       |       |       |       |       |
| Cash paid during  the year for:                                                                        |       |       |       |       |       |       |       |
| Federal income  taxes                                                                                  | ** ** | **$**      | **3,500**  | ** ** | **$**      | **4,530**  | ** ** | **$** | **2,600** | ** ** |
|                                                                                                   |       |       |       |       |       |       |       |
| Interest on  deposits and borrowings                                                                   | ** ** | **$**      | **20,294** | ** ** | **$**      | **18,206** | ** ** | **$** | **14,833** | ** ** |
|                                                                                                   |       |       |       |       |       |       |       |
| Supplemental disclosure  of noncash investing activities:                                              |       |       |       |       |       |       |       |
| Unrealized gains  (losses) on securities designated as available for sale, net of related tax  effects | ** ** | **$**      | **356**    | ** ** | **$**      | **(752**   | **)**      | **$** | **81** | ** ** |
|                                                                                                   |       |       |       |       |       |       |       |
| Transfers from  loans to real estate acquired through foreclosure                                      | ** ** | **$**      | **513**    | ** ** | **$**      | **2,863**  | ** ** | **$** | **620** | ** ** |
|                                                                                                   |       |       |       |       |       |       |       |
| Loans disbursed  to facilitate sale of real estate acquired through foreclosure                        | ** ** | **$**      | **339**    | ** ** | **$**      | **2,325**  | ** ** | **$** | **191** | ** ** |
| ** **                                                                                             | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Loans disbursed  to facilitate sale of real estate                                                     | ** ** | **$**      | **490**    | ** ** | **$**      | **—** | ** ** | **$** | **—** | ** ** |
|                                                                                                   |       |       |       |       |       |       |       |
| Recognition of  mortgage servicing rights in accordance with SFAS No. 140                              | ** ** | **$**      | **—** | ** ** | **$**      | **148**    | ** ** | **$** | **—** | ** ** |
|                                                                                                   |       |       |       |       |       |       |       |
| Fair value of  assets received in acquisition of:                                                      |       |       |       |       |       |       |       |
|                                                                                                   |       |       |       |       |       |       |       |
| Kenwood Bancorp,  Inc.                                                                                 | ** ** | **$**      | **—** | ** ** | **$**      | **—** | ** ** | **$** | **56,550** | ** ** |
|                                                                                                   |       |       |       |       |       |       |       |
| Ameriana branch  acquisition                                                                           | ** ** | **$**      | **—** | ** ** | **$**      | **34,440** | ** ** | **$** | **—** | ** ** |

 

The accompanying notes are an integral part of these statements.

 

27

----

 

**PEOPLES COMMUNITY BANCORP, INC.**

** **

**NOTES TO CONSOLIDATED FINANCIALSTATEMENTS**

 

September 30, 2004, 2003and 2002

** **

**NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTINGPOLICIES**

 

PeoplesCommunity Bancorp, Inc. (“Peoples” or the “Corporation”) is a savings and loanholding company whose activities are primarily limited to holding the stock ofPeoples Community Bank (“the Bank”).  Peoples conducts a general banking business insouthwestern Ohio which consists of attracting deposits from the general publicand primarily applying those funds to the origination of loans for residential,consumer and nonresidential purposes. Peoples’ profitability is significantly dependent on net interestincome, which is the difference between interest income generated frominterest-earning assets (i.e. loans and investments) and the interest expensepaid on interest-bearing liabilities (i.e. customer deposits and borrowedfunds).  Net interest income is affectedby the relative amount of interest-earning assets and interest-bearingliabilities and the interest received or paid on these balances.  The level of interest rates paid or receivedby Peoples can be significantly influenced by a number of factors, such asgovernmental monetary policy, that are outside of management’s control.

 

TheCorporation has entered into a number of acquisitions and divestitures duringthe years covered by these financial statements.

 

OnJanuary 18, 2002, the Bank sold $11.0 million in total loans and $9.9 millionin total deposits to another financial institution pursuant to a Purchase andAssumption Agreement.  These assets andliabilities had been assigned to the Bank’s branch office located inBlanchester, Ohio.

 

OnApril 26, 2002, the Bank completed its acquisition of Kenwood Bancorp, Inc. forconsideration of $25.22 per outstanding share, totaling $7.9 million incash.  Kenwood was merged with and intothe Bank and Kenwood’s wholly-owned banking subsidiary, Kenwood Savings Bank,became a wholly-owned subsidiary of Peoples. The Bank acquired $56.6 million in total assets and recordedapproximately $3.4 million in goodwill as a result of the transaction.

 

OnJuly 25, 2003, the Bank sold Kenwood Savings Bank consisting primarily of $10.0million in deposits and $10.1 million of loans to Fort Washington TrustCompany, a subsidiary of Western and Southern Life Insurance Company for totalcash consideration of $1.7 million.

 

OnSeptember 26, 2003, the Bank acquired the two Ohio branch offices of AmerianaBank and Trust, including $32.8 million in loans and $55.6 million indeposits.  The Bank recordedapproximately $2.3 million in goodwill as a result of the transaction.

 

OnApril 27, 2004, Peoples Community Bancorp completed a secondary offering of1,365,674 shares of common stock.  Thenet proceeds of the offering, totaling approximately $26.8 million, have beenused to fund Peoples Community Bancorp’s growth strategy and for generalcorporate purposes.

 

28

----

 

Theconsolidated financial information presented herein has been prepared inaccordance with accounting principles generally accepted in the United Statesof America (“U.S. GAAP”) and general accounting practices within the financialservices industry.  In preparingconsolidated financial statements in accordance with U.S. GAAP, management isrequired to make estimates and assumptions that affect the reported amounts ofassets and liabilities and the disclosure of contingent assets and liabilitiesat the date of the financial statements and revenues and expenses during thereporting period.  Actual results coulddiffer from such estimates.

 

Thefollowing is a summary of the Corporation’s significant accounting policieswhich have been consistently applied in the preparation of the accompanyingconsolidated financial statements.

 

1.  Principles of Consolidation

 

The accompanying consolidated financialstatements include the accounts of the Company and the Bank, it’s wholly-ownedsubsidiary.  All significant intercompanyitems have been eliminated.  In December2003, FASB issued a revision to FIN 46 to clarify certain provisions thataffected the accounting for trust preferred securities.  As a result of the provisions in FIN 46,Peoples Bancorp Capital Trust I was deconsolidated as of June 30, 2004, withthe Company accounting for its investment in Peoples Community Bancorp CapitalTrust I as an asset, its subordinated debentures as debt, and the interest paidthereon as interest expense.  The Companyhad always classified the trust preferred securities as debt, but eliminatedits common stock investment.

 

2.  Investment Securities and Mortgage-BackedSecurities

 

TheCorporation accounts for investment and mortgage-backed securities inaccordance with Statement of Financial Accounting Standards (“SFAS”) No. 115 “Accountingfor Certain Investments in Debt and Equity Securities.”  SFAS No. 115 requires that investments indebt and equity securities be categorized as held-to-maturity, trading, oravailable for sale.  Securitiesclassified as held-to-maturity are carried at cost only if the Corporation hasthe positive intent and ability to hold these securities to maturity.Securities designated as available for sale are carried at fair value withresulting unrealized gains or losses recorded to stockholders’ equity.  As of September 30, 2004 and 2003, Peopleshad designated all of its securities as available for sale.

 

Realizedgains and losses on sales of securities are recognized using the specificidentification method.  Amortization ofpremiums and accretion of discounts are recorded on a principal paydown methodbased on the estimated duration of the underlying security.

 

29

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3.  Loans Receivable

 

Loans receivable are stated at theprincipal amount outstanding, adjusted for deferred loan origination fees andthe allowance for loan losses.  Interestis accrued as earned unless the collectibility of the loan is in doubt.  Uncollectible interest on loans that arecontractually past due is charged off, or an allowance is established based onmanagement’s periodic evaluation.  Theallowance is established by a charge to interest income equal to all interestpreviously accrued.  Income issubsequently recognized only to the extent that cash payments are receiveduntil, in management’s judgment, the borrower’s ability to make periodicinterest and principal payments has returned to normal.  In this case the loan is returned to accrualstatus.  If the ultimate collectibilityof principal is in doubt, in whole or in part, all payments received onnonaccrual loans are applied to reduce principal until such doubt iseliminated.

 

During fiscal 2003, Peoples sold loans asa part of the Kenwood Savings Bank transaction, retaining servicing on theloans sold.

 

Peoples accounts formortgage servicing rights pursuant to the provisions of SFAS No. 140, “Accountingfor Transfers and Servicing of Financial Assets and Extinguishments ofLiabilities,” which requires that Peoples recognize as separate assets, rightsto service mortgage loans for others, regardless of how those servicing rightsare acquired.  An institution thatacquires mortgage servicing rights through either the purchase or originationof mortgage loans and sells those loans with servicing rights retained mustallocate some of the cost of the loans to mortgage servicing rights.

 

SFAS No. 140 requires that capitalizedmortgage servicing rights be assessed for impairment.  Impairment is measured based on fairvalue.  The mortgage servicing rightsrecorded by Peoples, calculated in accordance with the provisions of SFAS No.140, were segregated into pools for valuation purposes, using as pooling criteriathe loan term and coupon rate.  Oncepooled, each grouping of loans was evaluated on a discounted earnings basis todetermine the present value of future earnings that a purchaser could expect torealize from each portfolio.  Earningswere projected from a variety of sources, including loan servicing fees,interest earned on float, net interest earned on escrows, miscellaneous income,and costs to service the loans.  Thepresent value of future earnings is the “economic” value for the pool, i.e.,the net realizable present value to an acquirer of the acquired servicing.

 

The Bankrecorded amortization related to mortgage servicing rights totaling $111,000and $37,000 for the fiscal years ended September 30, 2004 and 2003,respectively.  At September 30, 2003, thefair value and carrying value of the Bank’s mortgage servicing rights totaledapproximately $111,000.  No mortgageservicing rights existed at September 30, 2004 or 2002.

 

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4.  Loan Origination Fees

 

Peoplesaccounts for loan origination fees in accordance with SFAS No. 91 “Accountingfor Nonrefundable Fees and Costs Associated with Originating or Acquiring Loansand Initial Direct Cost of Leases.” Pursuant to the provisions of SFAS No. 91, origination fees receivedfrom loans, net of direct origination costs, are deferred and amortized tointerest income using the level-yield method, giving effect to actual loanprepayments.  Additionally, SFAS No. 91generally limits the definition of loan origination costs to the direct costsof originating a loan, i.e., principally actual personnel costs.  Fees received for loan commitments that areexpected to be drawn upon, based on Peoples’ experience with similarcommitments, are deferred and amortized over the life of the loan using thelevel-yield method.  Fees for other loancommitments are deferred and amortized over the loan commitment period on astraight-line basis.

 

5.  Allowance for Loan Losses

 

Itis Peoples’ policy to provide valuation allowances for estimated losses onloans based on past loss experience, trends in the level of delinquent andproblem loans, adverse situations that may affect the borrower’s ability torepay, the estimated value of any underlying collateral and current and anticipatedeconomic conditions in the primary lending area.  When the collection of a loan becomesdoubtful, or otherwise troubled, Peoples records a loan charge-off equal to thedifference between the fair value of the property securing the loan and theloan’s carrying value.  Major loans(including development projects) and major lending areas are reviewedperiodically to determine potential problems at an early date.  The allowance for loan losses is increased bycharges to earnings and decreased by charge-offs (net of recoveries).

 

Peoplesaccounts for impaired loans in accordance with SFAS No. 114, “Accounting byCreditors for Impairment of a Loan,” which requires that impaired loans bemeasured based upon the present value of expected future cash flows discountedat the loan’s effective interest rate or, as an alternative, at the loan’sobservable market price or fair value of the collateral.  Peoples’ current procedures for evaluatingimpaired loans result in carrying such loans at the lower of cost or fair value.

 

Aloan is defined under SFAS No. 114 as impaired when, based on currentinformation and events, it is probable that a creditor will be unable tocollect all amounts due according to the contractual terms of the loanagreement.  In applying the provisions ofSFAS No. 114, the Bank considers its investment in one- to four-familyresidential loans and consumer loans to be homogeneous and therefore excludedfrom separate identification for evaluation of impairment.  With respect to Peoples’ investment inmulti-family, nonresidential real estate and land loans, and its evaluation ofimpairment thereof, such loans are collateral dependent, and as a result, arecarried as a practical expedient at the lower of cost or fair value.  With respect to the Bank’s investment inunsecured commercial lines of credit, impairment is measured based upon thepresent value of expected future cash flows.

 

Itis Peoples’ policy to charge off unsecured credits that are more than ninetydays delinquent.  Similarly, collateral dependentloans which are more than ninety days delinquent are considered to constitutemore than a minimum delay in repayment and are evaluated for impairment underSFAS No. 114 at that time.

 

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6.  Office Premises and Equipment

 

Officepremises and equipment are carried at cost and include expenditures whichextend the useful lives of existing assets. Maintenance, repairs and minor renewals are expensed as incurred.  For financial reporting, depreciation andamortization are provided on the straight-line and accelerated methods over theuseful lives of the assets, estimated to be forty to fifty years for buildings,ten to fifty years for building improvements, and three to ten years forfurniture and equipment.  An acceleratedmethod is used for tax reporting purposes.

 

7.  Real Estate Acquired Through Foreclosure

 

Realestate acquired through foreclosure is carried at the lower of the loan’sunpaid principal balance (cost) or fair value less estimated selling expensesat the date of acquisition.  Real estateloss provisions are recorded if the properties’ fair value subsequentlydeclines below the amount determined at the recording date.  In determining the lower of cost or fairvalue at acquisition, costs relating to development and improvement of propertyare capitalized.  Costs relating toholding real estate acquired through foreclosure, net of rental income, arecharged against earnings as incurred.

 

8.  Goodwill

 

Prior to adoption of SFAS No. 142, goodwillwas amortized over a ten year period using the straight-line method.  Management had periodically evaluated thecarrying value of intangible assets in relation to the continuing earningscapacity of the acquired assets and assumed liabilities.  During fiscal 2002, the Corporation recordeda charge to goodwill totaling $1.0 million following a review of diminished netinterest income arising from loans and deposits acquired in the fiscal 2000purchase of Harvest Home Financial Corporation.

 

Duringfiscal 2003, the Bank acquired two branch offices from another financialinstitution resulting in recognition of $2.3 million in goodwill.  Additionally, the Bank sold Kenwood SavingsBank, resulting in a reduction of approximately $1.1 million of goodwill relatedto the fiscal 2002 acquisition of Kenwood.

 

InJune 2001, the Financial Accounting Standards Board issued SFAS No. 142 “Goodwilland Intangible Assets,” which prescribes accounting for all purchased goodwilland intangible assets.  Pursuant to SFASNo. 142, acquired goodwill is not amortized, but is tested for impairment atthe reporting unit level annually and whenever an impairment indicatorarises.  Goodwill has been assigned tothe Bank as the reporting unit that is expected to benefit from the goodwill.

 

Peoples evaluated the unamortized goodwillbalance of $6.1 million during fiscal 2004 in accordance with the provisions ofSFAS No. 142.  The evaluation showed noindication of impairment.  The adoptionof SFAS No. 142 in fiscal 2002 resulted in the elimination of annual goodwillamortization of approximately $460,000.

 

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The following table displays the pro formaeffects on net earnings and earnings per share as if SFAS No. 142 had beenapplicable to the fiscal year ended September 30, 2002.

** **
| ** **                       | ** ** | **For the year ended September 30,**         | ** ** |
|----------------------------------|------------|----------------------------------------------|------------|
| ** **                       | ** ** | **2004**                                     | ** ** | **2003** | ** ** | **2002** | ** ** |
| ** **                       | ** ** | **(In thousands, except per share amounts)** | ** ** |
|                             |       |                                         |       |   |   |   |   |
| Reported net  earnings           |       | $                                            | 2,869      |   | $ | 3,724 |   | $ | 3,149 |   |
|                             |       |                                         |       |   |   |   |   |
| Add back:  goodwill amortization |       | —                                       |       | — |   | 460 |   |
|                             |       |                                         |       |   |   |   |   |
| Adjusted net  earnings           | ** ** | **$**                                        | **2,869**  | ** ** | **$** | **3,724** | ** ** | **$** | **3,609** | ** ** |
|                             |       |                                         |       |   |   |   |   |
| **Basic  earnings per share:**   | ** ** | ** **                                   | ** ** | ** ** | ** ** | ** ** | ** ** |
| Reported net  earnings           |       | $                                            | 0.92       |   | $ | 1.51 |   | $ | 1.29 |   |
| Goodwill  amortization           |       | —                                       |       | — |   | .19 |   |
|                             |       |                                         |       |   |   |   |   |
| Adjusted net  earnings           | ** ** | **$**                                        | **0.92**   | ** ** | **$** | **1.51** | ** ** | **$** | **1.48** | ** ** |
|                             |       |                                         |       |   |   |   |   |
| **Diluted  earnings per share:** | ** ** | ** **                                   | ** ** | ** ** | ** ** | ** ** | ** ** |
| Reported net  earnings           |       | $                                            | 0.91       |   | $ | 1.48 |   | $ | 1.27 |   |
| Goodwill  amortization           |       | —                                       |       | — |   | .19 |   |
|                             |       |                                         |       |   |   |   |   |
| Adjusted net  earnings           | ** ** | **$**                                        | **0.91**   | ** ** | **$** | **1.48** | ** ** | **$** | **1.46** | ** ** |

 

The changes in the carryingamount of goodwill for the years ended September 30, 2004 and 2003, were:

 
| ** **                     | ** ** | **2004** | ** ** | **2003** | ** ** |
|--------------------------------|------------|----------|------------|----------|------------|
|                           |       |     |       |     |       |
| Balance as of  October 1       |       | $        | 6,089      |     | $          | 4,875 |   |
| Sale of Kenwood  Charter       |       |     |       | (1,089   | )          |
| Purchase of  Ameriana branches |       | —   |       | 2,303    |       |
|                           |       |     |       |     |       |
| Balance as of  September 30    |       | $        | 6,089      |     | $          | 6,089 |   |

 

9.  Federal Income Taxes

 

TheCorporation accounts for federal income taxes in accordance with the provisionsof SFAS No. 109, “Accounting for Income Taxes.” Pursuant to the provisions of SFAS No. 109, a deferred tax liability ordeferred tax asset is computed by applying the current statutory tax rates tonet taxable or deductible differences between the tax basis of an asset orliability and its reported amount in the consolidated financial statements thatwill result in taxable or deductible amounts in future periods.  Deferred tax assets are recorded only to theextent that the amount of net deductible temporary differences or carryforwardattributes may be utilized against current period earnings, carried backagainst prior years’ earnings, offset against taxable temporary differencesreversing in future periods, or utilized to the extent of management’s estimateof future taxable income.  A valuationallowance is provided for deferred tax assets to the extent that the value ofnet deductible temporary differences and carryforward attributes exceedsmanagement’s estimates of taxes payable on future taxable income.  Deferred tax liabilities are provided on thetotal amount of net temporary differences taxable in the future.

 

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10.  Benefit Plans

 

Peopleshas a noncontributory unfunded retirement plan that covers all members of itsBoard of Directors.  Peoples’ policy isto maintain an accrued liability equal to the present value of benefitscomputed using a predetermined annual benefit amount at retirement.  The plan provides for immediate and totalvesting for all current participants. The provision for directors retirement expense totaled $45,000, $84,000and $84,000 for the fiscal years ended September 30, 2004, 2003 and 2002,respectively.

 

TheCorporation has an Employee Stock Ownership Plan (“ESOP”) which providesretirement benefits for substantially all full-time employees who havecompleted one year of service. The Corporation makes annual contributions tothe ESOP equal to the ESOP’s debt service less dividends received by the ESOPon unallocated shares.  All shares in theESOP were acquired using funds provided by a loan from the Corporation andaccordingly the cost of those shares is shown as a reduction of stockholders’equity.  Shares are released toparticipants proportionately as the loan is repaid. Dividends on allocatedshares are recorded as dividends and charged to retained earnings.  Dividends on unallocated shares are used torepay the loan and are treated as compensation expense.  Compensation expense is recorded equal to thefair market value of the stock when contributions are made to the ESOP.    The Corporation accounts for the ESOP inaccordance with Statement of Position (“SOP”) 93-6, “Employers’ Accounting forEmployee Stock Ownership Plans.”  SOP93-6 requires that compensation expense recorded by employers equal the fairvalue of ESOP shares allocated to participants during a given fiscal year.  In April 2004, the Corporation added 35,000shares to the ESOP plan in connection with its secondary stock offering at atotal value of $700,000.  Expenserecognized related to the ESOP totaled $484,000, $438,000 and $361,000 for thefiscal years ended September 30, 2004, 2003 and 2002, respectively.

 
| ** **                      | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** |
|---------------------------------|------------|----------|------------|----------|------------|----------|------------|
|                            |       |     |       |     |       |     |       |
| Allocated shares                |       | 66,640   |       | 47,600   |       | 28,560   |       |
| Shares released  for allocation |       | 24,037   |       | 19,040   |       | 19,040   |       |
| Unearned shares                 |       | 39,523   |       | 28,560   |       | 47,600   |       |
|                            |       |     |       |     |       |     |       |
| Total ESOP shares               |       | 130,200  |       | 95,200   |       | 95,200   |       |

 
| ** **                                     | ** ** | **(In  thousands)** | ** ** |
|------------------------------------------------|------------|---------------------|------------|
| Fair value of  unearned shares at September 30 |       | $                   | 922        |   | $ | 657 |   | $ | 1,107 |   |
|                                                |            |                     |            |  |  |  |  |  |  |  |

 

The Corporation also has aManagement Recognition Plan (“MRP”) which provides for awards of up to 79,109shares of the Corporation’s common stock to members of the Board of Directors,management and employees.  As ofSeptember 30, 2004, the MRP had awarded 68,855 cumulative shares to members ofthe Board of Directors, management and employees.  Common shares awarded to outside members ofthe Board of Directors were fully expensed when granted, while shares awardedto members of management and employees will vest over a five year periodbeginning with the date of the award. Shares awarded under the MRP are distributed from previously authorizedbut unissued shares.

 

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Sharesdistributed to recipients of the awards totaled 27,105 shares as of September30, 2004.  The Corporation recordedexpense related to the MRP totaling approximately $263,000, $128,000 and$129,000 for the fiscal years ended September 30, 2004, 2003 and 2002,respectively.

 

11.  Stock Option Plan

 

During fiscal 2001 the Board of Directorsadopted the Peoples Community Bancorp, Inc. Stock Option and Incentive Plan (the“Plan”) that provides for the issuance of 197,773 shares of authorized butunissued shares of common stock at fair value at the date of grant.  Through September 30, 2004, the Corporationhad granted 170,804 shares, net of forfeitures, under the Plan.  The Plan provides that one-fifth of theoptions granted become exercisable on each of the first five anniversaries ofthe date of grant.  The remaining sharesin the Plan may be granted to employees in increments of 20% per year based onmanagement’s discretion.

 

The Corporation accounts for the Plan inaccordance with SFAS No. 123, “Accounting for Stock-Based Compensation,” whichcontains a fair value-based method for valuing stock-based compensation thatentities may use, which measures compensation cost at the grant date based onthe fair value of the award. Compensation is then recognized over the service period, which isusually the vesting period.

 

Beginning with fiscal 2002, the Corporation electedto record the expense related to the vesting of its stock options in accordancewith the provisions of SFAS No. 123. Total expense recognized related to stock options amounted to $191,000,$149,000 and $143,000 for fiscal years ended September 30, 2004, 2003 and 2002,respectively.

 

Thefair value of the option grants are estimated on the date of grant using themodified Black-Scholes options-pricing model with the following assumptionsused for grants in fiscal 2004, 2003 and 2002: dividend yield of 2.5% for 2004 and no dividend yield for 2003 and 2002;expected volatility of 26.6% and 21.4% and 20.0%, respectively; a risk-freeinterest rate of 4.6 %, 3.6% and 2.0% in fiscal 2004, 2003 and 2002,respectively, and an expected life of ten years for all grants.

 

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Asummary of the status of the Plan as of and for the years ended September 30 ispresented below:

 
| ** **                                                      | ** ** | **2004**    | ** ** | **2003**                                | ** ** | **2002**   | ** **  |
|-----------------------------------------------------------------|------------|-------------|------------|-----------------------------------------|------------|------------|-------------|
| ** **                                                      | ** ** | **Shares**  | ** ** | **Weighted-  average  exercise  price** | ** ** | **Shares** | ** **  | **Weighted-  average  exercise  price** | ** ** | **Shares** | ** ** | **Weighted-  average  exercise  price** | ** ** |
|                                                            |       |        |       |                                    |       |       |        |   |   |   |   |   |   |
| Outstanding at  beginning of year                               |       | 144,528     |       | $                                       | 16.75      |       | 120,329     |   | $ | 15.34 |   | 94,861 |   | $ | 14.00 |   |
| Granted                                                         |       | 26,969      |       | 23.20                                   |       | 26,391     |        | 23.22 |   | 25,728 |   | 20.25 |   |
| Exercised                                                       |       | —      |       | —                                  |       | (468       | )           | 14.00 |   | — |   | — |   |
| Forfeited                                                       |       | (1,161      | )          | 18.60                                   |       | (1,724     | )           | 17.99 |   | (260 | ) | 14.00 |   |
|                                                            |       |        |       |                                    |       |       |        |   |   |   |   |   |   |
| Outstanding at  end of year                                     | ** ** | **170,336** | ** ** | **$**                                   | **17.76**  | ** ** | **144,528** | ** ** | **$** | **16.75** | ** ** | **120,329** | ** ** | **$** | **15.34** | ** ** |
|                                                            |       |        |       |                                    |       |       |        |   |   |   |   |   |   |
| Options  exercisable at year-end                                | ** ** | **70,839**  | ** ** | **$**                                   | **15.53**  | ** ** | **42,152**  | ** ** | **$** | **14.73** | ** ** | **18,924** | ** ** | **$** | **14.00** | ** ** |
|                                                            |       |        |       |                                    |       |       |        |   |   |   |   |   |   |
| Weighted-average  fair value of options granted during the year | ** ** | ** **  | ** ** | **$**                                   | **4.50**   | ** ** | ** **  |   | **$** | **9.41** |   |   |   | **$** | **6.19** |   |

 

Thefollowing information applies to options outstanding at September 30, 2004:

 
| Number outstanding                                       |   | 93,041          |   |
|----------------------------------------------------------|--------|-----------------|--------|
| Exercise price                                           |   | $14.00          |   |
| Weighted-average  exercise price                         |   | $14.00          |   |
| Weighted-average  remaining contractual life             |   | 6.75 years      |   |
| Options  exercisable at year end                         |   | 55,836          |   |
|                                                     |   |            |   |
| Number  outstanding                                      |   | 77,295          |   |
| Range of  exercise prices                                |   | $20.25 - $23.22 |   |
| Weighted-average  exercise price                         |   | $22.28          |   |
| Weighted-average  remaining contractual life             |   | 8.78 years      |   |
| Options  exercisable at year end                         |   | 15,003          |   |
|                                                     |   |            |   |
| Weighted-average  exercise price(all outstanding shares) |   | $17.76          |   |
| Weighted-average  remaining contractual life             |   | 7.67 years      |   |
| Options exercisable  at year end                         |   | 70,839          |   |

 

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12.  Earnings Per Share 

 

Basic earnings per share for the fiscalyears ended September 30, 2004, 2003 and 2002 is based upon theweighted-average shares outstanding during the year, less 39,523, 28,560 and47,600 unallocated ESOP shares, respectively. Diluted earnings per share is computed taking into consideration commonshares outstanding and dilutive potential common shares to be issued under theCorporation’s stock option plan.  Thecomputations were as follows:

 
| ** **                                            | ** ** | **2004**      | ** ** | **2003**      | ** ** | **2002**      | ** ** |
|-------------------------------------------------------|------------|---------------|------------|---------------|------------|---------------|------------|
| Weighted-average  common shares outstanding (basic)   |       | 3,103,000     |       | 2,474,673     |       | 2,447,984     |       |
| Dilutive effect  of assumed exercise of stock options |       | 37,005        |       | 39,490        |       | 29,796        |       |
| Weighted-average  common shares outstanding (diluted) | ** ** | **3,140,005** | ** ** | **2,514,163** | ** ** | **2,477,780** | ** ** |

 

Options to purchase 53,019 and 26,391 shares of common stock at aweighted-average exercise price of $23.21 and $23.22 were outstanding atSeptember 30, 2004 and 2003, respectively, but were excluded from thecalculation of diluted earnings per share for each year because the exerciseprice was greater than the average market price of the common shares.

 

13.  Fair Value of Financial Instruments

 

SFASNo. 107, “Disclosures About Fair Value of Financial Instruments,” requiresdisclosure of the fair value of financial instruments, both assets andliabilities whether or not recognized in the consolidated statement offinancial condition, for which it is practicable to estimate that value.  For financial instruments where quoted marketprices are not available, fair values are based on estimates using presentvalue and other valuation methods.

 

Themethods used are greatly affected by the assumptions applied, including thediscount rate and estimates of future cash flows.  Therefore, the fair values presented may notrepresent amounts that could be realized in an exchange for certain financialinstruments.

 

Thefollowing methods and assumptions were used by the Corporation in estimatingits fair value disclosures for financial instruments at September 30, 2004 and2003:

 

Cash and cash equivalents:  The carrying amounts presented in theconsolidated statements of financial condition for cash and cash equivalentsare deemed to approximate fair value.

 

Investment andmortgage-backed securities: For investment and mortgage-backed securities, fair value is deemed toequal the quoted market price.

 

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Loans receivable:  The loan portfolio has been segregated intocategories with similar characteristics, such as one- to four-familyresidential, multi-family residential, nonresidential real estate and unsecuredcommercial loans.  These loan categorieswere further delineated into fixed-rate and adjustable-rate loans.  The fair values for the resultant loancategories were computed via discounted cash flow analysis, using currentinterest rates offered for loans with similar terms to borrowers of similarcredit quality.  For consumer and otherloans, fair values were deemed to equal the historic carrying values.  The historical carrying amount of accruedinterest on loans is deemed to approximate fair value.

 

Federal Home Loan Bankstock:  The carryingamount presented in the consolidated statements of financial condition isdeemed to approximate fair value.

 

Deposits:  The fair value of checking accounts, savingsaccounts, money market demand and escrow deposits is deemed to approximate theamount payable on demand.  Fair valuesfor fixed-rate certificates of deposit have been estimated using a discountedcash flow calculation using the interest rates currently offered for depositsof similar remaining maturities.

 

Advances from the FederalHome Loan Bank:  Thefair value of these advances is estimated using the rates currently offered forsimilar advances of similar remaining maturities.

 

Other borrowed money:  The fair value of other borrowed money isestimated using the rates currently offered for similar borrowings of similarremaining maturities.

 

Subordinated debentures:  The fair value of the Corporation’ssubordinated debentures has been estimated using discounted cash flow analysis,based on the interest rates currently offered for instruments of similarremaining maturities.

 

Commitments to extendcredit:  For fixed-rateand adjustable-rate loan commitments, the fair value estimate considers thedifference between current levels of interest rates and committed rates.  At September 30, 2004 and 2003, thedifference between the fair value and notional amount of loan commitments wasnot material.

 

Accrued Interest:   The carrying amount presented in theconsolidated statements of financial condition is deemed to approximate fairvalue.

 

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Basedon the foregoing methods and assumptions, the carrying value and fair value ofthe Corporation’s financial instruments at September 30 are as follows:

** **
| ** **                                | ** ** | **2004**            | ** **  | **2003**        | ** ** |
|-------------------------------------------|------------|---------------------|-------------|-----------------|------------|
| ** **                                | ** ** | **Carrying  value** | ** **  | **Fair  value** | ** ** | **Carrying  value** | ** ** | **Fair  value** | ** ** |
| ** **                                | ** ** | **(In thousands)**  | ** **  |
| Financial assets                          |       |                |        |            |       |   |   |   |   |
| Cash and cash  equivalents                |       | $                   | 14,430      |            | $          | 14,430 |   | $ | 10,244 |   | $ | 10,244 |   |
| Investment  securities                    |       | 1,069               |        | 1,069           |       | 2,156 |   | 2,156 |   |
| Mortgage-backed  securities               |       | 228,085             |        | 228,085         |       | 133,828 |   | 133,828 |   |
| Loans receivable                          |       | 599,466             |        | 601,222         |       | 554,351 |   | 568,016 |   |
| Accrued interest  receivable              |       | 3,599               |        | 3,599           |       | 2,569 |   | 2,569 |   |
| Federal Home  Loan Bank stock             |       | 10,841              |        | 10,841          |       | 10,221 |   | 10,221 |   |
|                                      |       |                |        |            |       |   |   |   |   |
| ** **                                | ** ** | **$**               | **857,490** | ** **      | **$**      | **859,246** | ** ** | **$** | **713,369** | ** ** | **$** | **727,034** | ** ** |
| Financial  liabilities                    |       |                |        |            |       |   |   |   |   |
| Deposits                                  |       | $                   | 472,436     |            | $          | 475,567 |   | $ | 455,900 |   | $ | 464,207 |   |
| Advances from  the Federal Home Loan Bank |       | 324,500             |        | 330,054         |       | 218,500 |   | 227,295 |   |
| Other borrowed  money                     |       | —              |        | —          |       | 1,400 |   | 1,400 |   |
| Accrued interest  payable                 |       | 228                 |        | 228             |       | 709 |   | 709 |   |
| Subordinated  debentures                  |       | 12,887              |        | 12,887          |       | 12,500 |   | 13,313 |   |
|                                      |       |                |        |            |       |   |   |   |   |
| ** **                                | ** ** | **$**               | **810,051** | ** **      | **$**      | **818,736** | ** ** | **$** | **689,009** | ** ** | **$** | **706,924** | ** ** |
|                                           |            |                     |             |                 |            |  |  |  |  |  |  |  |  |  |  |

 

14.  Capitalization

 

TheCorporation’s authorized capital stock includes 1,000,000 shares of $.01 pershare par value voting preferred stock. No preferred shares were issued at September 30, 2004 and 2003.

 

15.  Cash and Cash Equivalents

 

Forpurposes of reporting cash flows, cash and cash equivalents include cash anddue from banks and interest-bearing deposits in other financial institutions.

 

16.  Reclassifications

 

Certainprior year amounts have been reclassified to conform to the 2004 consolidatedfinancial statement presentation.

 

39

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**NOTE B - INVESTMENTS AND MORTGAGE-BACKEDSECURITIES**

 

Theamortized cost, gross unrealized gains, gross unrealized losses and estimatedfair values of investment securities at September 30, 2004 and 2003, aresummarized as follows:

 
| ** **              | ** ** | **2004**            | ** ** |
|-------------------------|------------|---------------------|------------|
| ** **              | ** ** | **Amortized  cost** | ** ** | **Gross  unrealized  gains** | ** ** | **Gross  unrealized  losses** | ** ** | **Estimated  fair  value** | ** ** |
| ** **              | ** ** | **(In thousands)**  | ** ** |
| **Available for sale:** | ** ** | ** **          | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **              | ** ** | ** **          | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Mutual funds            | ** ** | **$**               | **1,091**  | ** ** | **$** | **—** | ** ** | **$** | **22** | ** ** | **$** | **1,069** | ** ** |
|                         |            |                     |            |  |  |  |  |  |  |  |  |  |  |

 
| ** **              | ** ** | **2003**            | ** ** |
|-------------------------|------------|---------------------|------------|
| ** **              | ** ** | **Amortized  cost** | ** ** | **Gross  unrealized  gains** | ** ** | **Gross  unrealized  losses** | ** ** | **Estimated  fair  value** | ** ** |
| ** **              | ** ** | **(In thousands)**  | ** ** |
| **Available for sale:** | ** ** | ** **          | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **              | ** ** | ** **          | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| FHLMC stock             |       | $                   | 1,391      |   | $ | — |   | $ | 268 |   | $ | 1,123 |   |
| Mutual funds            |       | 1,039               |       | — |   | 6 |   | 1,033 |   |
|                    |       |                |       |   |   |   |   |   |   |
| ** **              | ** ** | **$**               | **2,430**  | ** ** | **$** | **—** | ** ** | **$** | **274** | ** ** | **$** | **2,156** | ** ** |

 

Theamortized cost, gross unrealized gains, gross unrealized losses and estimatedfair values of mortgage-backed securities at September 30, 2004 and 2003, aresummarized as follows:

 
| ** **                                                           | ** ** | **2004**            | ** **  |
|----------------------------------------------------------------------|------------|---------------------|-------------|
| ** **                                                           | ** ** | **Amortized  cost** | ** **  | **Gross  unrealized  gains** | ** ** | **Gross  unrealized  losses** | ** ** | **Estimated  fair  value** | ** ** |
| ** **                                                           | ** ** | **(In thousands)**  | ** **  |
| **Available  for sale:**                                             | ** ** | ** **          | ** **  | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Federal Home  Loan Mortgage Corporation participation certificates   |       | $                   | 86,187      |   | $ | — |   | $ | 880 |   | $ | 85,307 |   |
|                                                                 |       |                |        |   |   |   |   |   |   |
| Government  National Mortgage Association participation certificates |       | 37,557              |        | 262 |   | — |   | 37,819 |   |
|                                                                 |       |                |        |   |   |   |   |   |   |
| Federal National  Mortgage Association participation certificates    |       | 104,824             |        | 419 |   | 284 |   | 104,959 |   |
|                                                                 |       |                |        |   |   |   |   |   |   |
| ** **                                                           | ** ** | **$**               | **228,568** | ** ** | **$** | **681** | ** ** | **$** | **1,164** | ** ** | **$** | **228,085** | ** ** |

 

40

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| ** **                                                         | ** ** | **2003**            | ** **  |
|--------------------------------------------------------------------|------------|---------------------|-------------|
| ** **                                                         | ** ** | **Amortized  cost** | ** **  | **Gross  unrealized  gains** | ** ** | **Gross  unrealized  losses** | ** ** | **Estimated  fair  value** | ** ** |
| ** **                                                         | ** ** | **(In thousands)**  | ** **  |
| **Available  for sale:**                                           | ** ** | ** **          | ** **  | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Federal Home  Loan Mortgage Corporation participation certificates |       | $                   | 94,295      |   | $ | — |   | $ | 590 |   | $ | 93,705 |   |
| Federal National  Mortgage Association participation certificates  |       | 40,303              |        | — |   | 180 |   | 40,123 |   |
|                                                               |       |                |        |   |   |   |   |   |   |
| ** **                                                         | ** ** | **$**               | **134,598** | ** ** | **$** | **—** | ** ** | **$** | **770** | ** ** | **$** | **133,828** | ** ** |

 

During fiscal2004 the Bank sold it’s investment in FHLMC stock for proceeds of $1.4 millionresulting in a realized gain of $19,000 and a related tax effect of $7,000.Proceeds from sales of investment and mortgage-backed securities amounted to$68.5 million during the fiscal year ended September 30, 2003, resulting ingross realized gains totaling $493,000 and a related tax effect of$168,000.  Proceeds from sales ofinvestment and mortgage-backed securities acquired in the Kenwood acquisitionamounted to $3.5 million during the fiscal year ended September 30, 2002,resulting in gross realized gains of $17,000 and gross realized losses of$20,000.

 

At September 30, 2004, People’s had $23.0million of mortgage-backed securities pledged to secure public deposits, and$174.6 million of mortgage-backed securities pledged to secure advances fromthe Federal Home Loan Bank.  At September30, 2003, People’s had $25.3 million of mortgage-backed securities pledged tosecure public deposits, and $49.6 million of mortgage-backed securities pledgedto secure advances from the Federal Home Loan Bank.

 

Certain investments in debt andmarketable equity securities are reported in the financial statements at anamount less than their historical cost. Total fair value of these investments at September 30, 2004, was $129.9million, which approximated 56.7% of the Corporation’s investmentportfolio.  These declines primarilyresulted from recent increases in market rates. Based on evaluation of the available evidence, including recent changesin market rates, credit rating information and information obtained fromregulatory filings, management believes the declines in fair value for thesesecurities are temporary.

 

Should the impairment of any of thesesecurities become other than temporary, the cost basis of the investment willbe reduced and the resulting loss recognized in net earnings in the period theother-than-temporary impairment is identified.

 

41

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The following table shows our investments’gross unrealized loses and fair value, aggregated by investment category andlength of time that individual securities have been in a continuous unrealizedloss position at September 30, 2004.

 
| ** **                             | ** ** | **Less than 12 months**    | ** ** | **12 Months or Longer** | ** ** | **Total**              | ** ** |
|----------------------------------------|------------|----------------------------|------------|-------------------------|------------|------------------------|------------|
| **Description  of securities**         | ** ** | **Number of  investments** | ** ** | **Fair  value**         | ** ** | **Unrealized  Losses** | ** ** | **Number of  investments** | ** ** | **Fair  value** | ** ** | **Unrealized  Losses** | ** ** | **Fair  value** | ** ** | **Unrealized  Losses** | ** ** |
| ** **                             | ** ** | **(In  Thousands)**        |
| ** **                             | ** ** | ** **                 | ** ** | ** **              | ** ** | ** **             | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Mutual funds                           |       | 2                          |       | $                       | 1,069      |                   | $          | 22 |   | — |   | $ | — |   | $ | — |   | $ | 1,069 |   | $ | 22 |   |
| Mortgage-backed  securities            |       | 9                          |       | 69,679                  |       | 393                    |       | 8 |   | 59,244 |   | 771 |   | 128,922 |   | 1,164 |   |
|                                   |       |                       |       |                    |       |                   |       |   |   |   |   |   |   |   |   |   |   |
| Total  temporarily impaired securities |       | 11                         | ** ** | **$**                   | **68,748** | ** **             | **$**      | **415** | ** ** | **8** | ** ** | **$** | **59,244** | ** ** | **$** | **771** | ** ** | **$** | **129,991** | ** ** | **$** | **1,186** | ** ** |

** **

**NOTE C - LOANS RECEIVABLE**

 

Thecomposition of the loan portfolio at September 30 is summarized as follows:

 
| ** **                               | ** ** | **2004**            | ** **  | **2003**   | ** ** |
|------------------------------------------|------------|---------------------|-------------|------------|------------|
| ** **                               | ** ** | **(In  thousands)** | ** **  |
| Residential real  estate                 |       |                |        |       |       |
| One-to-four  family                      |       | $                   | 226,735     |       | $          | 230,775 |   |
| Multifamily                              |       | 106,799             |        | 95,459     |       |
| Construction                             |       | 93,217              |        | 90,788     |       |
| Nonresidential  real estate and land     |       | 158,907             |        | 131,444    |       |
| Nonresidential  real estate construction |       | 31,779              |        | 31,810     |       |
| Commercial                               |       | 33,238              |        | 29,955     |       |
| Consumer and  other                      |       | 21,781              |        | 11,769     |       |
| Total loans receivable                   |       | 672,456             |        | 622,000    |       |
|                                     |       |                |        |       |       |
| Less:                                    |       |                |        |       |       |
| Undisbursed  portion of loans in process |       | 59,045              |        | 55,308     |       |
| Deferred loan  origination fees          |       | 2,920               |        | 2,597      |       |
| Allowance for  loan losses               |       | 11,025              |        | 9,744      |       |
|                                     |       |                |        |       |       |
| Loans receivable  - net                  | ** ** | **$**               | **599,466** | ** ** | **$**      | **554,351** | ** ** |

 

As depicted above, Peoples has continued to change the composition ofthe loan portfolio from a primary focus of one-to-four family residentialloans, to the addition of loans secured by multi-family residential andnonresidential real estate.  One-to-four-familyresidential loans comprised 37.8% and 41.6% of the net loan portfolio atSeptember 30 2004 and 2003, respectively. Multi-family residential loans comprised approximately $106.8 million,or 17.8%, of the net loan portfolio at September 30, 2004, and $95.5 million or17.2%, of the net loan portfolio at September 30, 2003.  Nonresidential real estate lending comprised

 

42

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approximately $190.7 million, or 31.8%,and $163.3 million, or 29.4%, of the net loan portfolio at September 30, 2004and September 30, 2003, respectively. Generally, real estate loans have been underwritten on the basis of nomore than an 80% loan-to-value ratio, which has historically provided Peopleswith adequate collateral coverage in the event of default.  Nevertheless, Peoples, as with any lendinginstitution, issubject to the risk that real estate values could deteriorate in its primarylending area of southwestern Ohio, thereby impairing collateral values.  However, management believes that real estatevalues in Peoples’ primary lending area are presently stable.

 

In the ordinarycourse of business, Peoples has granted loans to some of its directors,officers and their related business interests. All loans to related parties have been made on substantially the sameterms as those prevailing at the time for unrelated third parties.  The aggregate dollar amount of loans toexecutive officers and directors was approximately $1.1 million and $893,000 atSeptember 30, 2004 and 2003, respectively. During the fiscal year ended September 30, 2004, there was one loantotaling $375,000 originated to executive officers and directors, whileprincipal repayments of $218,000 were received from executive officers anddirectors.

** **

**NOTE D - ALLOWANCE FOR LOAN LOSSES**

 

Theactivity in the allowance for loan losses is summarized as follows for theyears ended September 30:

 
| ** **                                                  | ** ** | **2004**           | ** ** | **2003**   | ** ** | **2002**  | ** ** |
|-------------------------------------------------------------|------------|--------------------|------------|------------|------------|-----------|------------|
| ** **                                                  | ** ** | **(In thousands)** | ** ** |
|                                                        |       |               |       |       |       |      |       |
| Balance at  beginning of year                               |       | $                  | 9,744      |       | $          | 7,656     |       | $ | 3,662 |   |
| Provision for  losses on loans                              |       | 3,600              |       | 4,198      |       | 5,265     |       |
| Charge-off of  loans                                        |       | (2,360             | )          | (2,122     | )          | (1,547    | )          |
| Recoveries                                                  |       | 41                 |       | 12         |       | —    |       |
| Allowance  resulting from acquisition of Kenwood – net |       | —             |       | —     |       | 276       |       |
|                                                        |       |               |       |       |       |      |       |
| Balance at end  of year                                     | ** ** | **$**              | **11,025** | ** ** | **$**      | **9,744** | ** ** | **$** | **7,656** | ** ** |

 

AtSeptember 30, 2004, the Bank’s allowance for loan losses was solely general innature and is includible as a component of regulatory risk-based capital,subject to certain percentage limitations.

 

AtSeptember 30, 2004, 2003 and 2002, the Bank’s nonaccruing loans amounted to$6.0 million, $7.3 million and $7.5 million, respectively.  At September 30, 2004 no loans greater than90 days delinquent were still accruing. Interest income which would have been recognized if such loans had performedpursuant to contractual terms totaled approximately $560,000, $266,000 and$343,000 for the fiscal years ended September 30, 2004, 2003 and 2002,respectively.

 

43

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Informationwith respect to the Bank’s impaired loans at and for the years ended September30, 2004 and 2003 is as follows:

 
| ** **                                                    | ** ** | **2004**            | ** ** | **2003**   | ** ** |
|---------------------------------------------------------------|------------|---------------------|------------|------------|------------|
| ** **                                                    | ** ** | **(In  thousands)** | ** ** |
|                                                          |       |                |       |       |       |
| Impaired loans  with related allowance                        |       | $                   | 4,097      |       | $          | 7,822 |   |
| Impaired loans  with no related allowance                     |       | 54                  |       | —     |       |
|                                                          |       |                |       |       |       |
| Total impaired  loans                                         | ** ** | **$**               | **4,151**  | ** ** | **$**      | **7,822** | ** ** |
|                                                          |       |                |       |       |       |
| Allowance for  losses on impaired loans                       |       |                |       |       |       |
| Beginning  balance                                            |       | $                   | 666        |       | $          | 679 |   |
| Provision for  losses on loans                                |       | 2,177               |       | 27         |       |
| Charge off of  loans                                          |       | (1,475              | )          | (40        | )          |
|                                                          |       |                |       |       |       |
| Ending balance                                                | ** ** | **$**               | **1,368**  | ** ** | **$**      | **666** | ** ** |
|                                                          |       |                |       |       |       |
| Average recorded  investment in impaired loans                | ** ** | **$**               | **5,995**  | ** ** | **$**      | **8,853** | ** ** |
|                                                          |       |                |       |       |       |
| Interest income  recognized on impaired loans                 | ** ** | **$**               | **44**     | ** ** | **$**      | **172** | ** ** |
| ** **                                                    | ** ** | ** **          | ** ** | ** ** | ** ** |
| Interest income  recognized on a cash basis on impaired loans | ** ** | **$**               | **44**     | ** ** | **$**      | **172** | ** ** |

 

Theallowance for impaired loans is included in the Bank’s overall allowance forloan losses.

 

**NOTE E - OFFICE PREMISES AND EQUIPMENT**

 

Officepremises and equipment are comprised of the following at September 30:

 
| ** **                         | ** ** | **2004**           | ** ** | **2003**   | ** ** |
|------------------------------------|------------|--------------------|------------|------------|------------|
| ** **                         | ** ** | **(In thousands)** | ** ** |
|                               |       |               |       |       |       |
| Land and  improvements             |       | $                  | 5,102      |       | $          | 3,858 |   |
| Office buildings  and improvements |       | 8,384              |       | 7,468      |       |
| Construction in  progress          |       | 4,445              |       | 1,769      |       |
| Furniture,  fixtures and equipment |       | 3,837              |       | 3,837      |       |
|                               |       | 21,768             |       | 16,932     |       |
|                               |       |               |       |       |       |
| Less accumulated  depreciation     |       | 3,952              |       | 3,876      |       |
|                               |       |               |       |       |       |
| ** **                         | ** ** | **$**              | **17,816** | ** ** | **$**      | **13,056** | ** ** |

 

Duringfiscal 2003, the Corporation completed construction of four new branch officefacilities located in southwestern Ohio. Two of the offices replaced existing branch buildings. The cost of thesetwo projects amounted to approximately $2.1 million.  During the fourth quarter of fiscal 2003, theCorporation began construction of a branch office in Warren County.  This office was completed in the secondquarter of fiscal 2004 at a cost of $1.4 million.  During the first quarter of fiscal 2004construction

 

44

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beganon a new office at the Voice of America Park in Butler County with completionin October 2004.  The cost of thisproject is estimated at $3.5 million and will house a portion of the Company’scorporate staff, with approximately 50% of the building leased to a localChamber of Commerce.

 

Additionally,projects on two branch offices to replace existing structures began in thesecond quarter of fiscal 2004 with total remaining estimated costs of $1.5million committed for completion. Estimated completion dates are in the firstand fourth quarters of fiscal 2005.

 

**NOTE F - DEPOSITS**

 

Depositsconsist of the following major classifications at September 30:

 
| **Deposit type and weighted-average**                            | ** ** | **2004**                   | ** **  | **2003**   | ** ** |
|------------------------------------------------------------------|------------|----------------------------|-------------|------------|------------|
| **interest rate**                                                | ** ** | **Amount**                 | ** **  | **%**      | ** ** | **Amount** | ** ** | **%** | ** ** |
| ** **                                                       | ** ** | **(Dollars in thousands)** | ** **  |
|                                                             |       |                       |        |       |       |   |   |   |   |
| Non-interest  bearing checking accounts                          |       | $                          | 17,638      |       | 3.7        | % | $ | 9,266 |   | 2.0 | % |
| Checking  accounts -  1.33% in 2004 and 1.38% in 2003            |       | 18,978                     |        | 4.0        |       | 29,602 |   | 6.5 |   |
| Savings accounts  – 1.96% in 2004 and 1.39% in 2003         |       | 145,437                    |        | 30.8       |       | 134,767 |   | 29.6 |   |
| Money market  demand deposit -  1.24% in 2004 and 1.26% in 2003  |       | 29,582                     |        | 6.3        |       | 37,382 |   | 8.2 |   |
| Total demand,  transaction and passbook deposits                 |       | 211,635                    |        | 44.8       |       | 211,017 |   | 46.3 |   |
|                                                             |       |                       |        |       |       |   |   |   |   |
| Certificates of  deposit:                                        |       |                       |        |       |       |   |   |   |   |
| Original  maturities of:                                         |       |                       |        |       |       |   |   |   |   |
| Less than 12  months  1.97% in 2004 and 1.95% in 2003            |       | 16,517                     |        | 3.5        |       | 23,543 |   | 5.1 |   |
| 12 months to 36  months  2.66% in 2004 and 3.06% in 2003         |       | 130,433                    |        | 27.6       |       | 131,652 |   | 28.9 |   |
| More than 36  months  4.40% in 2004 and 5.05% in 2003            |       | 62,879                     |        | 13.3       |       | 45,404 |   | 10.0 |   |
| Individual  retirement accounts  4.37% in 2004 and 4.44% in 2003 |       | 50,972                     |        | 10.8       |       | 44,284 |   | 9.7 |   |
|                                                             |       |                       |        |       |       |   |   |   |   |
| Total  certificates of deposit                                   |       | 260,801                    |        | 55.2       |       | 244,883 |   | 53.7 |   |
|                                                             |       |                       |        |       |       |   |   |   |   |
| Total deposits                                                   | ** ** | **$**                      | **472,436** | ** ** | **100.0**  | **%** | **$** | **455,900** | ** ** | **100.0** | **%** |

 

AtSeptember 30, 2004 and 2003, Peoples had certificate of deposit accounts withbalances greater than $100,000 totaling $52.2 million and $46.2 million,respectively.

 

45

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Interestexpense on deposit accounts is summarized as follows for the years endedSeptember 30:

 
| ** **                            | ** ** | **2004**           | ** ** | **2003**   | ** ** | **2002**   | ** ** |
|---------------------------------------|------------|--------------------|------------|------------|------------|------------|------------|
| ** **                            | ** ** | **(In thousands)** | ** ** |
|                                  |       |               |       |       |       |       |       |
| Checking  accounts                    |       | $                  | 316        |       | $          | 207        |       | $ | 218 |   |
| Savings and  escrow accounts          |       | 2,474              |       | 2,459      |       | 1,392      |       |
| Money market  demand deposit accounts |       | 407                |       | 604        |       | 776        |       |
| Certificates of  deposit              |       | 8,275              |       | 7,990      |       | 8,078      |       |
|                                  |       |               |       |       |       |       |       |
| ** **                            | ** ** | **$**              | **11,472** | ** ** | **$**      | **11,260** | ** ** | **$** | **10,464** | ** ** |

 

Maturitiesof outstanding certificates of deposit are summarized as follows at September30:

 
| ** **           | ** ** | **2004**           | ** **  | **2003**   | ** ** |
|----------------------|------------|--------------------|-------------|------------|------------|
| ** **           | ** ** | **(In thousands)** | ** **  |
|                 |       |               |        |       |       |
| One year or less     |       | $                  | 119,542     |       | $          | 125,197 |   |
| One to two years     |       | 48,341             |        | 37,681     |       |
| Two to three  years  |       | 42,243             |        | 32,584     |       |
| Three to four  years |       | 21,300             |        | 29,658     |       |
| Four to five  years  |       | 29,375             |        | 19,763     |       |
|                 |       |               |        |       |       |
| ** **           | ** ** | **$**              | **260,801** | ** ** | **$**      | **244,883** |   |

 

**NOTE G - ADVANCES FROM THE FEDERAL HOME LOAN BANK**

 

Advancesfrom the Federal Home Loan Bank, collateralized at September 30, 2004 bypledges of certain residential mortgage loans totaling $327.5 million, certainmortgage backed securities totaling $200.9 million, and Peoples’ investment inFederal Home Loan Bank stock, are summarized as follows:

 
| ** **                      | ** ** | **Maturing fiscal** | ** ** | **September 30,**          | ** **  |
|---------------------------------|------------|---------------------|------------|----------------------------|-------------|
| **Interest Rate**               | ** ** | **year ending in**  | ** ** | **2004**                   | ** **  | **2003** | ** ** |
| ** **                      | ** ** | ** **          | ** ** | **(Dollars in thousands)** | ** **  |
|                            |       |                |       |                       |        |   |   |
| 1.10%                           |       | 2004                |       | —                     |        | $ | 66,000 |   |
| 1.88%                           |       | 2005                |       | 172,000                    |        | — |   |
| 5.22%                           |       | 2008                |       | 1,500                      |        | 1,500 |   |
| 3.97% - 4.13%                   |       | 2011                |       | 1,000                      |        | 1,000 |   |
| 3.58% - 4.24%                   |       | 2012                |       | 150,000                    |        | 150,000 |   |
|                            |       |                |       |                       |        |   |   |
| ** **                      | ** ** | ** **          | ** ** | **$**                      | **324,500** | ** ** | **$** | **218,500** |   |
| ** **                      | ** ** | ** **          | ** ** | ** **                 | ** **  | ** ** | ** ** |
| Weighted-average  interest rate | ** ** | ** **          | ** ** | **2.85**                   | **%**       | **3.08** | **%** |
|                                 |            |                     |            |                            |             |  |  |  |  |

 

46

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**NOTE H - OTHER BORROWED MONEY**

 

The Corporation has a $10.0 million line of creditwith another financial institution, with interest payable at LIBOR plus 150basis points.  No balance is outstandingat September 30, 2004.  At September 30,2003, the Corporation had $1.4 million outstanding at an interest rate of2.62%.  This line of credit expires inthe second quarter of fiscal 2005.  Theloan is secured by the outstanding shares of the Bank.

 

**NOTE I - GUARANTEED PREFERREDBENEFICIAL INTERESTS IN JUNIOR SUBORDINATED DEBENTURES**

 

In fiscal 2002, a Delaware trust owned bythe Corporation (the “Trust”), issued $12.5 million of mandatorily redeemabledebt securities.  The debt securitiesissued by the Trust are included in the Corporation’s regulatory capital,specifically as a component of Tier I capital. The subordinated debentures are the sole assets of the Trust, and theCorporation owns all of the common securities of the Trust.  Interest payments on the debt securities aremade semi-annually at an annual variable interest rate equal to the six-monthLIBOR rate plus 375 basis points, or equal to 5.61% and 4.81% at September 30,2004, and 2003, respectively, and are reported as a component of interestexpense on borrowings.  The net proceedsreceived by the Corporation from the sale of the debt securities were used forgeneral corporate purposes, including to facilitate the growth of theBank.  The subordinated debentures maturein December 2031, but can be redeemed through prior approval by the OTS in anyJune or December beginning in 2006.

 

**NOTE J - COMMITMENTS**

 

Peoplesis a party to financial instruments with off-balance-sheet risk in the normalcourse of business to meet the financing needs of its customers, includingcommitments to extend credit.  Suchcommitments involve, to varying degrees, elements of credit and interest-raterisk in excess of the amount recognized in the consolidated statement of financialcondition.  The contract or notionalamounts of the commitments reflect the extent of Peoples’ involvement in suchfinancial instruments.

 

Peoples’exposure to credit loss in the event of nonperformance by the other party tothe financial instrument for commitments to extend credit is represented by thecontractual notional amount of those instruments.  Peoples uses the same credit policies inmaking commitments and conditional obligations as those utilized foron-balance-sheet instruments.

 

AtSeptember 30, 2004, Peoples had commitments to originate loans totaling $4.3million of which $2.1 million were fixed rate and $2.2 million were adjustablerate.  Additionally, Peoples hadadjustable rate commitments for unused lines of credit under home equity loanstotaling $33.1 million and adjustable rate commitments for unused commerciallines of credit totaling $9.2 million. Management believes that such loancommitments are able to be funded through normal cash flow from operations.  Fees received in connection with thecommitments to originate loans have not been recognized in earnings.Additionally, Peoples had commitments to purchase variable rate mortgage-backedsecurities totaling $30.2 million and fixed rate standby letters of credit forcustomers totaling $6.6 million at September 30, 2004.  From time to time balances with correspondentbanks may exceed the FDIC $100,000 insurable limit.

 

47

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Commitmentsto extend credit are agreements to lend to a customer as long as there is noviolation of any condition established in the contract.  Commitments generally have fixed expirationdates or other termination clauses and may require payment of a fee.  Since many of the commitments may expirewithout being drawn upon, the total commitment amounts do not necessarilyrepresent future cash requirements. Peoples evaluates each customer’s creditworthiness on a case-by-casebasis.  The amount of collateralobtained, if it is deemed necessary by Peoples upon extension of credit, isbased on management’s credit evaluation of the counterparty.  Collateral on loans may vary but thepreponderance of loans granted generally include a mortgage interest in realestate as security.

 

PeoplesCommunity Bancorp has a stock purchase agreement with various stockholders ofColumbia Bancorp, Inc., Cincinnati, Ohio, a privately held bank holdingcompany, to acquire 69,925 shares held by these stockholders for an aggregatepurchase price of $2.5 million.  Theseshares represent approximately 38% of Columbia’s presently issued andoutstanding common stock.  This proposedstock purchase is subject to regulatory approval.  Assuming regulatory approval, PeoplesCommunity Bancorp, Inc. would become a bank holding company.  Peoples Community Bancorp, Inc. does notanticipate any significant changes to its operations if it becomes a bankholding company.

 

Peoples had also entered into leaseagreements for office premises under operating leases which expire at variousdates through 2007. Rent expense totaled $95,000, $94,000 and $83,000 for theyears ended September 30, 2004, 2003 and 2002, respectively. The followingtable summarizes minimum payments due under lease agreements by year.

 
| **Year ending  September 30,** | ** ** | **(Dollars in thousands)** | ** ** |
|--------------------------------|------------|----------------------------|------------|
|                           |       |                       |       |
| 2005                           |       | $                          | 24         |   |
| 2006                           |       | 19                         |       |
| 2007                           |       | 12                         |       |
| ** **                     | ** ** | **$**                      | **55**     | ** ** |

 

**NOTE K - FEDERAL INCOME TAXES**

 

Federalincome taxes differ from the amounts computed at the statutory corporate taxrate for the years ended September 30 as follows:

 
| ** **                                                  | ** ** | **2004**                   | ** ** | **2003**   | ** ** | **2002**   | ** ** |
|-------------------------------------------------------------|------------|----------------------------|------------|------------|------------|------------|------------|
| ** **                                                  | ** ** | **(Dollars in thousands)** | ** ** |
|                                                        |       |                       |       |       |       |       |       |
| Federal income  taxes at statutory rate                     |       | $                          | 1,424      |       | $          | 1,920      |       | $ | 1,884 |   |
| Increase in  taxes resulting from:                          |       |                       |       |       |       |       |       |
| Amortization and  other charges related to goodwill         |       | —                     |       | —     |       | 495        |       |
| Other                                                       |       | (104                       | )          | 2          |       | 13         |       |
| Federal income  taxes per consolidated financial statements |       | $                          | 1,320      |       | $          | 1,922      |       | $ | 2,392 |   |
| ** **                                                  | ** ** | ** **                 | ** ** | ** ** | ** ** | ** ** | ** ** |
| Effective tax  rate                                         | ** ** | **31.5**                   | **%**      | **34.0**   | **%**      | **43.2**   | **%**      |

 

48

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The composition of theCorporation’s net deferred tax asset at September 30 is as follows:

 
| ** **                                                                            | ** ** | **2004**           | ** ** | **2003**   | ** ** |
|---------------------------------------------------------------------------------------|------------|--------------------|------------|------------|------------|
| ** **                                                                            | ** ** | **(In thousands)** | ** ** |
| Taxes (payable)  refundable on temporary differences at estimated corporate tax rate: |       |               |       |       |       |
| Deferred tax  assets:                                                                 |       |               |       |       |       |
| General loan  loss allowance                                                          |       | $                  | 3,751      |       | $          | 3,313 |   |
| Deferred  compensation                                                                |       | 485                |       | 493        |       |
| Stock benefit  plans                                                                  |       | 26                 |       | 22         |       |
| Deferred loan  origination fees                                                       |       | 994                |       | 883        |       |
| Unrealized  losses on securities designated as as available for sale                  |       | 172                |       | 355        |       |
| Total deferred  tax assets                                                            |       | 5,428              |       | 5,066      |       |
|                                                                                  |       |               |       |       |       |
| Deferred tax  liabilities:                                                            |       |               |       |       |       |
| Percentage of  earnings bad debt deduction                                            |       | —             |       | (36        | )          |
| Cash versus  accrual basis of accounting                                              |       | (13                | )          | (70        | )          |
| Federal Home  Loan Bank stock dividends                                               |       | (1,241             | )          | (1,096     | )          |
| Book/tax  depreciation differences                                                    |       | (17                | )          | (17        | )          |
| Purchase price  adjustments and goodwill                                              |       | (52                | )          | (965       | )          |
| Total deferred  tax liabilities                                                       |       | (1,323             | )          | (2,184     | )          |
|                                                                                  |       |               |       |       |       |
| Net deferred tax  asset                                                               | ** ** | **$**              | **4,105**  | ** ** | **$**      | **2,882** | ** ** |

 

Priorto fiscal 1997, Peoples was allowed a special bad debt deduction based on apercentage of earnings, generally limited to 8% of otherwise taxable income andsubject to certain limitations based on aggregate loans and savings accountbalances at the end of the year.  Thisdeduction totaled approximately $4.9 million as of September 30, 2004.  If the amounts that qualified as deductionsfor federal income tax purposes are later used for purposes other than for baddebt losses, including distributions in liquidation, such distributions will besubject to federal income taxes at the then current corporate income taxrate.  The approximate amount of theunrecognized deferred tax liability relating to the cumulative bad debtdeduction is $1.4 million.

 

As a result of fiscal 1997 legislativechanges, Peoples is required to recapture as taxable income approximately $1.2million of its tax bad debt reserve, which represents the post-1987 additionsto the reserve, and is unable to utilize the percentage of earnings method tocompute its bad debt deduction in the future. Peoples has provided deferred taxes for this amount and began toamortize the recapture of the bad debt reserve into taxable income over a sixyear period in fiscal 1999.

 

49

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**NOTE L - REGULATORY CAPITAL**

 

Peoplesis subject to minimum regulatory capital standards promulgated by the Office ofThrift Supervision (the “OTS”).  Failureto meet minimum capital requirements can initiate certain mandatory -- andpossibly additional discretionary -- actions by regulators that, if undertaken,could have a direct material effect on the consolidated financial statements.  Under capital adequacy guidelines and theregulatory framework for prompt corrective action, the Bank must meet specificcapital guidelines that involve quantitative measures of it’s assets,liabilities, and certain off-balance-sheet items as calculated under regulatoryaccounting practices.  The Bank’s capitalamounts and classification are also subject to qualitative judgments by theregulators about components, risk weightings, and other factors.

 

The minimum capital standards of the OTSgenerally require the maintenance of regulatory capital sufficient to meet eachof three tests, hereinafter described as the tangible capital requirement, thecore capital requirement and the risk-based capital requirement.  The tangible capital requirement provides forminimum tangible capital (defined as stockholders’ equity less all intangibleassets) equal to 1.5% of adjusted total assets. The core capital requirement provides for minimum core capital (tangiblecapital plus certain forms of supervisory goodwill and other qualifyingintangible assets) generally equal to 4.0% of adjusted total assets, except forthose associations with the highest regulatory examination rating andacceptable levels of risk.  Therisk-based capital requirement provides for the maintenance of core capitalplus general loss allowances equal to 8.0% of risk-weighted assets.  In computing risk-weighted assets, Peoplesmultiplies the value of each asset on its statement of financial condition by adefined risk-weighting factor, e.g., one- to four-family residential loanscarry a risk-weighted factor of 50%.

 

During fiscal 2004, the Bank was notifiedby the OTS that it was categorized as “well-capitalized” under the regulatoryframework for prompt corrective action. To be categorized as “well-capitalized” the Bank must maintain minimumcapital ratios as set forth in the following tables.  There are no conditions or events since thatnotification that management believes have changed the Bank’s category.

 

Asof September 30, 2004 and 2003, Peoples Community Bank exceeded all capitaladequacy requirements to which it was subject.

 

50

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**Peoples Community Bank**

** **
| ** **          | ** ** | **As of September 30, 2004** | ** ** |
|---------------------|------------|------------------------------|------------|
| ** **          | ** ** | **Actual**                   | ** ** | **For capital  adequacy purposes** | ** ** | **To be “well-  capitalized” under  prompt corrective  action provisions** | ** ** |
| ** **          | ** ** | **Amount**                   | ** ** | **Ratio** | ** ** | **Amount** | ** ** | **Ratio** | ** ** | **Amount** | ** ** | **Ratio** | ** ** |
| ** **          | ** ** | **(Dollars  in thousands)**  | ** ** |
|                |       |                         |       |   |   |   |   |   |   |   |   |   |   |
| Tangible capital    |       | $                            | 73,507     |   | 8.3 | % | 3$13,289 |   | 31.5 | % | 3$44,296 |   | 3 5.0 | % |
|                |       |                         |       |   |   |   |   |   |   |   |   |   |   |
| Core capital        |       | $                            | 73,507     |   | 8.3 | % | 3$35,436 |   | 34.0 | % | 3$53,155 |   | 3 6.0 | % |
|                |       |                         |       |   |   |   |   |   |   |   |   |   |   |
| Risk-based  capital |       | $                            | 80,884     |   | 13.8 | % | 3$46,986 |   | 38.0 | % | 3$58,733 |   | 310.0 | % |

 
| ** **          | ** ** | **As of September 30, 2003** | ** ** |
|---------------------|------------|------------------------------|------------|
| ** **          | ** ** | **Actual**                   | ** ** | **For capital  adequacy purposes** | ** ** | **To be “well-  capitalized” under  prompt corrective  action provisions** | ** ** |
| ** **          | ** ** | **Amount**                   | ** ** | **Ratio** | ** ** | **Amount** | ** ** | **Ratio** | ** ** | **Amount** | ** ** | **Ratio** | ** ** |
| ** **          | ** ** | **(Dollars  in thousands)**  | ** ** |
|                |       |                         |       |   |   |   |   |   |   |   |   |   |   |
| Tangible capital    |       | $                            | 54,298     |   | 7.4 | % | 3$11,016 |   | 31.5 | % | 3$36,681 |   | 3 5.0 | % |
|                |       |                         |       |   |   |   |   |   |   |   |   |   |   |
| Core capital        |       | $                            | 54,298     |   | 7.4 | % | 3$29,377 |   | 34.0 | % | 3$44,017 |   | 3 6.0 | % |
|                |       |                         |       |   |   |   |   |   |   |   |   |   |   |
| Risk-based  capital |       | $                            | 60,646     |   | 11.9 | % | 3$40,614 |   | 38.0 | % | 3$50,785 |   | 310.0 | % |

 

Management believes that, under thecurrent regulatory capital regulations, the Bank will continue to meet theminimum capital requirements in the foreseeable future.  However, events beyond the control of theBank, such as increased interest rates or a downturn in the economy in the Bank’smarket area, could adversely affect future earnings and, consequently, theability to meet future minimum regulatory capital requirements.

 

51

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**NOTE M - CONDENSED FINANCIAL STATEMENTS OF PEOPLESCOMMUNITY BANCORP, INC.**

 

The following condensedfinancial statements summarize the financial position of Peoples CommunityBancorp, Inc. as of September 30, 2004 and 2003, and the results of itsoperations and its cash flows for the periods ended September 30, 2004, 2003and 2002.

 

**PEOPLES COMMUNITY BANCORP, INC.**

**STATEMENTS OF FINANCIAL CONDITION**

September 30, 2004 and2003

(In thousands)

 
| ** **                                                                            | ** ** | **2004**   | ** ** | **2003**   | ** ** |
|---------------------------------------------------------------------------------------|------------|------------|------------|------------|------------|
| **ASSETS**                                                                            | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                                                                            | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Cash  and cash equivalents**                                                        |       | $          | 8,969      |       | $          | 31 |   |
| Loan receivable  from Bank                                                            |       | 723        |       | 286        |       |
| Investment in  Peoples Community Bank                                                 |       | 79,286     |       | 60,107     |       |
| Prepaid federal  income taxes and other assets                                        |       | 1,368      |       | 665        |       |
|                                                                                  |       |       |       |       |       |
| Total assets                                                                          | ** ** | **$**      | **90,346** | ** ** | **$**      | **61,089** | ** ** |
| ** **                                                                            | ** ** | ** ** | ** ** | ** ** | ** ** |
| **LIABILITIES  AND STOCKHOLDERS’ EQUITY**                                        | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                                                                            | ** ** | ** ** | ** ** | ** ** | ** ** |
| Accrued expenses  and other liabilities                                               |       | $          | 222        |       | $          | 204 |   |
| Accounts payable  to subsidiary                                                       |       | 1,462      |       | 286        |       |
| Borrowings                                                                            |       | —     |       | 1,400      |       |
| Guaranteed  preferred beneficial interests in junior subordinated debentures          |       | 12,887     |       | 12,500     |       |
| Total  liabilities                                                                    |       | 14,571     |       | 14,390     |       |
|                                                                                  |       |       |       |       |       |
| Stockholders’  equity                                                            |       |       |       |       |       |
| Common stock and  additional paid-in capital                                          |       | 51,217     |       | 24,217     |       |
| Retained earnings                                                                     |       | 24,891     |       | 23,171     |       |
| Unrealized  losses on securities designated as available for sale, net of tax effects |       | (333       | )          | (689       | )          |
| Total  stockholders’ equity                                                      |       | 75,775     |       | 46,699     |       |
|                                                                                  |       |       |       |       |       |
| Total  liabilities and stockholders’ equity                                      | ** ** | **$**      | **90,346** | ** ** | **$**      | **61,089** | ** ** |

 

52

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**PEOPLES COMMUNITY BANCORP, INC.**

##### **STATEMENTS OF EARNINGS**

 

For the years endedSeptember 30, 2004, 2003 and 2002

(In thousands)

 
| ** **                                    | ** ** | **2004** | ** ** | **2003**   | ** ** | **2002**  | ** ** |
|-----------------------------------------------|------------|----------|------------|------------|------------|-----------|------------|
| Revenue                                       |       |     |       |       |       |      |       |
| Interest income                               |       | $        | 28         |       | $          | 2         |       | $ | 66 |   |
| Equity in  earnings of Peoples Community Bank |       | 3,480    |       | 4,266      |       | 3,900     |       |
| Total revenue                                 |       | 3,508    |       | 4,268      |       | 3,966     |       |
|                                          |       |     |       |       |       |      |       |
| Expense                                       |       |     |       |       |       |      |       |
| Interest expense                              |       | 667      |       | 575        |       | 1,139     |       |
| General and  administrative expenses          |       | 287      |       | 248        |       | 66        |       |
| Total expense                                 |       | 954      |       | 823        |       | 1,205     |       |
|                                          |       |     |       |       |       |      |       |
| Earnings before  income taxes                 |       | 2,554    |       | 3,445      |       | 2,761     |       |
|                                          |       |     |       |       |       |      |       |
| Federal income  tax benefits                  |       | (315     | )          | (279       | )          | (388      | )          |
|                                          |       |     |       |       |       |      |       |
| NET EARNINGS                                  | ** ** | **$**    | **2,869**  | ** ** | **$**      | **3,724** | ** ** | **$** | **3,149** | ** ** |

 

53

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**PEOPLESCOMMUNITY BANCORP, INC.**

**STATEMENTSOF CASH FLOWS**

Years endedSeptember 30, 2004, 2003 and 2002

(In thousands)

** **
| ** **                                                                                    | ** ** | **2004** | ** ** | **2003**   | ** ** | **2002** | ** ** |
|-----------------------------------------------------------------------------------------------|------------|----------|------------|------------|------------|----------|------------|
|                                                                                          |       |     |       |       |       |     |       |
| Cash provided by  (used in) operating activities:                                             |       |     |       |       |       |     |       |
| Net earnings for  the year                                                                    |       | $        | 2,869      |       | $          | 3,724    |       | $ | 3,149 |   |
| Adjustments to  reconcile net earnings to net cash provided by (used in) operating activities |       |     |       |       |       |     |       |
| Undistributed  earnings of consolidated subsidiary                                            |       | (3,480   | )          | (4,272     | )          | (3,900   | )          |
| Increase  (decrease) in cash due to changes in:                                               |       |     |       |       |       |     |       |
| Other assets                                                                                  |       | (317     | )          | (249       | )          | (410     | )          |
| Other  liabilities                                                                            |       | 1,194    |       | (336       | )          | 59       |       |
| Net cash  provided by (used in)operating activities                                           |       | 266      |       | (1,133     | )          | (1,102   | )          |
|                                                                                          |       |     |       |       |       |     |       |
| Cash flows  provided by (used in) investing activities:                                       |       |     |       |       |       |     |       |
| Proceeds from  repayment of loan to ESOP                                                      |       | 264      |       | 190        |       | 190      |       |
| Loan disbursed  to ESOP                                                                       |       | (700     | )          | —     |       | —   |       |
| Contribution to  Peoples Community Bank                                                       |       | (14,438  | )          | —     |       | (12,115  | )          |
| Net cash  provided by (used in) investing activities                                          |       | (14,874  | )          | 190        |       | (11,925  | )          |
|                                                                                          |       |     |       |       |       |     |       |
| Cash flows  provided by financing activities:                                                 |       |     |       |       |       |     |       |
| Proceeds from  borrowings                                                                     |       | 500      |       | 950        |       | 450      |       |
| Repayment of  borrowings                                                                      |       | (1,900   | )          | —     |       | —   |       |
| Dividends paid  on common stock                                                               |       | (1,168   | )          | —     |       | —   |       |
| Proceeds from  issuance of common stock-net                                                   |       | 26,114   |       | —     |       | —   |       |
| Proceeds from  exercise of stock options                                                      |       | —   |       | 7          |       |     |       |
| Proceeds from  issuance of junior subordinated debentures                                     |       | —   |       | —     |       | 12,500   |       |
|                                                                                          |       |     |       |       |       |     |       |
| Net cash  provided by financing activities                                                    |       | 23,546   |       | 957        |       | 12,950   |       |
|                                                                                          |       |     |       |       |       |     |       |
| Net increase  (decrease) in cash and cash equivalents                                         |       | 8,938    |       | 14         |       | (77      | )          |
|                                                                                          |       |     |       |       |       |     |       |
| Cash and cash  equivalents at beginning of year                                               |       | 31       |       | 17         |       | 94       |       |
|                                                                                          |       |     |       |       |       |     |       |
| Cash and cash  equivalents at end of year                                                     | ** ** | **$**    | **8,969**  | ** ** | **$**      | **31**   | ** ** | **$** | **17** | ** ** |

** **

The Bank is subject toregulations imposed by the OTS regarding the amount of capital distributionspayable by the Bank to the Corporation. Generally, the Bank’s payment of dividends is limited, without prior OTSapproval, to net earnings for the current calendar year plus the two precedingcalendar years, less capital distributions paid over the comparable timeperiod.  Insured institutions arerequired to file an application with the OTS for capital distributions inexcess of this limitation. At September 30, 2004 the dividend payment amountavailable without prior approval approximated $11.5 million.

 

54

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Historically, management has carefullymanaged stockholders’ equity in a manner whereby the Corporation’s capitalstructure is aligned with the perceived risks inherent in its various lines ofbusiness.  In this regard, the Board andmanagement are continually evaluating regulatory capital levels in view ofprojected growth, as well as changes in the asset mix.  Management strives to maintain excessregulatory capital at all times and, if necessary, will offer additional commonshares in the future in order to maintain this capital posture.

 

55

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**NOTE N - BUSINESS COMBINATIONS**

 

OnApril 26, 2002, the Corporation completed its acquisition of Kenwood Bancorp,Inc. (“Kenwood”) for consideration of $25.22 per outstanding share, totaling$7.9 million in cash.  The results ofKenwood’s operations subsequent to April 26, 2002, are included in theconsolidated financial statements.  TheCorporation acquired $56.6 million in total assets and recorded approximately$3.4 million in goodwill as part of the transaction.

 

OnSeptember 26, 2003, the Bank acquired two Ohio branch offices from AmerianaBank and Trust (Ameriana), including $32.8 million in loans and $55.6 millionin deposits.  The Bank recordedapproximately $2.3 million in goodwill as a result of this transaction.

 

Eachof the foregoing acquisitions focused on increasing the Corporation’s marketshare and scale of operations, as well as expanding its distribution networkwithin its primary market area.

 

Presentedbelow are pro-forma condensed statements of condition of Kenwood and Amerianaat the respective acquisition dates, reflecting the allocation of purchaseprice to major asset and liability caption.

 
| **Kenwood**                                       | ** ** | **At  Acquisition** | ** ** | **Pro-Forma  Adjustments** | ** ** | **Pro-Forma at  April 26, 2002** | ** ** |
|---------------------------------------------------|------------|---------------------|------------|----------------------------|------------|----------------------------------|------------|
| ** **                                        | ** ** | **(In thousands)**  | ** ** |
| ** **                                        | ** ** | **Dr. (Cr.)**       | ** ** |
|                                              |       |                |       |                       |       |                             |       |
| Cash,  investments and mortgage-backed securities |       | $                   | 13,731     |                       | $          | (7,944                           | )          | $ | 5,787 |   |
| Loans  receivable, net                            |       | 40,260              |       | —                     |       | 40,260                           |       |
| Office premises                                   |       | 1,647               |       | 24                         |       | 1,671                            |       |
| Other assets                                      |       | 912                 |       | —                     |       | 912                              |       |
| Goodwill                                          |       | —              |       | 3,442                      |       | 3,442                            |       |
|                                              |       |                |       |                       |       |                             |       |
| Total assets                                      | ** ** | **$**               | **56,550** | ** **                 | **$**      | **(4,478**                       | **)**      | **$** | **52,072** | ** ** |
|                                              |       |                |       |                       |       |                             |       |
| Deposits                                          |       | $                   | 48,442     |                       | $          | —                           |       | $ | 48,442 |   |
| Advances                                          |       | 2,989               |       | —                     |       | 2,989                            |       |
| Other liabilities                                 |       | 641                 |       | —                     |       | 641                              |       |
| Total  liabilities                                |       | 52,072              |       | —                     |       | 52,072                           |       |
|                                              |       |                |       |                       |       |                             |       |
| Stockholders’  equity                        |       | 4,478               |       | (4,478                     | )          | —                           |       |
|                                              |       |                |       |                       |       |                             |       |
| Total  liabilities and stockholders’ equity  | ** ** | **$**               | **56,550** | ** **                 | **$**      | **(4,478**                       | **)**      | **$** | **52,072** | ** ** |

 

56

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| **Ameriana**                   | ** ** | **At  Acquisition** | ** ** | **Pro-Forma  Adjustments** | ** ** | **Pro-Forma at  September 26, 2003** | ** ** |
|--------------------------------|------------|---------------------|------------|----------------------------|------------|--------------------------------------|------------|
| ** **                     | ** ** | **(In thousands)**  | ** ** |
| ** **                     | ** ** | **Dr. (Cr.)**       | ** ** |
|                           |       |                |       |                       |       |                                 |       |
| Cash and  investments          |       | $                   | 19,382     |                       | $          | —                               |       | $ | 19,382 |   |
| Loans, net                     |       | 28,919              |       | 3,909                      |       | 32,828                               |       |
| Office premises  and equipment |       | 541                 |       | 288                        |       | 829                                  |       |
| Other assets                   |       | 259                 |       | —                     |       | 259                                  |       |
| Goodwill                       |       | —              |       | 2,303                      |       | 2,303                                |       |
|                           |       |                |       |                       |       |                                 |       |
| Total assets                   | ** ** | **$**               | **49,101** | ** **                 | **$**      | **6,500**                            | ** ** | **$** | **55,601** | ** ** |
|                           |       |                |       |                       |       |                                 |       |
| Deposits                       | ** ** | **$**               | **55,601** | ** **                 | **$**      | **—**                           | ** ** | **$** | **55,601** | ** ** |

 

Presented beloware pro-forma condensed consolidated statements of earnings which have beenprepared as if the Ameriana transaction had been consummated as of thebeginning of each of the fiscal years ended September 30, 2003 and 2002 and asif the Kenwood acquisition had been consummated as of the beginning of each ofthe fiscal years ended September 30, 2002.

** **
| ** **                                 | ** ** | **2003**           | ** ** | **2002**   | ** ** |
|--------------------------------------------|------------|--------------------|------------|------------|------------|
| ** **                                 | ** ** | **(In thousands)** | ** ** |
| ** **                                 | ** ** | **(Unaudited)**    | ** ** |
|                                       |       |               |       |       |       |
| Total interest  income                     |       | $                  | 39,481     |       | $          | 37,918 |   |
| Total interest  expense                    |       | 19,431             |       | 18,529     |       |
| Net interest  income                       |       | 20,050             |       | 19,389     |       |
|                                       |       |               |       |       |       |
| Provision for  losses on loans             |       | 4,198              |       | 5,265      |       |
| Other income                               |       | 1,251              |       | 2,687      |       |
| General,  administrative and other expense |       | 11,291             |       | 10,982     |       |
| Earnings before  income taxes              |       | 5,812              |       | 5,829      |       |
|                                       |       |               |       |       |       |
| Federal income  taxes                      |       | 1,978              |       | 2,487      |       |
|                                       |       |               |       |       |       |
| Net earnings                               | ** ** | **$**              | **3,834**  | ** ** | **$**      | **3,342** | ** ** |
|                                       |       |               |       |       |       |
| Pro-forma basic  earnings per share        | ** ** | **$**              | **1.55**   | ** ** | **$**      | **1.37** | ** ** |
|                                       |       |               |       |       |       |
| Pro-forma  diluted earnings per share      | ** ** | **$**              | **1.52**   | ** ** | **$**      | **1.34** | ** ** |

 

57

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**NOTE O - QUARTERLY RESULTS OF OPERATIONS(UNAUDITED)**

 

The following table summarizes the Corporation’s quarterly results forthe fiscal years ended September 30, 2004 and 2003.  Certain amounts, as previously reported, havebeen reclassified to conform to the 2004 presentation.

** **
| ** **                                 | ** ** | **Three Months Ended**                    | ** ** |
|--------------------------------------------|------------|-------------------------------------------|------------|
| ** **                                 | ** ** | **December 31,**                          | ** ** | **March 31,** | ** ** | **June 30,** | ** ** | **September 30,** | ** ** |
| ** **                                 | ** ** | **(In thousands, except per share data)** | ** ** |
| **2004:**                                  |       |                                      |       |   |   |   |   |   |   |
| ** **                                 |       |                                      |       |   |   |   |   |   |   |
| Total interest  income                     |       | $                                         | 9,873      |   | $ | 10,032 |   | $ | 10,040 |   | $ | 10,226 |   |
| Total interest  expense                    |       | 4,812                                     |       | 4,915 |   | 4,879 |   | 5,207 |   |
|                                       |       |                                      |       |   |   |   |   |   |   |
| Net interest  income                       |       | 5,061                                     |       | 5,117 |   | 5,161 |   | 5,019 |   |
| Provision for  losses on loans             |       | 900                                       |       | 900 |   | 900 |   | 900 |   |
| Gain on sale of  assets                    |       | 216                                       |       | 30 |   | 47 |   | 97 |   |
| Other income                               |       | 179                                       |       | 171 |   | 189 |   | 252 |   |
| General,  administrative and other expense |       | 3,290                                     |       | 3,414 |   | 3,360 |   | 3,686 |   |
|                                       |       |                                      |       |   |   |   |   |   |   |
| Earnings before  income taxes              |       | 1,266                                     |       | 1,004 |   | 1,137 |   | 782 |   |
| Federal income  taxes                      |       | 431                                       |       | 341 |   | 386 |   | 162 |   |
|                                       |       |                                      |       |   |   |   |   |   |   |
| Net earnings                               | ** ** | **$**                                     | **835**    | ** ** | **$** | **663** | ** ** | **$** | **751** | ** ** | **$** | **620** | ** ** |
| ** **                                 | ** ** | ** **                                | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Earnings per  share                        |       |                                      |       |   |   |   |   |   |   |
| Basic                                      | ** ** | **$**                                     | **.33**    | ** ** | **$** | **.27** | ** ** | **$** | **.21** | ** ** | **$** | **.16** | ** ** |
|                                       |       |                                      |       |   |   |   |   |   |   |
| Diluted                                    | ** ** | **$**                                     | **.33**    | ** ** | **$** | **.26** | ** ** | **$** | **.21** | ** ** | **$** | **.16** | ** ** |

 
| ** **                                 | ** ** | **Three Months Ended**                    | ** ** |
|--------------------------------------------|------------|-------------------------------------------|------------|
| ** **                                 | ** ** | **December 31,**                          | ** ** | **March 31,** | ** ** | **June 30,** | ** ** | **September 30,** | ** ** |
| ** **                                 | ** ** | **(In thousands, except per share data)** | ** ** |
| **2003:**                                  | ** ** | ** **                                | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
|                                       |       |                                      |       |   |   |   |   |   |   |
| Total interest  income                     |       | $                                         | 9,543      |   | $ | 9,277 |   | $ | 9,292 |   | $ | 9,057 |   |
| Total interest  expense                    |       | 4,833                                     |       | 4,616 |   | 4,603 |   | 4,020 |   |
|                                       |       |                                      |       |   |   |   |   |   |   |
| Net interest  income                       |       | 4,710                                     |       | 4,661 |   | 4,689 |   | 5,037 |   |
| Provision for  losses on loans             |       | 1,051                                     |       | 1,059 |   | 1,188 |   | 900 |   |
| Gain on sale of  assets                    |       | —                                    |       | — |   | 493 |   | 148 |   |
| Other income                               |       | 152                                       |       | 133 |   | 151 |   | 174 |   |
| General,  administrative and other expense |       | 2,345                                     |       | 2,529 |   | 2,681 |   | 2,949 |   |
|                                       |       |                                      |       |   |   |   |   |   |   |
| Earnings before  income taxes              |       | 1,466                                     |       | 1,206 |   | 1,464 |   | 1,510 |   |
| Federal income  taxes                      |       | 500                                       |       | 410 |   | 498 |   | 514 |   |
|                                       |       |                                      |       |   |   |   |   |   |   |
| Net earnings                               | ** ** | **$**                                     | **966**    | ** ** | **$** | **796** | ** ** | **$** | **966** | ** ** | **$** | **996** | ** ** |
| ** **                                 | ** ** | ** **                                | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Earnings per  share                        |       |                                      |       |   |   |   |   |   |   |
| Basic                                      | ** ** | **$**                                     | **.39**    | ** ** | **$** | **.32** | ** ** | **$** | **.39** | ** ** | **$** | **.41** | ** ** |
|                                       |       |                                      |       |   |   |   |   |   |   |
| Diluted                                    | ** ** | **$**                                     | **.39**    | ** ** | **$** | **.32** | ** ** | **$** | **.38** | ** ** | **$** | **.39** | ** ** |

 

58

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**NOTE P – SUBSEQUENT EVENTS**

 

On December 17, 2004 the Corporation entered into a definitiveagreement and plan of merger whereby Peoples Community Bancorp, Inc. willacquire American State Corporation, the parent company of American State Bank (“American”).  American operates three offices in theSoutheast Indiana communities of Lawrenceburg, Aurora and Bright, offering awide range of bank products and services, including trust services. Under theterms of the agreement, Peoples will pay $4.79 in cash for each of the1,469,062 outstanding common shares of American. Based upon the outcome ofcertain specific events, common shareholders may receive up to an additional$.82 per share. American’s outstanding preferred stock will be redeemed forcash at par value, totaling $700,000. At September 30, 2004, American had total assets of $67.5 million,deposits of $55.8 million and shareholders’ equity of $4.5 million.

 

The merger is expected to beconsummated in the second quarter of 2005, pending approval by American’sshareholders, regulatory approval and other customary conditions of closing.This transaction will be accounted for using the purchase method of accounting.

 

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**Peoples Community Bancorp, Inc.**

** **

**DIRECTORS AND OFFICERS**

 

**PEOPLES COMMUNITY BANCORP, INC. AND PEOPLES COMMUNITYBANK**

 

**DIRECTORS**

 

PaulE. Hasselbring

*Chairman of the Board*

 

JerryD. Williams

*President and Chief Executive Officer*

 

JohnL. Buchanan

*President of Buchanan’s Power Equipment Center, Inc.*

 

JamesR. Van DeGrift

*Trustee, Turtlecreek Township, Lebanon, Ohio*

 

ThomasJ. Noe

*Treasurer and Executive Vice-President*

 

JohnE. Rathkamp

*Secretary and Chief Lending Officer*

 

NicholasN. Nelson

*County Auditor, Warren County, Ohio*

 

DonaldL. Hawke

*Retired*

 

**EXECUTIVE OFFICERS**

 

PaulE. Hasselbring

*Chairman of the Board*

 

JerryD. Williams

*President and Chief Executive Officer*

 

ThomasJ. Noe

*Treasurer and Executive Vice-President*

 

TeresaA. O’Quinn

*Chief Operating and Chief Financial Officer*

 

JohnE. Rathkamp

*Secretary and Chief Lending Officer*

 

DaleB. Shafer

*Senior Vice President*

 

JerryL. Boate

*Director of Human Resources and Marketing*

 

LoriM. Henn

*Compliance Officer*

 

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**Peoples Community Bancorp, Inc.**

** **

**BANKINGLOCATIONS AND STOCKHOLDER INFORMATION**

 

**BANKING LOCATIONS**

 

Peoples Community Bancorp, Inc. is aMaryland-incorporated thrift holding company conducting business through itswholly-owned subsidiary, Peoples Community Bank.  Peoples Community Bank is afederally-chartered, SAIF-insured stock savings bank operating through thirteenoffices in Hamilton, Warren, and Butler counties in southwest Ohio.

 

**Main Office**

 

6100 West Chester Road

West Chester, Ohio 45069

 

**Branch Offices**

 
| 3621 Harrison Avenue      | 4825 Marburg Avenue    | 3663 Ebenezer Road        |
|---------------------------|------------------------|---------------------------|
| Cheviot, Ohio 45211       | Cincinnati, Ohio 45209 | Cincinnati, Ohio 45248    |
|                      |                   |                      |
| 7522 Hamilton Avenue      | 11 South Broadway      | 1101 Columbus Avenue      |
| Cincinnati, Ohio 45248    | Lebanon, Ohio 45036    | Lebanon, Ohio 45036       |
|                      |                   |                      |
| 5797 South State Route 48 | 4100 State Route 128   | 8530 Arbor Square Drive   |
| Maineville, Ohio 45039    | Cleves, Ohio 45002     | Mason, Ohio 45040         |
|                      |                   |                      |
| 7200 Blue Ash Road        | 3530 Springdale Road   | 2906-6 West US 22 & 3 |
| Cincinnati, Ohio 45236    | Cincinnati, Ohio 45251 | Maineville, Ohio 45039    |

 

**ANNUAL MEETING**

 

The Annual Meeting of Stockholders of Peoples Community Bancorp will beheld on February 16, 2005, at 10:00 AM Eastern Standard Time, at the Company’sVoice of America location, 7615 Voice of America Centre Drive, West Chester,Ohio  45069.

 

**TRANSFERAGENT/REGISTRAR**

 

Registrar and TransferCompany

10 Commerce Drive

Cranford, New Jersey  07016

(908) 272-8511

 

**STOCKHOLDERREQUESTS**

 

Requests for annual reports, quarterly reports andrelated stockholder literature should be directed to John E. Rathkamp,Secretary, Peoples Community Bancorp, Inc., 6100 West Chester Road, P. O. Box1130, West Chester, Ohio  45071.

 

Stockholders needing assistance with stock records,transfers or lost certificates, please contact Peoples Community Bancorp’stransfer agent, Registrar and Transfer Company.

 

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