**SECURITIES AND EXCHANGECOMMISSION**

**Washington, D.C. 20549**

 

**FORM 10-K/A**

 

**(Amendment No. 1)**

 

| **(Mark One)**                                        |
|-------------------------------------------------------|
|                                                  |   |
| **ý**                                            | **Annual report pursuant to Section 13 or 15(d) of the  Securities Exchange Act of 1934** |
|                                                  |   |
| **For the fiscal year ended September 30, 2003** |
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| **OR**                                                |
|                                                  |   |
| **o**                                                 | **Transition report pursuant to Section 13 or 15(d) of  the Securities and Exchange Act of 1934** |
|                                                  |   |
| **Commission File No.: 000-29949**                    |

 

**PEOPLES COMMUNITY BANCORP, INC.**

(Exact Name of Registrant as Specified in Its Charter)

 

| **Maryland**                                                        |   | **31-1686242**                           |
|---------------------------------------------------------------------|--------|------------------------------------------|
| (State or Other Jurisdiction of  Incorporation or Organization)     |   | (I.R.S. Employer  Identification Number) |
|                                                                |   |                                     |
| **6100 West Chester Road, West Chester, Ohio**                      |   | **45069**                                |
| (Address of Principal Executive Offices)                            |   | (Zip Code)                               |
|                                                                |   |                                     |
| **(513) 870-3530**                                                  |
| (Registrant’s Telephone Number, Including Area Code)           |
|                                                                |   |                                     |
| Securities registered under Section 12(b) of the Exchange Act: |
| **Not Applicable**                                                  |
|                                                                |   |                                     |
| Securities registered under Section 12(g) of the Exchange Act: |
|                                                                |   |                                     |
| **Common Stock (par value $.01 per share)**                         |
| (Title of Class)                                                    |

 

Indicateby check mark whether the Registrant: (1) has filed all reports required to befiled by Section 13 or 15(d) of the Exchange Act during the preceding 12months (or for such shorter period that the Registrant was required to filesuch reports), and (2) has been subject to such filing requirements for thepast 90 days.  Yes  ý    No o

 

Indicateby check mark if disclosure of delinquent filers pursuant to Item 405 ofRegulation S-K is not contained herein, and will not be contained, to the bestof Registrant’s knowledge, in definitive proxy or information statementsincorporated by reference in Part III of this Form 10-K or any amendment tothis Form 10-K.  ý

 

Indicate by check mark whether the registrant is an accelerated filer(as defined in Exchange Act Rule 12b-2)

Yes  o    No  ý

 

As of December 22, 2003, the aggregate value of the 2,080,844shares of Common Stock of the Registrant issued and outstanding on such date,which excludes 441,244 shares held by all directors and executives officers ofthe Registrant and the Registrant’s Employee Stock Ownership Plan (“ESOP”) as agroup, was approximately $44.7 million. This figure is based on the closing sales price of $21.50 per share ofthe Registrant’s Common Stock on December 22, 2003.  Although directors and executive officersand the ESOP were assumed to be “affiliates” of the Registrant for purposes ofthis calculation, the classification is not to be interpreted as an admissionof such status.

 

Numberof shares of Common Stock outstanding as of December 22, 2003:  **2,522,088**

 

 

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**Explanatory Note**

 

                This Amendment No. 1 on Form 10-K/A amendsItems 1, 7, 8 and 15 of the Annual Report on Form 10-K of Peoples CommunityBancorp, Inc. (the “Company”) for the fiscal year ended September 30, 2003,which was originally filed on December 29, 2003 (“Original Filing”).  This amendment does not otherwise updateinformation in the Original Filing to reflect facts or events occurringsubsequent to the date of the Original Filing.

 

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**PART I**

 

**Item 1. Business**

 

**General**

 

Peoples Community Bancorp, Inc. (“Peoples” or the “Company”) wasorganized in December 1999 at the direction of the Board of Directors ofThe People’s Building, Loan and Savings Company, presently Peoples CommunityBank, (the “Bank”) for the purpose of holding all of the capital stock of theBank and in order to facilitate the conversion of the Bank from anOhio-chartered mutual savings and loan association to a federally-charteredstock savings bank (the “Conversion”). (Unless the context otherwise requires, reference to Peoples includesthe Bank).  Peoples is a unitary savingsand loan holding company whose assets consist primarily of the outstandingshares of common stock of the Bank, investments made with the portion of thenet proceeds from the issuance of Peoples shares to the public (the “Offering”)retained by Peoples and Peoples’ loan to the employee stock ownership plan (the“ESOP”).  Peoples has no significantliabilities other than junior subordinated debentures issued in fiscal2002.  The management of Peoples and theBank are substantially identical and Peoples neither owns nor leases anyproperty but instead uses the premises, equipment and furniture of the Bank.The Bank is a federally-chartered stock savings bank that was originallyorganized in 1889.  The Bank conductsits business from thirteen offices in Hamilton, Warren, and Butler Counties inOhio.  The Bank is primarily engaged inattracting deposits from the general public and using those funds to originateloans and invest in securities.  TheBank’s primary lending emphasis has been, and continues to be, loans secured byfirst liens on single-family (one- to-four units) residential propertieslocated in Hamilton, Warren and Butler Counties in Ohio.  However, over the past three fiscal years,the Bank has placed an increasing emphasis on multi-family residential loans,nonresidential real estate and land loans, construction loans, commercial loansand consumer loans.  As a result, as apercentage of the total loan portfolio, single-family residential loans havedecreased from 72.7% at September 30, 2000 to 37.1% at September 30,2003, while multi-family residential loans, nonresidential real estate and landloans, construction loans, commercial loans and consumer loans have increasedduring the same time period from 4.3% to 15.3%, 9.7% to 21.1%, 12.8% to 19.7%,0.0% to 4.8% and 0.1% to 1.9%, respectively. At September 30, 2003, Peoples had $738.7 million in total assets,$455.9 million in deposits and $46.7 million of stockholders’ equity.

 

Immediately prior to the Conversion, The Oakley Improved Building andLoan Company, an Ohio-chartered mutual savings and loan association (“Oakley”),merged with and into the Bank (the “Oakley merger”).  No consideration was exchanged in the Oakley merger.  The Oakley merger was accounted for on apooling of interests basis whereby prior year amounts are restated to includethe assets and liabilities of Oakley. Simultaneously with the Conversion, Harvest Home Financial Corporation,an Ohio corporation with its principal place of business in Ohio (“Harvest HomeFinancial”), merged with and into Peoples (the “Harvest Home merger”).  The Harvest Home merger was accounted forusing the purchase method of accounting and as such, prior period amounts arenot restated.  The Conversion, theOakley merger and the Harvest Home merger were interdependent transactions.

 

On March 30, 2001, Peoples Bancorp acquired Market FinancialCorporation for total consideration of $13.8 million in cash and shares ofcommon stock.  Under the terms of theagreement, each share of Market’s common stock was exchanged for a combinationof cash and shares of Peoples Bancorp totaling $13.00 per share.  The acquisition was accounted for using thepurchase method of accounting and, consequently, prior period amounts were notrestated.  As of March 30, 2001, MarketFinancial Corporation had approximately $56.7 million in assets, $50.7 millionin liabilities and $6.0 million in stockholders’ equity.

 

On January 18, 2002, the Bank sold $11.0 million in total loans subjectto the assumption of $9.9 million in total deposits to another financialinstitution pursuant to a Purchase and Assumption Agreement. These assets andliabilities had been assigned to the Bank’s branch office located inBlanchester, Ohio. This transaction reflected the Bank’s exit strategy from theClinton County market area and represented a part of the broader marketingstrategy of concentrating more fully on Butler, Hamilton and Warren counties. Again of $1.5 million was recorded on this transaction in the fiscal year endedSeptember 30, 2002.

 

On April 26, 2002, the Company completed its acquisition of KenwoodBancorp, Inc. for total consideration of $7.9 million in cash.  Kenwood was merged with and into the Companyand Kenwood’s wholly-owned banking subsidiary, Kenwood Savings Bank, became awholly-owned subsidiary of Peoples Bank. The Company acquired $56.6 million in total assets and initially recordedapproximately $3.4 million in goodwill as part of the transaction.

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On July 25, 2003, Peoples Bank sold Kenwood Savings Bank to a Midwestinsurance company for $1.8 million including the transfer of $10.0 million inloans and the assumption of $10.2 million of deposits. This transaction wasconducted in order to maximize the value of the original Kenwood purchasethrough the sale of the Savings Bank’s charter. The Company recorded a gainduring fiscal 2003 of approximately $150,000, with an adjustment to goodwillrelated to the charter totaling $1.65 million.

 

On September 26, 2003, Peoples Bank acquired $32.8 million in loans,$19.7 million in cash and assumed $55.6 million in deposits, along with theacquisition of two branches located in the Deer Park and Landen areas ofGreater Cincinnati. The purchase price was $6.5 million, with approximately$3.9 million of the purchase price assigned as a premium on the loan portfolio,$300,000 assigned to office premises and $2.3 million recorded as goodwill.

 

The Bank is subject to examination and comprehensive regulation by theOffice of Thrift Supervision, which is the Bank’s chartering authority andprimary federal regulator.  The Bank isalso regulated by the Federal Deposit Insurance Corporation (the “FDIC”),administrator of the Savings Association Insurance Fund.  The Bank is also subject to certain reserverequirements established by the Federal Reserve Board (the “FRB”) and is amember of the Federal Home Loan Bank (the “FHLB”) of Cincinnati, which is oneof the 12 regional banks comprising the FHLB System.

 

**Peoples Lending Activities**

 

**General.**  At September 30, 2003, the gross loanportfolio of Peoples totaled $622.0 million, representing approximately 84.2%of total assets at that date. The principal lending activity of Peoples is theorigination of residential and nonresidential real estate loans. AtSeptember 30, 2003, residential loans (including construction loanssecured by residential real estate) amounted to $417.0 million, or 67.1% of thegross loan portfolio.  Nonresidentialreal estate and land loans totaled $131.4 million, or 21.1% of the gross loanportfolio and nonresidential construction loans amounted to $31.8 million, or5.1% of  the gross loan portfolio as ofSeptember 30, 2003.  Further,commercial loans amounted to $30.0 million, or 4.8% of the gross loan portfolioat September 30, 2003 and consumer loans amounted to $11.8 million, or1.9% of the gross loan portfolio at such time. Peoples has placed an increased emphasis on multi-family residentialloans, nonresidential real estate and land loans, construction loans,commercial loans and consumer loans over the last three fiscal years.  The aggregate amount of these loans hasincreased to $391.2 million, or 62.9% of the gross loan portfolio atSeptember 30, 2003, compared to $57.8 million, or 27.3% of the gross loanportfolio at September 30, 2000.

 

The types of loans that Peoples may originate are subject to federaland state laws and regulations. Interest rates charged on loans are affectedprincipally by the demand for such loans and the supply of money available forlending purposes and the rates offered by its competitors. These factors areaffected by general and economic conditions, the monetary policy of the federalgovernment, including the Federal Reserve Board, legislative and tax policies,and governmental budgetary matters.

 

A savingsinstitution generally may not make loans to one borrower and related entitiesin an amount which exceeds 15% of its unimpaired capital and surplus.  However, loans in an amount equal to anadditional 10% of unimpaired capital and surplus may be made to a borrower ifthe loans are fully secured by readily marketable securities.   At September 30, 2003, Peoples’regulatory limit on loans-to-one borrower was $9.7 million.  All of Peoples’ five largest loans or groupsof loans-to-one borrower, amounting to $9.7 million, $9.0 million, $8.6million, $8.6 million and $8.6 million at September 30, were performing inaccordance with their terms at such date. See “Asset Quality - Classified Assets.”

 

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**Loan Portfolio Composition.**  The following table sets forth thecomposition of Peoples’ loans at the dates indicated.

 
|                                    |   | **September 30,** |       |
|-----------------------------------------|--------|------------------------|------------|
|                                    |   | **2003**               |       | **2002** |   | **2001** |   | **2000** |   | **1999** |   |
|                                    |   | **Amount**             | ** ** | **Percent of  Total** | ** ** | **Amount** | ** ** | **Percent of  Total** | ** ** | **Amount** | ** ** | **Percent of  Total** | ** ** | **Amount** | ** ** | **Percent of  Total** | ** ** | **Amount** | ** ** | **Percent of  Total** |   |
|                                    |   |                   |       |   |   |   |   |   |   | **(Dollars  in Thousands)** |   |   |   |   |   |   |   |   |   |
| Mortgage loans:                         |   |                   |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Single-family residential               |   | $                      | 230,775    |   | 41.7 | % | $ | 296,294 |   | 58.8 | % | $ | 242,540 |   | 64.2 | % | $ | 153,627 |   | 78.1 | % | $ | 87,574 |   | 92.6 | % |
| Multi-family residential                |   | 95,459                 |       | 17.2 |   | 56,980 |   | 11.3 |   | 36,487 |   | 9.7 |   | 8,999 |   | 4.6 |   | 1,588 |   | 1.7 |   |
| Nonresidential real estate and land     |   | 131,444                |       | 23.7 |   | 88,029 |   | 17.5 |   | 65,842 |   | 17.4 |   | 20,440 |   | 10.4 |   | 5,935 |   | 6.3 |   |
| Construction loans                      |   | 122,598                |       | 22.1 |   | 90,002 |   | 17.9 |   | 62,982 |   | 16.7 |   | 27,056 |   | 13.8 |   | 3,473 |   | 3.7 |   |
| Total mortgage loans                    |   | 580,276                |       | 104.7 |   | 531,305 |   | 105.5 |   | 407,851 |   | 108.0 |   | 210,122 |   | 106.9 |   | 98,570 |   | 104.3 |   |
|                                    |   |                   |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Commercial loans                        |   | 29,955                 |       | 5.4 |   | 21,280 |   | 4.2 |   | 9,800 |   | 2.6 |   | — |   | — |   | — |   | — |   |
| Consumer loans                          |   | 11,769                 |       | 2.1 |   | 4,265 |   | 0.8 |   | 1,883 |   | 0.5 |   | 1,307 |   | 0.7 |   | 133 |   | 0.1 |   |
| Total loans receivable                  |   | 622,000                |       | 112.2 |   | 556,850 |   | 110.5 |   | 419,534 |   | 111.1 |   | 211,429 |   | 107.6 |   | 98,703 |   | 104.4 |   |
| Less:                                   |   |                   |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Undisbursed portion of loans in process |   | (55,308                | )          | (10.0 | ) | (43,144 | ) | (8.6 | ) | (36,782 | ) | (9.7 | ) | (13,546 | ) | (6.9 | ) | (3,337 | ) | (3.6 | ) |
| Allowance for loan losses               |   | (9,744                 | )          | (1.8 | ) | (7,656 | ) | (1.5 | ) | (3,662 | ) | (1.0 | ) | (762 | ) | (0.4 | ) | (415 | ) | (0.4 | ) |
| Deferred loan fees                      |   | (2,597                 | )          | (0.4 | ) | (2,038 | ) | (0.4 | ) | (1,363 | ) | (0.4 | ) | (636 | ) | (0.3 | ) | (400 | ) | (0.4 | ) |
|                                    |   |                   |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Loans receivable, net                   |   | $                      | 554,351    |   | 100.0 | % | $ | 504,012 |   | 100.0 | % | $ | 377,727 |   | 100.0 | % | $ | 196,485 |   | 100.0 | % | $ | 94,551 |   | 100.0 | % |

 

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**Origination of Loans.**  The lending activities of Peoples aresubject to the written underwriting standards and loan origination proceduresestablished by the Board of Directors and management.  Loan originations are obtained through a variety of sources,including referrals from real estate brokers, builders and existing customers. Writtenloan applications are taken by loan officers. Loan processors obtain or procure credit reports, appraisals and otherdocumentation involved with a loan. Property valuations are performed by independent outside appraisersapproved by the Board of Directors of Peoples.

 

Under the real estate lending policy of Peoples, a title opinion mustbe obtained for each real estate loan. Peoples also requires fire and extended coverage casualty insurance, inorder to protect the properties securing its real estate loans.  Borrowers must also obtain flood insurancepolicies when the property is in a flood hazard area as designated by theDepartment of Housing and Urban Development. Peoples does not require borrowers to advance funds to an escrow accountfor the payment of real estate taxes or hazard insurance premiums.

 

Peoples’ loan approval process is intended to assess the borrower’sability to repay the loan, the viability of the loan and the adequacy of thevalue of the collateral that will secure the loan.  The Board of Directors has granted authority to approve securedloans as follows:  loans up to $500,000must be approved by two senior executive officers; loans between $500,000 and$1.0 million must be approved by three senior officers and loans greater than$1.0 million are approved by the Board of Directors or the executive committeeof the Board of Directors.

 

Unsecured loans up to $500,000 require approval by three seniorexecutive officers and those greater than $500,000 must be approved by theBoard of Directors or the executive committee of the Board of Directors.  The executive committee shall ratify allapprovals and present its report on a monthly basis for the Board of Directorsreview and approval.

 

**Activity in Loans.**  The following table shows the activity inPeoples’ loans during the periods indicated.

 
|                                        |   | **Year Ended  September 30,** |       |
|---------------------------------------------|--------|------------------------------------|------------|
|                                        |   | **2003**                           |       | **2002** | ** ** | **2001** | ** ** | **2000** | ** ** | **1999** | ** ** |
|                                        |   | **(In  Thousands)**                | ** ** |
|                                        |   |                               |       |   |   |   |   |   |   |   |   |
| Total loans held at beginning of period     |   | $                                  | 556,850    |   | $ | 419,534 |   | $ | 211,429 |   | $ | 98,703 |   | $ | 93,303 |   |
| Originations of loans:                      |   |                               |       |   |   |   |   |   |   |   |   |
| Mortgage loans:                             |   |                               |       |   |   |   |   |   |   |   |   |
| Single-family residential (1)               |   | 63,502                             |       | 90,592 |   | 87,272 |   | 51,281 |   | 28,236 |   |
| Multi-family residential                    |   | 50,686                             |       | 28,531 |   | 30,605 |   | 4,886 |   | 484 |   |
| Commercial real estate and land             |   | 30,170                             |       | 39,855 |   | 51,030 |   | 16,519 |   | 2,514 |   |
| Construction                                |   | 101,019                            |       | 72,167 |   | 58,467 |   | — |   | — |   |
| Commercial loans                            |   | 25,852                             |       | 26,656 |   | 12,394 |   | — |   | — |   |
| Consumer loans                              |   | 7,344                              |       | 3,775 |   | 1,344 |   | 1,037 |   | 50 |   |
| Total originations (2)                      |   | 278,573                            |       | 261,576 |   | 241,112 |   | 73,723 |   | 31,284 |   |
|                                        |   |                               |       |   |   |   |   |   |   |   |   |
| Increase due to Harvest Home acquisition    |   | —                             |       | — |   | — |   | 62,334 |   | — |   |
| Increase due to Market acquisition          |   | —                             |       | — |   | 37,476 |   | — |   | — |   |
| Increase due to Kenwood acquisition         |   | —                             |       | 40,326 |   | — |   | — |   | — |   |
| Increase due to Ameriana branch acquisition |   | 32,769                             |       | — |   | — |   | — |   | — |   |
| Total increases                             |   | 311,342                            |       | 301,902 |   | 278,588 |   | 136,057 |   | 31,284 |   |
|                                        |   |                               |       |   |   |   |   |   |   |   |   |
| Transfers to real estate owned              |   | (2,863                             | )          | (620 | ) | (197 | ) | (110 | ) | — |   |
| Charge-offs                                 |   | (2,122                             | )          | (1,547 | ) | — |   | (4 | ) | — |   |
| Other increases (decreases) (3)             |   | 5,879                              |       | (9,212 | ) | 22,285 |   | 10,772 |   | 121 |   |
| Repayments                                  |   | (247,086                           | )          | (153,207 | ) | (92,571 | ) | (33,989 | ) | (26,005 | ) |
| Net activity in loans                       |   | 65,150                             |       | 137,316 |   | 208,105 |   | 112,726 |   | 5,400 |   |
|                                        |   |                               |       |   |   |   |   |   |   |   |   |
| Gross loans held at end of period           |   | $                                  | 622,000    |   | $ | 556,850 |   | $ | 419,534 |   | $ | 211,429 |   | $ | 98,703 |   |

 

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(1)                      Includesconstruction loan originations made during fiscal year 2000 and 1999.

 

(2)                      Undisbursedportions of loans in process totaled $55.3 million, $43.1 million, $36.8million, $13.5 million and $3.3 million at September 30, 2003, 2002, 2001,2000 and 1999 respectively.

 

(3)                      Reflectsloan participations sold of $10.2 million, $6.7 million and $2.7 million infiscal 2003, 2002 and 2001, respectively. Peoples did not sell any loan participations in fiscal 2000 or 1999.   The reduction in total loans resulting fromloan sales in fiscal 2003, 2002 and 2001 were offset (increased) by increases(decreases) in undisbursed loans in process, and other net items totalingapproximately $16.1 million, ($2.5 million), and $25.0 million, respectively.

 

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The significant repayments of $247.1 million and $153.2 million duringfiscal 2003 and 2002, respectively, were primarily due to the refinancingactivity related to single-family residential loans in the low interest rateenvironment during such period.  Thetransfers to real estate owned of $2.9 million during fiscal 2003 werepartially due to a troubled builder of 1-4 family residential real estate, whodeeded five properties back to the bank in lieu of foreclosure.  These properties are being actively marketedwith one property sold in November 2003. Additionally, during fiscal year2003, the Bank continued to foreclose on the residential properties of a nowdefunct builder, with two properties remaining unsold as of September 30,2003.

 

Charge-offs of $2.1 million during fiscal 2003, consisted primarily of$1.8 million in loans secured by commercial real estate, equipment and otherassets.  This loss resulted from theliquidation of assets of a troubled manufacturing company, which was furthercomplicated by environmental issues.

 

Although federal laws and regulations permit savings institutions tooriginate and purchase loans secured by real estate located throughout theUnited States, Peoples generally confines its lending activity to its primarymarket area of Warren, Butler and Hamilton Counties, Ohio.  Subject to its loans-to-one borrowerlimitation, Peoples is permitted to invest without limitation in residentialmortgage loans and up to 400% of its capital in loans secured bynon-residential or commercial real estate. Peoples may also invest in secured and unsecured consumer loans in anamount not exceeding 35% of total assets. This 35% limitation may be exceeded for certain types of consumer loans,such as home equity and property improvement loans secured by residential realproperty.  In addition, Peoples mayinvest up to 10% of its total assets in secured and unsecured loans forcommercial, corporate, business or agricultural purposes.  At September 30, 2003, Peoples waswithin each of the above lending limits.

 

**One- to Four-Family Residential Real EstateLoans.**  Aprimary real estate lending activity of Peoples is the origination of loanssecured by first mortgage liens on one- to four-family residences.  At September 30, 2003, $230.8 million,or 41.7% of the net loan portfolio of Peoples consisted of conventional firstmortgage, one- to four-family residential loans, compared to $296.3 million, or58.8% at September 30, 2002.  The decreaseof $65.5 million, or 22.1%, was due to the refinancing activity in the lowinterest rate environment as well as the use of such excess funds to originatemulti-family residential, nonresidential real estate, land and commercialloans.

 

The loan-to-value ratio, maturity and other provisions of the loansmade by Peoples generally have reflected Peoples’ policy of making less thanthe maximum loan permissible under applicable regulations, in accordance withsound lending practices, market conditions and underwriting standardsestablished by Peoples.  Peoples’lending policies on one- to four-family residential mortgage loans generallylimit the maximum loan-to-value ratio to 80% of the lesser of the appraised valueor purchase price of the property. Residential mortgage loans are amortized ona monthly basis with principal and interest due each month. The loans generallyinclude “due-on-sale” clauses.

 

The residential mortgage loans originated by Peoples consist of fixedrate and adjustable rate loans.  Presently,the single-family fixed-rate residential mortgage loans originated by Peopleshave terms of up to 30 years.  Inaddition, Peoples originates adjustable-rate mortgage loans on which theinterest rate adjusts every one or three years based upon the one-year orthree-year rate on T-bills plus a specified margin. At September 30, 2003,$129.1 million, or 55.9% of our single-family residential loans were adjustablerate and $101.7 million, or 44.1% were fixed-rate.  Although significantly all of Peoples’ single-family loans areoriginated for its portfolio, the single-family residential mortgage loanspresently being originated by Peoples generally conform to Fannie Mae andFreddie Mac requirements and are available for sale in the secondary market.

 

**Multi-family Residential Loans.**  Peoples also originates multi-family (overfour units) residential loans.  Peoples’multi-family loans are primarily secured by apartment buildings.  The multi-family residential mortgage loansof Peoples are underwritten on substantially the same basis as itsnonresidential real estate loans, discussed below, although loan-to-valueratios are limited to 80%.  AtSeptember 30, 2003, Peoples had $95.5 million in multi-family residentialmortgage loans, which amounted to 17.2% of Peoples’ net loan portfolio,compared to $57.0 million, or 11.3% of Peoples’ net loan portfolio atSeptember 30, 2002.  During theyear ended September 30, 2003, Peoples originated $50.7 million of multi-familyresidential loans compared to $38.0 million during fiscal 2002.  Peoples intends to continue its increasedemphasis on this type of lending.

 

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**Nonresidential Real Estate and Land Loans.**  Peoples’ nonresidential real estate and landloan portfolio primarily consists of loans secured by professional offices,small retail centers, warehouses and land for development purposes locatedwithin Peoples’ primary market area. Nonresidential real estate and land loans amounted to $131.4 million, or23.7% of the net loan portfolio at September 30, 2003, with an averageloan balance of approximately $387,000. This compares to $88.0 million, or17.5% at September 30, 2002, with an average loan balance of approximately$304,000.

 

The nonresidential real estate loans of Peoples typically have aloan-to-value ratio of 75% or less and generally have higher interest ratesthan single-family residential mortgage loans. The maximum term of Peoples’nonresidential real estate loans is 25 years.  Decisions to lend are based on the economic viability of theproperty and the creditworthiness of the borrower.  Creditworthiness is determined by considering the character,experience, management and financial strength of the borrower, and the abilityof the property to generate adequate funds to cover both operating expenses anddebt services.  In evaluating whether tomake a nonresidential real estate loan, Peoples places primary emphasis on theratio of net cash flow to debt service on the property and generally requires aratio of cash flow to debt service of at least 120%, computed after deductionfor a vacancy factor and property expenses as Peoples deems appropriate.

 

The land loans of Peoples generally are secured by single-familyresidential lots or undeveloped land being held for residentialdevelopment.  Loans made on undevelopedland have a loan-to-value ratio of 75% or less (on an undeveloped basis) andare amortized over a five-year period or over a 15-year period with a balloonpayment of the remaining principal amount due at five years from the date oforigination.  Land loans secured bysingle-family residential lots are structured similar to undeveloped land witha loan-to-value ratio of 80% or less.

 

Nonresidential real estate lending is generally considered to involve ahigher degree of risk than one- to four-family residential lending. Suchlending typically involves large loan balances concentrated in a singleborrower or groups of related borrowers for rental or business properties. Inaddition, the payment experience on loans secured by income-producingproperties is typically dependent on the success of the operation of therelated project and thus is typically affected by adverse conditions in thereal estate market and in the economy. Peoples generally attempts to mitigatethe risks associated with its nonresidential real estate lending by, amongother things, lending primarily in its market area and using low loan-to-valueratios in the underwriting process.

 

Land development and acquisition loans involve significant additionalrisks when compared with loans on existing residential properties. These loansmay involve larger loan balances to single borrowers, and the paymentexperience may be dependent on the successful development of the land and thesale of the lots. These risks can be significantly impacted by supply anddemand conditions as well as local economic conditions.

 

**Construction Loans. **At September 30, 2003, Peoples hadapproximately $122.6 million, or 22.1% of the net loan portfolio, in constructionloans, compared to $90.0 million, or 17.9% of the total loan portfolio atSeptember 30, 2002.  Of thisamount, $90.8 million, or 74.1%, consisted of residential construction loansand $31.8 million, or 25.9%, consisted of nonresidential construction loans.  The increase in construction loans duringfiscal 2003 was due primarily to increased originations of construction loansto builders.  The construction loans ofPeoples are comprised largely of loans made to builders on a pre-sold basis, aswell as, to a lesser extent, to builders for homes on an unsold or speculativebasis.  Peoples’ construction loans tobuilders are generally made with a term not to exceed twelve months.  Interest-only payments are required duringthe construction period, which is typically twelve months.  Peoples generally limits the number ofunsold homes under construction to its builders. This number is dependent onthe reputation of the builder, the present exposure of the builder, the locationof the property and the financial strength of the builder.  In addition, loans made to borrowers toconstruct their homes are originated at one closing as a construction/permanentloan.

 

Peoples also originates loans for the construction of nonresidentialreal estate such as small office buildings and warehouses.  These loans are typically originated asconstruction/permanent loans with interest only payments during theconstruction period and converting to a permanent loan at the end of theconstruction period.  These loans aregenerally made with a construction term of 12 months.  The loan to value ratio is generally limited to 75% on theseloans on an as completed basis.  AtSeptember 30, 2003, nonresidential construction loans amounted to $31.8million, or 5.7% of the net loan portfolio.

 

Prior to making a commitment to fund a construction loan, Peoplesrequires an appraisal of the property. Peoples’ also requires inspections of each project.  Loan proceeds are then disbursed based on apercentage of completion.

 

8

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Construction lending is generally considered to involve a higher degreeof risk of loss than long-term financing on improved, owner-occupied realestate because of the uncertainties of construction, including the possibilityof costs exceeding the initial estimates and the need to obtain a tenant orpurchaser if the property will not be owner-occupied.  Peoples generally attempts to mitigate the risks associated withconstruction lending by, among other things, lending in its market area, usingconservative underwriting guidelines, and monitoring the construction process.

 

**Commercial Loans.** Peoples’ commercial loans consist primarilyof unsecured lines of credit for working capital purposes, and to a lesserextent, loans secured by business equipment. At September 30, 2003, commercial loans amounted to $30.0 million,or 5.4% of Peoples’ net loan portfolio, compared to $21.3 million, or 4.2% ofthe net loan portfolio at September 30, 2002.

 

**Consumer Loans.** Peoples’ consumer and other loans consist ofloans secured by deposit accounts, automobiles and stock.  At September 30, 2003, consumer andother loans amounted to $11.8 million, or 2.1% of Peoples’ net loan portfolio,compared to $4.3 million, or 0.8% of Peoples’ net loan portfolio as ofSeptember 30, 2002.  The increasein consumer loans was primarily due to the origination of $7.1 million in loanssecured by stock from initial public offerings of several financialinstitutions, as well as the purchase of $1.0 million of consumer loans inconnection with the acquisition of two branch offices from Ameriana Bank andTrust on September 26, 2003.

 

**Loan Origination and Other Fees.**  In addition to interest earned on loans,Peoples receives loan origination fees or “points” for originating loans.  Loan points are a percentage of theprincipal amount of the mortgage loan and are charged to the borrower inconnection with the origination of the loan. In accordance with Statement of Financial Accounting StandardsNo. 91, loan origination fees and certain related direct loan originationcosts are offset, and the resulting net amount is deferred and amortized asinterest income over the contractual life of the related loans as an adjustmentto the yield of such loans. At September 30, 2003, Peoples had $2.6million of deferred loan fees compared to $2.0 million of deferred loan fees atSeptember 30, 2002.

 

**Contractual Principal Repayments and InterestRates.**  Thefollowing table sets forth scheduled contractual amortization of Peoples’ loansat September 30, 2003 as well as the dollar amount of such loans which arescheduled to mature after one year which have fixed or adjustable interestrates.  Demand loans, loans having noschedule of repayments and no stated maturity and overdraft loans arereported as due in one year or less.

 
|                                |   | **Principal  Repayments Contractually Due  in Year(s) Ended September 30,** | ** **  |
|-------------------------------------|--------|----------------------------------------------------------------------------------|-------------|
|                                |   | **2004**                                                                         |        | **2005** | ** ** | **2006** | ** ** | **2007-  2008** | ** ** | **2009-  2014** | ** ** | **2015-  2019** | ** ** | **There-  after** | ** ** | **Total at  September 30,  2003** | ** ** |
|                                |   | **(In  Thousands )**                                                             | ** **  |
|                                |   |                                                                             |        |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Mortgage loans:                     |   |                                                                             |        |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Single-family residential           |   | $                                                                                | 8,047       |   | $ | 7,465 |   | $ | 8,393 |   | $ | 15,964 |   | $ | 81,942 |   | $ | 34,751 |   | $ | 74,213 |   | $ | 230,775 |   |
| Multi-family residential            |   | 2,089                                                                            |        | 1,807 |   | 1,895 |   | 3,950 |   | 16,218 |   | 15,463 |   | 54,037 |   | 95,459 |   |
| Nonresidential real estate and land |   | 30,732                                                                           |        | 26,125 |   | 19,351 |   | 4,500 |   | 18,270 |   | 10,538 |   | 21,928 |   | 131,444 |   |
| Construction loans                  |   | 57,292                                                                           |        | 19,495 |   | 774 |   | 6,385 |   | 6,632 |   | 7,593 |   | 24,427 |   | 122,598 |   |
| Commercial loans                    |   | 24,606                                                                           |        | 3,588 |   | 209 |   | 429 |   | 1,096 |   | 11 |   | 16 |   | 29,955 |   |
| Consumer loans                      |   | 592                                                                              |        | 1,178 |   | 257 |   | 9,642 |   | 100 |   | — |   | — |   | 11,769 |   |
|                                |   |                                                                             |        |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Total (1)                           |   | **$**                                                                            | **123,358** | ** ** | **$** | **59,658** | ** ** | **$** | **30,879** | ** ** | **$** | **40,870** | ** ** | **$** | **124,258** | ** ** | **$** | **68,356** | ** ** | **$** | **174,621** | ** ** | **$** | **622,000** | ** ** |

 

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(1)                      Of the $498.6 million of loan principalpayments contractually due after September 30, 2004, $143.8 million havefixed rates of interest and $354.8 million have adjustable rates of interest.

 

9

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Scheduled contractual maturities of loans do not necessarily reflectthe actual expected term of the loan portfolio. The average life of mortgageloans is substantially less than their average contractual terms because ofprepayments. The average life of mortgage loans tends to increase when currentmortgage loan rates are higher than rates on existing mortgage loans and,conversely, decrease when rates on current mortgage loans are lower thanexisting mortgage loan rates (due to refinancing of adjustable-rate andfixed-rate loans at lower rates). Under the latter circumstance, theweighted-average yield on loans decreases as higher yielding loans are repaidor refinanced at lower rates.

 

**Asset Quality**

 

**General.**  Peoples mails delinquent notices toborrowers when a borrower fails to make a required payment within 15 daysof the date due. Additional notices begin when a loan becomes 30 days pastdue. If a loan becomes 90 days past due, Peoples refers it to an attorneyto commence foreclosure. In most cases, deficiencies are cured promptly. WhilePeoples generally prefers to work with borrowers to resolve such problems,Peoples will institute foreclosure or other collection proceedings whennecessary to minimize any potential loss.

 

Loans are placed on non-accrual status when management believes theprobability of collection of interest is insufficient to warrant furtheraccrual. When a loan is placed on non-accrual status, previously accrued butunpaid interest is deducted from interest income. As a matter of policy,Peoples generally discontinues the accrual of interest income when the loanbecomes 90 days past due as to principal or interest.

 

Real estate acquired by Peoples as a result of foreclosure or bydeed-in-lieu of foreclosure is classified as real estate owned until sold.  Peoples had real estate owned of $1.3million and $97,000 at September 30, 2003 and 2002, respectively. Therewas no real estate owned at September 30, 2001.

 

**Delinquent Loans.**  The following table sets forth informationconcerning delinquent mortgage loans at the dates indicated, in dollar amountsand as a percentage of each category of Peoples’ loan portfolio. The amountspresented represent the total outstanding principal balances of the relatedloans, rather than the actual payment amounts which are past due.

 
|                                |   | **2003  60-89 Days  Delinquent** |   | **At  September 30,  2002  60-89 Days  Delinquent** |   | **2001  60-89 Days  Delinquent** |   |
|-------------------------------------|--------|----------------------------------|--------|----------------------------------------------------------|--------|----------------------------------|--------|
|                                |   | **Amount**                       |   | **Percent  of Loan  Category**                           |   | **Amount**                       |   | **Percent  of Loan  Category** |   | **Amount** |   | **Percent  of Loan  Category** |   |
|                                |   | **(Dollars  in Thousands)**      |   |
|                                |   |                             |   |                                                     |   |                             |   |   |   |   |   |   |   |
| Mortgage loans:                     |   |                             |   |                                                     |   |                             |   |   |   |   |   |   |   |
| Single-family                       |   | $                                | 1,146  |                                                     | .50    | %                                | $      | 3,027 |   | 1.02 | % | $ | 1,904 |   | .79 | % |
| Multi-family                        |   | —                           |   | —                                                   | %      | 112                              |   | .20 | % | — |   | — | % |
| Nonresidential real estate and land |   | 354                              |   | .27                                                      | %      | 198                              |   | .22 | % | 232 |   | .35 | % |
|                                |   |                             |   |                                                     |   |                             |   |   |   |   |   |   |   |
| Total                               |   | $                                | 1,500  |                                                     | .27    | %                                | $      | 3,337 |   | .66 | % | $ | 2,136 |   | .57 | % |

 

10

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**Non-Performing Assets.**  The following table sets forth informationwith respect to non-performing assets identified by Peoples, includingnon-accrual loans, loans more than 90 days past due and still accruinginterest and other real estate owned.

 
|                                                |   | **At  September 30,**  |       |
|-----------------------------------------------------|--------|-----------------------------|------------|
|                                                |   | **2003**                    |       | **2002** | ** ** | **2001** | ** ** | **2000** | ** ** | **1999** | ** ** |
|                                                |   | **(Dollars  in Thousands)** | ** ** |
|                                                |   |                        |       |   |   |   |   |   |   |   |   |
| Loans past due 90 days or more and still  accruing: |   |                        |       |   |   |   |   |   |   |   |   |
| Single-family residential                           |   | $                           | —     |   | $ | — |   | $ | — |   | $ | — |   | $ | 223 |   |
| Nonresidential real estate and land                 |   | —                      |       | — |   | — |   | — |   | 166 |   |
| Total                                               |   | —                      |       | — |   | — |   | — |   | 389 |   |
|                                                |   |                        |       |   |   |   |   |   |   |   |   |
| Non-accrual loans:                                  |   |                        |       |   |   |   |   |   |   |   |   |
| Single-family residential                           |   | 1,752                       |       | 1,274 |   | 783 |   | 1,062 |   | 690 |   |
| Multi-family residential                            |   | 3,557                       |       | 3,217 |   | — |   | 194 |   | — |   |
| Nonresidential real estate and land                 |   | —                      |       | 232 |   | — |   | — |   | — |   |
| Construction loans                                  |   | 1,951                       |       | 2,769 |   | — |   | — |   | — |   |
| Commercial loans                                    |   | —                      |       | — |   | — |   | — |   | — |   |
| Consumer loans                                      |   | 4                           |       | — |   | — |   | — |   | — |   |
| Total non-accruing loans                            |   | 7,264                       |       | 7,492 |   | 783 |   | 1,256 |   | 690 |   |
|                                                |   |                        |       |   |   |   |   |   |   |   |   |
| Total non-performing loans                          |   | 7,264                       |       | 7,492 |   | 783 |   | 1,256 |   | 1,079 |   |
|                                                |   |                        |       |   |   |   |   |   |   |   |   |
| Other real estate owned, net                        |   | 1,293                       |       | 97 |   | — |   | 110 |   | — |   |
|                                                |   |                        |       |   |   |   |   |   |   |   |   |
| Total non-performing assets                         |   | $                           | 8,556      |   | $ | 7,589 |   | $ | 783 |   | $ | 1,366 |   | $ | 1,079 |   |
| Non-performing assets to total assets               |   | 1.16                        | %          | 1.30 | % | 0.19 | % | 0.43 | % | 1.01 | % |
| Non-performing loans to total loans-net             |   | 1.54                        | %          | 1.49 | % | 0.21 | % | 0.64 | % | 1.09 | % |

 

The $967,000 increase in nonperforming assets resulted primarily froman increase of $1.2 million in other real estate owned. During fiscal year2003, the Bank continued to foreclose on the residential properties of a nowdefunct builder, with two properties remaining unsold as of September 30,2003.  Additionally, a financiallytroubled builder of 1-4 family residential real estate, deeded five propertiesback to the bank in lieu of foreclosure. These properties are being actively marketed with one property sold inNovember 2003.

 

If the $8.6 million of non-accruing and nonperforming loans of Peopleshad been current in accordance with their terms during fiscal 2003, the grossincome on such loans would have been approximately $645,000.  A total of approximately $206,000 ofinterest income was actually recorded by Peoples on such loans in the fiscalyear ended September 30, 2003.

 

**Classified Assets.**  Federal regulations require that eachinsured savings institution classify its assets on a regular basis. Inaddition, in connection with examinations of insured institutions, federalexaminers have authority to identify problem assets and, if appropriate,classify them. There are three classifications for problem assets:“substandard,” “doubtful” and “loss.” Substandard assets have one or moredefined weaknesses and are characterized by the distinct possibility that theinsured institution will sustain some loss if the deficiencies are notcorrected. Doubtful assets have the weaknesses of substandard assets with theadditional characteristic that the weaknesses make collection or liquidation infull on the basis of currently existing facts, conditions and valuesquestionable, and there is a higher possibility of loss. An asset classifiedloss is considered uncollectible and of such little value that continuance asan asset of the institution is not warranted. Another category designated“special mention” also must be established and maintained for assets which donot currently expose an insured institution to a sufficient degree of risk towarrant classification as substandard, doubtful or loss.  Assets classified as substandard or doubtfulmay require the institution to establish general allowances for loanlosses.  If an asset or portion thereofis classified loss, the insured institution must either establish specificallowances for loan losses in the amount of 100% of the portion of the assetclassified loss, or charge-off such amount. General loss allowances established to cover possible losses related toassets classified substandard or doubtful may be included in

 

11

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determining an institution’s regulatory capital, while specificvaluation allowances for loan losses do not qualify as regulatory capital.  Federal examiners may disagree with aninsured institution’s classifications and amounts reserved.

 

Peoples’ total classified assets at September 30, 2003 amounted to$14.5 million, of which $11.2 million and $3.3 million were classified assubstandard and special mention, respectively. The largest classified asset at September 30, 2003 consisted of a$3.5 million multi-family loan which was classified as substandard due to itsdelinquent status.  The remaining $11.0million of classified assets at September 30, 2003 consisted ofapproximately $9.1 million of residential real estate loans, $1.2 million offoreclosed real estate, $373,000 of nonresidential real estate and land loans,and $345,000 of commercial loans.

 

**Allowance for Loan Losses.**  The allocation of the allowance for loanlosses based on particular types of loans at September 30, 2003, 2002 and2001 was as follows:

 
|                                |   | **2003**                    |       | **2002**                    |       | **2001**    |       |
|-------------------------------------|--------|-----------------------------|------------|-----------------------------|------------|-------------|------------|
|                                |   | **Balance**                 |       | **Percent of  total loans** | ** ** | **Balance** | ** ** | **Percent of  total loans** | ** ** | **Balance** | ** ** | **Percent of  total loans** | ** ** |
|                                |   | **(Dollars  in Thousands)** | ** ** |
|                                |   |                        |       |                        |       |        |       |   |   |   |   |   |   |
| Single-family residential           |   | $                           | 1,120      |                        | 37.1       | %           | $          | 954 |   | 53.2 | % | $ | 690 |   | 63.7 | % |
| Multi-family residential            |   | 1,342                       |       | 15.4                        |       |        | 1,015      |   | 10.2 |   |   | 469 |   | 9.5 |   |
| Nonresidential real estate and land |   | 1,721                       |       | 21.1                        |       |        | 1,428      |   | 15.8 |   |   | 999 |   | 17.2 |   |
| Construction loans                  |   | 2,192                       |       | 19.7                        |       |        | 1,729      |   | 16.2 |   |   | 281 |   | 6.9 |   |
| Commercial loans                    |   | 3,124                       |       | 4.8                         |       |        | 2,452      |   | 3.8 |   |   | 1,189 |   | 2.3 |   |
| Consumer loans                      |   | 245                         |       | 1.9                         |       |        | 78         |   | .8 |   |   | 34 |   | .4 |   |
|                                |   |                        |       |                        |       |        |       |   |   |   |   |   |   |   |   |
|                                |   | $                           | 9,744      |                        | 100.0      | %           | $          | 7,656 |   | 100.0 | % | $ | 3,662 |   | 100.0 | % |

 

The allowance for loan lossesis maintained by management at a level considered sufficient to cover estimatedlosses inherent in the existing portfolio based on prior loan loss experience,known and probable risks in the portfolio, adverse situations that may affectthe borrower’s ability to repay, the estimated value of any underlyingcollateral, general economic conditions, and other factors and estimates whichare subject to change over time.

 

Loans acquired through theacquisition of Harvest Home, Market and Kenwood were determined by managementto have adequate allowances at the time of acquisition.  The loan loss allowances of Harvest Home,Market, and Kenwood totaling $195,000, $451,000 and $267,000, respectively,were added to Peoples’ allowance. Peoples did not record additional provisionsfor these loans unless deterioration of the credit quality was subsequentlynoted through Peoples normal credit review policies.  Peoples continues to increase its allowance for loan losses dueto an increase in the volume of loans, as well as change in the mix of the loanportfolio and increase in the level of charge-offs, impaired loans andnonperforming loans.

 

A quarterly analysis of theallowance for loan loss requirements includes general allocations based on thetype of collateral securing the loan. In the analysis, loans determined to have a higher risk will have higherallowance requirements.  Unfundedcommitments are allocated the same allowance requirements as their fundedcounterparts.  Additional allowancerequirements are allocated to criticized assets, based on the classified statuson the loan.  For example, loansclassified substandard require higher loan loss allowances as compared to loansclassified special mention.  No specialallowances are provided for concentration of loans to one borrower, unlessmanagement becomes aware of a potential problem with collectibility.  Allocations of the allowance may be made forspecific loans, but the entire allowance is available for any loan that shouldbe charged-off.

 

Peoples increased its allowancefor loan losses in fiscal 2003 by recording a $4.2 million provision for losseson loans due to an increase in the volume of loans, as well as changes in thecomposition of the loan portfolio during the year and increases in the level ofcharge-offs, impaired loans and nonperforming loans.  The change in the mix of the loan portfolio during the fiscalyear 2003, resulted in increases to the allowance related to growth inmulti-family residential loans, nonresidential real estate and land loans, constructionloans and unsecured commercial lines of credit, all of which are generallyconsidered to involve a higher degree of risk than single-family owner-occupiedresidential lending.   Peoples intendsto continue to increase its allowance for loan losses as its loan portfolioincreases and will adjust its allowance should the composition and relativecredit risk of the portfolio change.  While management believes that it determines the size of the allowancebased on the best information available at the time, the allowance will need tobe adjusted as circumstances change and assumptions are updated.  Future adjustments to the allowance couldsignificantly affect net earnings.

 

12

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The following table sets forth the activity in Peoples’ allowance forloan losses during the periods indicated.

 
|                                                                     |   | **Year Ended  September 30,** |       |
|--------------------------------------------------------------------------|--------|------------------------------------|------------|
|                                                                     |   | **2003**                           |       | **2002** | ** ** | **2001** | ** ** | **2000** | ** ** | **1999** | ** ** |
|                                                                     |   | **(Dollars  in Thousands)**        | ** ** |
|                                                                     |   |                               |       |   |   |   |   |   |   |   |   |
| Allowance at beginning of period                                         |   | $                                  | 7,656      |   | $ | 3,662 |   | $ | 762 |   | $ | 415 |   | $ | 240 |   |
| Increase due to Harvest Home Financial  acquisition                      |   | —                             |       | — |   | — |   | 195 |   | — |   |
| Increase due to Market acquisition                                       |   | —                             |       | — |   | 451 |   | — |   | — |   |
| Increase due to Kenwood acquisition                                      |   | —                             |       | 276 |   | — |   | — |   | — |   |
| Provision for losses on loans                                            |   | 4,198                              |       | 5,265 |   | 2,449 |   | 156 |   | 175 |   |
| Charge-offs:                                                             |   |                               |       |   |   |   |   |   |   |   |   |
| Single-family residential                                                |   | (97                                | )          | — |   | — |   | (4 | ) | — |   |
| Multi-family residential                                                 |   | —                             |       | — |   | — |   | — |   | — |   |
| Nonresidential real estate and land                                      |   | (1,097                             | )          | — |   | — |   | — |   | — |   |
| Construction                                                             |   | (62                                | )          | — |   | — |   | — |   | — |   |
| Commercial                                                               |   | (866                               | )          | (1,547 | ) | — |   | — |   | — |   |
| Consumer and other loans                                                 |   | —                             |       | — |   | — |   | — |   | — |   |
| Total charge-offs                                                        |   | (2,122                             | )          | (1,547 | ) | — |   | (4 | ) | — |   |
|                                                                     |   |                               |       |   |   |   |   |   |   |   |   |
| Recoveries:                                                              |   |                               |       |   |   |   |   |   |   |   |   |
| Single-family residential                                                |   | 12                                 |       | — |   | — |   | — |   | — |   |
| Multi-family residential                                                 |   | —                             |       | — |   | — |   | — |   | — |   |
| Nonresidential real estate and land                                      |   | —                             |       | — |   | — |   | — |   | — |   |
| Construction                                                             |   | —                             |       | — |   | — |   | — |   | — |   |
| Commercial                                                               |   | —                             |       | — |   | — |   | — |   | — |   |
| Consumer and other loans                                                 |   | —                             |       | — |   | — |   | — |   | — |   |
| Total recoveries                                                         |   | 12                                 |       | — |   | — |   | — |   | — |   |
|                                                                     |   |                               |       |   |   |   |   |   |   |   |   |
| Net loans charged-off to allowance for loan  losses                      |   | (2,110                             | )          | (1,547 | ) | — |   | (4 | ) | — |   |
|                                                                     |   |                               |       |   |   |   |   |   |   |   |   |
| Allowance at end of period                                               |   | $                                  | 9,744      |   | $ | 7,656 |   | $ | 3,662 |   | $ | 762 |   | $ | 415 |   |
|                                                                     |   |                               |       |   |   |   |   |   |   |   |   |
| Allowance for loan losses to total  nonperforming loans at end of period |   | 134.15                             | %          | 102.19 | % | 467.69 | % | 60.67 | % | 38.46 | % |
|                                                                     |   |                               |       |   |   |   |   |   |   |   |   |
| Allowance for loan losses to total loans at  end of period               |   | 1.57                               | %          | 1.37 | % | 0.87 | % | 0.36 | % | 0.42 | % |

 

**Investment Securities**

 

Peoples has authority to invest in various types of securities,including mortgage-backed securities, United States Treasury obligations,securities of various federal agencies and of state and municipal governments,certificates of deposit at federally-insured banks and savings institutions,certain bankers’ acceptances and federal funds.  Each significant purchase of an investment security is approvedby the Board of Directors.

 

13

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The following table sets forth information regarding the carrying valueand fair value of Peoples’ securities at the dates indicated.

 
|                         |   | **September 30,** |       |
|------------------------------|--------|------------------------|------------|
|                         |   | **2003**               | ** ** | **2002** | ** ** | **2001** | ** ** |
|                         |   | **Amortized  Cost**    |       | **Fair  Value** | ** ** | **Amortized  Cost** | ** ** | **Fair  Value** | ** ** | **Amortized  Cost** | ** ** | **Fair  Value** | ** ** |
|                         |   | **(In  Thousands)**    | ** ** |
|                         |   |                   |       |   |   |   |   |   |   |   |   |   |   |
| Available for sale:          |   |                   |       |   |   |   |   |   |   |   |   |   |   |
| Mortgage-backed securities   |   | $                      | 134,598    |   | $ | 133,828 |   | $ | 18,479 |   | $ | 18,763 |   | $ | — |   | $ | — |   |
| FHLMC stock                  |   | 1,391                  |       | 1,123 |   | 1,391 |   | 1,199 |   | 1,391 |   | 1,364 |   |
| Mutual funds                 |   | 1,039                  |       | 1,033 |   | — |   | — |   | — |   | — |   |
| Other equity securities      |   | —                 |       | — |   | 29 |   | 32 |   | — |   | — |   |
|                         |   |                   |       |   |   |   |   |   |   |   |   |   |   |
| Total                        |   | $                      | 137,028    |   | $ | 135,984 |   | $ | 19,899 |   | $ | 19,994 |   | $ | 1,391 |   | $ | 1,364 |   |
|                         |   |                   |       |   |   |   |   |   |   |   |   |   |   |
| Required investment:         |   |                   |       |   |   |   |   |   |   |   |   |   |   |
| Federal Home Loan Bank stock |   | $                      | 10,221     |   | $ | 10,221 |   | $ | 9,907 |   | $ | 9,907 |   | $ | 7,880 |   | $ | 7,880 |   |

 

The following table sets forth the activity in Peoples’ aggregatesecurities portfolio during the periods indicated.

 
|                                                                      |   | **Year Ended  September 30,** |       |
|---------------------------------------------------------------------------|--------|------------------------------------|------------|
|                                                                      |   | **2003**                           |       | **2002** | ** ** | **2001** | ** ** |
|                                                                      |   | **(In  Thousands)**                | ** ** |
|                                                                      |   |                               |       |   |   |   |   |
| Securities at beginning of period                                         |   | $                                  | 29,901     |   | $ | 9,244 |   | $ | 109,113 |   |
| Purchases (1)                                                             |   | 209,532                            |       | 21,664 |   | 528 |   |
| Sales of available for sale securities                                    |   | (67,996                            | )          | (3,523 | ) | (71,181 | ) |
| Amortization of premiums and discounts                                    |   | (1,058                             | )          | (264 | ) | 436 |   |
| Repayments, prepayments and maturities                                    |   | (23,032                            | )          | (1,730 | ) | (37,112 | ) |
| Securities acquired through acquisition –  net                       |   | —                             |       | 4,386 |   | 9,589 |   |
| Increase (decrease) in unrealized gains on  available-for-sale securities |   | (1,142                             | )          | 124 |   | (2,129 | ) |
|                                                                      |   |                               |       |   |   |   |   |
| Securities at end of period (2)                                           |   | $                                  | 146,205    |   | $ | 29,901 |   | $ | 9,244 |   |

 

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(1)                                  Includesincreases in Federal Home Loan Bank stock and mutual funds from purchases anddividends.

 

(2)                                  AtSeptember 30, 2003 and 2002, $133.8 million or 91.5%, and $18.8 million or62.8%, respectively, of Peoples’ securities portfolio consisted of adjustable-ratesecurities.  At September 30, 2001,Peoples had no adjustable-rate securities.

 

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The following table sets forth certain information regarding thematurities of Peoples’ mortgage-backed securities at September 30, 2003.

 
|                       |   | **Contractually  Maturing** |       |
|----------------------------|--------|-----------------------------|------------|
|                       |   | **Under 1  Year**           | ** ** | **Weighted  Average  Yield** | ** ** | **1-5  Years** | ** ** | **Weighted  Average  Yield** | ** ** | **6-10  Years** | ** ** | **Weighted  Average  Yield** | ** ** | **Over 10  Years** | ** ** | **Weighted  Average  Yield** | ** ** |
|                       |   | **(Dollars  in Thousands)** | ** ** |
|                       |   |                        |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Mortgage-backed securities |   | $                           | —     |   | — | % | $ | — |   | — | % | $ | — |   | — | % | $ | 133,828 |   | 2.92 | % |
|                            |        |                             |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

Mortgage-backed securities represent a participation interest in a poolof one- to four-family or multi-family mortgages.  The mortgage originators use intermediaries (generally U.S.Government agencies and government-sponsored enterprises) to pool and repackagethe participation interests in the form of securities, with investors receivingthe principal and interest payments on the mortgages.  Such U.S. Government agencies and government-sponsoredenterprises guarantee the payment of principal and interest to investors.

 

Mortgage-backed securities are typically issued with stated principalamounts, and the securities are backed by pools of mortgages that have loanswith interest rates that are within a range and have varying maturities.  The underlying pool of mortgages, i.e.,fixed-rate or adjustable-rate, as well as prepayment risk, are passed on to thecertificate holder.  The life of amortgage-backed pass-through security approximates the life of the underlyingmortgages.

 

The mortgage-backed securities of Peoples may consist of GovernmentNational Mortgage Association (“Ginnie Mae”), Federal Home Loan MortgageCorporation (“FHLMC”) and Federal National Mortgage Association (“FNMA”)securities.  Ginnie Mae is a governmentagency within the Department of Housing and Urban Development which is intendedto help finance government-assisted housing programs.  Ginnie Mae securities are backed by loans insured by the FederalHousing Administration, or guaranteed by the Veterans Administration, and thetimely payment of principal and interest on Ginnie Mae securities areguaranteed by Ginnie Mae and backed by the full faith and credit of the U.S.Government.

 

Mortgage-backed securities generally yield less than the loans whichunderlie such securities because of their payment guarantees or creditenhancements which offer nominal credit risk. In addition, mortgage-backedsecurities are more liquid than individual mortgage loans and may be used tocollateralize borrowings or other obligations of Peoples.  At September 30, 2003, Peoples hadmortgage-backed securities with a fair value totaling $133.8 million.

 

During fiscal year 2003, management purchased $208.1 million inadjustable-rate mortgage-backed securities as a tool to manage liquidity andinterest rate risk, as well as to provide interest income with minimal creditrisk, due to the implicit guaranty of government-sponsored agencies.

 

**Sources of Funds**

 

**General.**  Deposits are the primary source of Peoples’funds for lending and other investment purposes. In addition to deposits,principal and interest payments on loans and mortgage-backed securities are asource of funds. Loan repayments are a relatively stable source of funds, whiledeposit inflows and outflows are significantly influenced by general interestrates and money market conditions. Borrowings may also be used on a short-termbasis to compensate for reductions in the availability of funds from othersources and on a longer-term basis for general business purposes.

 

**Deposits.**  Deposits are attracted by Peoplesprincipally from within its primary market area. Deposit account terms vary,with the principal differences being the minimum balance required, the timeperiods the funds must remain on deposit and the interest rate.  Peoples offers traditional passbook savingsaccounts, money market accounts, checking accounts and certificates of deposit.

 

Peoples obtains deposits primarily from residents of southwesternOhio.  Peoples has not soliciteddeposits from outside Ohio or paid fees to brokers to solicit funds fordeposit.

 

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Interest rates paid, maturity terms, service fees and withdrawalpenalties are established on a periodic basis. Management determines the ratesand terms based on rates paid by competitors, the need for funds or liquidity,growth goals and federal and state regulations.

 

The following table sets forth the activity in Peoples’ deposits duringthe periods indicated.

 
|                                               |   | **Year Ended  September 30,** |       |
|----------------------------------------------------|--------|------------------------------------|------------|
|                                               |   | **2003**                           |       | **2002** | ** ** | **2001** | ** ** |
|                                               |   | **(In  Thousands)**                | ** ** |
|                                               |   |                               |       |   |   |   |   |
| Beginning balance                                  |   | $                                  | 369,080    |   | $ | 233,063 |   | $ | 151,353 |   |
|                                               |   |                               |       |   |   |   |   |   |   |   |
| Net increase before interest credited              |   | 76,378                             |       | 125,999 |   | 72,117 |   |
| Interest credited                                  |   | 10,442                             |       | 10,018 |   | 9,593 |   |
|                                               |   |                               |       |   |   |   |   |
| Net increase in deposits (including  acquisitions) |   | 86,820                             |       | 136,017 |   | 81,710 |   |
|                                               |   |                               |       |   |   |   |   |
| Ending balance                                     |   | $                                  | 455,900    |   | $ | 369,080 |   | $ | 233,063 |   |

 

The following table sets forth by various interest rate categories thecertificates of deposit with Peoples at the dates indicated.

 
|           |   | **September 30,** |       |
|----------------|--------|------------------------|------------|
|           |   | **2003**               |       | **2002** | ** ** | **2001** | ** ** |
|           |   | **(In  Thousands)**    | ** ** |
|           |   |                   |       |   |   |   |   |
| 0.00% to 2.99% |   | $                      | 104,180    |   | $ | 69,445 |   | $ | — |   |
| 3.00% to 3.99% |   | 56,216                 |       | 62,981 |   | 2,232 |   |
| 4.00% to 4.99% |   | 48,162                 |       | 53,175 |   | 58,763 |   |
| 5.00% to 6.99% |   | 35,713                 |       | 43,266 |   | 95,008 |   |
| 7.00% to 8.99% |   | 562                    |       | 460 |   | 9,835 |   |
|           |   |                   |       |   |   |   |   |
| Total          |   | $                      | 244,833    |   | $ | 229,327 |   | $ | 165,838 |   |

 

The following table sets forth the amount and remaining maturities ofPeoples’ certificates of deposit at September 30, 2003.

 
|           |   | **Six  Months  And Less** |   | **Over Six  Months  Through  One  Year** |   | **Over One  Year  Through  Two  Years** |   | **Over Two  Years  Through  Three  Years** |   | **Over  Three  Years** |   |
|----------------|--------|---------------------------|--------|------------------------------------------|--------|-----------------------------------------|--------|--------------------------------------------|--------|------------------------|--------|
|           |   | **(In  Thousands)**       |   |
|           |   |                      |   |                                     |   |                                    |   |                                       |   |                   |   |
| 0.00% to 2.99% |   | $                         | 50,157 |                                     | $      | 30,236                                  |   | $                                          | 17,994 |                   | $      | 5,656 |   | $ | 137 |   |
| 3.00% to 3.99% |   | 16,005                    |   | 13,030                                   |   | 6,081                                   |   | 3,036                                      |   | 18,064                 |   |
| 4.00% to 4.99% |   | 2,073                     |   | 3,175                                    |   | 14,124                                  |   | 7,454                                      |   | 21,336                 |   |
| 5.00% to 6.99% |   | 6,671                     |   | 3,432                                    |   | 9,183                                   |   | 4,104                                      |   | 12,323                 |   |
| 7.00% to 8.99% |   | 433                       |   | —                                   |   | 129                                     |   | —                                     |   | —                 |   |
|           |   |                      |   |                                     |   |                                    |   |                                       |   |                   |   |
| Total          |   | $                         | 75,339 |                                     | $      | 49,873                                  |   | $                                          | 47,511 |                   | $      | 20,250 |   | $ | 51,860 |   |

 

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As of September 30, 2003, the aggregate amount of outstandingcertificates of deposit at Peoples, in amounts greater than $100,000, wasapproximately $46.2 million.  Thefollowing table presents the maturity of these certificates of deposit at suchdate.

 
|                            |   | **September 30,  2003** |       |
|---------------------------------|--------|------------------------------|------------|
|                            |   | **(In  Thousands)**          | ** ** |
|                            |   |                         |       |
| 3 months or less                |   | $                            | 6,491      |   |
| Over 3 months through 6 months  |   | 5,196                        |       |
| Over 6 months through 12 months |   | 7,538                        |       |
| Over 12 months                  |   | 26,952                       |       |
|                            |   |                         |       |
|                            |   | $                            | 46,177     |   |

 

The following table sets forth the dollar amount of deposits in varioustypes of deposits offered by Peoples at the dates indicated.

 
|                           |   | **2003**                    | ** ** | **At  September 30,  2002** | ** ** | **2001**   | ** ** |
|--------------------------------|--------|-----------------------------|------------|----------------------------------|------------|------------|------------|
|                           |   | **Amount**                  |       | **Percentage**                   | ** ** | **Amount** | ** ** | **Percentage** | ** ** | **Amount** | ** ** | **Percentage** | ** ** |
|                           |   | **(Dollars  in Thousands)** | ** ** |
|                           |   |                        |       |                             |       |       |       |   |   |   |   |   |   |
| Non-interest checking accounts |   | $                           | 9,266      |                             | 2.03       | %          | $          | 6,075 |   | 1.65 | % | $ | 7,552 |   | 3.24 | % |
| Savings and checking accounts  |   | 164,369                     |       | 36.06                            |       |       | 104,413    |   | 28.29 |   |   | 32,082 |   | 13.77 |   |
| Certificates of deposit        |   | 244,883                     |       | 53.71                            |       |       | 229,327    |   | 62.13 |   |   | 165,838 |   | 71.15 |   |
| Money market accounts          |   | 37,382                      |       | 8.20                             |       |       | 29,265     |   | 7.93 |   |   | 27,591 |   | 11.84 |   |
|                           |   |                        |       |                             |       |       |       |   |   |   |   |   |   |   |   |
| Total                          |   | $                           | 455,900    |                             | 100.00     | %          | $          | 369,080 |   | 100.00 | % | $ | 233,063 |   | 100.00 | % |

 

Peoples attempts to control the flow of deposits by pricing itsaccounts to remain generally competitive with other financial institutions inits market area.

 

**Borrowings.**  Peoples may obtain advances from the FederalHome Loan Bank of Cincinnati upon the security of the common stock Peoples ownsin that bank and certain of its residential mortgage loans and mortgage-backedsecurities, provided certain standards related to creditworthiness have beenmet. These advances are made pursuant to several credit programs, each of whichhas its own interest rate and range of maturities. Federal Home Loan Bankadvances are generally available to meet seasonal and other withdrawals ofdeposit accounts and to permit increased lending.  As of September 30, 2003, Peoples was permitted to borrow upto $302.0 million from the Federal Home Loan Bank of Cincinnati.  At such date, Peoples had $218.5 million ofFederal Home Loan Bank advances.

 

Also, Peoples has a line of credit with another financial institutionfor $10 million.  As ofSeptember 30, 2003, Peoples had drawn $1.4 million on this line ofcredit.  This line of credit matures onMarch 31, 2004.

 

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The following table shows certain information regarding the borrowingsof Peoples at or for the dates indicated:

 
|                                                           |   | **At or for  the Year  Ended September 30,** | ** ** |
|----------------------------------------------------------------|--------|---------------------------------------------------|------------|
|                                                           |   | **2003**                                          |       | **2002** | ** ** | **2001** | ** ** |
|                                                           |   | **(Dollars  in Thousands )**                      | ** ** |
|                                                           |   |                                              |       |   |   |   |   |
| Federal Home Loan Bank advances:                               |   |                                              |       |   |   |   |   |
| Average balance outstanding                                    |   | $                                                 | 173,731    |   | $ | 152,995 |   | $ | 129,923 |   |
| Maximum amount outstanding at any month-end  during the period |   | $                                                 | 218,500    |   | $ | 180,489 |   | $ | 140,000 |   |
| Balance outstanding at end of period                           |   | $                                                 | 218,500    |   | $ | 152,500 |   | $ | 140,000 |   |
| Average interest rate during the period                        |   | 3.59                                              | %          | 2.86 | % | 5.05 | % |
| Weighted-average interest rate at end of  period               |   | 3.08                                              | %          | 3.93 | % | 3.31 | % |
|                                                           |   |                                              |       |   |   |   |   |
| Line of Credit:                                                |   |                                              |       |   |   |   |   |
| Average balance outstanding                                    |   | $                                                 | 946        |   | $ | 113 |   | $ | — |   |
| Maximum amount outstanding at any month-end  during the period |   | $                                                 | 1,400      |   | $ | 450 |   | — |   |
| Balance outstanding at end of period                           |   | $                                                 | 1,400      |   | $ | 450 |   | — |   |
| Average interest rate during the period                        |   | 2.85                                              | %          | 3.55 | % | — |   |
| Weighted-average interest rate at end of  period               |   | 2.62                                              | %          | 3.31 | % | — |   |

 

**Subsidiaries**

 

At September 30, 2003, Peoples did not have any directunconsolidated subsidiaries.

 

**Total Employees**

 

Peoples had 114 full-time employees and 5 part-time employees atSeptember 30, 2003.  None of theseemployees are represented by a collective bargaining agent, and Peoplesbelieves that it enjoys good relations with its personnel.

 

**Competition**

 

Peoples faces significant competition both in attracting deposits andin making loans.  Its most directcompetition for deposits has come historically from commercial banks, creditunions and other savings institutions located in its primary market area,including many large financial institutions which have greater financial andmarketing resources available to them. In addition, it faces significantcompetition for investors’ funds from short-term money market securities,mutual funds and other corporate and government securities.  Peoples does not rely upon any individualgroup or entity for a material portion of its deposits.  The ability of Peoples to attract and retaindeposits depends on its ability to generally provide a rate of return,liquidity and risk comparable to that offered by competing investmentopportunities.

 

Peoples’ competition for real estate loans comes principally frommortgage banking companies, commercial banks, other savings institutions andcredit unions.  It competes for loanoriginations primarily through the interest rates and loan fees it charges, andthe efficiency and quality of services it provides borrowers.  Factors which affect competition includegeneral and local economic conditions, current interest rate levels andvolatility in the mortgage markets. Competition may increase as a result of thecontinuing reduction of restrictions on the interstate operations of financialinstitutions and the anticipated slowing of refinancing activity.

 

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**REGULATION**

 

The following is a summary of certain statutes and regulationsaffecting Peoples and the Bank.  Thissummary is qualified in its entirety by such statutes and regulations.  A change in applicable laws or regulationsmay have a material effect on Peoples, the Bank and the business of Peoples andthe Bank.

 

**General**

 

Financial institutions and their holding companies are extensivelyregulated under federal and state law. Consequently, the growth and earnings performance of Peoples and theBank can be affected not only by management decisions and general economicconditions, but also by the statutes administered by, and the regulations andpolicies of, various governmental regulatory authorities.  Those authorities include, but are notlimited to, the Office of Thrift Supervision, the Federal Reserve Board, theFDIC, the Internal Revenue Service, and state taxing authorities.  The effect of such statutes, regulations andpolicies can be significant, and cannot be predicted with a high degree ofcertainty.

 

Federal and state laws and regulations generally applicable tofinancial institutions and their holding companies regulate, among otherthings, the scope of business, investments, reserves against deposits, capitallevels relative to operations, lending activities and practices, the nature andamount of collateral for loans, the establishment of branches, mergers,consolidations and dividends.  Thesystem of supervision and regulation applicable to Peoples and the Bankestablishes a comprehensive framework for their respective operations and isintended primarily for the protection of the FDIC’s deposit insurance funds,the depositors of the Bank and the public, rather than shareholders of the Bankor Peoples.

 

Federal law and regulations establish supervisory standards applicableto the lending activities of the Bank, including internal controls, creditunderwriting, loan documentation and loan-to-value ratios for loans secured byreal property.

 

**Peoples Community Bancorp**

 

**Holding Company Acquisitions.**  Peoples is a registered savings and loanholding company within the meaning of Section 10 of the Home Owners’ LoanAct, and is subject to Office of Thrift Supervision examination and supervisionas well as certain reporting requirements. Federal law generally prohibits a savings and loan holding company,without prior Office of Thrift Supervision approval, from acquiring theownership or control of any other savings institution or savings and loanholding company, or all, or substantially all, of the assets or more than 5% ofthe voting shares thereof.  Theseprovisions also prohibit, among other things, any director or officer of asavings and loan holding company, or any individual who owns or controls more than25% of the voting shares of such holding company, from acquiring control of anysavings institution not a subsidiary of such savings and loan holding company,unless the acquisition is approved by the Office of Thrift Supervision.

 

**Holding Company Activities.**  Peoples operates as a unitary savings andloan holding company.  The activities ofPeoples and its non-savings institution subsidiaries are restricted toactivities traditionally permitted to multiple savings and loan holdingcompanies and to financial holding companies under newly added provisions ofthe Bank Holding Company Act. Multiple savings and loan holding companies may:

 

•                  furnishor perform management services for a savings association subsidiary of asavings and loan holding company;

 

•                  hold,manage or liquidate assets owned or acquired from a savings associationsubsidiary of a savings and loan holding company;

 

•                  holdor manage properties used or occupied by a savings association subsidiary of asavings and loan holding company;

 

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•                  engagein activities determined by the Federal Reserve to be closely related tobanking and a proper incident thereto; and

 

•                  engagein services and activities previously determined by the Federal Home Loan BankBoard by regulation to be permissible for a multiple savings and loan holdingcompany as of March 5, 1987.

 

The activities financial holding companies may engage in include:

 

•                  lending,exchanging, transferring or investing for others, or safeguarding money orsecurities;

 

•                  insuring,guaranteeing or indemnifying others, issuing annuities, and acting asprincipal, agent or broker for purposes of the foregoing;

 

•                  providingfinancial, investment or economic advisory services, including advising aninvestment company;

 

•                  issuingor selling interests in pooled assets that a bank could hold directly;

 

•                  underwriting,dealing in or making a market in securities; and

 

•                  merchantbanking activities.

 

If the Office of Thrift Supervision determines that there is reasonablecause to believe that the continuation by a savings and loan holding company ofan activity constitutes a serious risk to the financial safety, soundness orstability of its subsidiary savings institution, the Office of ThriftSupervision may impose such restrictions as deemed necessary to address suchrisk. These restrictions include limiting the following:

 

•                  thepayment of dividends by the savings institution;

•                  transactionsbetween the savings institution and its affiliates; and

•                  anyactivities of the savings institution that might create a serious risk that theliabilities of the holding company and its affiliates may be imposed on thesavings institution.

 

Every savings institution subsidiary of a savings and loan holdingcompany is required to give the Office of Thrift Supervision at least30 days’ advance notice of any proposed dividends to be made on itsguaranty, permanent or other non-withdrawable stock, or else such dividend willbe invalid.  See “Peoples Community Bank- Capital Distributions.”

 

**Restrictions on Transactions With Affiliates.**  Transactions between a savings institutionand its “affiliates” are subject to quantitative and qualitative restrictionsunder Sections 23A and 23B of the Federal Reserve Act and Office of Thrift Supervisionregulations. Affiliates of a savings institution generally include, among otherentities, the savings institution’s holding company and companies that arecontrolled by or under common control with the savings institution.  However, most subsidiaries of savingsinstitutions are not considered affiliates for the purposes of these rules.

 

In general, a savings institution or its subsidiaries may engage incertain “covered transactions” with affiliates up to certain limits. Inaddition, a savings institution and its subsidiaries may engage in coveredtransactions and certain other transactions only on terms and undercircumstances that are substantially the same, or at least as favorable to thesavings institution or its subsidiary, as those prevailing at the time forcomparable transactions with nonaffiliated companies. A “covered transaction”is defined to include a loan or extension of credit to an affiliate; a purchaseof investment securities issued by an affiliate; a purchase of assets from an affiliate,with certain exceptions; the acceptance of securities issued by an affiliate ascollateral for a loan or extension of credit to any party; or the issuance of aguarantee, acceptance or letter of credit on behalf of an affiliate. Inaddition, a savings institution may not:

 

•                  makea loan or extension of credit to an affiliate unless the affiliate is engagedonly in activities permissible for bank holding companies;

 

•                  purchaseor invest in securities of an affiliate other than shares of a subsidiary;

 

20

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•                  purchasea low-quality asset from an affiliate; or

 

•                  engagein covered transactions and certain other transactions between a savingsinstitution or its subsidiaries and an affiliate except on terms and conditionsthat are consistent with safe and sound banking practices.

 

With certain exceptions, each loan or extension of credit by a savingsinstitution to an affiliate must be secured by collateral with a market valueranging from 100% to 130% (depending on the type of collateral) of the amountof the loan or extension of credit.

 

**Federal Securities Laws**.  Peoples registered its common stock with theSecurities and Exchange Commission under Section 12(g) of the SecuritiesExchange Act of 1934.  Peoples issubject to the proxy and tender offer rules, insider trading reportingrequirements and restrictions, and certain other requirements under theExchange Act. Pursuant to Office of Thrift Supervision regulations and the Planof Conversion, Peoples has agreed to maintain such registration for a minimumof three years following the conversion in March 2000.

 

**Sarbanes-Oxley Act of 2002.**  On July 30, 2002, the President signedinto law the Sarbanes-Oxley Act of 2002 implementing legislative reforms intendedto address corporate and accounting fraud. In addition to the establishment of a new accounting oversight boardwhich will enforce auditing, quality control and independence standards andwill be funded by fees from all publicly traded companies, the bill restrictsprovision of both auditing and consulting services by accounting firms.  To ensure auditor independence, anynon-audit services being provided to an audit client will require preapprovalby the company’s audit committee members. In addition, the audit partners must be rotated.  The bill requires chief executive officersand chief financial officers, or their equivalent, to certify to the accuracyof periodic reports filed with the SEC, subject to civil and criminal penaltiesif they knowingly or willfully violate this certification requirement.  In addition, under the Act, counsel will berequired to report evidence of a material violation of the securities laws or abreach of fiduciary duty by a company to its chief executive officer or its chieflegal officer, and, if such officer does not appropriately respond, to reportsuch evidence to the audit committee or other similar committee of the board ofdirectors or the board itself.

 

Longer prison terms and increased penalties will also be applied tocorporate executives who violate federal securities laws, the period duringwhich certain types of suits can be brought against a company or its officershas been extended, and bonuses issued to top executives prior to restatement ofa company’s financial statements are now subject to disgorgement if suchrestatement was due to corporate misconduct. Executives are also prohibited from insider trading during retirementplan “blackout” periods, and loans to company executives are restricted.  In addition, a provision directs that civilpenalties levied by the SEC as a result of any judicial or administrativeaction under the Act be deposited to a fund for the benefit of harmedinvestors.  The Federal Accounts forInvestor Restitution (“FAIR”) provision also requires the SEC to developmethods of improving collection rates. The legislation accelerates the time frame for disclosures by publiccompanies, as they must immediately disclose any material changes in theirfinancial condition or operations.  Directorsand executive officers must also provide information for most changes inownership in a company’s securities within two business days of the change.

 

The Act also increases the oversight of, and codifies certainrequirements relating to audit committees of public companies and how theyinteract with the company’s “registered public accounting firm” (“RPAF”).  Audit committee members must be independentand are barred from accepting consulting, advisory or other compensatory feesfrom the issuer.  In addition, companiesmust disclose whether at least one member of the committee is a “financialexpert” (as such term will be defined by the SEC) and if not, why not.  Under the Act, a RPAF is prohibited fromperforming statutorily mandated audit services for a company if such company’schief executive officer, chief financial officer, comptroller, chief accountingofficer or any person serving in equivalent positions has been employed by suchfirm and participated in the audit of such company during the one-year periodpreceding the audit initiation date. The Act also prohibits any officer or director of a company or any otherperson acting under their direction from taking any action to fraudulentlyinfluence, coerce, manipulate or mislead any independent public or certifiedaccountant engaged in the audit of the company’s financial statements for thepurpose of rendering the financial statement’s materially misleading.  The Act also requires the

 

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SEC to prescribe rules requiring inclusion of an internal controlreport and assessment by management in the annual report to stockholders.  The Act requires the RPAF that issues theaudit report to attest to and report on management’s assessment of the company’sinternal controls.  In addition, the Actrequires that each financial report required to be prepared in accordance with(or reconciled to) accounting principles generally accepted in the UnitedStates of America and filed with the SEC reflect all material correctingadjustments that are identified by a RPAF in accordance with accountingprinciples generally accepted in the United States of America and the rules andregulations of the SEC.

 

**Peoples Community Bank**

 

**General.**   The Bank is a federally chartered stocksavings bank.  The Office of ThriftSupervision is the chartering authority and primary federal regulator of theBank. The Office of Thrift Supervision has extensive authority over theoperations of federally chartered savings institutions.  As part of this authority, federallychartered savings institutions are required to file periodic reports with theOffice of Thrift Supervision and are subject to periodic examinations by theOffice of Thrift Supervision and the FDIC. The Bank also is subject to regulation and examination by the FDIC andto requirements established by the Federal Reserve Board.  The investment and lending authority ofsavings institutions are prescribed by federal laws and regulations, and suchinstitutions are prohibited from engaging in any activities not permitted bysuch laws and regulations.  Suchregulation and supervision is primarily intended for the protection ofdepositors and the Savings Association Insurance Fund.

 

The Office of Thrift Supervision’s enforcement authority over allsavings institutions and their holding companies includes, among other things,the ability to assess civil money penalties, to issue cease and desist orremoval orders and to initiate injunctive actions.  In general, these enforcement actions may be initiated forviolations of laws and regulations and unsafe or unsound practices. Otheractions or inactions may provide the basis for enforcement action, includingmisleading or untimely reports filed with the Office of Thrift Supervision.

 

**Insurance of Accounts.**  The deposits of the Bank are insured to themaximum extent permitted by the Savings Association Insurance Fund, which isadministered by the FDIC, and are backed by the full faith and credit of theU.S. Government.  As insurer, the FDIC isauthorized to conduct examinations of, and to require reporting by,FDIC-insured institutions. It also may prohibit any FDIC-insured institutionfrom engaging in any activity the FDIC determines by regulation or order topose a serious threat to the FDIC.  TheFDIC also has the authority to initiate enforcement actions against savingsinstitutions, after giving the Office of Thrift Supervision an opportunity totake such action. Currently, FDIC deposit insurance rates generally range fromzero basis points to 27 basis points, depending on the assessment riskclassification assigned to the depository institution.

 

The FDIC may terminate the deposit insurance of any insured depositoryinstitution, including the Bank, if it determines after a hearing that theinstitution has engaged or is engaging in unsafe or unsound practices, is in anunsafe or unsound condition to continue operations, or has violated anyapplicable law, regulation, order or any condition imposed by an agreement withthe FDIC.  It also may suspend depositinsurance temporarily during the hearing process for the permanent terminationof insurance, if the institution has no tangible capital.  If insurance of accounts is terminated, theaccounts at the institution at the time of the termination, less subsequentwithdrawals, shall continue to be insured for a period of six months to twoyears, as determined by the FDIC. Management is aware of no existing circumstances which would result intermination of the deposit insurance of the Bank.

 

22

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**Regulatory Capital Requirements.**  Federally insured savings institutions arerequired to maintain minimum levels of regulatory capital. The Office of ThriftSupervision has established capital standards applicable to all savingsinstitutions. These standards generally must be as stringent as the comparablecapital requirements imposed on national banks. The Office of ThriftSupervision also is authorized to impose capital requirements in excess ofthese standards on individual institutions on a case-by-case basis.

 

Current Office of Thrift Supervision capital standards require savingsinstitutions to satisfy three different capital requirements. Under thesestandards, savings institutions must maintain “tangible” capital equal to atleast 1.5% of adjusted total assets, “core” capital equal to at least 4.0% ofadjusted total assets and “total” capital (a combination of core and“supplementary” capital) equal to at least 8.0% of “risk-weighted” assets.  Tangible capital generally equals commonstockholders’ equity (including retained earnings) minus intangible assets,with only a limited exception for purchased mortgage servicing rights.  Core capital generally consists of tangiblecapital plus qualifying intangible assets.

 

In determining compliance with the risk-based capital requirement, asavings institution is allowed to include both core capital and supplementarycapital in its total capital, provided that the amount of supplementary capitalincluded does not exceed the savings institution’s core capital. Supplementarycapital generally consists of general allowances for loan losses up to amaximum of 1.25% of risk-weighted assets, together with certain otheritems.  In determining the requiredamount of risk-based capital, total assets, including certain off-balance sheetitems, are multiplied by a risk weight based on the risks inherent in the typeof assets.  The risk weights range from0% for cash and securities issued by the U.S. Government or unconditionallybacked by the full faith and credit of the U.S. Government to 100% for loans(other than qualifying residential loans weighted at 50%) and repossessedassets.

 

Savings institutions must value securities available for sale atamortized cost for regulatory capital purposes. This means that in computingregulatory capital, savings institutions should add back any unrealized lossesand deduct any unrealized gains, net of income taxes, on securities reported asa separate component of generally accepted accounting principles capital.

 

At September 30, 2003, the Bank exceeded all of its regulatorycapital requirements, with tangible, core and risk-based capital ratios of7.5%, 7.5% and 12.1%, respectively.

 

Any savings institution that fails any of the capital requirements issubject to possible enforcement actions by the Office of Thrift Supervision orthe FDIC. Such actions could include a capital directive, a cease and desistorder, civil money penalties, the establishment of restrictions on theinstitution’s operations, termination of federal deposit insurance and theappointment of a conservator or receiver. The Office of Thrift Supervision’scapital regulation provides that such actions, through enforcement proceedingsor otherwise, could require one or more of a variety of corrective actions.

 

**Prompt Corrective Action.**  The following table shows the amount ofcapital associated with the different capital categories set forth in theprompt corrective action regulations.

 
| **Capital Category**           |   | **Total  Risk-Based  Capital** | ** ** | **Tier 1  Risk-Based  Capital** | ** ** | **Tier 1  Leverage  Capital** | ** ** |
|--------------------------------|--------|--------------------------------|------------|---------------------------------|------------|-------------------------------|------------|
|                           |   |                           |       |                            |       |                          |       |
| Well capitalized               |   | 10% or more                    |       | 6% or more                      |       | 5% or more                    |       |
| Adequately capitalized         |   | 8% or more                     |       | 4% or more                      |       | 4% or more                    |       |
| Undercapitalized               |   | Less than 8%                   |       | Less than 4%                    |       | Less than 4%                  |       |
| Significantly undercapitalized |   | Less than 6%                   |       | Less than 3%                    |       | Less than 3%                  |       |

 

In addition, an institution is “critically undercapitalized” if it hasa ratio of tangible equity to total assets that is equal to or less than 2.0%.Under specified circumstances, a federal banking agency may reclassify a wellcapitalized institution as adequately capitalized and may require an adequatelycapitalized institution or an undercapitalized institution to comply withsupervisory actions as if it were in the next lower category (except that theFDIC may not reclassify a significantly undercapitalized institution ascritically undercapitalized).

 

23

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An institution generally must file a written capital restorationplan which meets specified requirements within 45 days of the date thatthe institution receives notice or is deemed to have notice that it isundercapitalized, significantly undercapitalized or criticallyundercapitalized. A federal banking agency must provide the institution withwritten notice of approval or disapproval within 60 days after receiving acapital restoration plan, subject to extensions by the agency. An institutionwhich is required to submit a capital restoration plan must concurrently submita performance guaranty by each company that controls the institution. Inaddition, undercapitalized institutions are subject to various regulatoryrestrictions, and the appropriate federal banking agency also may take anynumber of discretionary supervisory actions.

 

At September 30, 2003, the Bank was deemed a well capitalizedinstitution for purposes of the above regulations and as such is not subject tothe above mentioned restrictions.

 

**Safety and Soundness Guidelines.**  The Office of Thrift Supervision and the otherfederal banking agencies have established guidelines for safety and soundness,addressing operational and managerial standards, as well as compensationmatters for insured financial institutions. Institutions failing to meet thesestandards are required to submit compliance plans to their appropriate federalregulators. The Office of Thrift Supervision and the other agencies have alsoestablished guidelines regarding asset quality and earnings standards forinsured institutions.  The Bank believesthat it is in compliance with these guidelines and standards.

 

**Capital Distributions.**  Office of Thrift Supervision regulationsgovern capital distributions by savings institutions, which include cashdividends, stock repurchases and other transactions charged to the capitalaccount of a savings institution to make capital distributions. A savingsinstitution must file an application for Office of Thrift Supervision approvalof the capital distribution if either (1) the total capital distributionsfor the applicable calendar year exceed the sum of the institution’s retainednet income for that year to date plus the institution’s retained net income forthe preceding two years, (2) the institution would not be at leastadequately capitalized following the distribution, (3) the distributionwould violate any applicable statute, regulation, agreement or OTS-imposedcondition, or (4) the institution is not eligible for expedited treatmentof its filings. If an application is not required to be filed, savingsinstitutions which are a subsidiary of a holding company (as well as certainother institutions) must still file a notice with the Office of ThriftSupervision at least 30 days before the board of directors declares adividend or approves a capital distribution.

 

**Community Reinvestment Act and the FairLending Laws.** Savings institutions have a responsibility under the CommunityReinvestment Act of 1977 and related regulations of the Office of ThriftSupervision to help meet the credit needs of their communities, including low-and moderate-income neighborhoods. In addition, the Equal Credit OpportunityAct and the Fair Housing Act prohibit lenders from discriminating in theirlending practices on the basis of characteristics specified in those statutes.An institution’s failure to comply with the provisions of the CommunityReinvestment Act could, at a minimum, result in regulatory restrictions on itsactivities. Failure to comply with fair lending laws could result inenforcement actions by the Office of Thrift Supervision, as well as otherfederal regulatory agencies, and the Department of Justice.

 

**Qualified Thrift Lender Test.**  All savings institutions are required tomeet a qualified thrift lender test to avoid certain restrictions on theiroperations. A savings institution can comply with the qualified thrift lendertest by either qualifying as a domestic building and loan association asdefined in the Internal Revenue Code or by maintaining at least 65% of itsportfolio assets in certain housing and consumer-related assets such as:

 

•                  loansmade to purchase, refinance, construct, improve or repair domestic residentialhousing;

 

•                  homeequity loans;

 

•                  mostmortgage-backed securities;

 

•                  stockissued by a Federal Home Loan Bank; and

 

•                  director indirect obligations of the FDIC.

 

24

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A savings institution that does not meet the qualified thrift lendertest must either convert to a bank charter or comply with certain restrictionson its operations.

 

At September 30, 2003, the qualified thrift investments of theBank were approximately 82.9% of its portfolio assets.

 

**Federal Home Loan Bank System.**  The Bank is a member of the Federal HomeLoan Bank of Cincinnati, which is one of 12 regional Federal Home Loan Banksthat administers the home financing credit function of savingsinstitutions.  Each Federal Home LoanBank serves as a reserve or central bank for its members within its assignedregion. It is funded primarily from proceeds derived from the sale ofconsolidated obligations of the Federal Home Loan Bank System. It makes loansto members (i.e., advances) in accordance with policies and proceduresestablished by the Board of Directors of the Federal Home Loan Bank.

 

As a member, the Bank is required to purchase and maintain stock in theFederal Home Loan Bank of Cincinnati in an amount equal to at least 1% of itsaggregate unpaid residential mortgage loans or similar obligations at thebeginning of each year. At September 30, 2003, the Bank had $10.2 millionin Federal Home Loan Bank stock, which was in compliance with this requirement.

 

The Federal Home Loan Banks are required to provide funds for theresolution of troubled savings institutions and to contribute to affordablehousing programs through direct loans or interest subsidies on advancestargeted for community investment and low- and moderate-income housingprojects. These contributions have adversely affected the level of Federal HomeLoan Bank dividends paid in the past and could do so in the future. These contributionsalso could have an adverse effect on the value of Federal Home Loan Bank stockin the future.

 

**Federal Reserve System.**  The Federal Reserve Board requires alldepository institutions to maintain reserves against their transaction accounts(primarily NOW and Super NOW checking accounts) and non-personal time deposits.Because required reserves must be maintained in the form of vault cash or anoninterest-bearing account at a Federal Reserve Bank, the effect of thisreserve requirement is to reduce an institution’s earning assets.

 

25

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**TAXATION**

 

**Federal Taxation**

 

**General.**  Peoples and the Bank are subject to thecorporate tax provisions of the Internal Revenue Code, and the Bank is subjectto certain additional provisions which apply to thrifts and other types offinancial institutions. The following discussion of federal taxation isintended only to summarize certain pertinent federal income tax mattersrelevant to the taxation of Peoples and the Bank and is not a comprehensivediscussion of the tax rules applicable to Peoples and the Bank.

 

**Fiscal Year.**  Peoples and the Bank file federal income taxreturns on the basis of a calendar year ending on December 31.

 

**Bad Debt Reserves.**  In 1996, legislation was enacted thatrepealed the reserve method of accounting (including the percentage of taxableincome method) previously used by many savings institutions to calculate theirbad debt reserve for federal income tax purposes. Savings institutions with $500 millionor less in assets may, however, continue to use the experience method.  The Bank must recapture that portion of itsreserve which exceeds the amount that could have been taken under theexperience method for post-1987 tax years. The Bank’s post-1987 excess reserves amounted to approximately $1.2million.  The recapture will occur overa six-year period, which commenced in fiscal 1999. The legislation alsorequires savings institutions to account for bad debts for federal income taxpurposes on the same basis as commercial banks for tax years beginning afterDecember 31, 1995. This change in accounting method and recapture ofexcess bad debt reserves is adequately provided for in the Bank’s deferred taxliability.

 

At September 30, 2003, the federal income tax reserves of the Bankincluded $1.6 million for which no federal income tax has been provided.  Because of these federal income tax reservesand the liquidation account established for the benefit of certain depositorsof the Bank in connection with the recent conversion, the retained earnings ofthe Bank are substantially restricted.

 

**Distributions.**  If Peoples were to distribute cash orproperty to its stockholders, and the distribution was treated as being fromits accumulated bad debt reserves, the distribution would cause Peoples to haveadditional taxable income.  Adistribution is from accumulated bad debt reserves if (a) the reservesexceed the amount that would have been accumulated on the basis of actual lossexperience, and (b) the distribution is a “non-qualifieddistribution.”  A distribution withrespect to its stock is a non-qualified distribution to the extent that, forfederal income tax purposes,

 

•                  itis in redemption of its shares,

 

•                  itis pursuant to a liquidation of the institution, or

 

•                  inthe case of a current distribution, together with all other such distributionsduring the taxable year, it exceeds the institution’s current and post-1951accumulated earnings and profits.

 

The amount of additional taxable income created by a non-qualifieddistribution is an amount that when reduced by the tax attributable to it isequal to the amount of the distribution.

 

26

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**Minimum Tax.**  The Code imposes an alternative minimum taxat a rate of 20%. The alternative minimum tax generally applies to a base ofregular taxable income plus certain tax preferences (“alternative minimumtaxable income”) and is payable to the extent such alternative minimum taxableincome is in excess of an exemption amount. Tax preference items include thefollowing:

 

•                  depreciation,and

 

•                  75%of the excess (if any) of:

 

(1)                                  alternativeminimum taxable income determined without regard to this preference and priorto reduction by net operating losses, over

 

(2)                                  adjustedcurrent earnings as defined in the Code.

 

Peoples has not been subject to the alternative minimum tax or had anysuch amounts available as credits for carry-over.

 

**Capital Gains and CorporateDividends-Received Deduction.**  Corporate net capital gains are taxed at amaximum rate of 35%. Corporations which own 20% or more of the stock of acorporation distributing a dividend may deduct 80% of the dividends received.Corporations which own less than 20% of the stock of a corporation distributinga dividend may deduct 70% of the dividends received. However, a corporationthat receives dividends from a member of the same affiliated group ofcorporations may deduct 100% of the dividends received.

 

**Other Matters.**  Federal legislation is introduced from timeto time that would limit the ability of individuals to deduct interest paid onmortgage loans. Individuals are currently not permitted to deduct interest onconsumer loans. Significant increases in tax rates or further restrictions onthe deductibility of mortgage interest could adversely affect Peoples.

 

Peoples’ federal income tax returns for the tax years ended 2002, 2001and 2000 are open under the statute of limitations and are subject to review bythe IRS.  Peoples has not been auditedby the IRS during the last five years.

 

**State Taxation**

 

**Ohio Taxation.**  Peoples is subject to the Ohio corporationfranchise tax, which is a tax measured by both net earnings and net worth. Therate of tax is the greater of (i) 5.1% on the first $50,000 of computedOhio taxable income and 8.9% of computed Ohio taxable income in excess of$50,000 or (ii) 0.582% times taxable net worth.

 

In computing Peoples’ tax under the net worth method, 100% of theinvestment in the capital stock of the Bank after the conversion may beexcluded, as reflected on the balance sheet, in computing taxable net worth aslong as Peoples owns at least 25% of the issued and outstanding capital stockof the Bank.  The calculation of theexclusion from net worth is based on the ratio of the excludable investment(net of any appreciation or goodwill included in such investment) to totalassets multiplied by the net value of the stock.  As a holding company, Peoples may be entitled to various otherdeductions in computing taxable net worth that are not generally available tooperating companies.

 

A special litter tax is also applicable to all corporations, includingPeoples, subject to the Ohio corporation franchise tax other than “financialinstitutions.” If the franchise tax is paid on the net income basis, the littertax is equal to 0.11% of the first $50,000 of computed Ohio taxable income and0.22% of computed Ohio taxable income in excess of $50,000. If the franchisetax is paid on the net worth basis, the litter tax is equal to 0.014% times taxablenet worth.

 

The Bank is a “financial institution” for State of Ohio tax purposes.As such, it is subject to the Ohio corporate franchise tax on “financialinstitutions,” which is imposed annually at a rate of 1.3% of the Bank’s booknet worth determined in accordance with generally accepted accountingprinciples.  As a “financialinstitution”, the Bank is not subject to any tax based upon net income or netprofits imposed by the State of Ohio.

 

**Maryland Taxation.**  As a Maryland holding company not earningincome in Maryland, Peoples is exempt from Maryland corporate income tax.

 

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**PART II**

 

**Item 7. Management’s Discussion and Analysisof Financial Condition and Results of Operations**

 

**Peoples Community Bancorp, Inc.**

 

**MANAGEMENT’S DISCUSSIONAND ANALYSIS**

**OF FINANCIALCONDITION AND RESULTS OF OPERATIONS**

 

**General**

 

PeoplesBancorp’s profitability depends primarily on net interest income, which is thedifference between interest and dividend income on interest-earning assets,principally loans, mortgage-backed securities, investment securities andinterest-earning deposits in other financial institutions, and interestexpense, principally on interest-bearing deposits and borrowings from theFederal Home Loan Bank of Cincinnati. Net interest income is dependent upon the level of interest rates andthe extent to which such rates are changing. Peoples Bancorp’s profitability also depends, to a lesser extent, on thelevel of other income, the provision for losses on loans, general,administrative and other expenses and federal income taxes.

 

PeoplesBancorp’s operations and profitability are subject to changes in interestrates, applicable statutes and regulations and general economic conditions, aswell as other factors beyond management’s control.

 

On March 29,2000 the following transactions were completed:

 

•                  The OakleyImproved Building and Loan was merged with and into Peoples Bank;

•                  Peoples Bankconverted to a federally chartered stock savings bank and Peoples Bancorp sold1,190,000 shares of its common stock; and

•                  Peoples Bancorpacquired Harvest Home Financial Corporation and its wholly owned subsidiary,Harvest Home Savings Bank.

 

PeoplesBancorp’s consolidated financial statements give effect to the conversion, themerger between Peoples Bank and Oakley using the pooling of interests method ofaccounting and the merger between Peoples Bancorp and Harvest Home Financialusing the purchase method of accounting. In the conversion, Peoples Bancorp issued 1,190,000 shares of commonstock, which resulted in net proceeds of approximately $10.3 million.  In addition, Peoples Bancorp issued 787,733common shares in connection with the acquisition of Harvest Home.

 

On March 30,2001, Peoples Bancorp acquired Market Financial Corporation for totalconsideration of $13.8 million in cash and shares of common stock.  Under the terms of the agreement, each shareof Market’s common stock was exchanged for a combination of cash and shares ofPeoples Bancorp totaling $13.00 per share. The acquisition was accounted for using the purchase method ofaccounting and, consequently, prior period amounts were not restated.  As of March 30, 2001, Market FinancialCorporation had approximately $56.7 million in assets, $50.7 million in liabilitiesand $6.0 million in stockholders’ equity.

 

On January 18,2002, the Bank sold $11.0 million in total loans subject to the assumption of$9.9 million in total deposits to another financial institution pursuant to aPurchase and Assumption Agreement. These assets and liabilities had beenassigned to the Bank’s branch office located in Blanchester, Ohio. Thistransaction reflected the Bank’s exit strategy from the Clinton County marketarea and represented a part of the broader marketing strategy of concentratingmore fully on Butler, Hamilton and Warren counties. A gain of $1.5 million wasrecorded on this transaction in the fiscal year ended September 30, 2002.

 

On April 26,2002, the Company completed its acquisition of Kenwood Bancorp, Inc. for totalconsideration of $7.9 million in cash. Kenwood was merged with and into the Company and Kenwood’s wholly-ownedbanking subsidiary, Kenwood Savings Bank, became a wholly-owned subsidiary ofPeoples Bank.  The Company acquired$56.6 million in total assets and initially recorded approximately $3.4 millionin goodwill as part of the transaction.

 

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On July 25, 2003, Peoples Banksold Kenwood Savings Bank to a Midwest insurance company for $1.8 million includingthe transfer of $10.0 million in loans and the assumption of $10.2 million ofdeposits. This transaction was conducted in order to maximize the value of theoriginal Kenwood purchase through the sale of the Savings Bank’s charter. TheCompany recorded a gain during fiscal 2003 of approximately $150,000, with anadjustment to goodwill related to the charter totaling $1.65 million.

 

On September 26, 2003, PeoplesBank acquired $32.8 million in loans, $19.7 million in cash and assumed $55.6million in deposits, along with the acquisition of two branches located in theDeer Park and Landen areas of Greater Cincinnati. The purchase price was $6.5million, with approximately $3.9 million of the purchase price assigned as apremium on the loan portfolio, $300,000 assigned to office premises and $2.3million recorded as goodwill.

 

In evaluatingand recording acquisitions, the Company’s management consults with investmentbanking professionals who assist in assigning fair values to acquired assetsand liabilities assumed.  Fair values ofinterest-bearing assets are derived by reference to market values forinstruments of similar risk.  The fairvalue of interest-bearing liabilities is similarly derived from market quoteson comparable term liabilities.  Fair valueswith respect to office premises are determined by appraisal or reference torecent appraisals.

 

Additionally,management reviews acquisitions for the possible existence of intangibleassets, such as core deposit intangibles or customer related and locationrelated intangibles.  As a general rule,the intense financial services competition in Hamilton, Warren and Butlercounties creates rate sensitive deposit bases that preclude recognition ofthese types of intangible assets.

 

**CriticalAccounting Policies**

 

The “Management’s Discussionand Analysis of Financial Condition and Results of Operations,” as well asdisclosures found elsewhere in this annual report, are based upon the Company’sconsolidated financial statements, which are prepared in accordance with USGAAP.  The preparation of thesefinancial statements requires management to make estimates and judgments thataffect the reported amounts of assets, liabilities, revenues and expenses.  Several factors are considered indetermining whether or not a policy is critical in the preparation of financialstatements.  These factors include,among other 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 areparticularly susceptible to significant change in the near term relate to thedetermination of the allowance for loan losses and goodwill impairment.  Actual results could differ from thoseestimates.

 

**Allowancefor Loan Losses**. The procedures for detemining the amount of the allowance for loanlosses reflect management’s evaluation of credit risk after consideration ofall information available.  Indeveloping this assessment, management must rely on estimates and exercisejudgment regarding matters where the ultimate outcome is unknown, such aseconomic factors, developments affecting companies in specific industries andissues with respect to single borrowers. Depending on changes in circumstances, future assessments of credit riskmay yield materially different results, which may require an increase or adecrease in the allowance for loan losses.

 

The allowance is regularlyreviewed by management to determine whether the amount is considered adequateto absorb probable losses.  Thisevaluation includes specific loss estimates on certain individually reviewedloans, statistical loss estimates for loan pools that are based on historicalloss experience, and general loss estimates that are based upon the size,quality, and concentration characteristics of the various loan portfolios,adverse situations that may affect a borrower’s ability to repay, and currenteconomic and industry conditions.   Alsoconsidered as part of that judgment is a review of the Bank’s trends indelinquencies and loan losses, as well as trends in delinquencies and lossesfor the region and nationally, and economic factors.

 

**Goodwill**.  The Company has developed procedures to testgoodwill for impairment on an annual basis using September 30 financialdata.  The evaluation of possibleimpairment is outsourced to a third party. This evaluation is based on the analysis set forth below.

 

The test involves assigningtangible assets and liabilities, identified intangible assets and goodwill ofthe Bank (which is the Company’s reporting unit as defined under SFAS No. 142)and comparing the fair value of this reporting unit to its carrying valueincluding goodwill.  The value isdetermined assuming a freely negotiated transaction between a willing buyer anda willing seller, neither being under any compulsion to buy or sell and bothhaving reasonable knowledge of relevant facts. The third party selected by management utilizes the following commonapproaches to valuing business combination transactions involving financial institutionsto derive the fair value of the reporting unit:  (1) the comparable transactions approach which is specificallybased on earnings, book value, assets and deposit premium multiples received inrecent sales of comparable bank franchises; and (2) the discounted cash flow(“DCF”) approach.  The application ofthe valuation techniques takes into account the reporting unit’s operatinghistory, 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 areporting unit exceeds its carrying amount, goodwill of the reporting unit isconsidered not impaired and no second step is required.  If the fair value does not exceed thecarrying amount, a second test is required to measure the amount of goodwillimpairment.  The second test of theoverall goodwill impairment compares the implied fair value of the reportingunit goodwill with the carrying amount of the goodwill.  The impairment loss shall equal the excessof carrying value over fair value.

 

After each testing period, thethird party compiles a summary of the test that is then provided to the auditcommittee for review.

 

**Forward-Looking Statements Are Subject toChange**

 

Certainstatements are made in this document as to what management expects may happenin the future.  These statements usuallycontain the words “believe,” “estimate,” “project,” “expect,” “anticipate,”“intend” or similar expressions. Because these statements look to the future, they are based onmanagement’s current expectations and beliefs. Actual results or events may differ materially from those reflected inthe forward-looking statements. Management’s current expectations and beliefs as to future events aresubject to change at any time, and no assurances can be provided that thefuture events will actually occur.

 

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**Peoples Community Bancorp, Inc.**

 

# **AVERAGE BALANCES, NETINTEREST INCOME AND YIELDS EARNED AND RATES PAID**

 

The following table presentsfor the periods indicated the total dollar amount of interest income fromaverage interest-earning assets and the resultant yields, as well as interestexpense on average interest-bearing liabilities, expressed both in dollars andrates, and the net interest margin.  Allaverage balances are based on monthly balances.  Management does not believe that the monthly averages differsignificantly from the daily average balances.

 
|                                                                      |   | **Year ended  September 30,**     |        |
|---------------------------------------------------------------------------|--------|-----------------------------------|-------------|
|                                                                      |   | **2003**                          |        | **2002** |   | **2001** |   |
|                                                                      |   | **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)(2)                                                  |   | $                                 | 520,647     |   | $ | 34,952 |   | 6.71 | % | $ | 425,318 |   | $ | 32,790 |   | 7.71 | % | $ | 282,425 |   | $ | 22,098 |   | 7.82 | % |
| Mortgage-backed  securities                                               |   | 62,688                            |        | 1,568 |   | 2.50 |   | 12,239 |   | 361 |   | 2.95 |   | 42,195 |   | 2,867 |   | 6.79 |   |
| Investment  securities (3)                                                |   | 12,079                            |        | 479 |   | 3.97 |   | 9,688 |   | 446 |   | 4.60 |   | 12,952 |   | 769 |   | 5.94 |   |
| Interest-earning  deposits                                                |   | 15,089                            |        | 170 |   | 1.13 |   | 6,224 |   | 115 |   | 1.85 |   | 4,594 |   | 163 |   | 3.54 |   |
|                                                                      |   |                              |        |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Total  interest-earning assets                                            |   | 610,503                           |        | 37,169 |   | 6.09 |   | 453,469 |   | 33,712 |   | 7.43 |   | 342,166 |   | 25,897 |   | 7.57 |   |
|                                                                      |   |                              |        |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Non-interest-earning  assets                                              |   | 25,514                            |        |   |   |   |   | 19,949 |   |   |   |   |   | 17,724 |   |   |   |   |   |
|                                                                      |   |                              |        |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Total assets                                                              |   | **$**                             | **636,017** | ** ** |   | ** ** |   |   | **$** | **473,418** |   |   |   |   |   | **$** | **359,890** |   |   |   |   |   |
|                                                                      |   |                              |        |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Interest-bearing  liabilities:                                            |   |                              |        |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Savings and  checking accounts                                            |   | $                                 | 135,640     |   | 2,666 |   | 1.97 |   | $ | 53,741 |   | 1,610 |   | 3.00 |   | $ | 25,344 |   | 879 |   | 3.47 |   |
| Money market  deposit accounts                                            |   | 30,653                            |        | 604 |   | 1.97 |   | 28,252 |   | 776 |   | 2.75 |   | 22,638 |   | 818 |   | 3.61 |   |
| Certificates  of deposit                                                  |   | 223,390                           |        | 7,990 |   | 3.58 |   | 177,229 |   | 8,078 |   | 4.56 |   | 132,774 |   | 7,279 |   | 5.48 |   |
| FHLB  advances and other borrowings                                       |   | 174,677                           |        | 6,263 |   | 3.59 |   | 153,108 |   | 4,384 |   | 2.86 |   | 129,923 |   | 6,567 |   | 5.05 |   |
| Subordinated  debentures                                                  |   | 12,500                            |        | 549 |   | 4.39 |   | 10,417 |   | 750 |   | 7.20 |   | — |   | — |   | — |   |
|                                                                      |   |                              |        |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Total  interest-bearing liabilities                                       |   | 576,860                           |        | 18,072 |   | 3.13 |   | 422,747 |   | 15,598 |   | 3.69 |   | 310,679 |   | 15,543 |   | 5.00 |   |
|                                                                      |   |                              |        |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Non-interest-bearing  liabilities                                         |   | 14,202                            |        |   |   |   |   | 11,735 |   |   |   |   |   | 13,228 |   |   |   |   |   |
|                                                                      |   |                              |        |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Total  liabilities                                                        |   | 591,062                           |        |   |   |   |   | 434,482 |   |   |   |   |   | 323,907 |   |   |   |   |   |
|                                                                      |   |                              |        |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Stockholders’  equity                                                |   | 44,955                            |        |   |   |   |   | 38,936 |   |   |   |   |   | 35,983 |   |   |   |   |   |
|                                                                      |   |                              |        |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Total  liabilities and stockholders’ equity                          |   | **$**                             | **636,017** | ** ** |   | ** ** |   | ** ** | **$** | **473,418** | ** ** |   | ** ** |   | ** ** | **$** | **359,890** | ** ** |   |   |   |   |
|                                                                      |   |                              | ** **  |   | ** ** |   | ** ** |   | ** ** |   | ** ** |   | ** ** |   | ** ** |   |   |   |   |
| Net interest  income                                                      |   |                              | ** **  | **$** | **19,097** | ** ** |   | ** ** |   | ** ** | **$** | **18,114** | ** ** |   | ** ** |   | ** ** | **$** | **10,354** |   |   |   |
|                                                                      |   |                              |        |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Interest  rate spread                                                     |   |                              |        |   |   | **2.96** | **%** |   |   |   |   | **3.74** | **%** |   |   |   |   | **2.57** | % |
|                                                                      |   |                              |        |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Net interest  margin (4)                                                  |   |                              |        |   |   | **3.13** | **%** |   |   |   |   | **3.99** | **%** |   |   |   |   | **3.03** | % |
|                                                                      |   |                              |        |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Average  interest-earning assets to average interest- bearing liabilities |   |                              |        |   |   | **105.83** | **%** |   |   |   |   | **107.27** | **%** |   |   |   |   | **110.13** | % |

 

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(1)                                  Includes non-accruing loans.

 

(2)                                  For all relevant periods, the allowance for loanlosses contemplates the amount of probable losses related to loan commitmentsas well as the probable losses related to loans in the loan portfolio.

 

(3)                                  Includes Federal Home Loan Bank and Federal HomeLoan Mortgage Corp. stock and other equity securities.

 

(4)                                  Equals net interest income divided by averageinterest-earning assets.

 

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**Peoples Community Bancorp, Inc.**

 

**MANAGEMENT’S DISCUSSION AND ANALYSIS**

**OF FINANCIAL CONDITION AND RESULTS OFOPERATIONS**

 

**Rate/VolumeAnalysis**

 

The following table shows the extent to whichchanges in interest rates and changes in volume of interest-related assets and liabilitiesaffected Peoples 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,**    |       |
|------------------------------------|--------|----------------------------------|------------|
|                               |   | **2003 vs.  2002**               |       | **2002 vs.  2001** |   |
|                               |   | **Increase  (decrease)  due to** |       |   |   | **Increase  (decrease)  due to** |   |   |   |
|                               |   | **Rate**                         |       | **Volume** | ** ** | **Total** | ** ** | **Rate** | ** ** | **Volume** | ** ** | **Total** | ** ** |
|                               |   | **(In  thousands)**              | ** ** |
| Interest-earning assets:           |   |                             |       |   |   |   |   |   |   |   |   |   |   |
| Loans receivable                   |   | $                                | (4,253     | ) | $ | 6,415 |   | $ | 2,162 |   | $ | (316 | ) | $ | 11,008 |   | $ | 10,692 |   |
| Mortgage-backed securities         |   | (55                              | )          | 1,262 |   | 1,207 |   | (1,112 | ) | (1,394 | ) | (2,506 | ) |
| Investment securities (1)          |   | (61                              | )          | 94 |   | 33 |   | (152 | ) | (171 | ) | (323 | ) |
| Interest-earning deposits          |   | (45                              | )          | 100 |   | 55 |   | (58 | ) | 10 |   | (48 | ) |
| Total interest-earning assets      |   | (4,414                           | )          | 7,871 |   | 3,457 |   | (1,638 | ) | 9,453 |   | 7,815 |   |
|                               |   |                             |       |   |   |   |   |   |   |   |   |   |   |
| Interest-bearing liabilities:      |   |                             |       |   |   |   |   |   |   |   |   |   |   |
| Savings and checking accounts      |   | (556                             | )          | 1,612 |   | 1,056 |   | (137 | ) | 868 |   | 731 |   |
| Money market deposit accounts      |   | (220                             | )          | 48 |   | (172 | ) | (218 | ) | 176 |   | (42 | ) |
| Certificates of deposit            |   | (1,739                           | )          | 1,651 |   | (88 | ) | (1,331 | ) | 2,130 |   | 799 |   |
| FHLB advances and other borrowings |   | 1,110                            |       | 769 |   | 1,879 |   | (3,206 | ) | 1,023 |   | (2,183 | ) |
| Subordinated debentures            |   | (292                             | )          | 91 |   | (201 | ) | — |   | 750 |   | 750 |   |
| Total interest-bearing liabilities |   | (1,697                           | )          | 4,171 |   | 2,474 |   | (4,892 | ) | 4,947 |   | 55 |   |
|                               |   |                             |       |   |   |   |   |   |   |   |   |   |   |
| Increase in net interest income    |   | **$**                            | **(2,717** | **)** | **$** | **3,700** | ** ** | **$** | **983** | ** ** | **$** | **3,254** | ** ** | **$** | **4,506** | ** ** | **$** | **7,760** | ** ** |

 

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(1)           Includes Federal Home Loan Bank stock and certificates ofdeposit at other institutions.

 

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###### **Discussion of FinancialCondition Changes from September 30, 2002 to September 30, 2003**

 

At September 30, 2003, PeoplesBancorp’s total assets amounted to $738.7 million, an increase of $157.1million, or 27.0%, compared to the $581.6 million total at September 30,2002.  The increase in assets wascomprised primarily of a $50.3 million increase in loans and a $115.1 millionincrease in mortgage-backed securities. The increase in assets was funded bygrowth in deposits of $86.8 million and an increase in advances from theFederal Home Loan Bank and other borrowings totaling $67.0 million.

 

Liquid assets(i.e. cash and interest-bearing deposits) totaled $10.2 million at September30, 2003, a decrease of $16.4 million, or 61.5%, compared to September 30,2002.  Investment securities totaled$2.2 million at September 30, 2003, an increase of $925,000, or 75.1%, overSeptember 30, 2002 levels.

 

Mortgage-backed securitiestotaled $133.8 million at September 30, 2003, an increase of $115.1 millionover September 30, 2002.  The Companypurchased $208.1 million in adjustable rate mortgage-backed securities duringfiscal 2003 as a tool to manage liquidity and interest rate risk, as well as toprovide interest income with minimal credit risk, due to the implicit guaranteeof government sponsored agencies. During fiscal 2003, principal repayments on mortgage-backed securitiestotaled $23.0 million and sales amounted to $68.4 million.  The proceeds from the sale and repayment ofmortgage-backed securities were generally used to fund loan originations duringthe period.

 

Loans receivable totaled $554.4million at September 30, 2003, an increase of $50.3 million, or 10.0%, overSeptember 30, 2002 levels.  The Companyobtained loans totaling $32.8 million in September 2003 through the acquisitionof two branch offices of Ameriana Bank and Trust.  Loan disbursements amounted to $278.6 million during fiscal 2003,which were partially offset by principal repayments of $247.1 million and loanssold totaling $10.2 million.  The overall growth in the loan portfolioduring the year was comprised primarily of $38.5 million in loans secured bymulti-family residential real estate, $32.6 million in construction loans,$43.4 million in loans secured by nonresidential real estate and land, and$16.2 million in commercial and consumer loans.  Over the past three fiscal years, the Bank has placed anincreasing emphasis on multi-family residential loans, nonresidential realestate and land loans, construction loans, unsecured commercial loans andconsumer loans.  As a result, as apercentage of the total loan portfolio, single-family residential loans havedecreased from 72.7% at September 30, 2000 to 37.1% at September 30, 2003,while multi-family residential loans, nonresidential real estate and landloans, construction loans, commercial loans and consumer loans have increasedduring the same time period from 4.3% to 15.3%, 9.7% to 21.1%, 12.8% to 19.7%,0.0% to 4.8% and 0.1% to 1.9%, respectively. Nonresidential real estate lending and unsecured commercial lending aregenerally considered  to involve  a higher degree of risk than residentialreal estate lending due to the relatively larger loan amounts and the effect of general economic conditions on thesuccessful operation of the related business and/or income-producingproperties.  Peoples Bank has endeavoredto reduce such risk by evaluating the credit history and past performance ofthe borrower, the location of the real estate, the quality of the borrowers’management, the debt service ratio, the quality and characteristics of theincome stream generated by the business or the property and appraisalssupporting the property’s valuation, as applicable.

 

The allowance for loan lossestotaled $9.7 million at September 30, 2003, an increase of $2.1 million, or27.3%, compared to September 30, 2002. Loans charged-off amounted to $2.1 million during fiscal 2003 and $4.2million was added through the provision for losses on loans, due primarily tothe overall growth in the loan portfolio from September 30, 2002, as well asthe changes in the composition of the loan portfolio and the level ofcharge-offs and nonperforming loans.

 

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The allowance for loan lossesrepresented 1.57% and 1.37% of total loans at September 30, 2003 and 2002,respectively.  The allowance for loanlosses represented 134.1% and 102.2% of nonperforming loans at September 30,2003 and 2002, respectively. Nonperforming and impaired loans totaled $9.6 million and $7.5 millionat September 30, 2003 and 2002, respectively. Nonperforming multi-familyresidential loans, totaling $3.6 million, or 49.0%, of total nonperformingloans, consisted primarily of a $3.5 million loan in the process offoreclosure.  Nonperforming construction loans totaling$2.0 million, or 26.9% of total nonperforming loans, consisted primarily of aseries of condominium loans to a financially troubled builder aggregating $1.8million.  The Bank is closely monitoringthe construction progress and the builder has commitments to sell fourindividual units.  Management hasconsidered these loan concentrations as a part of its overall evaluation of theadequacy of the Bank’s allowance for loan losses.  Although management believes that its allowance for loan lossesat September 30, 2003 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.

 

Deposits totaled $455.9 millionat September 30, 2003, an increase of $86.8 million, or 23.5%, over the totalat September 30, 2002.  Total demand,transaction and savings deposits increased to $211.0 million at September 30,2003, from $139.8 million at September 30, 2002, while total certificates ofdeposit increased from $229.3 million to $244.9 million, respectively.  The increase in deposits was primarilyattributable to the addition of $55.6 million in deposits in connection withthe acquisition of two branch offices purchased from Ameriana Bank and Trust inSeptember 2003, as well as management’s efforts to maintain deposit growth throughmarketing strategies.  Proceeds fromdeposit growth were generally used to fund new loan originations and thepurchase mortgage-backed securities.

 

Advances from the Federal HomeLoan Bank and other borrowings totaled $219.9 million at September 30, 2003, anincrease of $67.0 million, or 43.8%, compared to September 30, 2002totals.  Borrowings totaling $96.0million were repaid during fiscal 2003, primarily using proceeds from depositgrowth and principal repayments on loans, while new borrowings of $163.0million were obtained, generally to fund new loan originations and purchasemortgage-backed securities.

 

Stockholders’ equity totaled$46.7 million at September 30, 2003, an increase of $3.7 million, or 8.6%, overSeptember 30, 2002.  The increaseresulted primarily from net earnings of $3.7 million and the amortizationeffects of the stock benefit and option plans totaling $730,000, which werepartially offset by a $752,000 decrease in net unrealized gains on availablefor sale securities.

 

**Comparisonof Results of Operations for the Fiscal Years Ended September 30, 2003 and 2002**

 

# **General**

 

The inclusion of the accountsof Kenwood, which the Company acquired in April 2002, in a transactionaccounted for using the purchase method of accounting, contributed to theincreases in the level of income and expense during the fiscal year endedSeptember 30, 2003, compared to fiscal 2002. In accordance with the purchase method of accounting, the consolidatedstatement of earnings for the fiscal year ended September 30, 2002 was notrestated for the acquisition.

 

Peoples Bancorp recorded netearnings of $3.7 million for the fiscal year ended September 30, 2003, anincrease of $575,000, or 18.3%, compared to fiscal 2002.  The increase in earnings resulted primarily froma $983,000 increase in net interest income, a $1.1 million decrease in theprovision for losses on loans and a $470,000 decrease in federal income taxes,which were partially offset by a $1.3 million decrease in other income and a$687,000 increase in general, administrative and other expense.

 

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# **NetInterest Income**

 

Total interest income amountedto $37.2 million for the fiscal year ended September 30, 2003, a $3.5 million,or 10.3%, increase over fiscal 2002. The increase was due to a $157.0 million, or 34.6%, increase in averageinterest-earning assets, partially offset by a 134 basis point decline in theaverage yield year to year. Approximately $29.1 million, or 6.8%, of the growthin average interest-earning assets resulted from the acquisition of KenwoodSavings Bank in fiscal 2002.

 

Interest income on loanstotaled $35.0 million for the fiscal year ended September 30, 2003, an increaseof $2.2 million, or 6.6%, over fiscal 2002. This increase was due primarily to a $95.3 million, or 22.4%, increasein the average portfolio balance outstanding year to year, partially offset bya 100 basis 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 market interest rates, such as the repricing ofits adjustable-rate loans and refinancing at lower rates. Interest income onmortgage-backed securities totaled $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, or412.2%, increase in the average balance outstanding year to year.  Interest income on investment securities andinterest-bearing deposits and other totaled $649,000, an increase of $88,000,or 15.7%, due primarily to an $11.3 million, or 70.7%, increase in the averagebalance of the related assets, partially offset by a decrease in the weighted-averageyield year to year.

 

Interest expense on depositstotaled $11.3 million for the fiscal year ended September 30, 2003, an increaseof $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 $26.5million, or 10.2%, of the growth in the average balance of deposits resultedfrom the acquisition of Kenwood Savings Bank in fiscal 2002.

 

Interest expense on borrowingstotaled $6.8 million for fiscal 2003, an increase of $1.7 million, or 32.7%,compared to fiscal 2002, due primarily to a $23.7 million, or 14.5%, increasein the average balance of borrowings outstanding, and a 50 basis point increasein the average 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 fiscal 2003, approximately $119,000 ofinterest was paid on FHLB advances assumed in the Kenwood Savings Bankacquisition in fiscal 2002.

 

As a result of the foregoingchanges in interest income and interest expense, net interest income increasedby $983,000, or 5.4%, during the fiscal year ended September 30, 2003, comparedto fiscal 2002.  The interest ratespread amounted to 2.96% for fiscal 2003 compared to 3.74% for fiscal2002.  The net interest margin totaled3.13% and 3.99% for the fiscal years ended September 30, 2003 and 2002,respectively.

 

# **Provisionfor Losses on Loans**

 

A provision for losses on loans is charged to earnings to bring thetotal allowance for loan losses to a level considered appropriate by managementbased on historical loss experience, the volume and type of lending conductedby the Bank, the status of past due principal and interest payments, generaleconomic conditions, particularly as such conditions relate to the Bank’smarket area, and other factors related to the collectibility of the Bank’s loanportfolio.  After considering the abovefactors, management recorded a provision for losses on loans totaling $4.2million and $5.3 million for the fiscal years ended September 30, 2003 and2002, respectively.  The provisionrecorded during the 

 

34

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fiscal 2003 period waspredicated primarily upon the $65.2 million, or 11.7%, of growth in the grossloan portfolio, as well as the increase in loans secured by multi-family andnonresidential real estate, the origination of approximately $25.7 million inunsecured commercial lines of credit during fiscal 2003 and an increase in thelevel of charge-offs and impaired and nonperforming loans year to year.  Such types of lending are generallyconsidered to involve a higher degree of risk than one- to four-familyresidential lending.  There can be noassurance that the allowance for loan losses will be sufficient to cover losseson nonperforming loans in the future.

 

# **OtherIncome**

 

Other income totaled $1.3million for the fiscal year ended September 30, 2003, a decrease of $1.3million, or 50.1%, compared to fiscal 2002. The decrease was due primarily to a $2.0 million, or 93.1%, decrease ingain on the sale of branch premises, deposits and loans, which was partiallyoffset by a $496,000 increase in gain on sale of investment and mortgage-backedsecurities and a $238,000, or 64.0%, increase in other operating income duringfiscal 2003.  In January 2002, the Banksold $11.0 million in total loans and $9.9 million in total deposits associatedwith its Blanchester branch office.  Theincrease in other operating income resulted primarily from increases in feesrelated to the growth of loan and deposit transactions from year to year.Approximately $31,000, or 8.3%, of the growth in other operating income resultedfrom the acquisition of deposit and loan accounts in the Kenwood Savings Banktransaction in fiscal 2002.

 

# **General,Administrative and Other Expense**

 

General, administrative andother expense totaled $10.5 million for the fiscal year ended September 30,2003, an increase of $687,000, or 7.0%, compared to fiscal 2002.  This increase resulted primarily from a $1.4million, or 37.7%, increase in employee compensation and benefits, a $329,000,or 20.6%, increase in occupancy and equipment expense, a $199,000, or 50.4%,increase in franchise tax, and a $259,000, or 71.0%, increase in dataprocessing, which were partially offset by a $70,000, or 3.1%, decrease inother operating expense and a $1.5 million decrease in goodwill amortizationand related charges.

 

As previously noted, theinclusion of the accounts of Kenwood, which the Company acquired in April 2002,contributed to the increases in the level of expenses during the fiscal yearended September 30, 2003, compared to fiscal 2002. A full year of expenses onthese acquired assets and liabilities was recognized in fiscal 2003 compared to5 months of expenses recognized in fiscal 2002. Of the $687,000 increase ingeneral, administrative and other expenses recorded in fiscal 2003,approximately $525,000 was directly associated with the inclusion of accounts,staff and branches acquired in the Kenwood acquisition.

 

The Bank employed approximately94 and 117 full-time employees as of September 30, 2002 and 2003, respectively.Eleven full-time employees were obtained in the acquisition of Kenwood inApril, 2002 and approximately 16 full-time employees were acquired in the twobranch office acquisition from Ameriana Bank in September, 2003. The increasein employee compensation and benefits was due to the increase in staffinglevels to support growth in the overall infrastructure of the Company, as wellas normal merit increases and increases in health insurance and other benefitcosts.

 

The increase in occupancy andequipment expense primarily reflects increased depreciation and maintenancecosts associated with the Company’s new branch offices. Two new officesreplacing existing branch buildings were opened in the third and fourth quarterof fiscal 2003. These projects reflect the effects of the Company’s ongoingcommitment to expand its branch office network through acquisition andconstruction of new branch facilities. The increase in franchise taxes was dueto the Company’s growth year to year, as well as the tax of approximately$45,000 recorded on Kenwood Savings Bank for fiscal 2003. The increase in dataprocessing reflects continued growth in loan and deposit accounts, includingexpenses of $137,000 in data processing expenses for the accounts acquiredthrough the acquisition of Kenwood Savings Bank. The decrease in goodwillamortization reflects the Company’s adoption of SFAS No. 142 effective October1, 2002. Pursuant to SFAS No. 142, goodwill is no longer amortized, but issubject to a periodic impairment evaluation.

 

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# **FederalIncome Taxes**

 

Peoples Bancorp recorded a taxprovision totaling $1.9 million for the fiscal year ended September 30, 2003,compared to a provision of $2.4 million for fiscal 2002.  The effective tax rates were 34.0% and 43.2%for the fiscal years ended September 30, 2003 and 2002, respectively.  The higher effective tax rate for fiscal2002 was primarily due to nondeductible amortization and other charges relatedto goodwill.

 

**Comparisonof Results of Operations for the Fiscal Years Ended September 30, 2002 and 2001**

 

# **General**

 

The inclusion of the accountsof Kenwood which the Company acquired in April 2002 and the inclusion of theaccounts of Market Bank which the Company acquired in March 2001, significantlycontributed to the increases in the level of income and expense during thefiscal year ended September 30, 2002, compared to fiscal 2001.  A full year of expenses on the acquiredassets and liabilities from Market Bank was recognized in fiscal 2002 comparedto 6 months of expenses recognized in fiscal 2001.  Likewise, approximately 5 months of expenses were recognized infiscal 2002 on the assets and liabilities acquired in the Kenwoodtransaction.  Both transactions wereaccounted for using the purchase method of accounting.  The statement of earnings for the fiscalyear ended September 30, 2001, was not restated for the acquisition.

 

Peoples Bancorp recorded netearnings of $3.1 million for the fiscal year ended September 30, 2002, anincrease of $825,000, or 35.5%, compared to fiscal 2001.  The increase in earnings resulted primarilyfrom a $7.8 million increase in net interest income, which was partially offsetby a $2.8 million increase in the provision for losses on loans, a $2.3 milliondecrease in other income and a $1.7 million increase in general, administrativeand other expense.

 

# **NetInterest Income**

 

Total interest income amountedto $33.7 million for the fiscal year ended September 30, 2002, a $7.8 million,or 30.2%, increase over fiscal 2001. The increase was due to a $111.3 million, or 32.5%, increase in averageinterest-earning assets, partially offset by a 14 basis point decline in theaverage yield year to year. Approximately $22.0 million, or 6.4%, of the growthin average interest-earning assets resulted from the acquisition of KenwoodSavings Bank in April, 2002, while approximately $22.9 million, or 6.7%, of thegrowth in average interest-earning assets resulted from the acquisition ofMarket Bank in fiscal 2001.

 

Interest income on loanstotaled $32.8 million for the fiscal year ended September 30, 2002, an increaseof $10.7 million, or 48.4%, over fiscal 2001. This increase was due primarily to a $142.9 million, or 50.6%, increasein the average portfolio balance outstanding year to year, partially offset by an11 basis point decline in weighted-average yield, to 7.71% for fiscal2002.  The impact on the Bank’s yield onits loan portfolio from the decrease in market interest rates, such as therepricing of its adjustable-rate loans and refinancing at lower rates, wassubstantially offset by the Bank’s increased emphasis on higher yieldingmulti-family, commercial real estate and unsecured commercial

 

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loans.  Interest income on investment andmortgage-backed securities and interest-bearing deposits and other totaled$922,000, a decrease of $2.9 million, or 75.7%, due primarily to a $31.6million, or 52.9%, decrease in the average balance of the related assets, a 308basis point decrease in the weighted-average yield year to year and a $264,000write down of premiums on mortgage-backed securities based upon management’sestimate of prepayment speeds.  Thedecrease in the average yield was primarily due to the decrease in marketinterest rates.  The decrease in theaverage outstanding balance of these assets was due to repayments and sales,which proceeds were used to fund loan originations.

 

Interest expense on depositstotaled $10.5 million for the fiscal year ended September 30, 2002, an increaseof $1.5 million, or 16.6%, over the $9.0 million recorded in fiscal 2001.  The increase was due primarily to a $78.5million, or 43.4%, increase in the average balance of deposits outstanding yearto year, which included the addition of $48.4 million in deposits from theacquisition of Kenwood, partially offset by a decrease in the weighted-averagecost of deposits of 93 basis points, to 4.04% for fiscal 2002.  The decrease in the average rate wasprimarily due to the decrease in market interest rates.

 

Interest expense on borrowingstotaled $5.1 million for fiscal 2002, a decrease of $1.4 million, or 21.8%,compared to fiscal 2001, due primarily to a 191 basis point decrease in theaverage cost of borrowings, to 3.14% for fiscal 2002, partially offset by a$33.6 million, or 25.9%, increase in the average balance of borrowingsoutstanding for fiscal 2002.  Thedecrease in the average cost of borrowings was primarily due to a decrease inmarket interest rates.

 

As a result of the foregoingchanges in interest income and interest expense, net interest income increasedby $7.8 million, or 74.9%, during the fiscal year ended September 30, 2002,compared to fiscal 2001.  The interestrate spread amounted to 3.74% for fiscal 2002 compared to 2.57% for fiscal2001.  The net interest margin totaled3.99% and 3.03% for the fiscal years ended September 30, 2002 and 2001,respectively.

 

# **Provisionfor Losses on Loans**

 

A provision for losses on loansis charged to earnings to bring the total allowance for loan losses to a levelconsidered appropriate by management based on historical loss experience, thevolume and type of lending conducted by the Bank, the status of past dueprincipal and interest payments, general economic conditions, particularly assuch conditions relate to the Bank’s market area, and other factors related tothe collectibility of the Bank’s loan portfolio.  After considering the above factors, management recorded aprovision for losses on loans totaling $5.3 million and $2.4 million for thefiscal years ended September 30, 2002 and 2001, respectively.  The provision recorded during the fiscal2002 period was predicated primarily upon the $137.3 million, or 32.7%, ofgrowth in the gross loan portfolio, taking into account the increase in loanssecured by multi-family, nonresidential real estate, the origination ofapproximately $26.7 million in unsecured commercial lines of credit duringfiscal 2002 and the increase in the level of nonperforming loans year toyear.  Such types of lending aregenerally considered to involve a higher degree of risk than one- tofour-family residential lending.

 

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# **OtherIncome**

 

Other income totaled $2.5million for the fiscal year ended September 30, 2002, a decrease of $2.3million, or 48.2%, compared to fiscal 2001. The decrease was due primarily to the effects of a $4.7 million gain onsecurities transactions recorded during fiscal 2001, which was partially offsetby a $2.1 million gain on the sale of branch offices during fiscal 2002 and a$238,000, or 177.6%, increase in other operating income.  During fiscal 2002, in connection with it’sbuilding, branch renovation and branch relocation projects, the Corporationsold three of its former branch buildings, as well as $11.0 million in loansand $9.9 million in deposits from it’s former Blanchester office, all of whichresulted in the $2.1 million gain on sale. Approximately $22,000, or 16.4%, of the growth in other operating incomeresulted from the acquisition of deposit and loan accounts in the KenwoodSavings Bank transaction in April 2002, while approximately $41,000, or 30.6%of the growth resulted from the acquisition of accounts of Market Bank infiscal 2001.

 

# **General,Administrative and Other Expense**

 

General, administrative andother expense totaled $9.8 million for the fiscal year ended September 30,2002, an increase of $1.7 million, or 20.8%, compared to fiscal 2001.  This increase resulted primarily from a$409,000, or 12.1%, increase in employee compensation and benefits, a $1.0million, or 168.0%, increase in occupancy and equipment expense, and a $1.1million, or 94.1%, increase in other operating expense, which were partiallyoffset by a  $402,000 decrease ingoodwill amortization.  Amortization ofgoodwill will be eliminated in future periods upon adoption of a recentlyissued accounting pronouncement. Management adopted SFAS No. 142 effectiveOctober 1, 2002, which will result in annual expense reduction totalingapproximately $460,000 beginning in fiscal 2003.

 

As previously noted, theinclusion of the accounts of Kenwood, which the Company acquired in April 2002,contributed to the increases in the level of expenses during the fiscal yearended September 30, 2002, compared to fiscal 2001.  Also, a full year of expenses on the acquired assets andliabilities of Market Bank was recognized in fiscal 2002 compared to 6 monthsof expenses recognized in fiscal 2001. Of the $1.7 million increase in general, administrative and otherexpenses recorded in fiscal 2002, approximately $547,000 was directlyassociated with the inclusion of accounts, staff and branches acquired in theMarket acquisition and approximately $390,000 was directly associated with theaccounts, staff and branches acquired in the Kenwood acquisition.

 

The Bank employed approximately68 and 94 full-time employees as of September 30, 2001 and 2002,respectively.  Eleven full-timeemployees were obtained in the acquisition of Kenwood in April 2002 andapproximately 6 full-time employees were obtained in the acquisition of MarketBank in 2001.  The increase in employeecompensation and benefits was primarily due to the increase in staffing levels,normal merit increases and $143,000 expensed for stock options awards vestingduring the fiscal year.

 

The increase in occupancy andequipment expense primarily reflects increased depreciation and maintenancecosts associated with the Company’s new main office and additions andimprovements made at several branch office locations.  During fiscal 2002, the Corporation committed to beginconstruction of four new branch office facilities located in southwesternOhio.  Two of the new offices willreplace existing branch buildings and two represent expansion into new markets.  The new offices are scheduled to be openedover the period through the second quarter of fiscal 2004.  These improvements reflect the effects ofthe Company’s previously announced ongoing commitment to expand its branchoffice network through the acquisition and construction of new branchfacilities. Additionally, during fiscal 2002 management reduced its estimate ofdepreciable lives for certain furniture and equipment assets.  As a result of this downward change inestimate, the Corporation recognized additional depreciation expense duringfiscal 2002 of approximately $215,000, or $.06 per share on an after-taxbasis.  The increase in other operatingexpense relates primarily to expenses related to the trust preferred offeringtotaling $385,000, an increase in legal expenses, including those related tononperforming loans, an increase in advertising costs, office supplies andpro-rata increases in costs associated with the Company’s overall growth yearto year.

 

38

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# **FederalIncome Taxes**

 

Peoples Bancorp recorded a taxprovision totaling $2.4 million for the fiscal year ended September 30, 2002,compared to a provision of $2.3 million for fiscal 2001.  The increase was due primarily to theincrease in pre-tax earnings of $913,000, or 19.7%.  The effective tax rates were 43.2% and 49.8% for the fiscal yearsended September 30, 2002 and 2001, respectively.  The relatively high effective tax rates were primarily due tonondeductible amortization and other charges related to goodwill.  The effective tax rate for fiscal 2001 wasalso affected by nondeductible merger-related expenses.

 

**Exposureto Changes in Interest Rates**

 

Peoples Bancorp’s ability tomaintain net interest 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 apositive spread between the interest earned on assets and the interest paid ondeposits and 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 secured bynon-residential real estate, in an effort to improve its interest rate riskposition.   At September 30, 2003,approximately $174.5 million, or 31.5%, of the Company’s loan portfolioconsisted of loans with fixed rates of interest and approximately $379.9million, or 68.5%, had adjustable rates of interest.  During fiscal year 2003, management purchased $208.1 million inadjustable rate mortgage-backed securities as a tool to manage liquidity andinterest rate risk, as well as to provide interest income with minimal creditrisk, due to the implicit guarantee of government sponsored agencies.

 

**QuantitativeAnalysis**

 

The OTS provides a quarterlyreport on the potential impact of interest rate changes upon the market valueof portfolio equity.  Management reviewsthe quarterly reports from the OTS that show the impact of changing interestrates on net portfolio value.  Netportfolio value is the difference between incoming and outgoing discounted cashflows from assets, liabilities, and off-balance sheet contracts.  The application of the methodology attemptsto quantify interest rate risk and the change in NPV which would result from atheoretical 100, 200 and 300 basis point change in market interest rates.

 

39

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The followingtables present Peoples Bank’s net portfolio value as of September 30, 2003 and2002, as calculated by the OTS, based on information provided to the OTS byPeoples Bank.  The information presentedis based on the feature in Peoples Bank’s mortgage loans which permits theloans to be called any time after three years from the date of origination andthe assumed repricing of called loans at a higher rate in a rising rateenvironment.

 
|                                                         |   | **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 | ) |
|                                                              |        |                            |        |  |  |  |  |  |  |  |  |  |  |

 
|                                                         |   | **September 30, 2002**     |   |
|--------------------------------------------------------------|--------|----------------------------|--------|
| **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     | $                          | 53,285 |   | $ | (4,472 | ) | (8 | )% | 9.34 | % | (27 | )bp |
| 200                                                          |   | 56,980                     |   | (777 | ) | (1 | ) | 9.79 |   | 18 |   |
| 100                                                          |   | 59,105                     |   | 1,348 |   | 2 |   | 9.97 |   | 36 |   |
| 0                                                            |   | 57,757                     |   | — |   | — |   | 9.61 |   | — |   |
| (100                                                         | )      | 53,081                     |   | (4,676 | ) | (8 | ) | 8.73 |   | (88 | ) |
|                                                              |        |                            |        |  |  |  |  |  |  |  |  |  |  |

 

As shown bythe 2003 table above, a 100 basis point increase in interest rates would resultin an increase in Peoples Bank’s net portfolio value based on OTS calculationsas of September 30, 2003, primarily due to Peoples Bank’s efforts to originateadjustable-rate loans and shorter-term fixed-rate loans in recent periods.  The table also indicates a decrease in netportfolio value at a 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.

 

Peoples Bank’s fixed-rate loans help itsprofitability if interest rates are stable or declining, since these loans haveyields that exceed its cost of funds. However, if interest rates increase, Peoples Bank would have to pay moreon its deposits and new borrowings, which would adversely affect its interestrate spread.  In order to counter thepotential effects of dramatic increases in market rates of interest, PeoplesBank has focused primarily on developing a strong core deposit base.  Historically, Peoples Bank has been able tomaintain relatively stable levels of net interest income despite the interestrate risk inherent in its operations. Peoples Bank attempts to mitigate potential exposure to interest raterisk by:

 

(1)           Originating one-year and three-year adjustable-ratemortgage loans;

 

(2)                                  Increasingoriginations of nonresidential real estate mortgage loans, which generally havehigher yields and shorter terms to maturity than single-family residentialmortgage loans;

 

40

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(3)                                  Originating homeequity lines of credit with interest rates that adjust monthly based on anindex;

 

(4)                                  Originating unsecuredlines of credit with interest rates that adjust monthly based on an index;

 

(5)           Purchasing adjustable-ratemortgage-backed securities; and

 

(6)           Utilizing fixed-rate longer-termadvances offered by the Federal Home Loan Bank.

 

**Liquidity and Capital Resources**

 

Peoples, likeother financial institutions, is required under applicable federal regulationsto maintain 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 fundsinclude deposits, principal and interest repayments on loans and onmortgage-backed securities and borrowings. The Bank’s first preference is to fund liquidity needs with coredeposits, if available, in the marketplace. Core deposits include noninterest-bearing and interest-bearing retaildeposits.  Other funding sources includeFederal Home Loan Bank advances.

 

Liquid assets as of September30, 2003, include cash and deposits in other financial institutions totaling$10.0 million, in addition to investment securities and mortgage-backedsecurities available for sale at a total market value of $136.0 million.  In the belief of management, these liquidassets, as well as the ability to borrow funds, sell loan participations andattract deposits through local pricing or through brokers will allow the Bankto meet its obligations and commitments as indicated in the table below.   Any future excess liquidity generated viaoperations will be utilized to repay borrowings or purchase investmentsecurities, including mortgage-backed securities.

 

The followingtable sets forth information regarding the Bank’s obligations and commitmentsto make future payments under contract as of September 30, 2003.

 
|                                                           |   | **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                                    |   | $                          | 123         |   | $ | 242 |   | $ | 212 |   | $ | 334 |   | $ | 911 |   |
| Contracts to purchase office premises                          |   | 3,200                      |        | — |   | — |   | — |   | 3,200 |   |
| Advances from the Federal Home Loan Bank  and other borrowings |   | 67,400                     |        | — |   | 1,500 |   | 151,000 |   | 219,900 |   |
| Certificates of deposit                                        |   | 125,197                    |        | 67,782 |   | 51,861 |   | 43 |   | 244,883 |   |
|                                                           |   |                       |        |   |   |   |   |   |   |   |   |
| Amount of commitments expiration per period                    |   |                       |        |   |   |   |   |   |   |   |   |
| Commitments to originate loans:                                |   |                       |        |   |   |   |   |   |   |   |   |
| Consumer lines of credit                                       |   | 23,832                     |        | — |   | — |   | — |   | 23,832 |   |
| Commercial lines of credit                                     |   | 2,567                      |        | — |   | — |   | — |   | 2,567 |   |
| One- to four-family and multi-family loans                     |   | 9,446                      |        | — |   | — |   | — |   | 9,446 |   |
| Non-residential real estate and land loans                     |   | 6,888                      |        | — |   | — |   | — |   | 6,888 |   |
| Commitments to purchase mortgage-backed  securities            |   | 70,000                     |        | — |   | — |   | — |   | 70,000 |   |
|                                                           |   |                       |        |   |   |   |   |   |   |   |   |
| Total contractual obligations                                  |   | **$**                      | **308,653** | ** ** | **$** | **68,024** | ** ** | **$** | **53,573** | ** ** | **$** | **151,377** | ** ** | **$** | **581,627** | ** ** |

 

Peoples Bank is required to maintainregulatory capital sufficient to meet tangible, core and risk-based capitalratios of at least 1.5%, 4.0% and 8.0%, respectively.  At September 30, 2003, Peoples Bank exceeded each of the capitalrequirements.  Peoples Bank’s tangible,core and risk-based capital ratios were 7.5%, 7.5% and 12.1%, respectively.

 

**Impact of Inflation and Changing Prices**

 

The consolidated financial statements andrelated financial data presented herein regarding Peoples Bancorp have beenprepared in accordance with accounting principles generally accepted in theUnited States of America, which generally require the measurement of financialposition and operating results in terms of historical dollars, withoutconsidering changes in relative purchasing power over time due toinflation.  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.

 

41

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**Item 8. Financial Statements andSupplementary Data**

 

**REPORT OF INDEPENDENT CERTIFIED PUBLICACCOUNTANTS**

 

Board of Directors

PeoplesCommunity Bancorp, Inc.

 

Wehave audited the consolidated statements of financial condition of PeoplesCommunity 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 endedSeptember 30, 2003.  These consolidatedfinancial statements are the responsibility of the Corporation’smanagement.  Our responsibility is toexpress an opinion on these consolidated financial statements based on ouraudits.

 

Weconducted our audits in accordance with auditing standards generally acceptedin the United States of America.  Thosestandards require that we plan and perform the audit to obtain reasonableassurance about whether the financial statements are free of material misstatement.  An audit includes examining, on a testbasis, 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.

 

Inour opinion, the financial statements referred to above present fairly, in allmaterial respects, the consolidated financial position of Peoples CommunityBancorp, Inc. as of September 30, 2003 and 2002, and the consolidated resultsof its operations and its cash flows for each of the years in the three yearperiod ended September 30, 2003, in conformity with accounting principlesgenerally accepted in the United States of America.

 
| /s/ Grant Thornton LLP |
|------------------------|

Cincinnati,Ohio

October30, 2003

 

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**PEOPLES COMMUNITYBANCORP, INC.**

 

**CONSOLIDATEDSTATEMENTS OF FINANCIAL CONDITION**

 
|                                                                                                                                                   |   | **Year ended  September 30,** |        |
|--------------------------------------------------------------------------------------------------------------------------------------------------------|--------|-------------------------------|-------------|
|                                                                                                                                                   |   | **2003**                      |        | **2002** |   |
|                                                                                                                                                   |   | **(In thousands)**            |        |
| **ASSETS**                                                                                                                                             |   |                          |        |   |   |
|                                                                                                                                                   |   |                          |        |   |   |
| Cash and due from  banks                                                                                                                               |   | $                             | 4,905       |   | $ | 4,460 |   |
| Interest-bearing  deposits in other financial institutions                                                                                             |   | 5,118                         |        | 22,177 |   |
| Cash and cash  equivalents                                                                                                                             |   | 10,023                        |        | 26,637 |   |
| Certificates  of deposit                                                                                                                               |   | 221                           |        | — |   |
| Investment securities  designated as available for sale - at market                                                                                    |   | 2,156                         |        | 1,231 |   |
| Mortgage-backed  securities designated as available for sale - at market                                                                               |   | 133,828                       |        | 18,763 |   |
| Loans receivable - net                                                                                                                                 |   | 554,351                       |        | 504,012 |   |
| Office premises and  equipment - at depreciated cost                                                                                                   |   | 13,056                        |        | 10,973 |   |
| Real estate acquired  through foreclosure                                                                                                              |   | 1,293                         |        | 97 |   |
| Federal Home Loan Bank  stock - at cost                                                                                                                |   | 10,221                        |        | 9,907 |   |
| Accrued interest  receivable on loans                                                                                                                  |   | 2,089                         |        | 2,264 |   |
| Accrued interest  receivable on mortgage-backed securities and other investments                                                                       |   | 480                           |        | 77 |   |
| Prepaid expenses and  other assets                                                                                                                     |   | 488                           |        | 621 |   |
| Goodwill, net of  accumulated amortization                                                                                                             |   | 5,528                         |        | 4,875 |   |
| Prepaid federal income  taxes                                                                                                                          |   | 1,506                         |        | — |   |
| Deferred federal  income taxes                                                                                                                         |   | 3,443                         |        | 2,175 |   |
|                                                                                                                                                   |   |                          |        |   |   |
| Total assets                                                                                                                                           |   | **$**                         | **738,683** | ** ** | **$** | **581,632** |   |
|                                                                                                                                                   |   |                          |        |   |   |
| **LIABILITIES AND STOCKHOLDERS’ EQUITY**                                                                                                          |   |                          |        |   |   |
|                                                                                                                                                   |   |                          |        |   |   |
| Deposits                                                                                                                                               |   | $                             | 455,900     |   | $ | 369,080 |   |
| Advances from the  Federal Home Loan Bank                                                                                                              |   | 218,500                       |        | 152,500 |   |
| Other borrowed money                                                                                                                                   |   | 1,400                         |        | 450 |   |
| Guaranteed preferred  beneficial interests in junior subordinated debentures                                                                           |   | 12,500                        |        | 12,500 |   |
| Advances by borrowers  for taxes and insurance                                                                                                         |   | 74                            |        | 189 |   |
| Accrued interest  payable                                                                                                                              |   | 709                           |        | 843 |   |
| Other liabilities                                                                                                                                      |   | 2,901                         |        | 2,929 |   |
| Accrued federal income  taxes                                                                                                                          |   | —                        |        | 151 |   |
| Total liabilities                                                                                                                                      |   | 691,984                       |        | 538,642 |   |
|                                                                                                                                                   |   |                          |        |   |   |
| Commitments                                                                                                                                            |   | —                        |        | — |   |
|                                                                                                                                                   |   |                          |        |   |   |
| Stockholders’ equity                                                                                                                              |   |                          |        |   |   |
| Common stock -  15,000,000 shares of $.01 par value authorized; 2,522,088 and 2,512,615  shares issued at September 30, 2003 and 2002, respectively    |   | 25                            |        | 25 |   |
| Additional paid-in  capital                                                                                                                            |   | 24,478                        |        | 23,931 |   |
| Retained earnings -  restricted                                                                                                                        |   | 23,171                        |        | 19,447 |   |
| Shares acquired by  stock benefit plan                                                                                                                 |   | (286                          | )           | (476 | ) |
| Accumulated  comprehensive income (loss), unrealized gains (losses) on securities  designated as available for sale,  net  of related tax effects |   | (689                          | )           | 63 |   |
| Total stockholders’  equity                                                                                                                       |   | 46,699                        |        | 42,990 |   |
|                                                                                                                                                   |   |                          |        |   |   |
| Total liabilities and  stockholders’ equity                                                                                                       |   | **$**                         | **738,683** | ** ** | **$** | **581,632** |   |

 

The accompanying notes are anintegral part of these statements.

 

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**PEOPLES COMMUNITYBANCORP, INC.**

 

 

**CONSOLIDATEDSTATEMENTS OF EARNINGS**

 
|                                                              |   | **Year ended September 30,**          |       |
|-------------------------------------------------------------------|--------|---------------------------------------|------------|
|                                                              |   | **2003**                              |       | **2002** |   | **2001** |   |
|                                                              |   | **(In thousands, except share data)** |       |
|                                                              |   |                                  |       |   |   |   |   |
| Interest income                                                   |   |                                  |       |   |   |   |   |
| Loans                                                             |   | $                                     | 34,952     |   | $ | 32,790 |   | $ | 22,098 |   |
| Mortgage-backed  securities                                       |   | 1,568                                 |       | 361 |   | 2,867 |   |
| Investment securities                                             |   | 479                                   |       | 446 |   | 769 |   |
| Interest-bearing  deposits and other                              |   | 170                                   |       | 115 |   | 163 |   |
| Total interest income                                             |   | 37,169                                |       | 33,712 |   | 25,897 |   |
|                                                              |   |                                  |       |   |   |   |   |
| Interest expense                                                  |   |                                  |       |   |   |   |   |
| Deposits                                                          |   | 11,260                                |       | 10,464 |   | 8,976 |   |
| Borrowings                                                        |   | 6,812                                 |       | 5,134 |   | 6,567 |   |
| Total interest expense                                            |   | 18,072                                |       | 15,598 |   | 15,543 |   |
|                                                              |   |                                  |       |   |   |   |   |
| Net interest income                                               |   | 19,097                                |       | 18,114 |   | 10,354 |   |
|                                                              |   |                                  |       |   |   |   |   |
| Provision for losses  on loans                                    |   | 4,198                                 |       | 5,265 |   | 2,449 |   |
|                                                              |   |                                  |       |   |   |   |   |
| Net interest income  after provision for losses on loans          |   | 14,899                                |       | 12,849 |   | 7,905 |   |
|                                                              |   |                                  |       |   |   |   |   |
| Other income                                                      |   |                                  |       |   |   |   |   |
| Gain (loss) on sale of  investment and mortgage-backed securities |   | 493                                   |       | (3 | ) | 4,713 |   |
| Gain on sale of branch                                            |   | 148                                   |       | 2,140 |   | — |   |
| Other operating                                                   |   | 610                                   |       | 372 |   | 134 |   |
| Total other income                                                |   | 1,251                                 |       | 2,509 |   | 4,847 |   |
|                                                              |   |                                  |       |   |   |   |   |
| General,  administrative and other expense                        |   |                                  |       |   |   |   |   |
| Employee compensation  and benefits                               |   | 5,206                                 |       | 3,780 |   | 3,371 |   |
| Occupancy and  equipment                                          |   | 1,926                                 |       | 1,597 |   | 596 |   |
| Franchise taxes                                                   |   | 594                                   |       | 395 |   | 456 |   |
| Data processing                                                   |   | 624                                   |       | 365 |   | 380 |   |
| Other operating                                                   |   | 2,154                                 |       | 2,224 |   | 1,146 |   |
| Merger-related  expenses                                          |   | —                                |       | — |   | 317 |   |
| Amortization and other  charges related to goodwill               |   | —                                |       | 1,456 |   | 1,858 |   |
| Total general,  administrative and other expense                  |   | 10,504                                |       | 9,817 |   | 8,124 |   |
|                                                              |   |                                  |       |   |   |   |   |
| Earnings before income  taxes                                     |   | 5,646                                 |       | 5,541 |   | 4,628 |   |
|                                                              |   |                                  |       |   |   |   |   |
| Federal income taxes                                              |   |                                  |       |   |   |   |   |
| Current                                                           |   | 2,800                                 |       | 4,761 |   | 3,348 |   |
| Deferred                                                          |   | (878                                  | )          | (2,369 | ) | (1,044 | ) |
| Total federal income  taxes                                       |   | 1,922                                 |       | 2,392 |   | 2,304 |   |
|                                                              |   |                                  |       |   |   |   |   |
| NET EARNINGS                                                      |   | **$**                                 | **3,724**  | ** ** | **$** | **3,149** | ** ** | **$** | **2,324** | ** ** |
|                                                              |   |                                  | ** ** |   | ** ** |   | ** ** |
| EARNINGS PER SHARE                                                |   |                                  | ** ** |   | ** ** |   | ** ** |
| Basic                                                             |   | **$**                                 | **1.51**   | ** ** | **$** | **1.29** | ** ** | **$** | **1.08** | ** ** |
|                                                              |   |                                  | ** ** |   | ** ** |   | ** ** |
| Diluted                                                           |   | **$**                                 | **1.48**   | ** ** | **$** | **1.27** | ** ** | **$** | **1.08** | ** ** |

 

The accompanying notes are anintegral part of these statements.

 

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**PEOPLES COMMUNITYBANCORP, INC.**

 

 

CONSOLIDATED STATEMENTSOF COMPREHENSIVE INCOME

 
|                                                                                                                                                                  |   | **Year ended  September 30,** |       |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|-------------------------------|------------|
|                                                                                                                                                                  |   | **2003**                      |       | **2002** |   | **2001** |   |
|                                                                                                                                                                  |   | **(In  thousands)**           |       |
|                                                                                                                                                                  |   |                          |       |   |   |   |   |
| Net earnings                                                                                                                                                          |   | $                             | 3,724      |   | $ | 3,149 |   | $ | 2,324 |   |
|                                                                                                                                                                  |   |                          |       |   |   |   |   |
| Other comprehensive income (loss), net of  tax:                                                                                                                       |   |                          |       |   |   |   |   |
| Unrealized holding gains (losses) on  securities during the period, net of taxes (benefits) of  $(220), $41 and $879 in 2003, 2002 and  2001, respectively       |   | (427                          | )          | 79 |   | 1,706 |   |
|                                                                                                                                                                  |   |                          |       |   |   |   |   |
| Reclassification adjustment for realized  (gains) losses included in earnings, net of taxes (benefits) of $168, $(1)  and $1,602 in 2003, 2002 and 2001, respectively |   | (325                          | )          | 2 |   | (3,111 | ) |
|                                                                                                                                                                  |   |                          |       |   |   |   |   |
| Comprehensive income                                                                                                                                                  |   | **$**                         | **2,972**  | ** ** | **$** | **3,230** | ** ** | **$** | **919** | ** ** |
|                                                                                                                                                                  |   |                          | ** ** |   | ** ** |   | ** ** |
| Accumulated comprehensive income (loss)                                                                                                                               |   | **$**                         | **(689**   | **)** | **$** | **63** | ** ** | **$** | **(18** | **)** |

 

The accompanying notes are anintegral part of these statements.

 

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**PEOPLES COMMUNITYBANCORP, INC.**

 

**CONSOLIDATEDSTATEMENTS OF STOCKHOLDERS’ EQUITY**

 
|                                                                                          |   | **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** |   |
|-----------------------------------------------------------------------------------------------|--------|---------------------|--------|----------------------------------|--------|------------------------|------------|-----------------------------------------------|------------|-----------------------------------------------------------------------------------|--------|-----------|--------|
|                                                                                          |   | **(In  thousands)** |   |
| Balance at October 1, 2000                                                                    |   | $                   | 20     |                             | $      | 17,140                 |       | $                                             | 13,974     |                                                                              | $      | (857      | )      | $ | 1,387 |   | $ | 31,664 |   |
|                                                                                          |   |                |   |                             |   |                   |       |                                          |       |                                                                              |   |      |   |
| Issuance of shares in connection with  acquisition of Market Financial                        |   | 5                   |   | 5,999                            |   | —                 |       | —                                        |       | —                                                                            |   | 6,004     |   |
| Amortization expense of stock benefit plan                                                    |   | —              |   | —                           |   | —                 |       | 191                                           |       | —                                                                            |   | 191       |   |
| Net earnings for the year ended September  30, 2001                                           |   | —              |   | —                           |   | 2,324                  |       | —                                        |       | —                                                                            |   | 2,324     |   |
| Unrealized losses on securities designated  as available for sale, net of related tax effects |   | —              |   | —                           |   | —                 |       | —                                        |       | (1,405                                                                            | )      | (1,405    | )      |
|                                                                                          |   |                |   |                             |   |                   |       |                                          |       |                                                                              |   |      |   |
| Balance at September 30, 2001                                                                 |   | 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       |   |
| Proceeds from 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** | ** ** |

 

The accompanying notes are anintegral part of these statements.

 

46

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**PEOPLES COMMUNITYBANCORP, INC.**

 

**CONSOLIDATEDSTATEMENTS OF CASH FLOWS**

 
|                                                                                           |   | **Year ended September 30,** |   |
|------------------------------------------------------------------------------------------------|--------|------------------------------|--------|
|                                                                                           |   | **2003**                     |   | **2002** |   | **2001** |   |
|                                                                                           |   | **(In thousands)**           |   |
|                                                                                           |   |                         |   |   |   |   |   |
| Cash flows provided by  (used in) operating activities:                                        |   |                         |   |   |   |   |   |
| Net earnings for the  year                                                                     |   | $                            | 3,724  |   | $ | 3,149 |   | $ | 2,324 |   |
| 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      |   | 1,058                        |   | 264 |   | (436 | ) |
| Amortization of  deferred loan origination fees                                                |   | (1,574                       | )      | (716 | ) | (311 | ) |
| Amortization expense  of stock benefit plan                                                    |   | 581                          |   | 839 |   | 191 |   |
| Compensation expense  related to vested stock options                                          |   | 149                          |   | 143 |   | — |   |
| Amortization and other  charges related to goodwill                                            |   | —                       |   | 1,456 |   | 1,858 |   |
| Reduction of goodwill  associated with sale of loans and deposits                              |   | 1,650                        |   | — |   | — |   |
| Depreciation and  amortization                                                                 |   | 879                          |   | 967 |   | 353 |   |
| Provision for losses  on loans                                                                 |   | 4,198                        |   | 5,265 |   | 2,449 |   |
| Federal Home Loan Bank  stock dividends                                                        |   | (414                         | )      | (430 | ) | (528 | ) |
| Dividends on  investment securities                                                            |   | (39                          | )      | — |   | — |   |
| (Gain) loss on sale of  securities                                                             |   | (493                         | )      | 3 |   | (4,713 | ) |
| Gain on sale of branch                                                                         |   | (148                         | )      | (2,140 | ) | — |   |
| Increase (decrease) in  cash, net of acquisitions, due to changes in:                          |   |                         |   |   |   |   |   |
| Accrued interest  receivable on loans                                                          |   | 316                          |   | (179 | ) | (366 | ) |
| Accrued interest  receivable on investments and mortgage-backed securities                     |   | (403                         | )      | (58 | ) | 195 |   |
| Prepaid expenses and  other assets                                                             |   | 134                          |   | (3,916 | ) | 87 |   |
| Accrued interest  payable                                                                      |   | (134                         | )      | 652 |   | (597 | ) |
| Other liabilities                                                                              |   | (119                         | )      | (132 | ) | 976 |   |
| Federal income taxes                                                                           |   |                         |   |   |   |   |   |
| Current                                                                                        |   | (1,657                       | )      | 3,583 |   | 2,072 |   |
| Deferred                                                                                       |   | (878                         | )      | (2,369 | ) | (1,044 | ) |
| Net cash provided by  operating activities                                                     |   | 6,830                        |   | 6,381 |   | 2,510 |   |
|                                                                                           |   |                         |   |   |   |   |   |
| Cash flows provided by  (used in) investing activities:                                        |   |                         |   |   |   |   |   |
| Purchases of  investment securities                                                            |   | (1,000                       | )      | — |   | — |   |
| Proceeds from maturity  of investment securities                                               |   | —                       |   | — |   | 10,500 |   |
| Proceeds from sale of  investment securities designated as available for sale                  |   | 32                           |   | — |   | 4,167 |   |
| Purchase of  mortgage-backed securities                                                        |   | (208,079                     | )      | (20,264 | ) | — |   |
| Principal repayments  on mortgage-backed securities                                            |   | 23,032                       |   | 1,730 |   | 26,612 |   |
| Proceeds from sale of  mortgage-backed securities designated as available for sale             |   | 68,357                       |   | 3,520 |   | 71,727 |   |
| Proceeds from sale of  real estate acquired through foreclosure                                |   | 65                           |   | — |   | — |   |
| Proceeds from sale of  loan participations                                                     |   | 10,180                       |   | 6,738 |   | 2,747 |   |
| Principal repayments  on loans                                                                 |   | 247,086                      |   | 153,207 |   | 92,571 |   |
| Loan disbursements                                                                             |   | (278,573                     | )      | (261,576 | ) | (241,112 | ) |
| Purchase of office  premises and equipment                                                     |   | (2,132                       | )      | (2,002 | ) | (4,358 | ) |
| Proceeds from sale of  branch                                                                  |   | —                       |   | 3,572 |   | — |   |
| Purchase of Federal  Home Loan Bank stock                                                      |   | —                       |   | (970 | ) | — |   |
| Proceeds from  redemption of Federal Home Loan Bank stock                                      |   | 100                          |   | — |   | — |   |
| Increase in  certificates of deposit in other financial institutions                           |   | (221                         | )      | — |   | — |   |
| Cash received from  branch acquisition transaction - net                                       |   | 19,730                       |   | — |   | — |   |
| Cash received in  acquisition of Kenwood Bancorp, Inc. - net                                   |   | —                       |   | 2,042 |   | — |   |
| Acquisition of Market  Financial Corporation common stock - net                                |   | —                       |   | — |   | (1,010 | ) |
| Net cash used in  investing activities                                                         |   | (121,423                     | )      | (114,003 | ) | (38,156 | ) |
|                                                                                           |   |                         |   |   |   |   |   |
| Net cash used in  operating and investing activities (balance carried forward)                 |   | (114,593                     | )      | (107,622 | ) | (35,646 | ) |
|                                                                                                |        |                              |        |  |  |  |  |  |  |  |

 

47

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|                                                                                                   |   | **Year ended  September 30,** |       |
|--------------------------------------------------------------------------------------------------------|--------|-------------------------------|------------|
|                                                                                                   |   | **2003**                      |       | **2002** |   | **2001**

  |   |
|                                                                                                   |   | **(In thousands)**            |       |
| Net cash used in operating and investing  activities (balance brought forward)                         |   | $                             | (114,593)  |   | $ | (107,622) |   | $ | (35,646) |   |
|                                                                                                   |   |                          |       |   |   |   |   |
| Cash flows provided by  (used in) financing activities:                                                |   |                          |       |   |   |   |   |
| Net increase in  deposit accounts                                                                      |   | 31,209                        |       | 97,551 |   | 40,007 |   |
| Proceeds from Federal  Home Loan Bank advances and other borrowings                                    |   | 162,950                       |       | 79,250 |   | 85,500 |   |
| Repayment of Federal  Home Loan Bank advances                                                          |   | (96,000                       | )          | (69,289 | ) | (80,000 | ) |
| Proceeds from issuance  of junior subordinated debentures                                              |   | —                        |       | 12,500 |   | — |   |
| Net increase  (decrease) in advances by borrowers for taxes and insurance                              |   | (187                          | )          | (348 | ) | 107 |   |
| Proceeds from exercise  of stock options                                                               |   | 7                             |       | — |   | — |   |
| Net cash provided by  financing activities                                                             |   | 97,979                        |       | 119,664 |   | 45,614 |   |
|                                                                                                   |   |                          |       |   |   |   |   |
| Net increase  (decrease) in cash and cash equivalents                                                  |   | (16,614                       | )          | 12,042 |   | 9,968 |   |
|                                                                                                   |   |                          |       |   |   |   |   |
| Cash and cash  equivalents at beginning of year                                                        |   | 26,637                        |       | 14,595 |   | 4,627 |   |
|                                                                                                   |   |                          |       |   |   |   |   |
| Cash and cash  equivalents at end of year                                                              |   | **$**                         | **10,023** | ** ** | **$** | **26,637** | ** ** | **$** | **14,595** | ** ** |
|                                                                                                   |   |                          | ** ** |   | ** ** |   | ** ** |
| Supplemental  disclosure of cash flow information:                                                     |   |                          | ** ** |   | ** ** |   | ** ** |
| Cash paid during the  year for:                                                                        |   |                          | ** ** |   | ** ** |   | ** ** |
| Federal income taxes                                                                                   |   | **$**                         | **4,530**  | ** ** | **$** | **2,600** | ** ** | **$** | **1,000** | ** ** |
|                                                                                                   |   |                          | ** ** |   | ** ** |   | ** ** |
| Interest on deposits  and borrowings                                                                   |   | **$**                         | **18,206** | ** ** | **$** | **14,833** | ** ** | **$** | **16,023** | ** ** |
|                                                                                                   |   |                          | ** ** |   | ** ** |   | ** ** |
| Supplemental  disclosure of noncash investing activities:                                              |   |                          | ** ** |   | ** ** |   | ** ** |
| Unrealized gains  (losses) on securities designated as available for sale, net of related tax  effects |   | **$**                         | **(752**   | **)** | **$** | **81** | ** ** | **$** | **(1,405** | **)** |
|                                                                                                   |   |                          | ** ** |   | ** ** |   | ** ** |
| Transfers from loans  to real estate acquired through foreclosure                                      |   | **$**                         | **2,863**  | ** ** | **$** | **620** | ** ** | **$** | **197** | ** ** |
|                                                                                                   |   |                          | ** ** |   | ** ** |   | ** ** |
| Loans disbursed to  facilitate sale of real estate acquired through foreclosure                        |   | **$**                         | **2,325**  | ** ** | **$** | **191** | ** ** | **$** | **412** | ** ** |
|                                                                                                   |   |                          | ** ** |   | ** ** |   | ** ** |
| Recognition of  mortgage servicing rights in accordance with SFAS No. 140                              |   | **$**                         | **148**    | ** ** | **$** | **—** | ** ** | **$** | **—** | ** ** |
|                                                                                                   |   |                          | ** ** |   | ** ** |   | ** ** |
| Fair value of assets  received in acquisition of:                                                      |   |                          | ** ** |   | ** ** |   | ** ** |
| Market Financial  Corporation                                                                          |   | **$**                         | **—** | ** ** | **$** | **—** | ** ** | **$** | **56,672** | ** ** |
|                                                                                                   |   |                          | ** ** |   | ** ** |   | ** ** |
| Kenwood Bancorp, Inc.                                                                                  |   | **$**                         | **—** | ** ** | **$** | **56,550** | ** ** | **$** | **—** | ** ** |
|                                                                                                   |   |                          | ** ** |   | ** ** |   | ** ** |
| Ameriana branch  acquisition                                                                           |   | **$**                         | **34,440** | ** ** | **$** | **—** | ** ** | **$** | **—** | ** ** |

** **

The accompanying notes are anintegral part of these statements.

 

48

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**PEOPLES COMMUNITYBANCORP, INC.**

 

 

**NOTES TO CONSOLIDATEDFINANCIAL STATEMENTS**

 

 

**NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTINGPOLICIES**

 

Peoples CommunityBancorp, Inc. (the “Corporation”) was formed in March 2000, coincident with themutual-to-stock conversion of Peoples Community Bank (“Peoples” or the “Bank”),its wholly-owned subsidiary.

 

OnMarch 30, 2001, the Corporation acquired Market Financial Corporation(“Market”) for consideration of $7.8 million in cash and 527,930 shares of theCorporation’s common stock.  Under theterms of the agreement, each share of Market’s common stock was exchanged forcash and/or shares of the Corporation totaling $13.00 per share.  The acquisition was accounted for using thepurchase method of accounting, consequently prior period amounts were notrestated.

 

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 in Blanchester,Ohio.

 

OnApril 26, 2002, the Corporation completed its acquisition of Kenwood Bancorp,Inc. for consideration of $25.22 per outstanding share, totaling $7.9 millionin cash.  Kenwood was merged with andinto the Corporation and Kenwood’s wholly-owned banking subsidiary, KenwoodSavings Bank, became a wholly-owned subsidiary of Peoples.  The Corporation acquired $56.6 million intotal assets and recorded approximately $3.4 million in goodwill as a result ofthe transaction.

 

OnJuly 25, 2003, the Bank sold the Kenwood Savings Bank charter, along with $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 two Ohio branch offices from 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 this transaction.

 

TheCorporation is a savings and loan holding company whose activities areprimarily limited to holding the stock of the Bank.  Peoples conducts a general banking business in southwestern Ohiowhich consists of attracting deposits from the general public and primarilyapplying those funds to the origination of loans for residential, consumer andnonresidential purposes.  Peoples’profitability is significantly dependent on net interest income, which is thedifference between interest income generated from interest-earning assets (i.e.loans and investments) and the interest expense paid on interest-bearingliabilities (i.e. customer deposits and borrowed funds).  Net interest income is affected by therelative amount of interest-earning assets and interest-bearing liabilities andthe interest received or paid on these balances.  The level of interest rates paid or received by Peoples can besignificantly influenced by a number of environmental factors, such asgovernmental monetary policy, that are outside of management’s control.

 

49

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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

 

Theaccompanying consolidated financial statements include the accounts of theCorporation and its wholly-owned subsidiaries, Peoples and Peoples BancorpCapital Trust I.  The fiscal year endedSeptember 30, 2002, also included Peoples’ wholly-owned subsidiary, KenwoodSavings Bank.  All significantintercompany balances and transactions have been eliminated.

 

2.  Investment Securities and Mortgage-BackedSecurities

 

TheCorporation accounts for investment and mortgage-backed securities inaccordance with Statement of Financial Accounting Standards (“SFAS”) No. 115“Accounting for 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 saleare carried at fair value with resulting unrealized gains or losses recorded tostockholders’ equity.

 

Realizedgains and losses on sales of securities are recognized using the specificidentification method.

 

3.  Loans Receivable

 

Loansreceivable are stated at the principal amount outstanding, adjusted fordeferred loan origination fees and the allowance for loan losses.  Interest is accrued as earned unless thecollectibility of the loan is in doubt. Uncollectible interest on loans that are contractually past due ischarged off, or an allowance is established based on management’s periodicevaluation.  The allowance isestablished by a charge to interest income equal to all interest previouslyaccrued.  Income is subsequentlyrecognized only to the extent that cash payments are received until, inmanagement’s judgment, the borrower’s ability to make periodic interest and principalpayments has returned to normal.  Inthis case the loan is returned to accrual status.  If the ultimate collectibility of principal is in doubt, in wholeor in part, all payments received on nonaccrual loans are applied to reduceprincipal until such doubt is eliminated.

 

50

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Duringfiscal 2003, Peoples sold loans as a part of the Kenwood Savings Bank chartersale transaction, retaining servicing on the loans sold.

 

Peoples accounts for mortgage servicing rights pursuant to theprovisions of SFAS No. 140, “Accounting for Transfers and Servicing ofFinancial Assets and Extinguishments of Liabilities,” which requires thatPeoples recognize as separate assets, rights to service mortgage loans forothers, regardless of how those servicing rights are acquired.  An institution that acquires mortgageservicing rights through either the purchase or origination of mortgage loansand sells those loans with servicing rights retained must allocate some of thecost of the loans to mortgage servicing rights.

 

SFAS No. 140 requiresthat capitalized mortgage servicing rights be assessed for impairment.  Impairment is measured based on fairvalue.  The mortgage servicing rightsrecorded by the Peoples, calculated in accordance with the provisions of SFASNo. 140, were segregated into pools for valuation purposes, using as poolingcriteria the loan term and coupon rate. Once pooled, each grouping of loans was evaluated on a discountedearnings basis to determine the present value of future earnings that a purchasercould expect to realize from each portfolio. Earnings were projected from a variety of sources, including loanservicing fees, interest earned on float, net interest earned on escrows,miscellaneous income, and costs to service the loans.  The present value of future earnings is the “economic” value forthe pool, i.e., the net realizable present value to an acquirer of the acquiredservicing.

 

TheBank recorded amortization related to mortgage servicing rights totaling$37,000 for the fiscal year ended September 30, 2003.  At September 30, 2003, the fair value andcarrying value of the Bank’s mortgage servicing rights totaled approximately$111,000.  No mortgage servicing rightsexisted at September 30, 2002.

 

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.

 

51

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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 andanticipated economic 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 increasedby charges 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 evaluating impairedloans 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 loan agreement.  In applying the provisions of SFAS No. 114,the Bank considers its investment in one- to four-family residential loans andconsumer loans to be homogeneous and therefore excluded from separateidentification for evaluation of impairment. With respect to Peoples’ investment in multi-family, nonresidential realestate and land loans, and its evaluation of impairment thereof, such loans arecollateral dependent, and as a result, are carried as a practical expedient atthe lower of cost or fair value.  Withrespect to the Bank’s investment in unsecured commercial lines of credit,impairment is measured based upon the present value of expected future cashflows.

 

Itis Peoples’ policy to charge off unsecured credits that are more than ninetydays delinquent.  Similarly, collateraldependent loans which are more than ninety days delinquent are considered toconstitute more than a minimum delay in repayment and are evaluated forimpairment under SFAS No. 114 at that time.

 

52

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Informationwith respect to the Bank’s impaired loans at and for the years ended September30, 2003 and 2002 is presented below. Peoples had no loans defined as impaired under SFAS No. 114 at September30, 2001.

 
|                                           |   | **2003**            |       | **2002**   |   |
|------------------------------------------------|--------|---------------------|------------|------------|--------|
|                                           |   | **(In  thousands)** |       |
|                                           |   |                |       |       |   |
| Impaired loans with  related allowance         |   | $                   | 7,822      |       | $      | 6,312 |   |
| Impaired loans with no  related allowance      |   | —              |       | —     |   |
|                                           |   |                |       |       |   |
| Total impaired loans                           |   | **$**               | **7,822**  | ** ** | **$**  | **6,312** | ** ** |
|                                           |   |                |       |       |   |
| Allowance for losses  on impaired loans        |   |                |       |       |   |
| Beginning balance                              |   | $                   | 679        |       | $      | — |   |
| Provision for losses  on loans                 |   | 27                  |       | 679        |   |
| Charge-offs                                    |   | (40                 | )          | —     |   |
|                                           |   |                |       |       |   |
| Ending balance                                 |   | **$**               | **666**    | ** ** | **$**  | **679** | ** ** |
|                                           |   |                | ** ** |       |   |
| Average recorded  investment in impaired loans |   | **$**               | **8,853**  | ** ** | **$**  | **2,352** | ** ** |
|                                           |   |                | ** ** |       |   |
| Interest income  recognized on impaired loans  |   | **$**               | **172**    | ** ** | **$**  | **211** | ** ** |

 

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

 

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 subsequently declinesbelow the amount determined at the recording date.  In determining the lower of cost or fair value at acquisition,costs relating to development and improvement of property are capitalized.  Costs relating to holding real estateacquired through foreclosure, net of rental income, are charged againstearnings as incurred.

 

53

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8.  Goodwill

 

Priorto adoption of SFAS No. 142, goodwill was amortized over a ten year periodusing the straight-line method.  Management had periodically evaluated the carrying value ofintangible assets in relation to the continuing earnings capacity of theacquired assets and assumed liabilities. During fiscal 2002, the Corporation recorded a charge to goodwilltotaling $1.0 million following a review of diminished net interest incomearising from loans and deposits acquired in the fiscal 2000 purchase of HarvestHome Financial Corporation.

 

During fiscal2003, the Bank acquired two branch offices from another financial institutionresulting in recognition of $2.3 million in goodwill.  Additionally, the Bank sold its Kenwood Savings Bank charter,resulting in a write-off of approximately $1.7 million of goodwill related tothe fiscal 2002 acquisition of Kenwood.

 

In June 2001, theFinancial Accounting Standards Board issued SFAS No. 142 “Goodwill andIntangible Assets,” which prescribes accounting for all purchased goodwill andintangible assets.  Pursuant to SFAS No.142, acquired goodwill is not amortized, but is tested for impairment at thereporting unit level annually and whenever an impairment indicator arises.  Goodwill has been assigned to the Bank asthe reporting unit that is expected to benefit from the goodwill.

 

Peoplesevaluated the unamortized goodwill balance of $5.5 million during fiscal 2003in accordance with the provisions of SFAS No. 142.  The evaluation showed no indication of impairment.  The adoption of SFAS No. 142 has resulted inthe elimination of annual goodwill amortization of approximately $460,000.

 

The followingtable displays the pro forma effects on net earnings and earnings per share asif SFAS No. 142 had been applicable to the fiscal years ended September 30,2002 and 2001.

 
|                                   |   | **For the  year ended September 30,**         |      |
|----------------------------------------|--------|-----------------------------------------------|-----------|
|                                   |   | **2003**                                      |      | **2002** |   | **2001** |   |
|                                   |   | **(In  thousands, except per share amounts)** |      |
|                                   |   |                                          |      |   |   |   |   |
| Reported net earnings                  |   | $                                             | 3,724     |   | $ | 3,149 |   | $ | 2,324 |   |
|                                   |   |                                          |      |   |   |   |   |
| Add back:   goodwill amortization |   | —                                        |      | 460 |   | 460 |   |
|                                   |   |                                          |      |   |   |   |   |
| Adjusted net earnings                  |   | **$**                                         | **3,724** | ** ** | **$** | **3,609** | ** ** | **$** | **2,784** | ** ** |
|                                   |   |                                          |      |   |   |   |   |
| **Basic earnings per share:**          |   |                                          |      |   |   |   |   |
| Reported net earnings                  |   | $                                             | 1.51      |   | $ | 1.29 |   | $ | 1.08 |   |
| Goodwill amortization                  |   | —                                        |      | .19 |   | .21 |   |
|                                   |   |                                          |      |   |   |   |   |
| Adjusted net earnings                  |   | **$**                                         | **1.51**  | ** ** | **$** | **1.48** | ** ** | **$** | **1.29** | ** ** |
|                                   |   |                                          |      |   |   |   |   |
| **Diluted earnings per share:**        |   |                                          |      |   |   |   |   |
| Reported net earnings                  |   | $                                             | 1.48      |   | $ | 1.27 |   | $ | 1.08 |   |
| Goodwill amortization                  |   | —                                        |      | .19 |   | .21 |   |
|                                   |   |                                          |      |   |   |   |   |
| Adjusted net earnings                  |   | **$**                                         | **1.48**  | ** ** | **$** | **1.46** | ** ** | **$** | **1.29** | ** ** |

 

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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 taxliability or deferred tax asset is computed by applying the current statutorytax rates to net taxable or deductible differences between the tax basis of anasset or liability and its reported amount in the consolidated financialstatements that will result in taxable or deductible amounts in futureperiods.  Deferred tax assets arerecorded only to the extent that the amount of net deductible temporarydifferences or carryforward attributes may be utilized against current periodearnings, carried back against prior years’ earnings, offset against taxabletemporary differences reversing in future periods, or utilized to the extent ofmanagement’s estimate of future taxable income.  A valuation allowance is provided for deferred tax assets to theextent that the value of net deductible temporary differences and carryforwardattributes exceeds management’s estimates of taxes payable on future taxableincome.  Deferred tax liabilities areprovided on the total amount of net temporary differences taxable in thefuture.

 

TheCorporation’s principal temporary differences between pretax financial incomeand taxable income result from different methods of accounting for deferredloan origination fees and costs, Federal Home Loan Bank stock dividends,deferred compensation and stock benefit plans, the general loan loss allowance,percentage of earnings bad debt deductions and purchase price adjustmentsresulting from acquisitions.  Additionaltemporary differences result from depreciation computed using acceleratedmethods for tax purposes.

 

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 provided that each director wasvested at 65% upon adoption with an additional vesting of 15% after three yearsand 5% per year thereafter until 100% vesting is reached.  During fiscal 2001, the plan was amended toprovide for total vesting for all participants.  The provision for directors retirement expense totaled $84,000,$84,000 and $547,000 for the fiscal years ended September 30, 2003, 2002 and2001, respectively.

 

TheCorporation has an Employee Stock Ownership Plan (“ESOP”) which providesretirement benefits for substantially all full-time employees who havecompleted one year of service.  TheCorporation accounts for the ESOP in accordance with Statement of Position(“SOP”) 93-6, “Employers’ Accounting for Employee Stock Ownership Plans.”  SOP 93-6 requires that compensation expenserecorded by employers equal the fair value of ESOP shares allocated toparticipants during a given fiscal year. Expense recognized related to the ESOP totaled $438,000, $361,000 and$292,000 for the fiscal years ended September 30, 2003, 2002 and 2001,respectively.

 

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The Corporation also has a ManagementRecognition Plan (“MRP”) which provides for awards of up to 79,109 shares ofthe Corporation’s common stock to members of the Board of Directors, managementand employees.  As of September 30,2003, the MRP had awarded 57,241 cumulative shares to members of the Board ofDirectors, management and employees. Common shares awarded to outside members of the Board of Directors werefully expensed in fiscal 2001, while shares awarded to members of managementand employees will vest over a five year period beginning with the date of theaward.  Shares awarded under the MRP aredistributed from previously authorized but unissued shares.  Shares distributed to recipients of the awardstotaled 16,120 shares as of September 30, 2003.  The Corporation recorded expense related to the MRP totalingapproximately $128,000, $129,000 and $346,000 for the fiscal years endedSeptember 30, 2003, 2002 and 2001, respectively.

 

11.  Stock Option Plan

 

Duringfiscal 2001 the Board of Directors adopted the Peoples Community Bancorp, Inc.Stock Option and Incentive Plan (the “Plan”) that provides for the issuance of197,773 shares of authorized but unissued shares of common stock at fair valueat the date of grant.  Through September30, 2003, the Corporation had granted 144,996 shares, net of forfeitures, underthe Plan.  The Plan provides thatone-fifth of the options granted become exercisable on each of the first fiveanniversaries of the date of grant.  Theremaining shares in the Plan may be granted to employees in increments of 20%per year based on management’s discretion.

 

TheCorporation accounts for the Plan in accordance with SFAS No. 123, “Accountingfor Stock-Based Compensation,” which contains a fair value-based method forvaluing stock-based compensation that entities may use, which measurescompensation cost at the grant date based on the fair value of the award.  Compensation is then recognized over theservice period, which is usually the vesting period.  Alternatively, SFAS No. 123 permits entities to continue toaccount for stock options and similar equity instruments under AccountingPrinciples Board (“APB”) Opinion No. 25, “Accounting for Stock Issued toEmployees.”  Entities that continue toaccount for stock options using APB Opinion No. 25 are required to make proforma disclosures of net earnings and earnings per share, as if the fairvalue-based method of accounting defined in SFAS No. 123 had been applied.

 

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Infiscal 2001, the Corporation applied APB Opinion No. 25 and relatedInterpretations in accounting for the Plan. Accordingly, no compensation cost had been recognized for the Plan.  Had compensation cost for the Plan beendetermined based on the fair value at the grant date for awards under the Planconsistent with the accounting method utilized in SFAS No. 123, theCorporation’s net earnings and earnings per share would have been reported asthe pro forma amounts indicated below:

 
|                         |                                  | **For the year ended  September 30, 2001** |   |
|------------------------------|---------------------------------------|--------------------------------------------|--------|
|                         |                                  |                                       |   |
| Net earnings (In  thousands) | As reported                           |                                       |   | $ | 2,324 |   |
|                         | Stock-based  compensation, net of tax |                                       |   | (88 | ) |
|                         | Pro-forma                             |                                       |   | **$** | **2,236** |   |
|                         |                                  |                                       |   |   |   |
| Earnings per share           |                                  |                                       |   |   |   |
| Basic                        | As reported                           |                                       |   | $ | 1.08 |   |
|                         | Stock-based  compensation, net of tax |                                       |   | (.04 | ) |
|                         | Pro-forma                             |                                       |   | **$** | **1.04** |   |
|                         |                                  |                                       |   |   |   |
| Diluted                      | As reported                           |                                       |   | $ | 1.08 |   |
|                         | Stock-based  compensation, net of tax |                                       |   | (.04 | ) |
|                         | Pro-forma                             |                                       |   | **$** | **1.04** |   |
|                              |                                       |                                            |        |  |  |  |  |

 

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 $149,000and $143,000 for the fiscal years ended September 30, 2003 and 2002,respectively.

 

Thefair value of stock option grants are estimated on the date of grant using themodified Black-Scholes options-pricing model with the following assumptionsused for grants in fiscal 2003, 2002 and 2001: no dividend yield; expected volatility of 21.4%, 20.0% and 20.0%,respectively; a risk-free interest rate of 3.6%, 2.0% and 4.0%, respectively,and an expected life of ten years for all grants.

 

Asummary of the status of the Plan as of and for the fiscal years endedSeptember 30 is presented below:

 
|                                                            |   | **2003**    |       | **2002**                                |      | **2001**   |        |
|-----------------------------------------------------------------|--------|-------------|------------|-----------------------------------------|-----------|------------|-------------|
|                                                            |   | **Shares**  |       | **Weighted-  average  exercise  price** |      | **Shares** |        | **Weighted-  average  exercise  price** |   | **Shares** |   | **Weighted-  average  exercise  price** |   |
|                                                            |   |        |       |                                    |      |       |        |   |   |   |   |   |   |
| Outstanding at  beginning of year                               |   | 120,329     |       | $                                       | 15.34     |       | 94,861      |   | $ | 14.00 |   | — |   | $ | — |   |
| Granted                                                         |   | 26,391      |       | 23.22                                   |      | 25,728     |        | 20.25 |   | 94,861 |   | 14.00 |   |
| Exercised                                                       |   | (468        | )          | 14.00                                   |      | —     |        | — |   | — |   | — |   |
| Forfeited                                                       |   | (1,724      | )          | 17.99                                   |      | (260       | )           | 14.00 |   | — |   | — |   |
|                                                            |   |        |       |                                    |      |       |        |   |   |   |   |   |   |
| Outstanding at end of  year                                     |   | **144,528** | ** ** | **$**                                   | **16.75** | ** ** | **120,329** | ** ** | **$** | **15.34** | ** ** | **94,861** | ** ** | **$** | **14.00** | ** ** |
|                                                            |   |        |       |                                    |      |       |        |   | ** ** |   | ** ** |   |   |
| Options exercisable at  year-end                                |   | **42,152**  | ** ** | **$**                                   | **14.73** | ** ** | **18,924**  | ** ** | **$** | **14.00** | ** ** | **—** | ** ** | **$** | **—** | ** ** |
|                                                            |   |        |       |                                    |      |       |        |   |   |   |   |   |   |
| Weighted-average fair  value of options granted during the year |   |        | ** ** | **$**                                   | **9.41**  | ** ** |        | ** ** | **$** | **6.19** | ** ** |   | ** ** | **$** | **5.70** |   |
|                                                                 |        |             |            |                                         |           |            |             |  |  |  |  |  |  |  |  |  |  |  |

 

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Thefollowing information applies to options outstanding at September 30, 2003:

 
| Number outstanding                           |   | 118,137         |   |
|----------------------------------------------|--------|-----------------|--------|
| Range of exercise  prices                    |   | $14.00 - $20.25 |   |
|                                         |   |            |   |
| Number outstanding                           |   | 26,391          |   |
| Range of exercise  prices                    |   | $23.22          |   |
|                                         |   |            |   |
| Weighted-average  exercise price             |   | $16.75          |   |
| Weighted-average  remaining contractual life |   | 8.3 years       |   |

 

12.  Earnings Per Share 

 

Basic earnings per share for the fiscalyears ended September 30, 2003, 2002 and 2001 is based upon theweighted-average shares outstanding during the year, less 28,560, 47,600 and85,680 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:

 
|                                                         |   | **2003**      |       | **2002**      |       | **2001**      |       |
|--------------------------------------------------------------|--------|---------------|------------|---------------|------------|---------------|------------|
| Weighted-average  common shares outstanding (basic)          |   | 2,474,673     |       | 2,447,984     |       | 2,147,132     |       |
| Dilutive  effect of  assumed exercise of stock  options |   | 39,490        |       | 29,796        |       | 9,486         |       |
| Weighted-average  common shares outstanding (diluted)        |   | **2,514,163** | ** ** | **2,477,780** | ** ** | **2,156,618** | ** ** |

 

Options to purchase 26,391 shares ofcommon stock at a weighted-average exercise price of $23.22 were outstanding atSeptember 30, 2003, but were excluded from the computation of diluted earningsper share because the exercise price was greater than the average market priceof the common shares.

 

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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 quotedmarket prices are not available, fair values are based on estimates usingpresent value 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 not represent amountsthat could be realized in an exchange for certain financial instruments.

 

Thefollowing methods and assumptions were used by the Corporation in estimating itsfair value disclosures for financial instruments at September 30, 2003 and2002:

 

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 and mortgage-backed securities:  For investment and mortgage-backedsecurities, fair value is deemed to equal the quoted market price.

 

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 Bank stock:  The carrying amount presented in theconsolidated statements of financial condition is deemed 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 Federal Home Loan Bank:  The fair value of these advances isestimated using the rates currently offered for similar advances of similarremaining maturities.

 

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

 

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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 extend credit:  For fixed-rate and adjustable-rate loancommitments, the fair value estimate considers the difference between currentlevels of interest rates and committed rates. At September 30, 2003 and 2002, the difference between the fair valueand notional amount of loan commitments was not material.

 

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

 
|                                     |   | **2003**            |        | **2002**        |   |
|------------------------------------------|--------|---------------------|-------------|-----------------|--------|
|                                     |   | **Carrying  value** |        | **Fair  value** |   | **Carrying  value** |   | **Fair  value** |   |
|                                     |   | **(In  thousands)** |        |
| Financial assets                         |   |                |        |            |   |   |   |   |   |
| Cash and cash equivalents                |   | $                   | 10,244      |            | $      | 10,244 |   | $ | 26,637 |   | $ | 26,637 |   |
| Investment securities                    |   | 2,156               |        | 2,156           |   | 1,231 |   | 1,231 |   |
| Mortgage-backed securities               |   | 133,828             |        | 133,828         |   | 18,763 |   | 18,763 |   |
| Loans receivable                         |   | 554,351             |        | 568,016         |   | 504,012 |   | 527,766 |   |
| Federal Home Loan Bank stock             |   | 10,221              |        | 10,221          |   | 9,907 |   | 9,907 |   |
|                                     |   |                |        |            |   |   |   |   |   |
|                                     |   | **$**               | **710,800** |            | **$**  | **724,465** | ** ** | **$** | **560,550** | ** ** | **$** | **584,304** |   |
| Financial liabilities                    |   |                |        |            |   |   |   |   |   |
| Deposits                                 |   | $                   | 455,900     |            | $      | 464,207 |   | $ | 369,080 |   | $ | 376,680 |   |
| Advances from the Federal Home Loan Bank |   | 218,500             |        | 227,295         |   | 152,500 |   | 153,266 |   |
| Other borrowed money                     |   | 1,400               |        | 1,400           |   | 450 |   | 450 |   |
| Subordinated debentures                  |   | 12,500              |        | 13,313          |   | 12,500 |   | 12,508 |   |
|                                     |   |                |        |            |   |   |   |   |   |
|                                     |   | **$**               | **688,300** |            | **$**  | **706,215** | ** ** | **$** | **534,530** | ** ** | **$** | **542,904** |   |

 

14.  Capitalization

 

TheCorporation’s authorized capital stock includes 1,000,000 shares of $.01 pershare par value voting preferred stock. No preferred shares have been issued at September 30, 2003 and 2002.

 

15.  Advertising

 

Advertisingcosts are expensed when incurred.  TheCorporation’s advertising expense totaled $360,000, $174,000 and $139,000 forthe fiscal years ended September 30, 2003, 2002 and 2001, respectively.

 

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16.  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 institutionswith original maturities of less than ninety days.

 

17.  Reclassifications

 

Certainprior year amounts have been reclassified to conform to the 2003 consolidatedfinancial statement presentation.

 

18.  Recent Accounting Pronouncements

 

In August2001, the Financial Accounting Standards Board (the “FASB”) issued Statement ofFinancial Accounting Standards (“SFAS”) No. 144, “Accounting for the Impairmentor Disposal of Long-Lived Assets.”  SFASNo. 144 carries over the recognition and measurement provisions in SFAS No.121.  Accordingly, an entity mustrecognize an impairment loss if the carrying value of a long-lived asset orasset group (a) is not recoverable and (b) exceeds its fair value.  Similar to SFAS No. 121, SFAS No. 144requires an entity to test an asset or asset group for impairment wheneverevents or changes in circumstances indicate that its carrying amount may not berecoverable.  SFAS No. 144 differs fromSFAS No. 121 in that it provides guidance on estimating future cash flows totest recoverability.  An entity may useeither a probability-weighted approach or best-estimate approach in developingestimates of cash flows to test recoverability.  SFAS No. 144 is effective for financial statements issued forfiscal years beginning after December 15, 2001 and interim periods within thosefiscal years.  Management adopted SFASNo. 144 effective October 1, 2002, without material effect on the Corporation’sfinancial condition or results of operations.

 

In June 2002,the FASB issued SFAS No. 146, “Accounting for Costs Associated with Exit or DisposalActivities.”  SFAS No. 146 providesfinancial accounting and reporting guidance for costs associated with exit ordisposal activities, including one-time termination benefits, contracttermination costs other than for a capital lease, and costs to consolidatefacilities or relocate employees.  SFASNo. 146 is effective for exit or disposal activities initiated after December31, 2002.  Management adopted SFAS No.146 effective January 1, 2003, without material effect on the Corporation’sfinancial condition or results of operations.

 

In October2002, the FASB issued SFAS No. 147, “Accounting for Certain FinancialInstitutions:  An Amendment of FASBStatements No. 72 and 144 and FASB Interpretation No. 9,” which removesacquisitions of financial institutions from the scope of SFAS No. 72,“Accounting for Certain Acquisitions of Banking and Thrift Institutions,”except for transactions between mutual enterprises.  Accordingly, the excess of the fair value of liabilities assumedover the fair value of tangible and intangible assets acquired in a businesscombination should be recognized and accounted for as goodwill in accordancewith SFAS No. 141, “Business Combinations,” and SFAS No. 142, “Goodwill andOther Intangible Assets.”

 

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SFAS No. 147also requires that the acquisition of a less-than-whole financial institution,such as a branch, be accounted for as a business combination if the transferredassets and activities constitute a business. Otherwise, the acquisition should be accounted for as the acquisition ofnet assets.

 

SFAS No. 147also amends the scope of SFAS No. 144, “Accounting for the Impairment orDisposal of Long-Lived Assets,” to include long-term customer relationshipassets of financial institutions (including mutual enterprises) such asdepositor- and borrower-relationship intangible assets and credit cardholderintangible assets.

 

The provisionsof SFAS No. 147 related to unidentifiable intangible assets and the acquisitionof a less-than-whole financial institution are effective for acquisitions forwhich the date of acquisition is on or after October 1, 2002.  The provisions related to impairment oflong-term customer relationship assets are effective October 1, 2002.  Transition provisions for previouslyrecognized unidentifiable intangible assets are effective on October 1, 2002,with earlier application permitted.

 

Managementadopted SFAS No. 147 on October 1, 2002, without material effect on theCorporation’s financial condition or results of operations.

 

In December 2002, the FASBissued SFAS No. 148, “Accounting for Stock-Based Compensation - Transition andDisclosure.”  SFAS No. 148 amends SFASNo. 123, “Accounting for Stock-Based Compensation,” to provide alternativemethods of transition for a voluntary change to the fair value based method ofaccounting for stock-based employee compensation.  In addition, SFAS No. 148 amends the disclosure requirements ofSFAS No. 123 to require prominent disclosures in both annual and interim financialstatements about the method of accounting for stock-based employee compensationand the effect of the method used on reported results.  SFAS No. 148 is effective for fiscal yearsbeginning after December 15, 2002.  Theinterim disclosure provisions are effective for financial reports containingfinancial statements for interim periods beginning after December 15,2002.  Management elected to recordexpense related to stock options beginning in fiscal 2002 and, as a result,adoption of SFAS No. 148 did not have a material effect on the Corporation’sfinancial position or results of operations.

 

In November2002, the FASB issued FASB Interpretation No. 45 (“FIN 45”), “Guarantor’sAccounting and Disclosure Requirements for Guarantees, Including IndirectGuarantees of Indebtedness of Others.” FIN 45 requires a guarantor entity, at the inception of a guaranteecovered by the measurement provisions of the interpretation, to record aliability for the fair value of the obligation undertaken in issuing theguarantee.  The Bank has financialletters of credit which require the Bank to make payment if the customer’sfinancial condition deteriorates, as defined in the agreements.  FIN 45 requires the Bank to record aninitial liability, generally equal to the fees received for these letters ofcredit when guaranteeing obligations. FIN 45 applies prospectively to letters of credit the Bank issues ormodifies subsequent to December 31, 2002.

 

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The Bankdefines the initial fair value of these letters of credit as the fee receivedfrom the customer.  The maximumpotential undiscounted amount of future payments of these letters of credit asof September 30, 2003 was $874,000 and they expire through fiscal 2006.  Amounts due under these letters of creditwould be reduced by any proceeds that the Bank would be able to obtain inliquidating the collateral for the loans, which varies depending on thecustomer.

 

In January 2003, the FASBissued FASB Interpretation No. 46 (“FIN 46”), “Consolidation of VariableInterest Entities.” FIN 46 requires a variable interest entity to beconsolidated by a company if that company is subject to a majority of the riskof loss from the variable interest entity’s activities or entitled to receive amajority of the entity’s residual returns, or both. FIN 46 also requiresdisclosures about variable interest entities that a company is not required toconsolidate, but in which it has a significant variable interest. Theconsolidation requirements of FIN 46 apply immediately to variable interestentities created after January 31, 2003. The consolidation requirements applyto existing entities in the first fiscal year or interim period beginning afterJune 15, 2003. Certain of the disclosure requirements apply in all financialstatements issued after January 31, 2003, regardless of when the variableinterest entity was established.  TheCorporation adopted the provisions of FIN 46 effective January 31, 2003,without material effect on its financial position or results of operations.

 

In April 2003,the FASB issued SFAS No. 149, “Amendment of Statement 133 on DerivativeInstruments and Hedging Activities,” which clarifies certain implementationissues raised by constituents and amends SFAS No. 133, “Accounting forDerivative Instruments and Hedging Activities,” to include the conclusionsreached by the FASB on certain FASB Staff Implementation Issues that, whileinconsistent with Statement 133’s conclusions, were considered by the Board tobe preferable; amends SFAS No. 133’s discussion of financial guaranteecontracts and the application of the shortcut method to an interest-rate swapagreement that includes an embedded option and amends other pronouncements.

 

The guidancein Statement 149 is effective for new contracts entered into or modified afterJune 30, 2003 and for hedging relationships designated after that date.  Management adopted SFAS No. 149 effectiveJuly 1, 2003, as required, without material effect on the Corporation’sfinancial position or results of operations.

 

In May 2003,the FASB issued SFAS No. 150, “Accounting for Certain Financial Instrumentswith Characteristics of both Liabilities and Equity,” which changes theclassification in the statement of financial position of certain commonfinancial instruments from either equity or mezzanine presentation toliabilities and requires an issuer of those financial statements to recognizechanges in fair value or redemption amount, as applicable, in earnings.  SFAS No. 150 requires an issuer to classifycertain financial instruments as liabilities, including mandatorily redeemablepreferred and common stocks.

 

SFAS No. 150is effective for financial instruments entered into or modified after May 31,2003 and, with one exception, is effective at the beginning of the firstinterim period beginning after June 15, 2003 (July 1, 2003 as to theCorporation).  The effect of adoptingSFAS No. 150 must be recognized as a cumulative effect of an accounting changeas of the beginning of the period of adoption. Restatement of prior periods is not permitted.  Management adopted SFAS No. 150 effective July 1, 2003, withoutmaterial effect on the Corporation’s financial position or results ofoperations.

 

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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, 2003 and 2002, aresummarized as follows:

 
|                    |   | **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** |   |

 
|                    |   | **2002**            |      |
|-------------------------|--------|---------------------|-----------|
|                    |   | **Amortized  cost** |      | **Gross  unrealized  gains** |   | **Gross  unrealized  losses** |   | **Estimated  fair  value** |   |
|                    |   | **(In  thousands)** |      |
| **Available for sale:** |   |                |      |   |   |   |   |   |   |
|                    |   |                |      |   |   |   |   |   |   |
| FHLMC stock             |   | $                   | 1,391     |   | $ | — |   | $ | 192 |   | $ | 1,199 |   |
| Other equity securities |   | 29                  |      | 3 |   | — |   | 32 |   |
|                    |   |                |      |   |   |   |   |   |   |
|                    |   | **$**               | **1,420** |   | **$** | **3** | ** ** | **$** | **192** | ** ** | **$** | **1,231** |   |

 

Proceedsfrom sales of investment securities amounted to $32,000 for the fiscal yearended September 30, 2003, resulting in gross realized gains totaling $4,000.

 

Proceedsfrom sales of investment securities amounted to $4.2 million for the fiscalyear ended September 30, 2001, resulting in gross realized gains totaling$2.5 million.

 

Theamortized cost, gross unrealized gains, gross unrealized losses and estimatedfair values of mortgage-backed securities at September 30, 2003 and 2002, aresummarized as follows:

 
|                                                               |   | **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** |   |

 

64

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|                                                                 |   | **2002**            |       |
|----------------------------------------------------------------------|--------|---------------------|------------|
|                                                                 |   | **Amortized  cost** |       | **Gross  unrealized  gains** |   | **Gross  unrealized  losses** |   | **Estimated  fair  value** |   |
|                                                                 |   | **(In  thousands)** |       |
| **Available for sale:**                                              |   |                |       |   |   |   |   |   |   |
| Government National Mortgage Association  participation certificates |   | **$**               | **18,479** | ** ** | **$** | **284** | ** ** | **$** | **—** | ** ** | **$** | **18,763** | ** ** |
|                                                                      |        |                     |            |  |  |  |  |  |  |  |  |  |  |

 

The amortizedcost of mortgage-backed securities, by contractual terms to maturity, are shownbelow.  Expected maturities will differfrom contractual maturities because borrowers may generally prepay obligations withoutprepayment penalties.

 
|                       |   | **September  30,** |        |
|----------------------------|--------|--------------------|-------------|
|                       |   | **2003**           |        | **2002** |   |
|                       |   | **(In thousands)** |        |
|                       |   |               |        |   |   |
| Due in three to five years |   | $                  | —      |   | $ | 8,681 |   |
| Due in five to ten years   |   | 33,179             |        | 9,798 |   |
| Due in ten to twenty years |   | 101,419            |        | — |   |
|                       |   |               |        |   |   |
|                       |   | **$**              | **134,598** |   | **$** | **18,479** |   |

 

Proceeds fromsales of mortgage-backed securities amounted to $68.4 million during the fiscalyear ended  September 30, 2003,resulting in gross realized gains totaling $489,000.  Proceeds from sales of mortgage-backed securities acquired in theKenwood acquisition amounted to $3.5 million during the fiscal year endedSeptember 30, 2002, resulting in gross realized gains of $17,000 and grossrealized losses of $20,000.  Proceedsfrom sales of mortgage-backed securities amounted to $71.7 million during thefiscal year ended September 30, 2001, resulting in gross realized gainstotaling $2.3 million and gross realized losses totaling $69,000.

 

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.

 

65

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**NOTE C - LOANS RECEIVABLE**

 

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

 
|                                     |   | **2003**           |        | **2002**   |   |
|------------------------------------------|--------|--------------------|-------------|------------|--------|
|                                     |   | **(In thousands)** |        |
| Residential real  estate                 |   |               |        |       |   |
| One- to four-family                      |   | $                  | 230,775     |       | $      | 296,294 |   |
| Multifamily                              |   | 95,459             |        | 56,980     |   |
| Construction                             |   | 90,788             |        | 51,544     |   |
| Nonresidential real estate and land      |   | 131,444            |        | 88,029     |   |
| Nonresidential real estate construction  |   | 31,810             |        | 38,458     |   |
| Commercial                               |   | 29,955             |        | 21,280     |   |
| Consumer and other                       |   | 11,769             |        | 4,265      |   |
| Total loans receivable                   |   | 622,000            |        | 556,850    |   |
|                                     |   |               |        |       |   |
| Less:                                    |   |               |        |       |   |
| Undisbursed portion of  loans in process |   | 55,308             |        | 43,144     |   |
| Deferred loan origination fees           |   | 2,597              |        | 2,038      |   |
| Allowance for loan losses                |   | 9,744              |        | 7,656      |   |
|                                     |   |               |        |       |   |
| Loans receivable - net                   |   | **$**              | **554,351** | ** ** | **$**  | **504,012** | ** ** |

 

Asdepicted above, Peoples has continued to change the composition of its loanportfolio from a primary focus on one- to four-family residential loans, to theaddition of loans secured by multi-family residential and nonresidential realestate.  One- to four-family residentialloans comprised 41.6% and 58.8% of the total net loan portfolio at September30, 2003 and 2002, respectively. Multi-family residential loans comprised approximately $95.5 million, or17.2%, of the net loan portfolio at September 30, 2003, and $57.0 million or11.3%, of the net loan portfolio at September 30, 2002.  Nonresidential real estate lending comprisedapproximately $163.3 million, or 29.4%, and $126.5 million, or 25.1%, of thenet loan portfolio at September 30, 2003 and September 30, 2002,respectively.  Generally, real estateloans have been underwritten on the basis of no more than an 80% loan-to-valueratio, which has historically provided Peoples with adequate collateralcoverage in the event of default. Nevertheless, Peoples, as with any lending institution, is subject tothe risk that real estate values could deteriorate in its primary lending areaof southwestern Ohio, thereby impairing collateral values.  However, management believes that realestate values in Peoples’ primary lending area are presently stable.

 

In theordinary course of business, Peoples has granted loans to some of itsdirectors, officers and their related business interests.  All loans to related parties have been madeon substantially the same terms as those prevailing at the time for unrelatedthird parties.  The aggregate dollaramount of loans to executive officers and directors was approximately $893,000and $1.2 million at September 30, 2003 and 2002, respectively.  During the fiscal year ended September 30,2003, there were no loans originated to executive officers and directors, whileprincipal repayments of $265,000 were received from executive officers anddirectors.

 

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**NOTE D - ALLOWANCE FOR LOAN LOSSES**

 

The activityin the allowance for loan losses is summarized as follows for the fiscal yearsended September 30:

 
|                                                   |   | **2003**           |      | **2002**   |   | **2001**  |       |
|--------------------------------------------------------|--------|--------------------|-----------|------------|--------|-----------|------------|
|                                                   |   | **(In thousands)** |      |
|                                                   |   |               |      |       |   |      |       |
| Balance at beginning of year                           |   | $                  | 7,656     |       | $      | 3,662     |       | $ | 762 |   |
| Provision for losses on loans                          |   | 4,198              |      | 5,265      |   | 2,449     |       |
| Charge-off of loans                                    |   | (2,122             | )         | (1,547     | )      | —    |       |
| Recoveries                                             |   | 12                 |      | —     |   | —    |       |
| Allowance resulting from acquisition of  Market - net  |   | —             |      | —     |   | 451       |       |
| Allowance resulting from acquisition of  Kenwood - net |   | —             |      | 276        |   | —    |       |
|                                                   |   |               |      |       |   |      |       |
| Balance at end of year                                 |   | **$**              | **9,744** | ** ** | **$**  | **7,656** | ** ** | **$** | **3,662** | ** ** |

 

At September30, 2003, the Bank’s allowance for loan losses was solely general in nature andis includible as a component of regulatory risk-based capital, subject tocertain percentage limitations.

 

At September30, 2003, 2002 and 2001, the Bank’s nonperforming loans, including impairedloans, totaled $9.6 million, $7.5 million and $783,000, respectively.  Interest income which would have beenrecognized if such loans had performed pursuant to contractual terms totaledapproximately $266,000, $343,000 and $27,000 for the fiscal years endedSeptember 30, 2003, 2002 and 2001, respectively.

 

**NOTE E - OFFICE PREMISES AND EQUIPMENT**

 

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

 
|                               |   | **2003**           |       | **2002** |   |
|------------------------------------|--------|--------------------|------------|----------|--------|
|                               |   | **(In thousands)** |       |
|                               |   |               |       |     |   |
| Land and improvements              |   | $                  | 3,858      |     | $      | 2,563 |   |
| Office buildings and  improvements |   | 9,237              |       | 8,010    |   |
| Furniture, fixtures and equipment  |   | 3,837              |       | 3,397    |   |
|                               |   | 16,932             |       | 13,970   |   |
| Less accumulated depreciation      |   | 3,876              |       | 2,997    |   |
|                               |   |               |       |     |   |
|                               |   | **$**              | **13,056** |     | **$**  | **10,973** |   |

 

During fiscal2002, the Corporation committed to begin construction of four new branch officefacilities located in southwestern Ohio. Two of the new offices replaced existing branch buildings and werecompleted and opened in the third and fourth quarter of fiscal 2003.  The cost of these two projects amounted toapproximately $2.1 million.  During thefourth quarter of fiscal 2003, the Corporation began construction of a branchoffice in Warren County.  This office isexpected to be completed in the second quarter of fiscal 2004 at an estimatedcost of $1.2 million.   A commitment wasalso made during fiscal 2003 to construct a new office in Butler County withexpected completion in the third quarter of fiscal 2004.  The cost of this project is estimated at$3.2 million.

 

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**NOTE F - DEPOSITS**

 

Depositsconsist of the following major classifications at September 30:

 
| **Deposit type and weighted-average**                           |   | **2003**                   |        | **2002**   |      |
|-----------------------------------------------------------------|--------|----------------------------|-------------|------------|-----------|
| **interest rate**                                               |   | **Amount**                 |        | **%**      |      | **Amount** |   | **%** |   |
|                                                            |   | **(Dollars in thousands)** |        |
|                                                            |   |                       |        |       |      |   |   |   |   |
| Non-interest bearing checking accounts                          |   | $                          | 9,266       |       | 2.0       | % | $ | 6,075 |   | 1.6 | % |
| Checking accounts - 1.38% in 2003 and 1.51%  in 2002            |   | 29,602                     |        | 6.5        |      | 17,220 |   | 4.7 |   |
| Savings accounts - 1.39% in 2003 and 2.98%  in 2002             |   | 134,767                    |        | 29.6       |      | 87,193 |   | 23.7 |   |
| Money market demand deposit - 1.26% in 2003  and 2.51% in 2002  |   | 37,382                     |        | 8.2        |      | 29,265 |   | 7.9 |   |
| Total demand, transaction and passbook  deposits                |   | 211,017                    |        | 46.3       |      | 139,753 |   | 37.9 |   |
|                                                            |   |                       |        |       |      |   |   |   |   |
| Certificates of  deposit:                                       |   |                       |        |       |      |   |   |   |   |
| Original maturities of:                                         |   |                       |        |       |      |   |   |   |   |
| Less than 12 months 1.95% in 2003 and 2.92%  in 2002            |   | 23,543                     |        | 5.1        |      | 53,674 |   | 14.5 |   |
| 12 months to 36 months 3.06% in 2003 and  3.87% in 2002         |   | 131,652                    |        | 28.9       |      | 114,171 |   | 30.9 |   |
| More than 36 months 5.05% in 2003 and 5.44%  in 2002            |   | 45,404                     |        | 10.0       |      | 36,493 |   | 9.9 |   |
| Individual retirement  accounts 4.44% in 2003 and 4.99% in 2002 |   | 44,284                     |        | 9.7        |      | 24,989 |   | 6.8 |   |
|                                                            |   |                       |        |       |      |   |   |   |   |
| Total certificates of deposit                                   |   | 244,883                    |        | 53.7       |      | 229,327 |   | 62.1 |   |
|                                                            |   |                       |        |       |      |   |   |   |   |
| Total deposits                                                  |   | **$**                      | **455,900** | ** ** | **100.0** | **%** | **$** | **369,080** | ** ** | **100.0** | **%** |

 

At September30, 2003 and 2002, Peoples had certificate of deposit accounts with balancesgreater than $100,000 totaling $46.2 million and $55.2 million, respectively.

 

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

 
|                                 |   | **2003**            |       | **2002** |   | **2001**   |       |
|--------------------------------------|--------|---------------------|------------|----------|--------|------------|------------|
|                                 |   | **(In  thousands)** |       |
|                                 |   |                |       |     |   |       |       |
| Checking accounts                    |   | $                   | 207        |     | $      | 218        |       | $ | 111 |   |
| Savings and escrow accounts          |   | 2,459               |       | 1,392    |   | 768        |       |
| Money market demand deposit accounts |   | 604                 |       | 776      |   | 818        |       |
| Certificates of deposit              |   | 7,990               |       | 8,078    |   | 7,279      |       |
|                                 |   |                |       |     |   |       |       |
|                                 |   | **$**               | **11,260** |     | **$**  | **10,464** | ** ** | **$** | **8,976** |   |

 

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

 
|                    |   | **2003**            |        | **2002** |   |
|-------------------------|--------|---------------------|-------------|----------|--------|
|                    |   | **(In  thousands)** |        |
|                    |   |                |        |     |   |
| Less than one year      |   | $                   | 125,197     |     | $      | 123,283 |   |
| One year to three years |   | 67,782              |        | 67,151   |   |
| Over three years        |   | 51,904              |        | 38,893   |   |
|                    |   |                |        |     |   |
|                    |   | **$**               | **244,883** |     | **$**  | **229,327** |   |

 

**NOTE G - ADVANCES FROM THE FEDERAL HOME LOANBANK**

 

Advances fromthe Federal Home Loan Bank, collateralized at September 30, 2003 by pledges ofcertain residential mortgage loans totaling $215.5 million, certain mortgagebacked securities totaling $49.6 million, and Peoples’ investment in FederalHome Loan Bank stock, are summarized as follows:

 
|                           |   | **Maturing  fiscal** |   | **September  30,**         |        |
|--------------------------------|--------|----------------------|--------|----------------------------|-------------|
| **Interest Rate**              |   | **year  ending in**  |   | **2003**                   |        | **2002** |   |
|                           |   |                 |   | **(Dollars in thousands)** |        |
|                           |   |                 |   |                       |        |   |   |
| 1.10%                          |   | 2004                 |   | $                          | 66,000      |   | $ | — |   |
| 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 |   |
|                           |   |                 |   |                       |        |   |   |
|                           |   |                 |   | **$**                      | **218,500** |   | **$** | **152,500** |   |
|                           |   |                 |   |                       |        |   |   |
| Weighted-average interest rate |   |                 |   | **3.08**                   | **%**       | **3.93** | **%** |

 

**NOTE H - OTHER BORROWED MONEY**

 

TheCorporation has a $10.0 million line of credit with another financialinstitution, with interest payable at LIBOR plus 150 basis points.  At September 30, 2003 and 2002, theCorporation had $1.4 million and $450,000 outstanding at an interest rate of2.62% and 3.31%, respectively.  Thisline of credit expires in the second quarter of fiscal 2004.  The loan is secured by the outstandingshares of the Bank.

 

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**NOTEI - GUARANTEED PREFERRED BENEFICIAL INTERESTS IN JUNIOR SUBORDINATED DEBENTURES**

 

In November2001, a Delaware trust owned by the Corporation (the “Trust”), issued $12.5million of mandatorily redeemable debt securities.  The debt securities issued by the Trust are included in theCorporation’s regulatory capital, specifically as a component of Tier Icapital.  The subordinated debenturesare the sole assets of the Trust, and the Corporation owns all of the commonsecurities of the Trust.  Interestpayments on the debt securities are made semi-annually at an annual variableinterest rate equal to the six-month LIBOR rate plus 375 basis points, or equalto 4.81% and 5.78% at September 30, 2003 and 2002, respectively, and arereported as a component of interest expense on borrowings.  The net proceeds received by the Corporationfrom the sale of the debt securities were used for general corporate purposes,including to facilitate the growth of the Bank.

 

**NOTE J - COMMITMENTS**

 

Peoples is aparty to financial instruments with off-balance-sheet risk in the normal courseof business to meet the financing needs of its customers, including commitmentsto extend credit.  Such commitmentsinvolve, to varying degrees, elements of credit and interest-rate risk inexcess 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 in making commitments andconditional obligations as those utilized for on-balance-sheet instruments.

 

At September30, 2003, Peoples had commitments to originate loans totaling $16.3 million,commitments for unused lines of credit under home equity loans totaling $23.8million, commitments for unused commercial lines of credit totaling $2.6million, and commitments for letters of credit under commercial loans totaling$1.0 million.  Management believes thatsuch loan commitments are able to be funded through normal cash flow fromoperations.  Fees received in connectionwith the commitments to originate loans have not been recognized inearnings.  Additionally, Peoples hadcommitments to purchase mortgage-backed securities totaling $70.0 million atSeptember 30, 2003.

 

Commitments toextend 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.

 

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Peoples hadalso entered into lease agreements for office premises under operating leaseswhich expire at various dates through 2012. The following table summarizes minimum payments due under leaseagreements by year.

 

 
| **Year  ending  September 30,** |   | **(Dollars  in thousands)** |    |
|---------------------------------|--------|-----------------------------|---------|
|                            |   |                        |    |
| 2004                            |   | $                           | 123     |   |
| 2005                            |   | 123                         |    |
| 2006                            |   | 119                         |    |
| 2007                            |   | 113                         |    |
| 2008                            |   | 100                         |    |
| 2009 and thereafter             |   | 333                         |    |
|                            |   |                        |    |
|                            |   | **$**                       | **911** |   |

 

###### **NOTE K - FEDERAL INCOME TAXES**

 

Federal incometaxes differ from the amounts computed at the statutory corporate tax rate forthe fiscal years ended September 30 as follows:
|                                                        |   | **2003**                    |      | **2002**   |   | **2001**  |       |
|-------------------------------------------------------------|--------|-----------------------------|-----------|------------|--------|-----------|------------|
|                                                        |   | **(Dollars  in thousands)** |      |
|                                                        |   |                        |      |       |   |      |       |
| Federal income taxes at statutory rate                      |   | $                           | 1,920     |       | $      | 1,884     |       | $ | 1,574 |   |
| Increase in taxes resulting from:                           |   |                        |      |       |   |      |       |
| Amortization and other charges related to  goodwill         |   | —                      |      | 495        |   | 590       |       |
| Nondeductible merger-related expenses                       |   | —                      |      | —     |   | 108       |       |
| Other                                                       |   | 2                           |      | 13         |   | 32        |       |
| Federal income taxes per consolidated financial  statements |   | **$**                       | **1,922** | ** ** | **$**  | **2,392** | ** ** | **$** | **2,304** | ** ** |
|                                                        |   |                        |      |       |   |      |       |
| Effective tax rate                                          |   | **34.0**                    | **%**     | **43.2**   | **%**  | **49.8**  | **%**      |

 

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Thecomposition of the Corporation’s net deferred tax asset at September 30 is asfollows:

 
|                                                                                  |   | **2003**            |      | **2002**   |   |
|---------------------------------------------------------------------------------------|--------|---------------------|-----------|------------|--------|
|                                                                                  |   | **(In  thousands)** |      |
| Taxes (payable) refundable on temporary  differences at estimated corporate tax rate: |   |                |      |       |   |
| Deferred tax assets:                                                                  |   |                |      |       |   |
| General loan loss allowance                                                           |   | $                   | 3,313     |       | $      | 2,603 |   |
| Deferred compensation                                                                 |   | 493                 |      | 488        |   |
| Stock benefit plans                                                                   |   | 22                  |      | 103        |   |
| Deferred loan origination fees                                                        |   | 883                 |      | 693        |   |
| Unrealized losses on securities designated  as available for sale                     |   | 355                 |      | —     |   |
| Other                                                                                 |   | —              |      | 14         |   |
| Total deferred tax assets                                                             |   | 5,066               |      | 3,901      |   |
|                                                                                  |   |                |      |       |   |
| Deferred tax liabilities:                                                             |   |                |      |       |   |
| Percentage of earnings bad debt deduction                                             |   | (36                 | )         | (119       | )      |
| Cash versus accrual basis of accounting                                               |   | (70                 | )         | (156       | )      |
| Federal Home Loan Bank stock dividends                                                |   | (1,096              | )         | (989       | )      |
| Book/tax depreciation differences                                                     |   | (17                 | )         | (26        | )      |
| Unrealized gains on securities designated  as available for sale                      |   | —              |      | (32        | )      |
| Purchase price adjustments                                                            |   | (404                | )         | (404       | )      |
| Total deferred tax liabilities                                                        |   | (1,623              | )         | (1,726     | )      |
|                                                                                  |   |                |      |       |   |
| Net deferred tax asset                                                                |   | **$**               | **3,443** | ** ** | **$**  | **2,175** | ** ** |

 

Prior tofiscal 1997, Peoples was allowed a special bad debt deduction based on a percentageof earnings, generally limited to 8% of otherwise taxable income and subject tocertain limitations based on aggregate loans and savings account balances atthe end of the year.  This deductiontotaled approximately $4.9 million as of September 30, 2003.  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 $1.6 million.

 

As a result offiscal 1997 legislative changes, Peoples is required to recapture as taxable incomeapproximately $1.2 million of its tax bad debt reserve, which represents thepost-1987 additions to the reserve, and is unable to utilize the percentage ofearnings method to compute its bad debt deduction in the future.  Peoples has provided deferred taxes for thisamount and began to amortize the recapture of the bad debt reserve into taxableincome over a six year period in fiscal 1999.

 

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**NOTE L - REGULATORY CAPITAL**

 

Peoples issubject 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 financialstatements.  Under capital adequacyguidelines and the regulatory framework for prompt corrective action, the Bankmust meet specific capital guidelines that involve quantitative measures of itsassets, liabilities, and certain off-balance-sheet items as calculated underregulatory accounting practices.  TheBank’s capital amounts and classification are also subject to qualitativejudgments by the regulators about components, risk weightings, and otherfactors.

 

The minimumcapital standards of the OTS generally require the maintenance of regulatorycapital sufficient to meet each of three tests, hereinafter described as thetangible capital requirement, the core capital requirement and the risk-basedcapital requirement.  The tangiblecapital requirement provides for minimum tangible capital (defined asstockholders’ equity less all intangible assets) equal to 1.5% of adjustedtotal assets.  The core capitalrequirement provides for minimum core capital (tangible capital plus certainforms of supervisory goodwill and other qualifying intangible assets) generallyequal to 4.0% of adjusted total assets, except for those associations with thehighest regulatory examination rating and acceptable levels of risk.  The risk-based capital requirement providesfor the maintenance of core capital plus general loss allowances equal to 8.0%of risk-weighted assets.  In computingrisk-weighted assets, Peoples multiplies the value of each asset on itsstatement of financial condition by a defined risk-weighting factor, e.g., one-to four-family residential loans carry a risk-weighted factor of 50%.

 

During fiscal2003, the Bank was notified by the OTS that it was categorized as“well-capitalized” under the regulatory framework for prompt correctiveaction.  To be categorized as“well-capitalized” the Bank must maintain minimum capital ratios as set forthin the following table.

 

As ofSeptember 30, 2003, Peoples exceeded all capital adequacy requirements to whichit was subject.  As of September 30,2002, Peoples and its subsidiary, Kenwood Savings Bank, exceeded all capitaladequacy requirements to which they were subject.

 
| **Peoples Community Bank** |   | **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           |   | $                             | 55,081 |   | 7.5 | % | 3$ | 11,004 |   | 31.5 | % | 3$ | 36,681 |   | 35.0 | % |
|                       |   |                          |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Core capital               |   | $                             | 55,081 |   | 7.5 | % | 3$ | 29,345 |   | 34.0 | % | 3$ | 44,017 |   | 36.0 | % |
|                       |   |                          |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Risk-based capital         |   | $                             | 61,429 |   | 12.1 | % | 3$ | 40,628 |   | 38.0 | % | 3$ | 50,785 |   | 310.0 | % |

 

73

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|               |   | **As of  September 30, 2002** |   |
|--------------------|--------|-------------------------------|--------|
|               |   | **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   |   | $                             | 50,793 |   | 8.8 | % | 3$ | 8,704 |   | 31.5 | % | 3$ | 29,013 |   | 35.0 | % |
|               |   |                          |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Core capital       |   | $                             | 50,793 |   | 8.8 | % | 3$ | 23,210 |   | 34.0 | % | 3$ | 34,815 |   | 36.0 | % |
|               |   |                          |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Risk-based capital |   | $                             | 55,689 |   | 13.7 | % | 3$ | 32,549 |   | 38.0 | % | 3$ | 40,686 |   | 310.0 | % |

 
| **Kenwood Savings Bank** |   | **As of  September 30, 2002** |   |
|--------------------------|--------|-------------------------------|--------|
|                     |   | **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         |   | $                             | 4,355  |   | 7.7 | % | 3$ | 849 |   | 31.5 | % | 3$ | 2,830 |   | 35.0 | % |
|                     |   |                          |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Core capital             |   | $                             | 4,355  |   | 7.7 | % | 3$ | 2,264 |   | 34.0 | % | 3$ | 3,396 |   | 36.0 | % |
|                     |   |                          |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Risk-based capital       |   | $                             | 4,456  |   | 16.2 | % | 3$ | 2,205 |   | 38.0 | % | 3$ | 2,756 |   | 310.0 | % |

 

Managementbelieves that, under the current regulatory capital regulations, the Bank willcontinue to meet its minimum capital requirements in the foreseeablefuture.  However, events beyond thecontrol of the Bank, such as increased interest rates or a downturn in theeconomy in the Bank’s market area, could adversely affect future earnings and,consequently, the ability to meet future minimum regulatory capitalrequirements.

 

74

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**NOTE M - CONDENSED FINANCIAL STATEMENTS OFPEOPLES COMMUNITY BANCORP, INC.**

 

The followingcondensed financial statements summarize the financial position of PeoplesCommunity Bancorp, Inc. as of September 30, 2003 and 2002, and the results ofits operations and its cash flows for the fiscal years ended September 30,2003, 2002 and 2001.

 

**PEOPLES COMMUNITY BANCORP, INC.**

**STATEMENTSOF FINANCIAL CONDITION**

September 30, 2003 and 2002

(In thousands)

 
|                                                                                          |   | **2003** |       | **2002**   |       |
|-----------------------------------------------------------------------------------------------|--------|----------|------------|------------|------------|
|                                                                                          |   |     | ** ** |       | ** ** |
| **ASSETS**                                                                                    |   |     |       |       |       |
|                                                                                          |   |     |       |       |       |
| **Cash and cash equivalents**                                                                 |   | **$**    | **31**     | ** ** | **$**      | **17** | ** ** |
| Loan receivable from ESOP                                                                     |   | 286      |       | 476        |       |
| Investment in Peoples Community Bank                                                          |   | 60,107   |       | 55,857     |       |
| Accrued interest receivable from ESOP                                                         |   | —   |       | 28         |       |
| Prepaid federal income taxes                                                                  |   | 665      |       | 388        |       |
|                                                                                          |   |     |       |       |       |
| Total assets                                                                                  |   | **$**    | **61,089** | ** ** | **$**      | **56,766** | ** ** |
|                                                                                          |   |     |       |       |       |
| **LIABILITIES AND STOCKHOLDERS’ EQUITY**                                                 |   |     |       |       |       |
|                                                                                          |   |     |       |       |       |
| Accrued expenses and other liabilities                                                        |   | $        | 490        |       | $          | 826 |   |
| Borrowings                                                                                    |   | 1,400    |       | 450        |       |
| Guaranteed preferred beneficial interests  in junior subordinated debentures                  |   | 12,500   |       | 12,500     |       |
| Total liabilities                                                                             |   | 14,390   |       | 13,776     |       |
|                                                                                          |   |     |       |       |       |
| Stockholders’ equity                                                                     |   |     |       |       |       |
| Common stock and additional paid-in capital                                                   |   | 24,217   |       | 23,480     |       |
| Retained earnings                                                                             |   | 23,171   |       | 19,447     |       |
| Unrealized gains (losses) on securities  designated as available for sale, net of tax effects |   | (689     | )          | 63         |       |
| Total stockholders’ equity                                                               |   | 46,699   |       | 42,990     |       |
|                                                                                          |   |     |       |       |       |
| Total liabilities and stockholders’ equity                                               |   | **$**    | **61,089** | ** ** | **$**      | **56,766** | ** ** |

 

75

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**PEOPLESCOMMUNITY BANCORP, INC.**

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

**Forthe years ended September 30, 2003, 2002 and 2001**

(In thousands)

 
|                                          |   | **2003** |      | **2002**   |   | **2001**  |       |
|-----------------------------------------------|--------|----------|-----------|------------|--------|-----------|------------|
| Revenue                                       |   |     |      |       |   |      |       |
| Interest income                               |   | $        | 2         |       | $      | 66        |       | $ | 68 |   |
| Equity in earnings of  Peoples Community Bank |   | 4,266    |      | 3,900      |   | 2,324     |       |
| Total revenue                                 |   | 4,268    |      | 3,966      |   | 2,392     |       |
|                                          |   |     |      |       |   |      |       |
| Expense                                       |   |     |      |       |   |      |       |
| Interest expense                              |   | 575      |      | 1,139      |   | —    |       |
| General and  administrative expenses          |   | 248      |      | 66         |   | 68        |       |
| Total expense                                 |   | 823      |      | 1,205      |   | 68        |       |
|                                          |   |     |      |       |   |      |       |
| Earnings before income  tax credits           |   | 3,445    |      | 2,761      |   | 2,324     |       |
|                                          |   |     |      |       |   |      |       |
| Federal income tax  credits                   |   | (279     | )         | (388       | )      | —    |       |
|                                          |   |     |      |       |   |      |       |
| NET EARNINGS                                  |   | **$**    | **3,724** | ** ** | **$**  | **3,149** | ** ** | **$** | **2,324** | ** ** |

 

76

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**PEOPLESCOMMUNITY BANCORP, INC.**

**STATEMENTSOF CASH FLOWS**

Years ended September 30, 2003, 2002 and 2001

(In thousands)

 
|                                                                                          |   | **2003** |   | **2002**   |   | **2001** |       |
|-----------------------------------------------------------------------------------------------|--------|----------|--------|------------|--------|----------|------------|
|                                                                                          |   |     |   |       |   |     |       |
| Cash provided by (used in) operating  activities:                                             |   |     |   |       |   |     |       |
| Net earnings for the year                                                                     |   | $        | 3,724  |       | $      | 3,149    |       | $ | 2,324 |   |
| Adjustments to reconcile net earnings to  net cash provided by (used in) operating activities |   |     |   |       |   |     |       |
| Undistributed earnings of consolidated  subsidiary                                            |   | (4,273   | )      | (3,900     | )      | (2,324   | )          |
| Increase (decrease) in cash due to changes  in:                                               |   |     |   |       |   |     |       |
| Other assets                                                                                  |   | (249     | )      | (410       | )      | (7       | )          |
| Other liabilities                                                                             |   | (336     | )      | 59         |   | (125     | )          |
| Net cash used in operating activities                                                         |   | (1,133   | )      | (1,102     | )      | (132     | )          |
|                                                                                          |   |     |   |       |   |     |       |
| Cash flows provided by (used in) investing  activities:                                       |   |     |   |       |   |     |       |
| Proceeds from repayment of loan to ESOP                                                       |   | 190      |   | 190        |   | 191      |       |
| Contribution to Peoples Community Bank                                                        |   | —   |   | (12,115    | )      | —   |       |
| Net cash provided by (used in) investing  activities                                          |   | 190      |   | (11,925    | )      | 191      |       |
|                                                                                          |   |     |   |       |   |     |       |
| Cash flows provided by financing  activities:                                                 |   |     |   |       |   |     |       |
| Proceeds from borrowings                                                                      |   | 950      |   | 450        |   | —   |       |
| Proceeds from issuance of junior  subordinated debentures                                     |   | —   |   | 12,500     |   | —   |       |
| Proceeds from exercise of stock options                                                       |   | 7        |   | —     |   | —   |       |
|                                                                                          |   |     |   |       |   |     |       |
| Net cash provided by financing activities                                                     |   | 957      |   | 12,950     |   | —   |       |
|                                                                                          |   |     |   |       |   |     |       |
| Net increase (decrease) in cash and cash  equivalents                                         |   | 14       |   | (77        | )      | 59       |       |
|                                                                                          |   |     |   |       |   |     |       |
| Cash and cash equivalents at beginning of  year                                               |   | 17       |   | 94         |   | 35       |       |
|                                                                                          |   |     |   |       |   |     |       |
| Cash and cash equivalents at end of year                                                      |   | **$**    | **31** | ** ** | **$**  | **17**   | ** ** | **$** | **94** | ** ** |

 

The Bank issubject to regulations imposed by the OTS regarding the amount of capitaldistributions payable by the Bank to the Corporation.  Generally, the Bank’s payment of dividends is limited, withoutprior OTS approval, to net earnings for the current calendar year plus the twopreceding calendar years, less capital distributions paid over the comparabletime period.  Insured institutions arerequired to file an application with the OTS for capital distributions inexcess of this limitation.

 

Historically,management has carefully managed stockholders’ equity in a manner whereby theCorporation’s capital structure is aligned with the perceived risks inherent inits various lines of business.  In thisregard, the Board and management are continually evaluating regulatory capitallevels in view of projected 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.

 

77

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**NOTE N - BUSINESS COMBINATIONS**

 

On March 30,2001, the Corporation acquired Market utilizing the purchase method ofaccounting.  Market was dissolved uponconsummation, with Market’s banking subsidiary, Market Bank, merging with andinto Peoples.  The results of Market’soperations subsequent to March 30, 2001, are included in the consolidatedfinancial statements.  The Corporationpaid $7.8 million in cash and issued 527,930 of its common shares in connectionwith the acquisition for total consideration of $13.8 million.

 

On April 26,2002, the Corporation completed its acquisition of Kenwood Bancorp, Inc.(“Kenwood”) for consideration of $25.22 per outstanding share, totaling $7.9million 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.

 

On September 26, 2003, theBank acquired two Ohio branch offices from Ameriana Bank and Trust (Ameriana),including $32.8 million in loans and $55.6 million in deposits.  The Bank recorded approximately $2.3 millionin goodwill as a result of this transaction.

 

Each of the foregoingacquisitions focused on increasing the Corporation’s market share and scale ofoperations, as well as expanding its distribution network within its primarymarket area.

 

Presented below arepro-forma condensed statements of condition of Market, Kenwood and Ameriana atthe respective acquisition dates, reflecting the allocation of purchase priceto major asset and liability caption.

 
| **Market**                                            |   | **At  Acquisition** |       | **Pro-Forma  Adjustments** |   | **Pro-Forma  at  March 30, 2001** |       |
|-------------------------------------------------------|--------|---------------------|------------|----------------------------|--------|-----------------------------------|------------|
|                                                  |   | **(In  thousands)** |       |
|                                                  |   | **Dr. (Cr.)**       |       |
|                                                  |   |                |       |                       |   |                              |       |
| Cash, investments and mortgage-backed  securities     |   | $                   | 16,421     |                       | $      | (7,844                            | )          | $ | 8,577 |   |
| Loans receivable, net                                 |   | 37,463              |       | —                     |   | 37,463                            |       |
| Office premises and equipment                         |   | 1,414               |       | —                     |   | 1,414                             |       |
| Other assets                                          |   | 354                 |       | —                     |   | 354                               |       |
| Goodwill                                              |   | —              |       | 123                        |   | 123                               |       |
|                                                  |   |                |       |                       |   |                              |       |
| Total assets                                          |   | **$**               | **55,652** | ** **                 | **$**  | **(7,721**                        | **)**      | **$** | **47,931** |   |
|                                                  |   |                |       |                       |   |                              |       |
| Deposits                                              |   | $                   | 41,703     |                       | $      | —                            |       | $ | 41,703 |   |
| Other liabilities                                     |   | 224                 |       | —                     |   | 224                               |       |
| Total liabilities                                     |   | 41,927              |       | —                     |   | 41,927                            |       |
|                                                  |   |                |       |                       |   |                              |       |
| Stockholders’ equity                             |   | 13,725              |       | 7,721                      |   | 6,004                             |       |
|                                                  |   |                |       |                       |   |                              |       |
| Total liabilities and  stockholders’ equity |   | **$**               | **55,652** | ** **                 | **$**  | **—**                        | ** ** | **$** | **47,931** |   |

 

78

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| **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**                        | **)**  | **$** | **52,048** |   |
|                                              |   |                              |       |                       |   |                              |   |
| 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** |   |

 
| **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** |   |

 

79

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Presented below are pro-formacondensed consolidated statements of earnings which have been prepared as ifthe Ameriana transaction had been consummated as of the beginning of each ofthe fiscal years ended September 30, 2003 and 2002, as if the Kenwoodacquisition had been consummated as of the beginning of each of the fiscalyears ended September 30, 2002 and 2001, and as if the Market acquisition hadbeen consummated as of the beginning of the fiscal year ended September 30,2001.

 
|                                      |   | **2003**            |       | **2002**   |       | **2001**   |       |
|-------------------------------------------|--------|---------------------|------------|------------|------------|------------|------------|
|                                      |   | **(In  thousands)** |       |
|                                      |   | **(Unaudited)**     |       |
|                                      |   |                |       |       |       |       |       |
| Total interest income                     |   | **$**               | **39,481** | ** ** | **37,918** | ** ** | **30,903** |   |
| Total interest expense                    |   | 19,431              |       | 18,529     |       | 18,918     |       |
| Net interest income                       |   | **20,050**          | ** ** | **19,389** | ** ** | **11,985** |       |
|                                      |   |                |       |       |       |       |       |
| Provision for losses on loans             |   | 4,198               |       | 5,265      |       | 2,614      |       |
| Other income                              |   | 1,251               |       | 2,687      |       | 5,201      |       |
| General, administrative and other expense |   | 11,291              |       | 10,982     |       | 10,092     |       |
| Earnings before income taxes              |   | 5,812               |       | 5,829      |       | 4,480      |       |
|                                      |   |                |       |       |       |       |       |
| Federal income taxes                      |   | 1,978               |       | 2,487      |       | 2,272      |       |
|                                      |   |                |       |       |       |       |       |
| Net earnings                              |   | **$**               | **3,834**  | ** ** | **$**      | **3,342**  | ** ** | **$** | **2,208** |   |
|                                      |   |                |       |       |       |       |       |
| Pro-forma basic earnings per share        |   | **$**               | **1.55**   | ** ** | **$**      | **1.37**   | ** ** | **$** | **0.92** |   |
|                                      |   |                |       |       |       |       |       |
| Pro-forma diluted earnings per share      |   | **$**               | **1.52**   | ** ** | **$**      | **1.34**   | ** ** | **$** | **0.91** |   |

 

80

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

 

The followingtable summarizes the Corporation’s quarterly results for the fiscal years endedSeptember 30, 2003 and 2002. Certain amounts, as previously reported, have been reclassified toconform to the 2003 presentation.

 
|                                      |   | **Three  Months Ended**                    |    |
|-------------------------------------------|--------|--------------------------------------------|---------|
| **2003:**                                 |   | **December  31,**                          |    | **March 31,** |   | **June 30,** |   | **September  30,** |   |
|                                      |   | **(In  thousands, except per share data)** |    |
|                                      |   |                                       |    |   |   |   |   |   |   |
| 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 |   |
| Other income                              |   | 152                                        |    | 133 |   | 644 |   | 322 |   |
| 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** | ** ** |

 
|                                      |   | **Three  Months Ended**                    |    |
|-------------------------------------------|--------|--------------------------------------------|---------|
| **2002:**                                 |   | **December  31,**                          |    | **March 31,** |   | **June 30,** |   | **September  30,** |   |
|                                      |   | **(In  thousands, except per share data)** |    |
|                                      |   |                                       |    |   |   |   |   |   |   |
| Total interest income                     |   | $                                          | 7,666   |   | $ | 7,973 |   | $ | 8,667 |   | $ | 9,406 |   |
| Total interest expense                    |   | 3,707                                      |    | 3,462 |   | 3,798 |   | 4,631 |   |
|                                      |   |                                       |    |   |   |   |   |   |   |
| Net interest income                       |   | 3,959                                      |    | 4,511 |   | 4,869 |   | 4,775 |   |
| Provision for losses on loans             |   | 1,057                                      |    | 1,412 |   | 1,300 |   | 1,496 |   |
| Other income                              |   | 284                                        |    | 1,628 |   | 291 |   | 306 |   |
| General, administrative and other expense |   | 2,234                                      |    | 3,074 |   | 2,412 |   | 2,097 |   |
|                                      |   |                                       |    |   |   |   |   |   |   |
| Earnings before income taxes              |   | 952                                        |    | 1,653 |   | 1,448 |   | 1,488 |   |
| Federal income taxes                      |   | 367                                        |    | 941 |   | 530 |   | 554 |   |
|                                      |   |                                       |    |   |   |   |   |   |   |
| Net earnings                              |   | **$**                                      | **585** | ** ** | **$** | **712** | ** ** | **$** | **918** | ** ** | **$** | **934** | ** ** |
|                                      |   |                                       |    |   |   |   |   |   |   |
| Earnings per share                        |   |                                       |    |   |   |   |   |   |   |
| Basic                                     |   | **$**                                      | **.25** | ** ** | **$** | **.29** | ** ** | **$** | **.38** | ** ** | **$** | **.37** | ** ** |
|                                      |   |                                       |    |   |   |   |   |   |   |
| Diluted                                   |   | **$**                                      | **.25** | ** ** | **$** | **.29** | ** ** | **$** | **.37** | ** ** | **$** | **.36** | ** ** |

 

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**Item 15. Exhibits, Financial StatementSchedules and Reports on Form 8-K**

 

(a)  The following documents arefiled as part of this report:

 

Report of Independent Certified Public Accountants.

 

Consolidated Statements of Financial Condition as of September 30,2003 and 2002.

 

Consolidated Statements of Earnings for the Years EndedSeptember 30, 2003, 2002 and 2001.

 

Consolidated Statements of Stockholders’ Equity for the Years EndedSeptember 30, 2003, 2002 and 2001.

 

Consolidated Statements of Cash Flows for the Years EndedSeptember 30, 2003, 2002 and 2001.

 

Notes to Consolidated Financial Statements.

 

The following exhibits are filed as part of the Form 10-K/A, and thislist includes the Exhibit Index:

 
| **No.** |   | **Exhibits** |
|---------|--------|--------------|
| 3.1     |   |         | Articles of Incorporation of Peoples Community Bancorp, Inc.* |
| 3.2     |   |         | Bylaws of Peoples Community Bancorp, Inc.* |
| 4       |   |         | Stock Certificate of Peoples Community Bancorp, Inc.** |
| 13      |   |         | Annual Report to Stockholders for the Year Ended September 30,  2003*** |
| 21      |   |         | List of Subsidiaries (See “Item I. Business - Subsidiaries” in this  Form 10-K)*** |
| 31.1    |   |         | Certification of Chief Executive Officer Pursuant to Rules 13a-14 and  15d-14 of the Securities Exchange Act of 1934 and Section 302 of the Sarbanes-Oxley  Act of 2002*** |
| 31.2    |   |         | Certification of Chief Financial Officer Pursuant to Rules 13a-14 and  15d-14 of the Securities Exchange Act of 1934 and Section 302 of the  Sarbanes-Oxley Act of 2002*** |
| 32.1    |   |         | Certification of Chief Executive Officer Pursuant to Section 906  of the Sarbanes-Oxley Act of 2002 (18 U.S.C. 1350) |
| 32.2    |   |         | Certification of Chief Financial Officer Pursuant to Section 906  of the Sarbanes-Oxley Act of 2002 (18 U.S.C. 1350) |

 

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*  Incorporated herein byreference to Peoples’ Proxy Statement dated January 28, 2002.

**  Incorporated herein byreference to Peoples’ Registration Statement on Form S-1 filed with the SEC onDecember 17, 1999.

***  Incorporated herein byreference to Peoples’ Form 10-K for the year ended September 30, 2003 filedwith the SEC on December 29, 2003.

 

(b)         Reports filed on Form8-K.

 

Peoples filed an 8-K dated July 30, 2003 under Item 12 in order tofile its press release reporting earnings for the period ended June 30,2003.  No financial statements werefiled.

 

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**SIGNATURES**

 

Pursuant to the requirements of Section 13 or 15(d) of theSecurities Exchange Act of 1934, the registrant has duly caused this report tobe signed on its behalf by the undersigned, thereunto duly authorized.

 

 
|          | **PEOPLES COMMUNITY BANCORP, INC.** |
|---------------|-------------------------------------|
|          |                                |
| March 8, 2004 | By:                                 |   /s/ Jerry D. Williams |   |
|          |                                | Jerry D.  Williams |
|          |                                | President, Chief Executive Officer  and Director |
|          |                                |   |
|          |                                |   |
| March 8, 2004 | By:                                 |    /s/ Teresa A.  O’Quinn |   |
|          |                                | Teresa A.  O’Quinn |
|          |                                | Chief Financial Officer |
|          |                                | (principal financial and accounting officer) |
|               |                                     |  |  |  |

 

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