**SECURITIES AND EXCHANGECOMMISSION**

**Washington, D.C. 20549**

 

**FORM 10-K**

 

**(MarkOne)**
| **ý**                                             | ** ** | **Annual report pursuant to Section 13 or 15(d) of  the Securities Exchange Act of 1934**         |
|--------------------------------------------------------|------------|-------------------------------------------------------------------------------------------------------------|
| ** **                                             | ** ** | ** **                                                                                                  |
| **For the  fiscal year ended September 30, 2005** |
|                                                   |
| **OR**                                                 |
|                                                   |       |                                                                                                        |
| **o**                                                  | ** ** | **Transition report pursuant to Section 13 or  15(d) of the Securities and Exchange Act of 1934** |

 

**CommissionFile No.: 000-29949**

 

**PEOPLES COMMUNITY BANCORP, INC.**

(Exact Name of Registrant asSpecified in Its Charter)

 
| **Maryland**                                                              | ** ** | **31-1686242**         |
|---------------------------------------------------------------------------|------------|------------------------|
| (State or Other  Jurisdiction of                                          |       | (I.R.S. Employer       |
| Incorporation or  Organization)                                           |       | 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)                                                          |

 

Indicate by check mark whether the Registrant: (1) hasfiled all reports required to be filed by Section 13 or 15(d) of theExchange Act during the preceding 12 months (or for such shorter period thatthe Registrant was required to file such reports), and (2) has beensubject to such filing requirements for the past 90 days.         Yes  ý   No o

 

Indicate by check mark if disclosure of delinquentfilers pursuant to Item 405 of Regulation S-K is not contained herein, and willnot be contained, to the best of Registrant’s knowledge, in definitive proxy orinformation statements incorporated by reference in Part III of this Form 10-Kor any amendment to this Form 10-K. ý

 

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

Yes  o                                  No    ý   

 

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

Yes  o                                  No    ý   

 

As of March 31, 2005, the aggregate value ofthe 3,035,753 shares of Common Stock of the Registrant issued and outstandingon such date, which excludes 864,947 shares held by all directors andexecutives officers of the Registrant and the Registrant’s Employee StockOwnership Plan (“ESOP”) as a group, was approximately $73.2 million.  This figure is based on the closing salesprice of $24.10 per share of the Registrant’s Common Stock on March 31,2005.  Although directors and executiveofficers and the ESOP were assumed to be “affiliates” of the Registrant forpurposes of this calculation, the classification is not to be interpreted as anadmission of such status.

 

Number of shares of Common Stock outstanding as of December 27,2005:  4,424,449

 

 

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**PART I**

 

**Item 1. Business**

 

**General**

 

Peoples Community Bancorp, Inc.(“Peoples” or the “Company”) was organized in December 1999 at the directionof the Board of Directors of The People’s Building, Loan and Savings Company,presently Peoples Community Bank (the “Bank”), for the purpose of holding allof the capital stock of the Bank and in order to facilitate the conversion ofthe Bank from an Ohio-chartered mutual savings and loan association to afederally-chartered stock savings bank (the “Conversion”).  (Unless the context otherwise requires,reference to Peoples includes the Bank). In fiscal year 2005, Peoples changed its charter to a federal bankholding company, in order to acquire an investment interest in a local bankholding company.  People’s assets consistprimarily of the outstanding shares of common stock of the Bank, investmentsmade with the portion of the net proceeds from the issuance of Peoples sharesto the public (the “Offering”) retained by Peoples, Peoples’ loan to theemployee stock ownership plan (the “ESOP”), and a 38%  interest in a local bank holdingcompany.  Peoples has no significantliabilities other than junior subordinated debentures issued in fiscal 2002 andfiscal 2005.  The management of Peoplesand the Bank are substantially identical and Peoples neither owns nor leasesany property but instead uses the premises, equipment and furniture of theBank. The Bank is a federally-chartered stock savings bank that was originallyorganized in 1889.  The Bank conducts itsbusiness from sixteen offices in Hamilton, Warren, and Butler Counties in Ohioand Dearborn County, Indiana.   The Bankis primarily engaged in attracting deposits from the general public and usingthose funds to originate loans and invest in securities.  The Bank’s primary lending emphasis has been,and continues to be, loans secured by first liens on single-family (one-to-four units) residential properties located in its local market.  However, over the past five fiscal years, theBank 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 57.8% at September 30, 2001 to 31.8% at September 30,2005, while multi-family residential loans, nonresidential real estate and landloans, construction loans, commercial loans and consumer loans have increasedduring the same time period from 8.7% to 15.5%, 15.7% to 16.7%, 15.0% to 27.8%,2.3% to 5.4% and 0.5% to 2.8%, respectively.

 

The Company was formed in December 1999 inconnection with the mutual to stock conversion of the Bank, and the sale of1,190,000 shares of common stock to depositors and members of thecommunity.  The Bank conducts itsbusiness from sixteen full service offices in Hamilton, Warren and Butlercounties in Southwest Ohio and Dearborn County in Southeast Indiana.  The Bank’s business is conducted through anaggressive marketing and selling effort of its lending products and services tothe communities in its market area and through the continued development ofinnovative lending programs that give the Bank a competitive advantage.  The Bank offers a wide variety of loanproducts, including single and multi-family residential loans, nonresidentialreal estate and land loans and construction loans.  In addition, the Bank invests insecurities.  The funds for the Bank’slending and investment activities are primarily provided by deposits andborrowings.  At September 30, 2005,the Company had $1.0 billion in total assets, $612.2 million in deposits,$273.6 million in borrowings (excluding subordinated debentures) and $86.7million of stockholders’ equity.  TheCompany’s principal executive office is located at 6100 West Chester Road, P.O. Box1130, West Chester, Ohio 45071-1130.  TheCompany’s telephone number is (513) 870-3530.

 

As a result of acquisitions and internal growth, theCompany has grown from $416.0 million in total assets as of September 30,2001 to $1.0 billion in total assets as of September 30, 2005.  Between the completion of the initial publicoffering in March 2000 and September 30, 2005, the Company has completedthe acquisition of four financial institutions with aggregate total assets asof the time of acquisition of $304.3 million. In addition, in September 2003, the Company purchased $32.8 millionin loans and assumed $55.6 million in deposits in connection with theacquisition of two branch offices from another financial institution.  The Company has supplemented this growth fromacquisitions with loan generation secured primarily by real estate in its marketarea.  Loan originations have increasedfrom $241.1 million in fiscal 2001 to $337.0 in fiscal 2005.  As a result, loans receivable, net increasedfrom $377.7 million at September 30, 2001 to $704.0 million at September 30,2005.  In addition, since September 30,2001, the Company has expanded its franchise through the opening of four fullservice branch offices.  The new branchoffices, as well as acquired branch offices, have expanded the Company’s marketpresence and facilitated its loan production growth.  The Company’s loan growth has been funded in

 

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partby deposits.  The Company has placed anemphasis on deposit generation both internally and through whole bank andbranch acquisitions.  Deposits haveincreased from $233.1 million at September 30, 2001 to $612.2 million at September 30,2005.

 

The Company intends to continue to pursue growthboth internally and through strategic acquisitions.  The Company believes its internal growth willcontinue to come from loan originations, and, in particular, multi-familyresidential loans, nonresidential real estate and land loans and constructionloans.  These loan types complement itssingle-family lending, diversify its loan portfolio and are expected toincrease its yield on interest-earning assets. The Company’s primary funding vehicle will continue to be deposits.  The Company intends to increase its depositgeneration by expanding its products and services, increasing its branchnetwork and cross-selling its current and prospective business customers.  The expansion of its market share throughselective branching and opportunistic acquisitions will continue to depend onmarket and economic conditions.

 

On January 14, 2005, the Company acquired 69,925shares held by various stockholders of Columbia Bancorp, Inc., a privatelyheld bank holding company, for an aggregate purchase price of $2.5million.  These shares representapproximately 38% of Columbia’s presently issued and outstanding common stock.  The Company presently intends to hold theseshares as a passive investment.

 

OnMay 4, 2005, the Company entered into a definitive agreement and plan ofmerger whereby the Company will acquire PFS Bancorp, Inc. (“PFS”), theparent company of Peoples Federal Savings Bank (“Peoples Federal”).  Peoples Federal operates three offices in theSoutheast Indiana communities of Aurora, Rising Sun, and Vevay, offering a widerange of bank products and services. Under the terms of the agreement, the Company will pay $23.00 in cashfor each of the outstanding common shares of PFS, resulting in aggregate mergerconsideration of approximately $33.8 million.  The merger was consummated on December 16, 2005 and was accountedfor using the purchase method of accounting.

 

OnJune 10, 2005, the Company acquired American State Corporation, the parentcompany of American State Bank (“American”) with three branch offices in theSoutheast Indiana communities of Lawrenceburg, Aurora and Bright.  The Bank paid $4.79 in cash for each of the1,469,062 outstanding common shares of American.  American’s outstanding preferred stock wasredeemed for cash at par value, totaling $700,000.   The expansion in this Southeast Indianacommunity further enhances Peoples Community Bank’s ability to increase itsmarket share and scale of operations, as well as expand its distributionnetwork within the greater Cincinnati area.

 

OnAugust 11, 2005, the Company completed a private placement of 500,000shares of the common stock to certain institutional investors and directors andofficers. The net proceeds of $10.3 million were utilized to supplement theCompany’s capital and also will serve as an additional source to fund theCompany’s growth strategy and for general corporate purposes.

 

The Company is subject toexamination and comprehensive regulation by the Federal Reserve Board.

 

The Bank is subject toexamination and comprehensive regulation by the Office of Thrift Supervision,which is the Bank’s chartering authority and primary federal regulator.  The Bank is also regulated by the FederalDeposit Insurance Corporation (the “FDIC”), administrator of the SavingsAssociation Insurance Fund.  The Bank isalso subject to certain reserve requirements established by the Federal ReserveBoard (the “FRB”) and is a member of the Federal Home Loan Bank (the “FHLB”) ofCincinnati, which is one of the 12 regional banks comprising the FHLB System.

 

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**Peoples Lending Activities**

 

**General.**  At September 30,2005, the net loan portfolio of Peoples totaled $704.7 million, representingapproximately 70.0% of total assets at that date. The principal lendingactivity of Peoples is the origination of residential and nonresidential realestate loans. At September 30, 2005, residential loans (includingconstruction loans secured by residential real estate) amounted to $488.0million, or 61.5% of the gross loan portfolio. Nonresidential real estate and land loans totaled $132.5 million, or16.7% of the gross loan portfolio and nonresidential construction loansamounted to $107.9 million, or 13.6% of the gross loan portfolio as of September 30,2005.  Further, commercial loans amountedto $43.2 million, or 5.4% of the gross loan portfolio at September 30,2005 and consumer loans amounted to $22.5 million, or 2.8% of the gross loanportfolio at such time.  Peoples hasplaced an increased emphasis on multi-family residential loans, nonresidentialreal estate and land loans, construction loans, commercial loans and consumerloans over the last four fiscal years. The aggregate amount of these loans has increased to $541.8 million, or68.2% of the gross loan portfolio at September 30, 2005, compared to$177.0 million, or 42.2% of the gross loan portfolio at September 30,2001.

 

The types of loans thatPeoples may originate are subject to federal and state laws and regulations.Interest rates charged on loans are affected principally by the demand for suchloans and the supply of money available for lending purposes and the rates offeredby its competitors. These factors are affected by general and economicconditions, the monetary policy of the federal government, including theFederal Reserve Board, legislative and tax policies, and governmental budgetarymatters.

 

Asavings institution generally may not make loans to one borrower and relatedentities in an amount which exceeds 15% of its unimpaired capital andsurplus.  However, loans in an amountequal to an additional 10% of unimpaired capital and surplus may be made to aborrower if the loans are fully secured by readily marketable securities.   At September 30, 2005, Peoples’regulatory limit on loans-to-one borrower was $15.8 million.  All of Peoples’ five largest loans or groupsof loans-to-one borrower, amounting to $12.8 million, $12.6 million, $12.2million, $11.9 million and  $11.8 millionat September 30, 2005 were performing in accordance with their terms atsuch date.  See “Asset Quality -Classified Assets.”

 

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**Loan Portfolio Composition.**  Thefollowing table sets forth the composition of Peoples’ loans at the datesindicated.

 
|                                    |   | **September 30,**     |       |
|-----------------------------------------|--------|----------------------------|------------|
|                                    |   | **2005**                   |       | **2004** |   | **2003** |   | **2002** |   | **2001** |   |
|                                    |   | **Amount**                 | ** ** | **Percent of  Net loans** | ** ** | **Amount** | ** ** | **Percent of  Net loans** | ** ** | **Amount** | ** ** | **Percent of  Net loans** | ** ** | **Amount** | ** ** | **Percent of  Net loans** | ** ** | **Amount** | ** ** | **Percent of  Net loans** |   |
|                                    |   | **(Dollars in Thousands)** |       |
| Mortgage loans:                         |   |                       |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Single-family residential               |   | $                          | 252,424    |   | 35.8 | % | $ | 226,735 |   | 37.8 | % | $ | 230,775 |   | 41.7 | % | $ | 296,294 |   | 58.8 | % | $ | 242,540 |   | 64.2 | % |
| Multi-family residential                |   | 122,802                    |       | 17.4 |   | 106,799 |   | 17.8 |   | 95,459 |   | 17.2 |   | 56,980 |   | 11.3 |   | 36,487 |   | 9.7 |   |
| Nonresidential real estate and land     |   | 132,502                    |       | 18.8 |   | 158,907 |   | 26.5 |   | 131,444 |   | 23.7 |   | 88,029 |   | 17.5 |   | 65,842 |   | 17.4 |   |
| Construction loans                      |   | 220,733                    |       | 31.3 |   | 124,996 |   | 20.9 |   | 122,598 |   | 22.1 |   | 90,002 |   | 17.9 |   | 62,982 |   | 16.7 |   |
| Total mortgage loans                    |   | 728,461                    |       | 103.3 |   | 617,437 |   | 103.0 |   | 580,276 |   | 104.7 |   | 531,305 |   | 105.5 |   | 407,851 |   | 108.0 |   |
|                                    |   |                       |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Commercial loans                        |   | 43,231                     |       | 6.1 |   | 33,238 |   | 5.5 |   | 29,955 |   | 5.4 |   | 21,280 |   | 4.2 |   | 9,800 |   | 2.6 |   |
| Consumer loans                          |   | 22,502                     |       | 3.2 |   | 21,781 |   | 3.6 |   | 11,769 |   | 2.1 |   | 4,265 |   | 0.8 |   | 1,883 |   | 0.5 |   |
| Total loans receivable                  |   | 794,194                    |       | 112.6 |   | 672,456 |   | 112.1 |   | 622,000 |   | 112.2 |   | 556,850 |   | 110.5 |   | 419,534 |   | 111.1 |   |
| Less:                                   |   |                       |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Undisbursed portion of loans in process |   | (72,894                    | )          | (10.3 | ) | (59,045 | ) | (9.8 | ) | (55,308 | ) | (10.0 | ) | (43,144 | ) | (8.6 | ) | (36,782 | ) | (9.7 | ) |
| Allowance for loan losses               |   | (13,697                    | )          | (1.9 | ) | (11,025 | ) | (1.8 | ) | (9,744 | ) | (1.8 | ) | (7,656 | ) | (1.5 | ) | (3,662 | ) | (1.0 | ) |
| Deferred loan fees                      |   | (2,889                     | )          | (0.4 | ) | (2,920 | ) | (0.5 | ) | (2,597 | ) | (0.4 | ) | (2,038 | ) | (0.4 | ) | (1,363 | ) | (0.4 | ) |
|                                    |   |                       |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Loans receivable, net                   |   | $                          | 704,714    |   | 100.0 | % | $ | 599,466 |   | 100.0 | % | $ | 554,351 |   | 100.0 | % | $ | 504,012 |   | 100.0 | % | $ | 377,727 |   | 100.0 | % |

 

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**Originationof Loans.**  The lending activities of Peoples are subjectto the written underwriting standards and loan origination proceduresestablished by the Board of Directors and management.  Loan originations are obtained through avariety of sources, including referrals from real estate brokers, builders andexisting customers. Written loan applications are taken by loan officers.  Loan processors obtain or procure credit reports,appraisals and other documentation involved with a loan.  Property valuations are performed byindependent outside appraisers approved by the Board of Directors of Peoples.

 

Under the real estatelending policy of Peoples, a title opinion must be obtained for each realestate loan.  Peoples also requires fireand extended coverage casualty insurance, in order to protect the propertiessecuring its real estate loans.  Borrowersmust also obtain flood insurance policies when the property is in a floodhazard area as designated by the Department of Housing and UrbanDevelopment.  Peoples does not requireborrowers to advance funds to an escrow account for the payment of real estatetaxes or hazard insurance premiums.

 

Peoples’ loan approvalprocess is intended to assess the borrower’s ability to repay the loan, theviability of the loan and the adequacy of the value of the collateral that willsecure the loan.  The Board of Directorshas granted authority to approve secured loans as follows:  loans up to $500,000 must be approved by twosenior executive officers; loans between $500,000 and $1.0 million must beapproved by three senior officers and loans greater than $1.0 million must beapproved by the Board of Directors or the executive committee of the Board ofDirectors.

 

Unsecuredloans up to $500,000 require approval by three senior executive officers andthose greater than $500,000, individually or in the aggregate, must be approvedby the Board of Directors or the executive committee of the Board ofDirectors.  The executive committeeratifies all approvals and presents its report on a monthly basis for the Boardof Directors review and approval.

 

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

 
| ** **                                  | ** ** | **Year Ended September 30,** | ** ** |
|---------------------------------------------|------------|-----------------------------------|------------|
| ** **                                  | ** ** | **2005**                          | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** | **2001** | ** ** |
| ** **                                  | ** ** | **(In Thousands)**                | ** ** |
|                                        |       |                              |       |   |   |   |   |   |   |   |   |
| Total loans held at beginning of period     |       | $                                 | 672,456    |   | $ | 622,000 |   | $ | 556,850 |   | $ | 419,534 |   | $ | 211,429 |   |
| Originations of loans:                      |       |                              |       |   |   |   |   |   |   |   |   |
| Mortgage loans:                             |       |                              |       |   |   |   |   |   |   |   |   |
| Single-family residential                   |       | 79,588                            |       | 89,145 |   | 63,502 |   | 90,592 |   | 87,272 | (1) |
| Multi-family residential                    |       | 42,248                            |       | 29,357 |   | 50,686 |   | 28,531 |   | 30,605 |   |
| Nonresidential real estate and land         |       | 85,658                            |       | 70,158 |   | 30,170 |   | 39,855 |   | 51,030 |   |
| Construction                                |       | 91,494                            |       | 75,278 |   | 101,019 |   | 72,167 |   | 58,467 |   |
| Commercial loans                            |       | 34,768                            |       | 23,051 |   | 25,852 |   | 26,656 |   | 12,394 |   |
| Consumer loans                              |       | 11,058                            |       | 12,374 |   | 7,344 |   | 3,775 |   | 1,344 |   |
| Total originations (1)                      |       | 344,814                           |       | 289,465 |   | 278,573 |   | 261,576 |   | 241,112 |   |
|                                        |       |                              |       |   |   |   |   |   |   |   |   |
| Increase due to Market acquisition          |       | —                            |       | — |   | — |   | — |   | 37,476 |   |
| Increase due to Kenwood acquisition         |       | —                            |       | — |   | — |   | 40,326 |   | — |   |
| Increase due to Ameriana branch acquisition |       | —                            |       | — |   | 32,769 |   | — |   | — |   |
| Increase due to American State acquisition  |       | 38,358                            |       | — |   | — |   | — |   | — |   |
| Total increases                             |       | 38,358                            |       | — |   | 311,342 |   | 301,902 |   | 278,588 |   |
|                                        |       |                              |       |   |   |   |   |   |   |   |   |
| Transfers to real estate owned              |       | (1,854                            | )          | (513 | ) | (2,863 | ) | (620 | ) | (197 | ) |
| Charge-offs                                 |       | (1,081                            | )          | (2,360 | ) | (2,122 | ) | (1,547 | ) | — |   |
| Other increases (decreases) (2)             |       | 5,197                             |       | (9,641 | ) | 5,879 |   | (9,212 | ) | 22,285 |   |
| Repayments                                  |       | (263,696                          | )          | (236,398 | ) | (247,086 | ) | (153,207 | ) | (92,571 | ) |
| Net activity in loans                       |       | 121,738                           |       | 50,456 |   | 65,150 |   | 137,316 |   | 208,105 |   |
| Gross loans held at end of period           |       | $                                 | 794,194    |   | $ | 672,456 |   | $ | 622,000 |   | $ | 556,850 |   | $ | 419,534 |   |

 

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(1)       Undisbursedportions of loans in process totaled $72.9 million, $59.0 million, $55.3million, $43.1 million and $36.8 million at September 30, 2005, 2004,2003, 2002 and 2001, respectively.

 

(2)       Includes loanparticipations sold of $1.1 million, $5.0 million, $10.2 million, $6.7 millionand $2.7 million in fiscal 2005, 2004, 2003, 2002 and 2001, respectively.  For fiscal 2005 and 2004, includes wholeloans sold of $6.7 million and $9.9 million, respectively. The reduction intotal loans resulting from sales of loans and loan participations in fiscal2005, 2004, 2003, 2002 and 2001 were offset (increased) by increases(decreases) in undisbursed loans in process, and other net items totalingapproximately $13.0 million, $5.3 million, $16.1 million, ($2.5 million), and$25.0 million,  respectively.

 

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Thesignificant repayments of $263.7 million, $236.4 million and $247.1 millionduring fiscal 2005, 2004 and 2003, respectively, were primarily due to therepayment of short-term construction loans and land development loans as wellas the refinancing activity related to single-family residential loans in thelow interest rate environment during such periods.  The transfers to real estate owned of $1.9million during fiscal 2005 were due to three separate borrowers withresidential real estate properties acquired through foreclosure.

 

Charge-offsof $1.1 million during fiscal 2005 consisted primarily of $940,000 in loanssecured by multi-family residential real estate.  The higher level of charge-offs during thepast four years was due primarily to the increased risk of loss associated withthe Bank’s diversification of its loan portfolio and increased originations ofmulti-family loans, nonresidential real estate and land loans, constructionloans and commercial loans.

 

Althoughfederal laws and regulations permit savings institutions to originate andpurchase loans secured by real estate located throughout the United States,Peoples generally confines its lending activity to its primary market area ofWarren, Butler and Hamilton Counties, Ohio and Dearborn County, Indiana.  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 consumerloans.  In addition, Peoples may investup to 10% of its total assets in secured and unsecured loans for commercial,corporate, business or agricultural purposes. At September 30, 2005, Peoples was within each of the above lendinglimits.

 

**One-to-FourFamily Residential Real Estate Loans.**  Despite the diversification ofthe loan portfolio over the past few years, the primary real estate lendingactivity of Peoples continues to be the origination of loans secured residentialreal estate.  At September 30, 2005,$252.4 million, or 35.8% of the net loan portfolio of Peoples consisted ofconventional first mortgage, one- to four-family residential loans, compared to$226.7 million, or 37.8% at September 30, 2004.  The increase of $25.7 million, or 11.3%, wasdue primarily to approximately $19.4 million of single family residential loansacquired in conjunction with the purchase of American State Corporation in June 2005.

 

The loan-to-value ratio,maturity and other provisions of the loans made by Peoples generally havereflected Peoples’ policy of making less than the maximum loan permissibleunder applicable regulations, in accordance with sound lending practices,market conditions and underwriting standards established by Peoples.  Peoples’ lending policies on one- tofour-family residential mortgage loans generally limit the loan-to-value ratioto 80% of the lesser of the appraised value or purchase price of the property.Residential mortgage loans are amortized on a monthly basis with principal andinterest due each month. The loans generally include “due-on-sale” clauses.

 

Theresidential mortgage loans originated by Peoples consist of fixed rate andadjustable rate loans.  Presently, thesingle-family fixed-rate residential mortgage loans originated by Peoples haveterms of up to 30 years.  In addition,Peoples originates adjustable-rate mortgage loans on which the interest rateadjusts every one, three or five years based upon the one-year or three-yearrate on T-bills plus a specified margin. During fiscal 2004, Peoples introduced a five year fixed rate balloonproduct and a five year fixed rate product which adjusts on an annual basisthereafter based on the one-year rate on the T-bill.  At September 30, 2005, $144.1 million,or 57.1% of our single-family residential loans were adjustable rate and $108.3million, or 42.9% 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 may be sold in the secondary market.

 

**Multi-familyResidential Loans.**  Peoples also originates multi-family (overfour units) residential loans.  Peoples’multi-family loans are primarily secured by apartment buildings or apartmentsbeing converted to condominium units. The multi-family residential mortgage loans of Peoples are underwrittenon substantially the same basis as its nonresidential real estate loans,discussed below, although loan-to-value ratios are generally limited to80%.  At September 30, 2005, Peopleshad $122.8 million in multi-family residential mortgage loans, which amountedto 17.4% of Peoples’ net loan portfolio, compared to $106.8 million, or 17.8%of Peoples’ net loan portfolio at September 30, 2004.  During the year ended September 30,2005, Peoples originated $42.2 million of multi-family residential loanscompared to $29.4 million during fiscal 2004. The increase was primarily due toPeoples continued efforts to diversify its portfolio.

 

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**NonresidentialReal Estate and Land Loans.**  Peoples’ nonresidential realestate and land loan portfolio primarily consists of loans secured by land fordevelopment purposes, professional offices, small retail centers, warehousesand building lots located within Peoples’ primary market area.  Nonresidential real estate and land loansamounted to $132.5 million, or 18.8% of the net loan portfolio at September 30,2005, with an average loan balance of approximately $310,000. This compares to$158.9 million, or 26.5% at September 30, 2004, with an average loanbalance of approximately $436,000.

 

Nonresidential real estateloans originated by Peoples typically have a loan-to-value ratio of 75% or lessand generally have higher interest rates than single-family residentialmortgage loans with similar terms and structure. The maximum original term ofPeoples’ nonresidential real estate loans is 25 years.  Decisions to lend are based on the economicviability of the property and the creditworthiness of the borrower.  Creditworthiness is determined by consideringthe character, experience, management and financial strength of the borrower,and the ability of the property to generate adequate funds to cover bothoperating expenses and debt services.  Inevaluating whether to make a nonresidential real estate loan, Peoples placesprimary emphasis on the ratio of net cash flow to debt service on the property andgenerally requires a ratio of cash flow to debt service of at least 120%,computed after deduction for a vacancy factor and property expenses as Peoplesdeems appropriate.

 

The land loans of Peoplesgenerally are secured by single-family residential lots or undeveloped landbeing held for residential development. Lot loans generally have a loan-to-value ratio of 80% or less (on anundeveloped basis) and are typically interest only loans with one-yearmaturities.  Loans originated ondeveloped land generally have a loan to value ratio of 75% or less withinterest only over either a one or two year term.  Land loans secured by single-familyresidential lots are structured similar to undeveloped land with aloan-to-value ratio of 80% or less.

 

Nonresidential real estatelending is generally considered to involve a higher degree of risk than one- tofour-family residential lending. Such lending typically involves large loanbalances concentrated in a single borrower or groups of related borrowers forrental or business properties. In addition, the payment experience on loanssecured by income-producing properties is typically dependent on the success ofthe operation of the related project and thus is typically affected by adverseconditions in the real estate market and in the economy. Peoples generallyattempts to mitigate the risks associated with its nonresidential real estatelending by, among other things, lending primarily in its market area and usingreasonable loan-to-value ratios in the underwriting process.

 

Land development andacquisition loans involve significant additional risks when compared with loanson existing residential properties. These loans may involve larger loanbalances to single borrowers, and the payment experience may be dependent onthe successful development of the land and the sale of the lots. These riskscan be significantly impacted by supply and demand conditions as well as localeconomic conditions.

 

**ConstructionLoans. **At September 30, 2005, Peoples hadapproximately $220.7 million, or 31.3% of the net loan portfolio, inconstruction loans, compared to $125.0 million, or 20.9% of the total loanportfolio at September 30, 2004.  Ofthis amount, $112.8 million, or 51.1%, consisted of residential constructionloans and $107.9 million, or 49.9%, consisted of nonresidential constructionloans.  The increase in constructionloans during fiscal 2005 was due primarily to increased originations ofconstruction loans to builders.  Theconstruction loans of Peoples are comprised largely of loans made to builderson a pre-sold basis, as well as, to a lesser extent, to builders for homes onan unsold or speculative basis.  Peoples’construction loans to builders are generally made with a term not to exceedtwelve months.  Interest-only paymentsare required during the construction period, which is typically twelvemonths.  Peoples generally limits thenumber of unsold homes under construction to its builders. This number isdependent on the financial strength of the builder, marketability of theproperty and the Bank’s experience with and present exposure to thebuilder.  In addition, loans made toborrowers to construct their personal residences are originated at one closingas a construction/permanent loan.

 

Peoplesalso originates loans for the construction of nonresidential real estate suchas small office buildings and warehouses. These loans are typically originated as construction/permanent loanswith interest only payments during the construction period and converting to apermanent loan at the end of the construction period.  These loans are generally made with aconstruction term of 12 months.  The loanto value ratio is generally limited to 75% on these loans on an “as completed”basis.  At September 30, 2005,nonresidential construction loans amounted to $107.9 million, or 15.3% of thenet loan portfolio.

 

8

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Prior to making a commitmentto fund a construction loan, Peoples requires an appraisal of theproperty.  Peoples also generallyrequires third party inspections of each project prior to disbursement offunds.  Loan proceeds are then disbursedbased on a percentage of completion.

 

Construction lending isgenerally considered to involve a higher degree of risk of loss than long-termfinancing on improved, owner-occupied real estate because of the uncertaintiesof construction, including the possibility of costs exceeding the initialestimates and the need to obtain a tenant or purchaser if the property will notbe owner-occupied.  Peoples generallyattempts to mitigate the risks associated with construction lending by, amongother things, primarily lending in its market area, using conservativeunderwriting guidelines, and monitoring the construction process.

 

**CommercialLoans.** Peoples’ commercial loans consist primarily ofunsecured lines of credit for working capital purposes, and to a lesser extent,loans secured by business equipment.  At September 30,2005, commercial loans amounted to $43.2 million, or 6.1% of Peoples’ net loanportfolio, compared to $33.2 million, or 5.5% of the net loan portfolio at September 30,2004.

 

**ConsumerLoans.** Peoples’ consumer and other loans consist ofloans secured by deposit accounts, automobiles and stock.  At September 30, 2005, consumer and otherloans amounted to $22.5 million, or 3.2% of Peoples’ net loan portfolio,compared to $21.8 million, or 3.6% of Peoples’ net loan portfolio as of September 30,2004.  This increase was primarily due toapproximately $1.4 million in loans secured by automobiles which were obtainedin the acquisition of American State Bank in June 2005.

 

**LoanOrigination and Other Fees.**  In addition to interest earnedon loans, Peoples receives loan origination fees or “points” for originatingloans.  Loan points are a percentage ofthe principal 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 Standards No. 91,loan origination fees and certain related direct loan origination costs areoffset, and the resulting net amount is deferred and amortized as interestincome over the contractual life of the related loans as an adjustment to theyield of such loans. Peoples had $2.9 million of deferred loan fees at September 30,2005 and 2004.

 

**ContractualPrincipal Repayments and Interest Rates.**  Thefollowing table sets forth scheduled contractual amortization of Peoples’ loansat September 30, 2005 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 no schedule ofrepayments and no stated maturity and overdraft loans are reported as due inone year or less.

 
| ** **                          | ** ** | **Principal Repayments Contractually Due** | ** **  |
|-------------------------------------|------------|--------------------------------------------|-------------|
| ** **                          | ** ** | **in Year(s) Ended September 30,**    | ** **  |
| ** **                          | ** ** | **2006**                                   | ** **  | **2007** | ** ** | **2008** | ** ** | **2009-  2010** | ** ** | **2011-  2016** | ** ** | **2017-  2021** | ** ** | **There-  after** | ** ** | **Total at  September 30,  2005** | ** ** |
| ** **                          | ** ** | **(In Thousands)**                         | ** **  |
|                                |       |                                       |        |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Mortgage loans:                     |       |                                       |        |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Single-family residential           |       | $                                          | 84,264      |   | $ | 6,348 |   | $ | 6,566 |   | $ | 13,389 |   | $ | 42,170 |   | $ | 30,065 |   | $ | 69,622 |   | $ | 252,424 |   |
| Multi-family residential            |       | 34,171                                     |        | 4,431 |   | 2,943 |   | 6,182 |   | 16,100 |   | 15,041 |   | 43,934 |   | 122,802 |   |
| Nonresidential real estate and land |       | 48,409                                     |        | 3,825 |   | 3,976 |   | 7,522 |   | 21,008 |   | 18,872 |   | 28,890 |   | 132,502 |   |
| Construction loans                  |       | 178,957                                    |        | 14,289 |   | 8,204 |   | 6,037 |   | 2,087 |   | 2,290 |   | 8,869 |   | 220,733 |   |
| Commercial loans                    |       | 39,876                                     |        | 886 |   | 578 |   | 741 |   | 966 |   | 184 |   | — |   | 43,231 |   |
| Consumer loans                      |       | 21,408                                     |        | 621 |   | 311 |   | 143 |   | 19 |   | — |   | — |   | 22,502 |   |
|                                |       |                                       |        |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Total (1)                           | ** ** | **$**                                      | **407,085** | ** ** | **$** | **30,400** | ** ** | **$** | **22,578** | ** ** | **$** | **34,014** | ** ** | **$** | **82,350** | ** ** | **$** | **66,452** | ** ** | **$** | **151,315** | ** ** | **$** | **794,194** | ** ** |

 

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(1)                      Of the $387.1 million of loan principalpayments contractually due after September 30, 2006, $113.4 million havefixed rates of interest and $273.7 million have adjustable rates of interest.

 

9

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Scheduled contractual maturities of loans do notnecessarily reflect the actual expected term of the loan portfolio. The averagelife of mortgage loans is substantially less than their average contractualterms because of prepayments. The average life of mortgage loans tends toincrease when current mortgage loan rates are higher than rates on existingmortgage loans and, conversely, decrease when rates on current mortgage loansare lower than existing mortgage loan rates (due to refinancing ofadjustable-rate and fixed-rate loans at lower rates). Under the lattercircumstance, the weighted-average yield on loans decreases as higher yieldingloans are repaid or refinanced at lower rates.

 

**Asset Quality**

 

**General.**  Peoples mails delinquentnotices to borrowers when a borrower fails to make a required payment within15 days of the date due. Additional notices begin when a loan becomes30 days past due. If a loan becomes 90 days past due, Peoples refersit to an attorney to commence foreclosure. In many cases, deficiencies arecured promptly. While Peoples generally prefers to work with borrowers toresolve such problems, Peoples will institute foreclosure or other collectionproceedings when necessary 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, and if collection ofthe interest is questionable.

 

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 $207,000,$301,000, and $1.3 million at September 30, 2005, 2004, and 2003,respectively.

 

**Delinquent Loans.**  Thefollowing tables set forth information concerning delinquent loans at the datesindicated, in dollar amounts and as a percentage of each category of Peoples’loan portfolio. The amounts presented represent the total outstanding principalbalances of the related loans, rather than the actual payment amounts which arepast due.

 
| ** **                          | ** ** | **At September 30,**        | ** ** |
|-------------------------------------|------------|----------------------------------|------------|
| ** **                          | ** ** | **2005  60-89 Days  Delinquent** | ** ** | **2004  60-89 Days  Delinquent** | ** ** | **2003  60-89 Days  Delinquent** | ** ** |
| ** **                          | ** ** | ** **                       | ** ** | **Percent** | ** ** | ** ** | ** ** | **Percent** | ** ** | ** ** | ** ** | **Percent** | ** ** |
| ** **                          | ** ** | ** **                       | ** ** | **Of Loan** | ** ** | ** ** | ** ** | **of Loan** | ** ** | ** ** | ** ** | **of Loan** | ** ** |
| ** **                          | ** ** | **Amount**                       | ** ** | **Category** | ** ** | **Amount** | ** ** | **Category** | ** ** | **Amount** | ** ** | **Category** | ** ** |
| ** **                          | ** ** | **(Dollars in Thousands)**       | ** ** |
| Mortgage loans:                     |       |                             |       |   |   |   |   |   |   |   |   |   |   |
| Single-family                       |       | $                                | 991        |   | .39 | % | $ | 821 |   | .36 | % | $ | 1,146 |   | .50 | % |
| Multi-family                        |       | 332                              |       | .27 | % | 16 |   | .01 | % | — |   | — |   |
| Nonresidential real estate and land |       | 766                              |       | .58 | % | — |   | — |   | 354 |   | .27 | % |
| Commercial                          |       | 516                              |       | 1.19 | % | — |   | — |   | — |   | — |   |
| Consumer                            |       | 100                              |       | .44 | % | — |   | — |   | — |   | — |   |
| Total                               |       | $                                | 2,705      |   | .34 | % | $ | 837 |   | .12 | % | $ | 1,500 |   | .27 | % |

 

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**Non-PerformingAssets.**  The following table sets forth informationwith respect to non-performing assets identified by Peoples, includingnon-accrual loans and other real estate owned.

 
| ** **                              | ** ** | **At September 30,**  | ** ** |
|-----------------------------------------|------------|----------------------------|------------|
| ** **                              | ** ** | **2005**                   | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** | **2001** | ** ** |
| ** **                              | ** ** | **(Dollars in Thousands)** | ** ** |
| ** **                              | ** ** | ** **                 | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Non-accrual loans:                      |       |                       |       |   |   |   |   |   |   |   |   |
| Single-family residential               |       | $                          | 6,674      |   | $ | 2,090 |   | $ | 1,752 |   | $ | 1,274 |   | $ | 783 |   |
| Multi-family residential                |       | 2,325                      |       | 2,535 |   | 3,557 |   | 3,217 |   | — |   |
| Nonresidential real estate and land     |       | 3,787                      |       | 197 |   | — |   | 232 |   | — |   |
| Construction loans                      |       | 2,640                      |       | 1,039 |   | 1,951 |   | 2,769 |   | — |   |
| Commercial loans                        |       | 3,220                      |       | 165 |   | — |   | — |   | — |   |
| Consumer loans                          |       | 741                        |       | 3 |   | 4 |   | — |   | — |   |
| Total non-accrual loans                 |       | 19,387                     |       | 6,029 |   | 7,264 |   | 7,492 |   | 783 |   |
| Loans 90 days past due and accruing     |       | 1,266                      |       | — |   | — |   | — |   | — |   |
| Total non-performing loans              |       | 20,653                     |       | 6,029 |   | 7,264 |   | 7,492 |   | 783 |   |
| Other real estate owned, net            |       | 207                        |       | 301 |   | 1,293 |   | 97 |   | — |   |
| Total non-performing assets             |       | $                          | 20,860     |   | $ | 6,330 |   | $ | 8,557 |   | $ | 7,589 |   | $ | 783 |   |
| Non-performing assets to total assets   |       | 2.07                       | %          | 0.71 | % | 1.16 | % | 1.30 | % | 0.19 | % |
| Non-performing loans to total loans-net |       | 2.96                       | %          | 1.01 | % | 1.31 | % | 1.49 | % | 0.21 | % |

 

Nonperforming assets totaled$20.9 million and $6.3 million at September 30, 2005 and 2004,respectively.  Nonperforming assets at September 30,2005 consisted of $6.7 million of loans secured by single-family residentialreal estate, $2.3 million of loans secured by multi-family residential realestate, $3.8 million of loans secured by nonresidential real estate and land,$2.6 million in construction loans, $4.0 million of commercial and consumerloans, $1.3 million of loans 90 days or more past due and still accruing, and$207,000 in foreclosed real estate.  TheBank’s management continues to aggressively pursue the collection and resolutionof all delinquent loans.  In addition, approximately $2.8 million ofnon-performing loans were obtained in the acquisition of American State Bank inJune 2005.  The increase innonperforming loans was due in large part to loan concentrations in a smallnumber of borrowers, primarily with respect to single-family investmentproperties and unsecured commercial loans. These borrowers have experienced financial difficulties due to a declinein the local real estate market and the volume of their respective inventories.

 

Non-accrual loans secured bysingle-family residential real estate consist of $2.4 million in owner-occupiedresidences with an average balance of $103,000, and $4.3 million in non-owneroccupied residential real estate, with an average balance of $81,000.   Five borrowers represent $3.2 million of thenon-owner occupied single-family residential non-accrual loans, with thelargest borrower owing $1.4 million.

 

Nonresidential real estatesecured non-accrual loans total $3.8 million at September 30, 2005.  The average balance of these ten loans is$374,000.  The largest loan of $1.6million was paid in full in November 2005. Non-accrual construction loans totaled $2.5 million at September 30,2005 with the largest loan balance of $1.6 million being secured bymulti-family residential real estate. Commercial and consumer non-accrual loans totaled $4.0 million.  Approximately $2.4 million of these loans areunsecured, with an average balance of $124,000.

 

Approximately $4.8 million of the non-performing loansconsist of a series of unsecured and real estate secured loans made to a smallgroup of real estate investors who are in the process of liquidating theirassets.

 

If the $19.4 million ofnon-accruing and nonperforming loans of Peoples had been current in accordancewith their terms during fiscal 2005, the gross income on such loans would havebeen approximately $1.9 million.  A totalof approximately $793,000 of interest income was actually recorded by Peopleson such loans in the fiscal year ended September 30, 2005.

 

11

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**ClassifiedAssets.**  Federal regulations require that each insuredsavings institution classify its assets on a regular basis. In addition, inconnection with examinations of insured institutions, federal examiners haveauthority to identify problem assets and, if appropriate, classify them. Thereare three classifications for problem assets: “substandard,” “doubtful” and “loss.”Substandard assets have one or more defined weaknesses and are characterized bythe distinct possibility that the insured institution will sustain some loss ifthe deficiencies are not corrected. Doubtful assets have the weaknesses of substandardassets with the additional characteristic that the weaknesses make collectionor liquidation in full on the basis of currently existing facts, conditions andvalues questionable, and there is a higher possibility of loss. An assetclassified loss is considered uncollectible and of such little value thatcontinuance as an asset of the institution is not warranted. Another categorydesignated “special mention” also must be established and maintained for assetswhich do not currently expose an insured institution to a sufficient degree ofrisk to warrant 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 determining aninstitution’s regulatory capital, while specific valuation allowances for loanlosses do not qualify as regulatory capital. Federal examiners may disagree with an insured institution’sclassifications and amounts reserved.

 

Peoples’total classified assets at September 30, 2005 amounted to $33.4 million,which consisted of $7.1 million of assets classified as special mention, $21.4million of assets classified as substandard, $527,000 classified asdoubtful,  and $1.6 million of assetsclassified as loss.  The largestclassified asset at September 30, 2005 was a $1.6 million loan secured bynonresidential real estate.  This loanwas subsequently paid in full in November 2005.  The remaining $31.8 million of classifiedassets at September 30, 2005 consisted of approximately $22.5 million ofresidential real estate loans, $4.9 million of commercial loans, $4.0 millionof nonresidential real estate and land loans, $307,000 of consumer loans, and$207,000 of foreclosed real estate

 

**Allowance for Loan Losses.**  Theallocation of the allowance for loan losses based on particular types of loansat September 30, 2005, 2004 and 2003 was as follows:

 
| ** **                          | ** ** | **2005**                   | ** ** | **2004**        | ** ** | **2003**    | ** ** |
|-------------------------------------|------------|----------------------------|------------|-----------------|------------|-------------|------------|
| ** **                          | ** ** | ** **                 | ** ** | **Percent of**  | ** ** | ** **  | ** ** | **Percent of** | ** ** | ** ** | ** ** | **Percent of** | ** ** |
| ** **                          | ** ** | **Balance**                | ** ** | **total loans** | ** ** | **Balance** | ** ** | **total loans** | ** ** | **Balance** | ** ** | **total loans** | ** ** |
| ** **                          | ** ** | **(Dollars in Thousands)** | ** ** |
|                                |       |                       |       |            |       |        |       |   |   |   |   |   |   |
| Single-family residential           |       | $                          | 2,097      |            | 15.3       | %           | $          | 1,100 |   | 33.7 | % | $ | 1,120 |   | 37.1 | % |
| Multi-family residential            |       | 517                        |       | 3.8             |       | 1,661       |       | 15.9 |   | 1,342 |   | 15.4 | % |
| Nonresidential real estate and land |       | 3,020                      |       | 22.0            |       | 2,461       |       | 23.7 |   | 1,721 |   | 21.1 | % |
| Construction loans                  |       | 976                        |       | 7.1             |       | 2,211       |       | 18.6 |   | 2,192 |   | 19.7 | % |
| Commercial loans                    |       | 6,587                      |       | 48.1            |       | 3,122       |       | 4.9 |   | 3,124 |   | 4.8 | % |
| Consumer loans                      |       | 500                        |       | 3.7             |       | 470         |       | 3.2 |   | 245 |   | 1.9 |   |
|                                |       | $                          | 13,697     |            | 100.0      | %           | $          | 11,025 |   | 100.0 | % | $ | 9,744 |   | 100.0 | % |

 

The allowance for loan losses is maintained bymanagement at a level considered sufficient to cover estimated losses inherentin the existing portfolio based on prior loan loss experience, known andprobable risks in the portfolio, adverse situations that may affect theborrower’s ability to repay, the estimated value of any underlying collateral,general economic conditions, and other factors and estimates which are subjectto change over time.

 

A quarterly analysis of the allowance for loan lossrequirements includes general allocations based on the type of collateralsecuring the loan.  In the analysis,loans determined to have a higher risk will have higher allowance requirements.** **Additionalallowance requirements are allocated to criticized assets, based on theclassified status on the loan.  Forexample, loans classified substandard require higher loan loss allowances ascompared to loans classified special mention. No special allowances are provided for concentration of loans to oneborrower, unless management becomes aware of a potential problem withcollectibility.  Allocations of theallowance may be made for specific loans, but the entire allowance is availablefor any loan that should be charged-off.

 

12

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Peoples increased its allowance for loan losses infiscal 2005 by recording a $3.6 million provision for losses on loans due to anincrease in the volume of loans, as well as changes in the composition of theloan portfolio during the year and an increase in the level ofcharge-offs.  The change in the mix ofthe loan portfolio during the fiscal year 2005 resulted in increases to theallowance related to growth in multi-family residential loans, nonresidentialreal estate and land loans, construction loans and unsecured commercial linesof credit, all of which are generally considered to involve a higher degree ofrisk than single-family owner-occupied residential lending.   Peoples intends to continue to increase itsallowance for loan losses as its loan portfolio increases and will adjust itsallowance should the composition and relative credit risk of the portfoliochange.  While management believes thatit determines the size of the allowance based on the best information availableat the time, the allowance will need to be adjusted as circumstances change andassumptions are updated.  Future adjustmentsto the allowance could significantly affect future net earnings.

 

As previously stated, over the past four years, theBank has placed an increased emphasis on multi-family residential loans,non-residential real estate and land loans, construction loans, commercialloans and consumer loans. Correspondingly, the allowance for loan losses has increased from $3.7million or .87% of total loans at September 30, 2001 to $13.7 million or1.72% of total loans at September 30, 2005.

 

The following table sets forth the activity in theallowance for loan losses during the periods indicated.

 
| ** **                                                               | ** ** | **Year Ended September 30,** | ** ** |
|--------------------------------------------------------------------------|------------|-----------------------------------|------------|
| ** **                                                               | ** ** | **2005**                          | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** | **2001** | ** ** |
| ** **                                                               | ** ** | **(Dollars in Thousands)**        | ** ** |
|                                                                     |       |                              |       |   |   |   |   |   |   |   |   |
| Allowance at beginning of period                                         |       | $                                 | 11,025     |   | $ | 9,744 |   | $ | 7,656 |   | $ | 3,662 |   | $ | 762 |   |
| Increase due to Market acquisition                                       |       | —                            |       | — |   | — |   | — |   | 451 |   |
| Increase due to Kenwood acquisition                                      |       | —                            |       | — |   | — |   | 276 |   | — |   |
| Provision for losses on loans                                            |       | 3,600                             |       | 3,600 |   | 4,198 |   | 5,265 |   | 2,449 |   |
| Charge-offs:                                                             |       |                              |       |   |   |   |   |   |   |   |   |
| Single-family residential                                                |       | (103                              | )          | (609 | ) | (97 | ) | — |   | — |   |
| Multi-family residential                                                 |       | (940                              | )          | (1,431 | ) | — |   | — |   | — |   |
| Nonresidential real estate and land                                      |       | —                            |       | (151 | ) | (1,097 | ) | — |   | — |   |
| Construction                                                             |       | (16                               | )          | — |   | (62 | ) | — |   | — |   |
| Commercial                                                               |       | —                            |       | (145 | ) | (866 | ) | (1,547 | ) | — |   |
| Consumer and other loans                                                 |       | (22                               | )          | _ (24 | ) | — |   | — |   | — |   |
| Total charge-offs                                                        |       | (1,081                            | )          | (2,360 | ) | (2,122 | ) | (1,547 | ) | — |   |
| Recoveries:                                                              |       |                              |       |   |   |   |   |   |   |   |   |
| Single-family residential                                                |       | 9                                 |       | — |   | 12 |   | — |   | — |   |
| Multi-family residential                                                 |       | 140                               |       | — |   | — |   | — |   | — |   |
| Nonresidential real estate and land                                      |       | —                            |       | — |   | — |   | — |   | — |   |
| Construction                                                             |       | —                            |       | — |   | — |   | — |   | — |   |
| Commercial                                                               |       | —                            |       | 21 |   | — |   | — |   | — |   |
| Consumer and other loans                                                 |       | 4                                 |       | 20 |   | — |   | — |   | — |   |
| Total recoveries                                                         |       | 153                               |       | 41 |   | 12 |   | — |   | — |   |
|                                                                     |       |                              |       |   |   |   |   |   |   |   |   |
| Net loans charged-off to allowance for loan losses                       |       | (928                              | )          | (2,319 | ) | (2,110 | ) | (1,547 | ) | — |   |
|                                                                     |       |                              |       |   |   |   |   |   |   |   |   |
| Allowance at end of period                                               |       | $                                 | 13,697     |   | $ | 11,025 |   | $ | 9,744 |   | $ | 7,656 |   | $ | 3,662 |   |
| Allowance for loan losses to total nonperforming  loans at end of period |       | 70.65                             | %          | 182.87 | % | 134.15 | % | 102.19 | % | 467.69 | % |
|                                                                     |       |                              |       |   |   |   |   |   |   |   |   |
| Allowance for loan losses to total loans at end of  period               |       | 1.72                              | %          | 1.64 | % | 1.57 | % | 1.37 | % | 0.87 | % |

 

13

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**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 approved by theBoard of Directors.

 

The investment policy of Peoples is designed tomaintain adequate liquidity, manage investment assets in conjunction withinterest rate risk and maximize stability through diversification.  Excess funds not utilized to meet loan demandare typically invested using the guidelines of the investment policy to seekthe maximum return with minimal risk. All investments are approved to be heldas “Available for sale” or “Held to maturity”. Peoples does not maintain any investments as “Trading”.  Peoples transacts all investment activitythrough a select group of securities dealers approved by the Board ofDirectors.

 

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

 
| ** **                   | ** ** | **September 30,** | ** ** |
|------------------------------|------------|------------------------|------------|
| ** **                   | ** ** | **2005**               | ** ** | **2004** | ** ** | **2003** | ** ** |
| ** **                   | ** ** | **Amortized**          | ** ** | **Fair** | ** ** | **Amortized** | ** ** | **Fair** | ** ** | **Amortized** | ** ** | **Fair** | ** ** |
| ** **                   | ** ** | **Cost**               | ** ** | **Value** | ** ** | **Cost** | ** ** | **Value** | ** ** | **Cost** | ** ** | **Value** | ** ** |
| ** **                   | ** ** | **(In Thousands)**     |
| Available for sale:          |       |                   |       |   |   |   |   |   |   |   |   |   |   |
| Mortgage-backed securities   |       | $                      | 199,845    |   | $ | 199,716 |   | $ | 228,568 |   | $ | 228,085 |   | $ | 134,598 |   | $ | 133,828 |   |
| FHLMC stock                  |       | —                 |       | — |   | — |   | — |   | 1,391 |   | 1,123 |   |
| Mutual funds                 |       | 1,136                  |       | 1,096 |   | 1,091 |   | 1,069 |   | 1,039 |   | 1,033 |   |
| US treasuries and agencies   |       | 5,549                  |       | 5,535 |   |   |   |   |   |   |   |   |   |
| Other equity securities      |       | 1,009                  |       | 1,019 |   | — |   | — |   | — |   | — |   |
| Total                        |       | $                      | 207,539    |   | $ | 207,366 |   | $ | 229,659 |   | $ | 229,154 |   | $ | 137,028 |   | $ | 135,984 |   |
|                         |       |                   |       |   |   |   |   |   |   |   |   |   |   |
| Required investment:         |       |                   |       |   |   |   |   |   |   |   |   |   |   |
| Federal Home Loan Bank stock |       | $                      | 11,871     |   | $ | 11,871 |   | $ | 10,841 |   | $ | 10,841 |   | $ | 10,221 |   | $ | 10,221 |   |

 

The following table sets forth the activity inPeoples’ aggregate securities portfolio during the periods indicated.

 
| ** **                                                                         | ** ** | **Year Ended September 30,** | ** ** |
|------------------------------------------------------------------------------------|------------|-----------------------------------|------------|
| ** **                                                                         | ** ** | **2005**                          | ** ** | **2004** | ** ** | **2003** | ** ** |
| ** **                                                                         | ** ** | **(In Thousands)**                | ** ** |
|                                                                               |       |                              |       |   |   |   |   |
| Securities at beginning of period                                                  |       | $                                 | 239,995    |   | $ | 146,205 |   | $ | 29,901 |   |
| Purchases (1)                                                                      |       | 88,667                            |       | 147,624 |   | 209,532 |   |
| Sales of available for sale securities                                             |       | (41,186                           | )          | (1,391 | ) | (67,996 | ) |
| Amortization of premiums and discounts                                             |       | (1,768                            | )          | (1,493 | ) | (1,058 | ) |
| Repayments, prepayments and maturities                                             |       | (76,502                           | )          | (51,489 | ) | (23,032 | ) |
| Securities acquired through acquisition – net                                 |       | 9,699                             |       | — |   | — |   |
| Increase (decrease) in unrealized gains (losses) on available-for-sale  securities |       | 332                               |       | 539 |   | (1,142 | ) |
|                                                                               |       |                              |       |   |   |   |   |
| Securities at end of period (2)                                                    |       | $                                 | 219,237    |   | $ | 239,995 |   | $ | 146,205 |   |

 

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(1)           Includes increases in Federal Home Loan Bankstock and mutual funds from purchases and dividends.

 

(2)           At September 30, 2005, 2004 and 2003,$199.6 million or 91.1%, $228.1 million or 95.0%, and $33.8 million or 91.5%,respectively, of Peoples’ securities portfolio consisted of adjustable-ratesecurities.

 

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The following table sets forth certain informationregarding the maturities of Peoples’ security portfolio at September 30,2005.

 
| ** **                  | ** ** | **Contractually Maturing** | ** ** |
|-----------------------------|------------|----------------------------|------------|
| ** **                  | ** ** | ** **                 | ** ** | **Weighted** | ** ** | ** ** | ** ** | **Weighted** | ** ** | ** ** | ** ** | **Weighted** | ** ** | ** ** | ** ** | **Weighted** | ** ** |
| ** **                  | ** ** | **Under 1**                | ** ** | **Average** | ** ** | **1-5** | ** ** | **Average** | ** ** | **6-10** | ** ** | **Average** | ** ** | **Over 10** | ** ** | **Average** | ** ** |
| ** **                  | ** ** | **Year**                   | ** ** | **Yield** | ** ** | **Years** | ** ** | **Yield** | ** ** | **Years** | ** ** | **Yield** | ** ** | **Years** | ** ** | **Yield** | ** ** |
| ** **                  | ** ** | **(Dollars in Thousands)** |
|                        |       |                       |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Investment  securities      |       | $                          | 1,004      |   | 3.70 | % | $ | 2,010 |   | 4.17 | % | $ | 1,448 |   | 4.91 | % | $ | 2,092 |   | 6.10 | % |
| Mortgage-backed  securities |       | —                     |       | — |   | — |   | — |   | — |   | — |   | 199,716 |   | 3.61 |   |
|                        |       |                       |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|                        |       | $                          | 1,004      |   | 3.70 | % | $ | 2,010 |   | 4.17 | % | $ | 1,448 |   | 4.91 | % | $ | 201,808 |   | 3.64 | % |

 

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) topool and repackage the participation interests in the form of securities, withinvestors receiving the 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 loansinsured by the Federal Housing Administration, or guaranteed by the VeteransAdministration, and the timely payment of principal and interest on Ginnie Maesecurities are guaranteed by Ginnie Mae and backed by the full faith and creditof 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, 2005, Peoples hadmortgage-backed securities with a fair value totaling $199.7 million.

 

Duringfiscal year 2005, Peoples purchased $88.1 million in adjustable-ratemortgage-backed securities as a tool  tomanage interest rate risk, as well as to provide interest income with minimalcredit risk, due to the implicit guaranty of government-sponsored agencies.

 

**Sources of Funds**

 

**General.**  Deposits are the primary sourceof Peoples’ funds for lending and other investment purposes. In addition todeposits, principal and interest payments on loans and mortgage-backedsecurities are a source of funds. Loan repayments are a relatively stablesource of funds, while deposit inflows and outflows are significantlyinfluenced by general interest rates, competition from other financialentities, and money market conditions. Borrowings may also be used on ashort-term basis to compensate for reductions in the availability of funds fromother sources and on a longer-term basis for general business purposes.

 

15

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**Deposits.**  Deposits are attracted byPeoples principally from within its primary market area. Deposit account termsvary, with the principal differences being the minimum balance required, thetime periods the funds must remain on deposit and the interest rate. The bankoffers traditional passbook savings accounts, money market accounts, checkingaccounts and certificates of deposit.

 

The bank obtains deposits primarily from residents of its primarymarket areas of southwestern Ohio and southeastern Indiana.  The bank does not solicit deposits fromoutside its primary market area or pay fees to brokers to solicit funds fordeposit.

 

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 theactivity in Peoples’ deposits during the periods indicated.

 
| ** **                                        | ** ** | **Year Ended September 30,** | ** ** |
|---------------------------------------------------|------------|-----------------------------------|------------|
| ** **                                        | ** ** | **2005**                          | ** ** | **2004** | ** ** | **2003** | ** ** |
| ** **                                        | ** ** | **(In Thousands)**                |
|                                              |       |                              |       |   |   |   |   |
| Beginning balance                                 |       | $                                 | 472,436    |   | $ | 455,900 |   | $ | 369,080 |   |
|                                              |       |                              |       |   |   |   |   |
| Net increase before interest credited             |       | 139,568                           |       | 5,255 |   | 76,378 |   |
| Interest credited                                 |       | 195                               |       | 11,281 |   | 10,442 |   |
|                                              |       |                              |       |   |   |   |   |
| Net increase in deposits (including acquisitions) |       | 139,763                           |       | 16,536 |   | 86,820 |   |
|                                              |       |                              |       |   |   |   |   |
| Ending balance                                    |       | $                                 | 612,199    |   | $ | 472,436 |   | $ | 455,900 |   |

 

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

 
| ** **     | ** ** | **September 30,** | ** ** |
|----------------|------------|------------------------|------------|
| ** **     | ** ** | **2005**               | ** ** | **2004** | ** ** | **2003** | ** ** |
| ** **     | ** ** | **(In Thousands)**     | ** ** |
| ** **     | ** ** | ** **             | ** ** | ** ** | ** ** | ** ** | ** ** |
| 0.00% to 2.99% |       | $95,437                |       | $124,115 |   | $104,180 |   |
| 3.00% to 3.99% |       | 107,399                |       | 56,156 |   | 56,216 |   |
| 4.00% to 4.99% |       | 140,226                |       | 55,199 |   | 48,162 |   |
| 5.00% to 6.99% |       | 18,514                 |       | 25,194 |   | 35,713 |   |
| 7.00% to 8.99% |       | —                 |       | 137 |   | 562 |   |
|           |       |                   |       |   |   |   |   |
| Total          |       | $361,576               |       | $260,801 |   | $244,833 |   |

 

16

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The following table sets forth the amount and remaining maturities ofPeoples’ certificates of deposit at September 30, 2005. 

 
| ** **     | ** ** | ** **         | ** ** | **Over Six** | ** ** | **Over One** | ** ** | **Over Two** | ** ** | ** ** | ** ** |
|----------------|------------|--------------------|------------|--------------|------------|--------------|------------|--------------|------------|------------|------------|
| ** **     | ** ** | ** **         | ** ** | **Months**   | ** ** | **Year**     | ** ** | **Years**    | ** ** | ** ** | ** ** |
| ** **     | ** ** | **Six**            | ** ** | **Through**  | ** ** | **Through**  | ** ** | **Through**  | ** ** | **Over**   | ** ** |
| ** **     | ** ** | **Months**         | ** ** | **One**      | ** ** | **Two**      | ** ** | **Three**    | ** ** | **Three**  | ** ** |
| ** **     | ** ** | **And Less**       | ** ** | **Year**     | ** ** | **Years**    | ** ** | **Years**    | ** ** | **Years**  | ** ** |
| ** **     | ** ** | **(In Thousands)** |
|           |       |               |       |         |       |         |       |         |       |       |       |
| 0.00% to 2.99% |       | $                  | 68,531     |         | $          | 13,111       |       | $            | 12,312     |       | $          | 1,221 |   | $ | 262 |   |
| 3.00% to 3.99% |       | 9,854              |       | 34,816       |       | 21,697       |       | 21,426       |       | 19,606     |       |
| 4.00% to 4.99% |       | 3,280              |       | 32,383       |       | 30,169       |       | 5,697        |       | 68,697     |       |
| 5.00% to 6.99% |       | 3,234              |       | 2,423        |       | 12,824       |       | 7            |       | 26         |       |
|           |       |               |       |         |       |         |       |         |       |       |       |
| Total          |       | $                  | 84,899     |         | 82,733     |         | $          | 77,002       |       | $          | 28,351     |   | $ | 88,591 |   |
|                |            |                    |            |              |            |              |            |              |            |            |            |  |  |  |  |  |

 

As of September 30, 2005, the aggregate amount of outstandingcertificates of deposit at Peoples, in amounts greater than $100,000, wasapproximately $88.0 million.  Thefollowing table presents the maturity of these certificates of deposit at suchdate.

 
| ** **                      | ** ** | **September 30, 2005** | ** ** |
|---------------------------------|------------|-----------------------------|------------|
| ** **                      | ** ** | **(In Thousands)**          | ** ** |
|                            |       |                        |       |
| 3 months or less                |       | $                           | 11,882     |   |
| Over 3 months through 6 months  |       | 11,096                      |       |
| Over 6 months through 12 months |       | 15,893                      |       |
| Over 12 months                  |       | 49,154                      |       |
|                            |       |                        |       |
|                            |       | $                           | 88,025     |   |

 

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

 
| ** **                     | ** ** | **At September 30,**  | ** ** |
|--------------------------------|------------|----------------------------|------------|
| ** **                     | ** ** | **2005**                   | ** ** | **2004** | ** ** | **2003** | ** ** |
| ** **                     | ** ** | **Amount**                 | ** ** | **Percentage** | ** ** | **Amount** | ** ** | **Percentage** | ** ** | **Amount** | ** ** | **Percentage** | ** ** |
| ** **                     | ** ** | **(Dollars in Thousands)** |
|                           |       |                       |       |   |   |   |   |   |   |   |   |   |   |
| Non-interest checking accounts |       | $                          | 20,150     |   | 3.29 | % | $ | 17,638 |   | 3.74 | % | $ | 9,266 |   | 2.03 | % |
| Savings and checking accounts  |       | 210,590                    |       | 34.40 |   | 164,415 |   | 34.80 |   | 164,369 |   | 36.06 |   |
| Certificates of deposit        |       | 361,576                    |       | 59.06 |   | 260,801 |   | 55.20 |   | 244,883 |   | 53.71 |   |
| Money market accounts          |       | 19,883                     |       | 3.25 |   | 29,582 |   | 6.26 |   | 37,382 |   | 8.20 |   |
|                           |       |                       |       |   |   |   |   |   |   |   |   |   |   |
| Total                          |       | $                          | 612,199    |   | 100.00 | % | $ | 472,436 |   | 100.00 | % | $ | 455,900 |   | 100.00 | % |

 

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

 

17

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**Borrowings.**  Peoples may obtain advancesfrom the Federal Home Loan Bank of Cincinnati upon the security of the commonstock Peoples owns in that bank and certain of its residential mortgage loansand mortgage-backed securities, provided certain standards related tocreditworthiness have been met. These advances are made pursuant to severalcredit programs, each of which has its own interest rate and range ofmaturities. Federal Home Loan Bank advances are generally available to meetseasonal and other withdrawals of deposit accounts and to permit increasedlending.  As of September 30, 2005,Peoples was permitted to borrow, subject to security pledge agreements, up to$340.0 million from the Federal Home Loan Bank of Cincinnati.  At such date, Peoples had $273.6 million ofFederal Home Loan Bank advances. The Bank has used Federal Home Loan Bankadvances in order to complement deposits as a funding source for loans andinvestments.  Of the $273.6 million ofadvances at September 30, 2005, $120.0 million mature in fiscal 2006.

 

In addition, Peoples has a line of credit with another financialinstitution for $20 million.  As of September 30,2005, Peoples did not have an outstanding balance on this line of credit.  This line of credit matures on March 31,2006.

 

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

 
| ** **                                                     | ** ** | **At or for the Year********Ended September 30,** | ** ** |
|----------------------------------------------------------------|------------|--------------------------------------------------------|------------|
| ** **                                                     | ** ** | **2005**                                               | ** ** | **2004** | ** ** | **2003** | ** ** |
| ** **                                                     | ** ** | **(Dollars in Thousands)**                             | ** ** |
|                                                           |       |                                                   |       |   |   |   |   |
| Federal Home  Loan Bank advances:                              |       |                                                   |       |   |   |   |   |
| Average  balance outstanding                                   |       | $                                                      | 296,527    |   | $ | 299,224 |   | $ | 173,731 |   |
| Maximum  amount outstanding at any month-end during the period |       | $                                                      | 320,474    |   | $ | 327,000 |   | $ | 218,500 |   |
| Balance  outstanding at end of period                          |       | $                                                      | 273,569    |   | $ | 324,500 |   | $ | 218,500 |   |
| Average  interest rate during the period                       |       | 3.35                                                   | %          | 2.56 | % | 3.59 | % |
| Weighted-average  interest rate at end of period               |       | 3.89                                                   | %          | 2.85 | % | 3.08 | % |
|                                                           |       |                                                   |       |   |   |   |   |
| Line of  Credit:                                               |       |                                                   |       |   |   |   |   |
| Average  balance outstanding                                   |       | $                                                      | —     |   | $ | 1,100 |   | $ | 946 |   |
| Maximum  amount outstanding at any month-end during the period |       | —                                                 |       | $ | 1,900 |   | $ | 1,400 |   |
| Balance  outstanding at end of period                          |       | —                                                 |       | — |   | $ | 1,400 |   |
| Average  interest rate during the period                       |       | N/A                                                    |       | 2.97 | % | 2.85 | % |
| Weighted-average  interest rate at end of period               |       | N/A                                                    |       | N/A |   | 2.62 | % |

 

**Columbia Bancorp, Inc.**

 

At September 30, 2005, Peoples owned approximately 38% of ColumbiaBancorp, Inc., a privately held bank holding company in southwest Ohio.

 

**Total Employees**

 

Peoples had 169 full-timeequivalent employees at September 30, 2005.  None of these employees are representedby  a collective bargaining agent, andPeoples believes that it enjoys good relations with its personnel.

 

18

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**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 investment opportunities.

 

Peoples’ competition forloans comes principally from mortgage banking companies, commercial banks,other savings institutions and credit unions. It competes for loan originations primarily through the interest ratesand loan fees it charges, and the efficiency and quality of services itprovides borrowers.  Factors which affectcompetition include general and local economic conditions, current interestrate levels and volatility in the mortgage markets. Competition may increase asa result of the continuing reduction of restrictions on the interstateoperations of financial institutions and the anticipated slowing of refinancingactivity.

 

19

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**REGULATION**

 

The following is a summaryof certain statutes and regulations affecting Peoples and the Bank.  This summary is qualified in its entirety bysuch statutes and regulations.  A changein applicable laws or regulations may have a material effect on Peoples, theBank and the business of Peoples and the Bank.

 

**General**

 

Financial institutions andtheir holding companies are extensively regulated under federal and statelaw.  Consequently, the growth andearnings performance of Peoples and the Bank can be affected not only bymanagement decisions and general economic conditions, but also by the statutesadministered by, and the regulations and policies of, various governmentalregulatory authorities.  Thoseauthorities include, but are not limited to, the Office of Thrift Supervision,the Federal Reserve Board, the FDIC, the Internal Revenue Service, and statetaxing authorities.  The effect of suchstatutes, regulations and policies can be significant, and cannot be predictedwith a high degree of certainty.

 

Federal and state laws andregulations generally applicable to financial institutions and their holdingcompanies regulate, among other things, the scope of business, investments,reserves against deposits, capital levels relative to operations, lendingactivities and practices, the nature and amount of collateral for loans, theestablishment of branches, mergers, consolidations and dividends.  The system of supervision and regulationapplicable to Peoples and the Bank establishes a comprehensive framework for theirrespective operations and is intended primarily for the protection of the FDIC’sdeposit insurance funds, the depositors of the Bank and the public, rather thanshareholders of the Bank or Peoples.

 

Federal law and regulationsestablish supervisory standards applicable to the lending activities of theBank, including internal controls, credit underwriting, loan documentation andloan-to-value ratios for loans secured by real property.

 

**Peoples Community Bancorp**

 

Peoplesis registered as a bank holding company and is subject to the regulations ofthe Board of Governors of the Federal Reserve System (the Federal Reserve)under the Bank Holding Company Act of 1956, as amended.  The Bank Holding Company Act requires bankholding companies to file periodic reports with and is subject to examinationby the Federal Reserve.  The FederalReserve issued regulations under the Bank Holding Company Act that require abank holding company to serve as a source of financial and managerial strengthto its subsidiary banks.  As a result,the Federal Reserve may require the holding company to use its resources toprovide adequate capital funds to the bank during periods of financial stressor adversity.

 

TheBank Holding Company Act prohibits Peoples from acquiring direct or indirectcontrol of more than 5 percent of the outstanding voting stock of any bank, orsubstantially all of the assets of any bank, or merging with another bankholding company, without the prior approval of the Federal Reserve.

 

TheBank Holding Company Act restricts Peoples to engaging in activities that theFederal Reserve has found to be closely related to banking, and which areexpected to produce benefits for the public that will outweigh any potentiallyadverse effects.  To this end, the BankHolding Company Act, prohibits Peoples from engaging in most nonbankingbusinesses, or acquiring ownership or control of more than 5 percent of theoutstanding voting stock of any company engaged in a nonbanking business,unless the Federal Reserve has determined that the nonbanking business is closelyrelated to banking.  Under the BankHolding Company Act, the Federal Reserve may require a bank holding company toend a nonbanking business if it constitutes a serious risk to the financialsoundness and stability of any bank subsidiary of the bank holding company.

 

20

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TheFederal Reserve Act imposes restrictions on a subsidiary bank of a bank holdingcompany.  The restrictions affectextension of credit to the bank holding company and its subsidiaries,investments in the stock or securities as collateral for loans.  The Federal Reserve Act and the FederalReserve regulations also place limitations and reporting requirements onextensions of credit by a bank to the principal shareholders of its parent holdingcompany, among others, and to related interests of such principalshareholders.  In addition, suchlegislation and regulation may affect the terms upon which any person becominga principal shareholder of a holding company may obtain credit from banks withwhich the subsidiary bank maintains a correspondent relationship.

 

**FederalSecurities Laws**.  Peoples registered its common stock with theSecurities and Exchange Commission under Section 12(g) of theSecurities Exchange Act of 1934.  Peoplesis subject to the proxy and tender offer rules, insider trading reportingrequirements and restrictions, and certain other requirements under theExchange Act.

 

**Sarbanes-Oxley Act of 2002.**  On July 30,2002, the President signed into law the Sarbanes-Oxley Act of 2002 implementinglegislative reforms intended to address corporate and accounting fraud.  In addition to the establishment of a newaccounting oversight board which will enforce auditing, quality control andindependence standards and will be funded by fees from all publicly tradedcompanies, the bill restricts provision of both auditing and consultingservices by accounting firms.  To ensureauditor independence, any non-audit services being provided to an audit clientwill require preapproval by the company’s audit committee members.  In addition, the audit partners must berotated.  The bill requires chiefexecutive officers and chief financial officers, or their equivalent, to certifyto the accuracy of periodic reports filed with the SEC, subject to civil andcriminal penalties if they knowingly or willfully violate this certificationrequirement.  In addition, under the Act,counsel will be required to report evidence of a material violation of thesecurities laws or a breach of fiduciary duty by a company to its chiefexecutive officer or its chief legal officer, and, if such officer does notappropriately respond, to report such evidence to the audit committee or othersimilar committee of the board of directors or the board itself.

 

Longer prison terms andincreased penalties will also be applied to corporate executives who violatefederal securities laws, the period during which certain types of suits can bebrought against a company or its officers has been extended, and bonuses issuedto top executives prior to restatement of a company’s financial statements arenow subject to disgorgement if such restatement was due to corporatemisconduct.  Executives are alsoprohibited from insider trading during retirement plan “blackout” periods, andloans to company executives are restricted. In addition, a provision directs that civil penalties levied by the SECas a result of any judicial or administrative action under the Act be depositedto a fund for the benefit of harmed investors. The Federal Accounts for Investor Restitution (“FAIR”) provision alsorequires the SEC to develop methods of improving collection rates.  The legislation accelerates the time framefor disclosures by public companies, as they must immediately disclose anymaterial changes in their financial condition or operations.  Directors and executive officers must alsoprovide information for most changes in ownership in a company’s securitieswithin two business days of the change.

 

The Act also increases the oversight of, andcodifies certain requirements relating to audit committees of public companiesand how they interact 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 from performingstatutorily mandated audit services for a company if such company’s chiefexecutive 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.  TheAct also prohibits any officer or director of a company or any other personacting under their direction from taking any action to fraudulently influence, coerce,manipulate or mislead any independent public or certified accountant engaged inthe audit of the company’s financial statements for the purpose of renderingthe financial statement’s materially misleading.  The Act also requires the 

 

21

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SEC to prescribe rules requiringinclusion of an internal control report and assessment by management in theannual report to stockholders.  The Actrequires the RPAF that issues the audit report to attest to and report onmanagement’s assessment of the company’s internal controls.  In addition, the Act requires that eachfinancial report required to be prepared in accordance with (or reconciled to)accounting principles generally accepted in the United States of America andfiled with the SEC reflect all material correcting adjustments that areidentified by a RPAF in accordance with accounting principles generallyaccepted in the United States of America and the rules and regulations ofthe SEC.

 

**Peoples Community Bank**

 

**General.**   TheBank is a federally chartered stock savings bank.  The Office of Thrift Supervision is thechartering authority and primary federal regulator of the Bank. The Office ofThrift Supervision has extensive authority over the operations of federallychartered savings institutions.  As partof this authority, federally chartered savings institutions are required tofile periodic reports with the Office of Thrift Supervision and are subject toperiodic examinations by the Office of Thrift Supervision and the FDIC.  The Bank also is subject to regulation andexamination by the FDIC and to requirements established by the Federal ReserveBoard.  The investment and lending authorityof savings institutions are prescribed by federal laws and regulations, andsuch institutions are prohibited from engaging in any activities not permittedby such laws and regulations.  Suchregulation and supervision is primarily intended for the protection ofdepositors and the Savings Association Insurance Fund.

 

The Office of ThriftSupervision’s enforcement authority over all savings institutions and theirholding companies includes, among other things, the ability to assess civilmoney penalties, to issue cease and desist or removal orders and to initiateinjunctive actions.  In general, theseenforcement actions may be initiated for violations of laws and regulations andunsafe or unsound practices. Other actions or inactions may provide the basisfor enforcement action, including misleading or untimely reports filed with theOffice of Thrift Supervision.

 

**Insuranceof Accounts.**  The deposits acquired in conjunction with thepurchase of American State Corporation in June 2005 are insured to themaximum extent permitted by the Bank Insurance Fund.  The remaining deposits of the Bank areinsured to the maximum extent permitted by the Savings Association InsuranceFund.  Both funds are administered by theFDIC, and are backed by the full faith and credit of the U.S. Government.  As insurer, the FDIC is authorized to conductexaminations of, and to require reporting by, FDIC-insured institutions. Italso may prohibit any FDIC-insured institution from engaging in any activitythe FDIC determines by regulation or order to pose a serious threat to theFDIC.  The FDIC also has the authority toinitiate enforcement actions against savings institutions, after giving theOffice of Thrift Supervision an opportunity to take such action. Currently,FDIC deposit insurance rates generally range from zero basis points to 27 basispoints, depending on the assessment risk classification assigned to thedepository institution.

 

The FDIC may terminate thedeposit insurance of any insured depository institution, including the Bank, ifit determines after a hearing that the institution has engaged or is engagingin unsafe or unsound practices, is in an unsafe or unsound condition tocontinue operations, or has violated any applicable law, regulation, order orany condition imposed by an agreement with the FDIC.  It also may suspend deposit insurancetemporarily during the hearing process for the permanent termination ofinsurance, 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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**RegulatoryCapital Requirements.**  Federal bank holding companies, as well asfederally insured savings institutions are required to maintain minimum levelsof regulatory capital. The Federal Reserve has established minimum capital ratiosfor bank holding companies, while the Office of Thrift Supervision (OTS) hasestablished capital standards applicable to all savings institutions. The OTSstandards generally must be as stringent as the comparable capital requirementsimposed on national banks. The OTS also is authorized to impose capitalrequirements in excess of these standards on individual institutions on acase-by-case basis.

 

The Federal Reserve usesrisk-based capital guidelines for bank holding companies.  These are designed to make such capitalrequirements more sensitive to differences in risk profiles amount bank holdingaccounts, to account for off-balance sheet exposure and to minimizedisincentives for holding liquid assets. Assets and off-balance sheet items are assigned to broad riskcategories, each with appropriate weights. The resulting capital ratios represent capital as a percentage of totalrisk-weighted assets.  The guidelines areminimums, and the Federal Reserve has noted that bank holding companiescontemplating significant expansion programs should not allow expansion todiminish their capital ratios and should maintain ratios well in excess of theminimum.  The current guidelines requireall bank holding companies to maintain a minimum risk-based total capital ratioequal to 8%, of which at least 4% must be Tier I capital.  Tier I capital for bank holding companiesincludes common shareholder’s equity, certain qualifying perpetual preferredstock and minority interests in equity accounts of consolidated subsidiaries,less intangible assets.

 

The Federal Reserve alsoemploys a leverage ratio, which is Tier I capital as a percentage of totalassets less intangibles, to be used as a supplement to risk-basedguidelines.  The principal objective ofthe leverage ratio is to constrain the maximum degree to which a bank holdingcompany may leverage its equity capital base. The Federal Reserve requires a minimum leverage ratio of 3%.  However, for all but the most highly ratedbank holding companies and for bank holding companies seeking to expand, theFederal Reserve expects an additional amount of capital at least 1% to 2%.

 

At September 30, 2005,Peoples met all Federal Reserve capital and leverage ratios, with Tier Irisk-based capital ratio of 14.3%, total risk-based capital ratio of 16.5%, andleverage ratio of 9.7%.

 

Current OTS capitalstandards require savings institutions to satisfy three different capitalrequirements. Under these standards, savings institutions must maintain “tangible”capital equal to at least 1.5% of adjusted total assets, “core” capital equalto at least 4.0% of adjusted total assets and “total” capital (a combination ofcore and “supplementary” capital) equal to at least 8.0% of “risk-weighted”assets.  Tangible capital generallyequals common stockholders’ equity (including retained earnings) minusintangible assets, with only a limited exception for purchased mortgageservicing rights. Core capital generally consists of tangible capital plusqualifying intangible assets.

 

In determining compliancewith the risk-based capital requirement, a savings institution is allowed toinclude both core capital and supplementary capital in its total capital,provided that the amount of supplementary capital included does not exceed thesavings institution’s core capital. Supplementary capital generally consists ofgeneral allowances for loan losses up to a maximum of 1.25% of risk-weightedassets, together with certain other items. In determining the required amount of risk-based capital, total assets,including certain off-balance sheet items, are multiplied by a risk weightbased on the risks inherent in the type of assets.  The risk weights range from 0% for cash andsecurities issued by the U.S. Government or unconditionally backed by the fullfaith and credit of the U.S. Government to 100% for loans (other thanqualifying residential loans weighted at 50%) and repossessed assets.

 

Savingsinstitutions must value securities available for sale at amortized cost forregulatory capital purposes. This means that in computing regulatory capital,savings institutions should add back any unrealized losses and deduct anyunrealized gains, net of income taxes, on securities reported as a separatecomponent of generally accepted accounting principles capital.

 

At September 30, 2005,the Bank exceeded all of its OTS capital requirements, with tangible, core andrisk-based capital ratios of 9.7%, 9.7% and 14.6%, respectively.

 

Any savings institution thatfails any of the capital requirements is subject to possible enforcementactions by the Office of Thrift Supervision or the FDIC. Such actions couldinclude a capital directive, a cease and desist order, civil money penalties,the establishment of restrictions on the institution’s operations, terminationof federal deposit insurance

 

23

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and the appointment of a conservator or receiver.The Office of Thrift Supervision’s capital regulation provides that suchactions, through enforcement proceedings or otherwise, could require one ormore of a variety of corrective actions.

 

**PromptCorrective Action.**  The following table shows the amount ofcapital associated with the different OTS 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 institutionis “critically undercapitalized” if it has a ratio of tangible equity to totalassets that is equal to or less than 2.0%. Under specified circumstances, afederal banking agency may reclassify a well capitalized institution asadequately capitalized and may require an adequately capitalized institution oran undercapitalized institution to comply with supervisory actions as if itwere in the next lower category (except that the FDIC may not reclassify asignificantly undercapitalized institution as critically undercapitalized).

 

An institution generallymust file a written capital restoration plan which meets specifiedrequirements within 45 days of the date that the institution receivesnotice or is deemed to have notice that it is undercapitalized, significantlyundercapitalized or critically undercapitalized. A federal banking agency mustprovide the institution with written notice of approval or disapproval within60 days after receiving a capital restoration plan, subject to extensionsby the agency. An institution which is required to submit a capital restorationplan must concurrently submit a performance guaranty by each company that controlsthe institution. In addition, undercapitalized institutions are subject tovarious regulatory restrictions, and the appropriate federal banking agencyalso may take any number of discretionary supervisory actions.

 

At September 30, 2005,the Bank was deemed a well capitalized institution for purposes of the aboveregulations and as such is not subject to the above mentioned restrictions.

 

**Safety andSoundness Guidelines.**  The Federal Reserve, the Office of ThriftSupervision, and the other federal banking agencies have established guidelinesfor safety and soundness, addressing operational and managerial standards, aswell as compensation matters for insured financial institutions. Institutionsfailing to meet these standards are required to submit compliance plans totheir appropriate federal regulators. The Federal Reserve, the Office of ThriftSupervision, and the other agencies have also established guidelines regardingasset quality and earnings standards for insured institutions.  The Bank believes that it is in compliancewith these guidelines and standards.

 

**CapitalDistributions.**  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, savings institutionswhich are a subsidiary of a holding company (as well as certain otherinstitutions) 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.

 

24

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**CommunityReinvestment Act and the Fair Lending 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.

 

**QualifiedThrift Lender Test.**  All savings institutions are required to meeta 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; home equity loans; most mortgage-backed securities; stock issued by aFederal Home Loan Bank; and direct or indirect obligations of the FDIC.

 

A savings institution thatdoes not meet the qualified thrift lender test must either convert to a bankcharter or comply with certain restrictions on its operations.

 

At September 30, 2005,the qualified thrift investments of the Bank were approximately 87.8% of itsportfolio assets.

 

**FederalHome Loan Bank System.**  The Bank is a member of the Federal Home LoanBank of Cincinnati, which is one of 12 regional Federal Home Loan Banks thatadministers the home financing credit function of savings institutions.  Each Federal Home Loan Bank serves as areserve or central bank for its members within its assigned region. It isfunded primarily from proceeds derived from the sale of consolidatedobligations of the Federal Home Loan Bank System. It makes loans to members(i.e., advances) in accordance with policies and procedures established by theBoard of Directors of the Federal Home Loan Bank.

 

Asa member, the Bank is required to purchase and maintain stock in the FederalHome Loan Bank of Cincinnati in an amount equal to at least 1% of its aggregateunpaid residential mortgage loans or similar obligations at the beginning ofeach year. At September 30, 2005, the Bank had $11.4 million in FederalHome Loan Bank of Cincinnati stock, which was in compliance with thisrequirement.   The Bank also hadapproximately $500,000 in Federal Home Loan Bank of Indianapolis stock, whichwas obtained through the acquisition of American State Bank in June 2005.

 

The Federal Home Loan Banksare required to provide funds for the resolution of troubled savingsinstitutions and to contribute to affordable housing programs through directloans or interest subsidies on advances targeted for community investment andlow- and moderate-income housing projects. These contributions have adverselyaffected the level of Federal Home Loan Bank dividends paid in the past andcould do so in the future. These contributions also could have an adverseeffect on the value of Federal Home Loan Bank stock in the future.

 

**FederalReserve 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 the corporate tax provisions of theInternal Revenue Code, and the Bank is subject to certain additional provisionswhich apply to thrifts and other types of financial institutions. The followingdiscussion of federal taxation is intended only to summarize certain pertinentfederal income tax matters relevant to the taxation of Peoples and the Bank andis not a comprehensive discussion of the tax rules applicable to Peoplesand the Bank.

 

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

 

**Bad DebtReserves.**  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 million or less in assets may, however, continue to use theexperience method.  The Bank mustrecapture that portion of its reserve which exceeds the amount that could havebeen taken under the experience method for post-1987 tax years.  The Bank’s post-1987 excess reserves amountedto approximately $1.2 million.  Therecapture has occurred over a six-year period, which commenced in fiscal 1999.The legislation also requires savings institutions to account for bad debts forfederal income tax purposes on the same basis as commercial banks for tax yearsbeginning after December 31, 1995. This change in accounting method andrecapture of excess bad debt reserves is adequately provided for in the Bank’sdeferred tax liability.

 

At September 30, 2005,the federal income tax reserves of the Bank included $1.4 million for which nofederal income tax has been provided. Because of these federal income tax reserves and the liquidation accountestablished for the benefit of certain depositors of the Bank in connectionwith the recent conversion, the retained earnings of the Bank are substantiallyrestricted.

 

**Distributions.**  Ifthe Bank were to distribute cash or property to its stockholders, and thedistribution was treated as being from its accumulated bad debt reserves, thedistribution would cause the Bank to have additional taxable income.  A distribution is from accumulated bad debtreserves if (a) the reserves exceed the amount that would have beenaccumulated on the basis of actual loss experience, and (b) thedistribution is a “non-qualified distribution.” A distribution with respect to its stock is a non-qualified distributionto the extent that, for federal income tax purposes, (1) it is inredemption of its shares, (2) it is pursuant to a liquidation of theinstitution, or (3) in the case of a current distribution, together withall other such distributions during the taxable year, it exceeds theinstitution’s current and post-1951 accumulated earnings and profits.

 

The amount of additionaltaxable income created by a non-qualified distribution is an amount that whenreduced by the tax attributable to it is equal to the amount of thedistribution.

 

**MinimumTax.**  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 includedepreciation and 75% of the excess (if any) of (1) alternative minimum taxable income determined without regard tothis preference and prior to reduction by net operating losses, over (2) adjustedcurrent earnings as defined in the Code.

 

Peoples has not been subjectto the alternative minimum tax or had any such amounts available as credits forcarry-over.

 

26

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**CapitalGains and Corporate Dividends-Received Deduction.** Corporate net capital gains are taxed at a maximum rate of 35%.Corporations which own 20% or more of the stock of a corporation distributing adividend may deduct 80% of the dividends received. Corporations which own lessthan 20% of the stock of a corporation distributing a dividend may deduct 70%of the dividends received. However, a corporation that receives dividends froma member of the same affiliated group of corporations may deduct 100% of thedividends received.

 

**OtherMatters.**  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 taxreturns for the tax years ended 2004, 2003 and 2002 are open under the statuteof limitations and are subject to review by the IRS.  Peoples has not been audited by the IRSduring the last five years.

 

**State Taxation**

 

**OhioTaxation.**  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’ taxunder the net worth method, 100% of the investment in the capital stock of theBank after the conversion may be excluded, as reflected on the balance sheet,in computing taxable net worth as long as Peoples owns at least 25% of theissued and outstanding capital stock of the Bank.  The calculation of the exclusion from networth is based on the ratio of the excludable investment (net of anyappreciation or goodwill included in such investment) to total assets multipliedby the net value of the stock.  As aholding company, Peoples may be entitled to various other deductions incomputing taxable net worth that are not generally available to operatingcompanies.

 

A special litter tax is alsoapplicable to all corporations, including Peoples, subject to the Ohiocorporation franchise tax other than “financial institutions.” If the franchisetax is paid on the net income basis, the litter tax is equal to 0.11% of thefirst $50,000 of computed Ohio taxable income and 0.22% of computed Ohiotaxable income in excess of $50,000. If the franchise tax is paid on the networth basis, the litter tax is equal to 0.014% times taxable net worth.

 

The Bank is a “financialinstitution” for State of Ohio tax purposes. As such, it is subject to the Ohiocorporate franchise tax on “financial institutions,” which is imposed annuallyat a rate of 1.3% of the Bank’s book net worth determined in accordance withgenerally accepted accounting principles. As a “financial institution”, the Bank is not subject to any tax basedupon net income or net profits imposed by the State of Ohio.

 

**IndianaTaxation.** Peoples is subject to the Indianafinancial institution tax, which is tax calculated at eight and one-half (8.5)percent of the adjusted gross income of the business conducted in the state ofIndiana.  This financial institution taxis extended to both resident and nonresident financial institutions.

 

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

 

27

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#### **Item 2. Properties**

 

At September 30,2005, Peoples conducted its business from its main office in West Chester, Ohioand fifteen other branch offices in Hamilton and Warren counties in Ohio andDearborn County, Indiana.  The followingtable sets forth the net book value (including leasehold improvement,furnishings and equipment) and certain other information with respect to theoffices and other properties of Peoples at September 30, 2005.

 
| ** **                                             |       | **Owned or  Leased** | ** ** | **Lease  Expiration  Date** | ** ** | **Net Book Value  of Property and  Leasehold  Improvements at  September 30,  2005** | ** ** | **Deposits at  September 30,  2005** | ** ** |
|--------------------------------------------------------|------------|----------------------|------------|-----------------------------|------------|-------------------------------------------------------------------------------------------|------------|-------------------------------------------|------------|
| ** **                                             | ** ** | ** **           | ** ** | ** **                  | ** ** | **(In thousands)**                                                                        | ** ** |
| **Main  Office:**                                      |       |                 |       |                        |       |                                                                                      |       |                                      |       |
| 6100 West  Chester Road, West Chester, Ohio 45069      |       | Owned                |       | N/A                         |       | $                                                                                         | 2,464      |                                      | $          | 68,117 |   |
|                                                   |       |                 |       |                        |       |                                                                                      |       |                                      |       |
| **Branch  Offices:**                                   |       |                 |       |                        |       |                                                                                      |       |                                      |       |
| 7615 Voice  of America Drive, West Chester, Ohio 45069 |       | Owned                |       | N/A                         |       | 3,891                                                                                     |       | 9,401                                     |       |
| 11 South  Broadway, Lebanon, Ohio 45036                |       | Owned                |       | N/A                         |       | 694                                                                                       |       | 58,946                                    |       |
| 4825 Marburg  Avenue, Cincinnati, Ohio 45209           |       | Owned                |       | N/A                         |       | 1,656                                                                                     |       | 29,888                                    |       |
| 5712  Bridgetown Road, Cincinnati, Ohio 45248          |       | Owned                |       | N/A                         |       | 2,047                                                                                     |       | 68,784                                    |       |
| 6570  Harrison Avenue, Cincinnati, Ohio 45247          |       | Owned                |       | N/A                         |       | 1,355                                                                                     |       | 40,765                                    |       |
| 7522  Hamilton Avenue, Cincinnati, Ohio 45231          |       | Owned                |       | N/A                         |       | 1,282                                                                                     |       | 66,990                                    |       |
| 4100 State  Route 128, Cleves, Ohio 45002              |       | Owned                |       | N/A                         |       | 968                                                                                       |       | 16,819                                    |       |
| 1101  Columbus Avenue, Lebanon, Ohio 45036             |       | Owned                |       | N/A                         |       | 1,378                                                                                     |       | 41,698                                    |       |
| 5797 South  State Route 48, Maineville, Ohio 45039     |       | Owned                |       | N/A                         |       | 981                                                                                       |       | 19,125                                    |       |
| 8350 Arbor  Square Drive, Mason, Ohio 45040            |       | Owned                |       | N/A                         |       | 1,362                                                                                     |       | 22,509                                    |       |
| 3530  Springdale Road, Cincinnati, Ohio 45251          |       | Owned                |       | N/A                         |       | 688                                                                                       |       | 24,647                                    |       |
| 7200 Blue  Ash Road, Cincinnati, Ohio 45236            |       | Owned                |       | N/A                         |       | 2,340                                                                                     |       | 85,115                                    |       |
| 2906-6 West  US 22 & 3, Maineville, OH 45039  |       | Leased               |       | 06/07                       |       | —                                                                                    |       | —                                    |       |
| 131 Walnut  Street, Lawrenceburg, Indiana 47025        |       | Leased               |       | 02/13                       |       | 138                                                                                       |       | 46,745                                    |       |
| 320  Importing Street, Aurora, Indiana 47001           |       | Owned                |       | N/A                         |       | 550                                                                                       |       | 8,017                                     |       |
| 24128 State  Line Road, Bright, Indiana 47025          |       | Owned                |       | N/A                         |       | 354                                                                                       |       | 4,448                                     |       |
|                                                        |            |                      |            |                             |            |                                                                                           |            |                                           |            |  |  |

 

Additionally,the Company had capitalized construction in progress costs totalingapproximately $794,000 at September 30, 2005, and has purchased land inWarren County for $1.0 million for future expansion.

 

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**Item 3. Legal Proceedings**

 

The Company is not involved inany legal proceeding except nonmaterial litigation incidental to the ordinarycourse of business.

 

**Item 4. Submission of Matters to a Vote ofSecurity Holders**

 

Not applicable

 

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**PART II**

 

**Item 5. Market for Registrant’s CommonEquity, and Related Stockholder Matters and Issuer Purchases of EquitySecurities**

 

(a)  The information required herein isincorporated by reference from page  of Peoples’ 2005 Annual Report toStockholders filed as Exhibit 13 hereto (“2005 Annual Report”) and from Part III,Item 12 hereof.

(b)  Not applicable.

(c)  Not applicable.

 

#### **Item 6. Selected Financial Data**

 

Theinformation required herein is incorporated from pages 4 and 5 of the 2005Annual Report.

 

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

 

The information required herein isincorporated by reference from pages 6 to16 of the 2005 Annual Report.

 

**Item 7A. Quantitative and QualitativeDisclosures About Market Risk**

 

The information required herein isincorporated from pages 16 and 17 of the 2005 Annual Report.

 

**Item 8. Financial Statements andSupplementary Data**

 

The information required herein isincorporated by reference from pages 21 to 58 of the 2005 Annual Report.

 

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**REPORT OF REGISTERED INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS**

 

 

Board of Directors

Peoples Community Bancorp, Inc.

 

Wehave audited the consolidated statement of financial condition of PeoplesCommunity Bancorp, Inc. as of September 30, 2003 (which is not included in thisAnnual Report on Form 10-K) and the related consolidated statements ofearnings, comprehensive income, stockholders’ equity and cash flows for theyear then ended.  These consolidatedfinancial statements are the responsibility of the Corporation’smanagement.  Our responsibility is toexpress an opinion on these consolidated financial statements based on ouraudits.

 

Weconducted our audit in accordance with auditing standards generally accepted inthe United States of America.  Thosestandards require that we plan and perform the audit to obtain reasonableassurance about whether the financial statements are free of materialmisstatement.  An audit includesexamining, on a test basis, evidence supporting the amounts and disclosures inthe financial statements.  An audit alsoincludes assessing the accounting principles used and significant estimatesmade by management, as well as evaluating the overall financial statementpresentation.  We believe that our auditprovides a reasonable 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 the consolidated results of itsoperations and its cash flows for the year ended September 30, 2003, inconformity with accounting principles generally accepted in the United Statesof America.

 

 
| /s/GRANT THORNTON LLP |   |
|-----------------------|--------|
| Cincinnati, Ohio      |
| October 30, 2003      |

 

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**Report of Registered Independent Public Accounting Firm**

 

Audit Committee, Board of Directors and Stockholders

PeoplesCommunity Bancorp, Inc.

WestChester, Ohio

 

 

We have audited the consolidated statement offinancial condition of Peoples Community Bancorp, Inc. as of September 30,2005 and 2004, and the related consolidated statements of earnings, comprehensiveincome, stockholders’ equity and cash flows for each of the two years in theperiod ended September 30, 2005. These consolidated financial statements are the responsibility of theCorporation’s management.  Ourresponsibility is to express an opinion on these consolidated financialstatements based on our audit.

 

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

 

In our opinion, the financial statementsreferred to above present fairly, in all material respects, the consolidatedfinancial position of Peoples Community Bancorp, Inc. as of September 30,2005 and 2004, and the consolidated results of its operations and its cashflows for each of the two years in the period ended September 30, 2005, inconformity with accounting principles generally accepted in the United Statesof America.

 
| /s/ BKD, LLP                                                                            |   |
|-----------------------------------------------------------------------------------------|--------|
|                                                                                    |
| Cincinnati, Ohio                                                                        |
| October 28, 2005, except for Note P as to  which the date is November 4, 2005 |

 

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**Item 9. Changes in and Disagreements WithAccountants on Accounting and Financial Disclosure**

 

Not applicable.

 

**Item 9A. Controls and Procedures**

 

Our management evaluated, with theparticipation of our Chief Executive Officer and Chief Financial Officer, theeffectiveness of our disclosure controls and procedures (as defined by Rules 13a-15(e) and15d-15(e) under the Securities Exchange Act of 1934) as of September 30,2005.  Based on such evaluation, ourChief Executive Officer and Chief Financial Officer have concluded that ourdisclosure controls and procedures are designed to ensure that informationrequired to be disclosed by us in the reports that we file or submit under theSecurities Exchange Act of 1934 is recorded, processed, summarized and reportedwithin the time periods specified in the SEC’s rules and regulations andare operating in an effective manner.

 

No change in our internal control overfinancial reporting (as defined in Rules 13a-15(f) and 15(d)-15(f) underthe Securities Exchange Act of 1934) occurred during the fourth fiscal quarterof fiscal 2005 that has materially affected, or is reasonably likely tomaterially affect, our internal control over financial reporting.

 

**Item 9B. Other Information**

 

Not applicable.

 

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**PART III**

 

**Item 10. Directors and Executive Officers ofthe Registrant**

 

The information required herein isincorporated by reference from the Registrant’s Proxy Statement to be filedwithin 120 days after the end of the fiscal year covered by this Form 10-K(“Proxy Statement”).

 

**Item 11. Executive Compensation**

 

The information required herein isincorporated by reference from the Proxy Statement.

 

**Item 12. Security Ownership of CertainBeneficial Owners and Management and Related Stockholder Matters**

 

**Equity Compensation Plan Information**

 

The following table sets forth certain informationfor all equity compensation plans and individual compensation arrangements(whether with employees or non-employees, such as directors), in effect as of September 30,2005.

 
| **Plan Category**                                           | ** ** | **Number of Shares to  be issued upon the  Exercise of  Outstanding  Options,  Warrants and Rights(1)** | ** ** | **Weighted-  Average Exercise  Price of  Outstanding  Options(1)** | ** ** | **Number of Shares  Remaining Available for  Future Issuance (Excluding  Shares Reflected in the First  Column)** | ** ** |
|-------------------------------------------------------------|------------|---------------------------------------------------------------------------------------------------------|------------|--------------------------------------------------------------------|------------|-------------------------------------------------------------------------------------------------------------------|------------|
| ** **                                                  | ** ** | ** **                                                                                              | ** ** | ** **                                                         | ** ** | ** **                                                                                                        | ** ** |
| Equity  Compensation Plans Approved by Security Holders     |       | 183,590                                                                                                 |       | $                                                                  | 18.29      |                                                                                                              | 211,603    |   |
|                                                        |       |                                                                                                    |       |                                                               |       |                                                                                                              |       |   |
| Equity  Compensation Plans Not Approved by Security Holders |       | —                                                                                                  |       | —                                                             |       | —                                                                                                            |       |
|                                                        |       |                                                                                                    |       |                                                               |       |                                                                                                              |       |
| Total                                                       |       | 183,590                                                                                                 |       | $                                                                  | 18.29      |                                                                                                              | 211,603    |   |

 

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(1)           Included in such number are 92,543 shareswhich are subject to restricted stock grants which were not vested as of September 30,2005.  The weighted average exerciseprice excludes restricted stock grants.

 

**Item 13. Certain Relationships and RelatedTransactions**

 

The information required herein isincorporated by reference from the Proxy Statement.

 

##### **Item 14. Principal Accounting Fees and Services**

 

The information required herein is incorporatedby reference from the Proxy Statement.

 

 

34

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**Item 15. Exhibits, Financial StatementSchedules**

 

(a) (1)  The following documentsare filed as part of this report and are incorporated herein by reference fromthe Registrant’s 2005 Annual Report:

 

Report of Registered Independent CertifiedPublic Accountants.

 

Consolidated Statements of FinancialCondition as of September 30, 2005 and 2004.

 

Consolidated Statements of Earnings for theYears Ended September 30, 2005, 2004 and 2003.

 

Consolidated Statements of Stockholders’Equity for the Years Ended September 30, 2005, 2004 and 2003.

 

Consolidated Statements of Cash Flows for theYears Ended September 30, 2005, 2004 and 2003.

 

Notes to Consolidated Financial Statements.

 

(2)  All schedules are omitted because they are not required or applicable,or the required information is shown in the consolidated financial statementsor the notes thereto.

 

(b)  Exhibits.

 

The following exhibits are filed as part ofthis Form 10-K, and this list includes the Exhibit Index:

 
| **No.** | ** ** | **Exhibits**                                                                                                                                                                       |
|---------|------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 3.1     |       | Articles of Incorporation of Peoples  Community Bancorp, Inc.(1)                                                                                                                   |
| 3.2     |       | Bylaws of Peoples Community Bancorp, Inc.(1)                                                                                                                                  |
| 4       |       | Stock Certificate of Peoples Community  Bancorp, Inc.(4)                                                                                                                      |
| 10.1    |       | 2001 Stock Option Plan(2)                                                                                                                                                          |
| 10.2    |       | 2001 Recognition and Retention Plan(2)                                                                                                                                             |
| 10.3    |       | 2004 Stock Option Plan(3)                                                                                                                                                          |
| 10.4    |       | 2004 Recognition and Retention Plan(3)                                                                                                                                             |
| 10.5    |       | Employment Agreements with each of Jerry D.  Williams, Thomas J. Noe, John E. Rathkamp and Teresa A. O’Quinn(4)                                                               |
| 10.6    |       | Change in Control Agreement with Jerry  Boate(5)                                                                                                                                   |
| 13      |       | Annual Report to Stockholders for the Year  Ended September 30, 2005                                                                                                          |
| 21      |       | List of Subsidiaries  (See “Item I. Business - Subsidiaries” in this Form 10-K)                                                                                     |
| 23.1    |       | Consent of BKD LLP                                                                                                                                                                 |
| 23.2    |       | Consent of Grant Thornton LLP                                                                                                                                                      |
| 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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(1)        Incorporatedherein by reference to Peoples’ Proxy Statement dated January 28, 2002.

(2)        Incorporatedherein by reference to Peoples’ Proxy Statement dated January 29, 2001.

(3)        Incorporatedherein by reference to Peoples’ Proxy Statement dated January 5, 2004.

(4)        Incorporatedherein by reference to Peoples’ Annual Report on Form 10-K for the yearended September 30, 2004, filed with the SEC on December 29, 2004.

(5)        Incorporatedherein by reference to Peoples’ Quarterly Report on Form 10-Q for thequarter ended March 31, 2003.

 

35

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**SIGNATURES**

 

Pursuant to the requirements of Section 13or 15(d) of the Securities Exchange Act of 1934, the registrant has dulycaused this report to be signed on its behalf by the undersigned, thereuntoduly authorized.

 

 

 
| ** ** | **PEOPLES COMMUNITY BANCORP, INC.** |
|------------|-------------------------------------|
|       |                                |   |
|       | By:                                 | /s/Jerry D. Williams |   |
|       |                                |    Jerry D. Williams |
|       |                                |    President,  Chief Executive Officer   and Director |

 

Pursuant to the requirements of theSecurities Exchange Act of 1934, as amended, this report has been signed belowby the following persons on behalf of the registrant and in the capacities andon the dates indicated.

 

 
| /s/Jerry D. Williams                               |   |   | December 28, 2005 |
|----------------------------------------------------|--------|--------|------------------------|
| Jerry D. Williams                                  |   |   |
| President,  Chief Executive   Officer and Director |   |   |
| (principal executive officer)                      |   |   |
|                                               |   |   |
|                                               |   |   |
| /s/Thomas J. Noe                                   |   |   | December 28, 2005 |
| Thomas J. Noe                                      |   |   |
| Treasurer and Director                             |   |   |
|                                               |   |   |
|                                               |   |   |
| /s/Paul E. Hasselbring                             |   |   | December 28, 2005 |
| Paul E. Hasselbring                                |   |   |
| Chairman of the Board and                          |   |   |
| Director                                           |   |   |
|                                               |   |   |
|                                               |   |   |
| /s/John E. Rathkamp                                |   |   | December 28, 2005 |
| John E. Rathkamp                                   |   |   |
| Chief  Lending Officer, Secretary and Director     |   |   |

 

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| /s/John L. Buchanan                           |   |   | December 28, 2005 |
|-----------------------------------------------|--------|--------|------------------------|
| John L. Buchanan                              |   |   |
| Director                                      |   |   |
|                                          |   |   |
|                                          |   |   |
| /s/Donald L. Hawke                            |   |   | December 28, 2005 |
| Donald L. Hawke                               |   |   |
| Director                                      |   |   |
|                                          |   |   |
|                                          |   |   |
| /s/James R. Van DeGrift                       |   |   | December 28, 2005 |
| James R. Van DeGrift                          |   |   |
| Director                                      |   |   |
|                                          |   |   |
|                                          |   |   |
| /s/Nicholas N. Nelson                         |   |   | December 28, 2005 |
| Nicholas N. Nelson                            |   |   |
| Director                                      |   |   |
|                                          |   |   |
|                                          |   |   |
| /s/Teresa A. O’Quinn                     |   |   | December 28, 2005 |
| Teresa A. O’Quinn                        |   |   |
| Chief Financial Officer                       |   |   |
| (principal financial and accounting  officer) |   |   |

 

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