**SECURITIES AND EXCHANGECOMMISSION**

**Washington, D.C. 20549**

 

**FORM10-K**

 

**(Mark One)**

 ý        **Annualreport pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934**

 

**For the fiscal year ended September 30, 2004**

 

**OR**

 

 o        **Transitionreport pursuant to Section 13 or 15(d) of the Securities and Exchange Act of1934**

 

**Commission File No.: 000-29949**

 

**PEOPLESCOMMUNITY BANCORP, INC.**

(Exact Name of Registrant as Specified in Its Charter)

 
| **Maryland**                                                     | ** ** | **31-1686242**                            |
|------------------------------------------------------------------|------------|-------------------------------------------|
| (State  or Other Jurisdiction of  Incorporation or Organization) |       | (I.R.S.  Employer  Identification Number) |
|                                                             |       |                                      |
| **6100 West Chester Road, West Chester, Ohio**                   | ** ** | **45069**                                 |
| (Address  of Principal Executive Offices)                        |       | (Zip  Code)                               |

 

**(513) 870-3530**

 (Registrant’s Telephone Number,Including Area Code)

 

Securities registered under Section 12(b) of the Exchange Act:

**Not Applicable**

 

Securities registered under Section 12(g) of the Exchange Act:

 

**Common Stock (par value $.01 per share)**

(Title of Class)

 

Indicate by check markwhether the Registrant: (1) has filed all reports required to be filed bySection 13 or 15(d) of the Exchange Act during the preceding 12 months (or forsuch shorter period that the Registrant was required to file such reports), and(2) has been subject to such filing requirements for the past 90 days.     Yesý    No o

 

Indicate by check mark ifdisclosure of delinquent filers pursuant to Item 405 of Regulation S-K is notcontained herein, and will not be contained, to the best of Registrant’sknowledge, in definitive proxy or information statements incorporated byreference in Part III of this Form 10-K or any amendment to this Form 10-K. ý

 

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

Yeso    No ý

 

As of December 28, 2004, the aggregate value of the 3,310,044 shares ofCommon Stock of the Registrant issued and outstanding on such date, whichexcludes 589,074 shares held by all directors and executives officers of theRegistrant and the Registrant’s Employee Stock Ownership Plan (“ESOP”) as a group,was approximately $79.4 million.  Thisfigure is based on the closing sales price of $24.00 per share of theRegistrant’s Common Stock on December 28, 2004. Although directors and executive officers and the ESOP were assumed tobe “affiliates” of the Registrant for purposes of this calculation, theclassification is not to be interpreted as an admission of such status.

 

Number of shares of CommonStock outstanding as of December 28, 2004: 3,899,118

 

 

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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 direction of the Board of Directors ofThe People’s Building, Loan and Savings Company, presently Peoples CommunityBank (the “Bank”), for the purpose of holding all of the capital stock of theBank and in order to facilitate the conversion of the Bank from anOhio-chartered mutual savings and loan association to a federally-charteredstock savings bank (the “Conversion”). (Unless the context otherwise requires, reference to Peoples includesthe Bank).  Peoples is a unitary savingsand loan holding company whose assets consist primarily of the outstandingshares of common stock of the Bank, investments made with the portion of the netproceeds from the issuance of Peoples shares to the public (the “Offering”)retained by Peoples and Peoples’ loan to the employee stock ownership plan (the“ESOP”).  Peoples has no significantliabilities other than junior subordinated debentures issued in fiscal2002.  The management of Peoples and theBank are substantially identical and Peoples neither owns nor leases anyproperty but instead uses the premises, equipment and furniture of the Bank.The Bank is a federally-chartered stock savings bank that was originallyorganized in 1889.  The Bank conducts itsbusiness from thirteen offices in Hamilton, Warren, and Butler Counties inOhio.  The Bank is primarily engaged inattracting deposits from the general public and using those funds to originateloans and invest in securities.  The Bank’sprimary lending emphasis has been, and continues to be, loans secured by firstliens on single-family (one- to-four units) residential properties located inHamilton, Warren and Butler Counties in Ohio. However, over the past four fiscal years, the Bank has placed anincreasing emphasis on multi-family residential loans, nonresidential realestate and land loans, construction loans, commercial loans and consumerloans.  As a result, as a percentage ofthe total loan portfolio, single-family residential loans have decreased from72.7% at September 30, 2000 to 33.7% at September 30, 2004, while multi-familyresidential loans, nonresidential real estate and land loans, constructionloans, commercial loans and consumer loans have increased during the same timeperiod from 4.3% to 15.9%, 9.7% to 23.6%, 12.8% to 18.6%, 0.0% to 4.9% and 0.1%to 3.2%, respectively.  At September 30,2004, Peoples had $889.1 million in total assets, $472.4 million in depositsand $75.8 million of stockholders’ equity.

 

The Company was formed inDecember 1999 in connection with the mutual to stock conversion of the Bank,and the sale of 1,190,000 shares of common stock to depositors and members ofthe community.  The Bank conducts itsbusiness from thirteen full service offices in Hamilton, Warren and Butlercounties in Southwest Ohio.  The Bank’sbusiness is conducted through an aggressive marketing and selling effort of itslending products and services to the communities in its market area and throughthe continued development of innovative lending programs that give Peoples Banka competitive advantage.  The Bank offersa wide variety of loan products, including single and multi-family residentialloans, nonresidential real estate and land loans and construction loans.  In addition, the Bank invests insecurities.  The funds for the Bank’slending and investment activities are primarily provided by deposits andborrowings.  At September 30, 2004, theCompany had $889.1 million in total assets, $472.4 million in deposits, $324.5million in borrowings (excluding subordinated debentures) and $75.8 million ofstockholders’ equity.  The Company’sprincipal executive office is located at 6100 West Chester Road, P.O. Box 1130,West Chester, Ohio 45071-1130.  TheCompany’s telephone number is (513) 870-3530.

 

As a result of acquisitionsand internal growth, the Company has grown significantly from $320.6 million intotal assets as of September 30, 2000 to $889.1 million in total assets as ofSeptember 30, 2004.  Since the completionof the initial public offering in March 2000, the Company has acquired threefinancial institutions with aggregate total assets as of the time ofacquisition of $231.2 million.  Inaddition, in September 2003, the Company purchased $32.8 million in loans andassumed $55.6 million in deposits in connection with the acquisition of twobranch offices from another financial institution.  The Company has supplemented this growth fromacquisitions with loan generation secured primarily by real estate in itsmarket area.  Loan originations increasedfrom $73.7 million in fiscal 2000, to $241.1 million in fiscal 2001, $261.6million in fiscal 2002, $278.6 million in fiscal 2003 and $289.5 million infiscal 2004.  Loans receivable, net increasedfrom $196.5 million at September 30, 2000 to $599.5 million at September 30,2004.   In addition, since September 30, 2000, theCompany has expanded its franchise through the opening of four full servicebranch offices including the Voice of America branch office in Butler Countyopened in October 2004.** **These new branch offices, as wellas acquired branch

 

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offices, have expanded theCompany’s market presence and facilitated its loan production growth.  The Company’s loan growth has been funded inpart by deposits.  The Company has placedan emphasis on deposit generation both internally and through whole bank andbranch acquisitions.  Deposits haveincreased from $151.4 million at September 30, 2000 to $472.4 million atSeptember 30, 2004.

 

The Company intends tocontinue to pursue growth both internally and through strategicacquisitions.  The Company believes itsinternal growth will continue to come from loan originations, and, inparticular, multi-family residential loans, nonresidential real estate and landloans and construction loans.  These loantypes complement its single-family lending, diversify its loan portfolio andare expected to increase its yield on interest-earning assets.  The Company’s primary funding vehicle will continueto be deposits.  The Company intends toincrease its deposit generation by expanding its products and services,increasing its branch network and cross-selling its current and prospectivebusiness customers.  The expansion of itsmarket share through selective branching and opportunistic acquisitions willdepend on market and economic conditions.

 

On March 12, 2004, theCompany entered into a stock purchase agreement with various stockholders ofColumbia Bancorp, Inc., a privately held bank holding company, to acquire69,925 shares held by these stockholders for an aggregate purchase price of$2.5 million.  These shares representapproximately 38% of Columbia’s presently issued and outstanding commonstock.  The Company presently intends tohold these shares as a passive investment. This proposed stock purchase is subject to regulatory approval.  Assuming regulatory approval, the Companywould become a bank holding company.   The Company does not anticipate anysignificant changes to its operations if it becomes a bank holding company.

 

On December 17, 2004, theCompany entered into an agreement and plan of merger to acquire American StateCorporation, an Indiana chartered bank holding company, and its wholly ownedsubsidiary, American State Bank, an Indiana-chartered commercial bank.  American State Bank operates three offices inthe Southeast Indiana communities of Lawrenceburg, Aurora and Bright.  Under the terms of the agreement, the Bankwill pay $4.79 in cash for each of the 1,469,062 outstanding shares of commonstock of American State Corporation.  Inaddition, depending on the outcome of certain specific events primarily relatedto the performance of certain loans and other assets of American State Bank, holdersof American State Corporation outstanding common stock may receive up to anadditional $.82 per share.  Outstandingshares of American State Corporation preferred stock will be redeemed for cashat par value, totaling $700,000.  Thetransaction is expected to be consummated in the second quarter of 2005,pending approval by American State Corporation’s shareholders, regulatoryapproval and other customary conditions of closing.

 

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

 

3

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**Peoples Lending Activities**

 

**General.**  At September 30, 2004, thegross loan portfolio of Peoples totaled $672.5 million, representingapproximately 75.6% of total assets at that date. The principal lendingactivity of Peoples is the origination of residential and nonresidential realestate loans. At September 30, 2004, residential loans (includingconstruction loans secured by residential real estate) amounted to $426.8million, or 63.5% of the gross loan portfolio. Nonresidential real estate and land loans totaled $158.9 million, or 23.6%of the gross loan portfolio and nonresidential construction loans amounted to$31.8 million, or 4.7% of the gross loan portfolio as of September 30, 2004.  Further, commercial loans amounted to $33.2million, or 4.9% of the gross loan portfolio at September 30, 2004 and consumerloans amounted to $21.8 million, or 3.2% of the gross loan portfolio at suchtime.  Peoples has placed an increasedemphasis on multi-family residential loans, nonresidential real estate and landloans, construction loans, commercial loans and consumer loans over the last fourfiscal years.  The aggregate amount ofthese loans has increased to $445.7 million, or 66.3% of the gross loanportfolio at September 30, 2004, compared to $57.8 million, or 27.3% ofthe gross loan portfolio at September 30, 2000.

 

Thetypes of loans that Peoples may originate are subject to federal and state lawsand regulations. Interest rates charged on loans are affected principally bythe demand for such loans and the supply of money available for lendingpurposes and the rates offered by its competitors. These factors are affectedby general and economic conditions, the monetary policy of the federalgovernment, including the Federal Reserve Board, legislative and tax policies,and governmental budgetary matters.

 

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, 2004, Peoples’regulatory limit on loans-to-one borrower was $12.7 million.  All of Peoples’ five largest loans or groupsof loans-to-one borrower, amounting to $11.8 million, $11.7 million, $10.7million, $10.2 million and $9.5 million at September 30, 2004 were performingin accordance with their terms at such 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,**          | ** ** |
|------------------------------------------|------------|-----------------------------|------------|
| ** **                               | ** ** | **2004**                    | ** ** | **2003** | ** ** | **2002** | ** ** | **2001** | ** ** | **2000** | ** ** |
| ** **                               | ** ** | **Amount**                  | ** ** | **Percent  of  Total** | ** ** | **Amount** | ** ** | **Percent  of  Total** | ** ** | **Amount** | ** ** | **Percent  of  Total** | ** ** | **Amount** | ** ** | **Percent  of  Total** | ** ** | **Amount** | ** ** | **Percent  of  Total** | ** ** |
| ** **                               | ** ** | **(Dollars  in Thousands)** | ** ** |
| Mortgage loans:                          |       |                        |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Single-family  residential               |       | $                           | 226,735    |   | 37.8 | % | $ | 230,775 |   | 41.7 | % | $ | 296,294 |   | 58.8 | % | $ | 242,540 |   | 64.2 | % | $ | 153,627 |   | 78.1 | % |
| Multi-family  residential                |       | 106,799                     |       | 17.8 |   | 95,459 |   | 17.2 |   | 56,980 |   | 11.3 |   | 36,487 |   | 9.7 |   | 8,999 |   | 4.6 |   |
| Nonresidential  real estate and land     |       | 158,907                     |       | 26.5 |   | 131,444 |   | 23.7 |   | 88,029 |   | 17.5 |   | 65,842 |   | 17.4 |   | 20,440 |   | 10.4 |   |
| Construction  loans                      |       | 124,996                     |       | 20.9 |   | 122,598 |   | 22.1 |   | 90,002 |   | 17.9 |   | 62,982 |   | 16.7 |   | 27,056 |   | 13.8 |   |
| Total mortgage  loans                    |       | 617,437                     |       | 103.0 |   | 580,276 |   | 104.7 |   | 531,305 |   | 105.5 |   | 407,851 |   | 108.0 |   | 210,122 |   | 106.9 |   |
|                                     |       |                        |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Commercial loans                         |       | 33,238                      |       | 5.5 |   | 29,955 |   | 5.4 |   | 21,280 |   | 4.2 |   | 9,800 |   | 2.6 |   | — |   | — |   |
| Consumer loans                           |       | 21,781                      |       | 3.6 |   | 11,769 |   | 2.1 |   | 4,265 |   | 0.8 |   | 1,883 |   | 0.5 |   | 1,307 |   | 0.7 |   |
| Total loans  receivable                  |       | 672,456                     |       | 112.1 |   | 622,000 |   | 112.2 |   | 556,850 |   | 110.5 |   | 419,534 |   | 111.1 |   | 211,429 |   | 107.6 |   |
| Less:                                    |       |                        |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Undisbursed  portion of loans in process |       | (59,045                     | )          | (9.8 | ) | (55,308 | ) | (10.0 | ) | (43,144 | ) | (8.6 | ) | (36,782 | ) | (9.7 | ) | (13,546 | ) | (6.9 | ) |
| Allowance for  loan losses               |       | (11,025                     | )          | (1.8 | ) | (9,744 | ) | (1.8 | ) | (7,656 | ) | (1.5 | ) | (3,662 | ) | (1.0 | ) | (762 | ) | (0.4 | ) |
| Deferred loan  fees                      |       | (2,920                      | )          | (0.5 | ) | (2,597 | ) | (0.4 | ) | (2,038 | ) | (0.4 | ) | (1,363 | ) | (0.4 | ) | (636 | ) | (0.3 | ) |
|                                     |       |                        |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Loans receivable,  net                   |       | $                           | 599,466    |   | 100.0 | % | $ | 554,351 |   | 100.0 | % | $ | 504,012 |   | 100.0 | % | $ | 377,727 |   | 100.0 | % | $ | 196,485 |   | 100.0 | % |

 

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**Origination of Loans.**  Thelending activities of Peoples are subject to the written underwriting standardsand loan origination procedures established by the Board of Directors andmanagement.  Loan originations areobtained through a variety of sources, including referrals from real estatebrokers, builders and existing customers. Written loan applications are takenby loan officers.  Loan processors obtainor procure credit reports, appraisals and other documentation involved with aloan.  Property valuations are performedby independent outside appraisers approved by the Board of Directors ofPeoples.

 

Underthe real estate lending policy of Peoples, a title opinion must be obtained foreach real estate loan.  Peoples alsorequires fire and extended coverage casualty insurance, in order to protect theproperties securing its real estate loans. Borrowers must also obtain flood insurance policies when the property isin a flood hazard 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 approval process is intended to assess the borrower’s ability to repay theloan, the viability of the loan and the adequacy of the value of the collateralthat will secure the loan.  The Board ofDirectors has 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 committee ratifiesall approvals and presents its report on a monthly basis for the Board ofDirectors review and approval.

 

**Activity in Loans.**  The following table shows theactivity in Peoples’ loans during the periods indicated.

 
| ** **                                  | ** ** | **Year Ended September 30,** | ** ** |
|---------------------------------------------|------------|------------------------------|------------|
| ** **                                  | ** ** | **2004**                     | ** ** | **2003** | ** ** | **2002** | ** ** | **2001** | ** ** | **2000** | ** ** |
| ** **                                  | ** ** | **(In Thousands)**           | ** ** |
|                                        |       |                         |       |   |   |   |   |   |   |   |   |
| Total loans held at beginning of period     |       | $                            | 622,000    |   | $ | 556,850 |   | $ | 419,534 |   | $ | 211,429 |   | $ | 98,703 |   |
| Originations of loans:                      |       |                         |       |   |   |   |   |   |   |   |   |
| Mortgage loans:                             |       |                         |       |   |   |   |   |   |   |   |   |
| Single-family residential                   |       | 89,145                       |       | 63,502 |   | 90,592 |   | 87,272 |   | 51,281 | (1) |
| Multi-family residential                    |       | 29,357                       |       | 50,686 |   | 28,531 |   | 30,605 |   | 4,886 |   |
| Commercial real estate and land             |       | 70,158                       |       | 30,170 |   | 39,855 |   | 51,030 |   | 16,519 |   |
| Construction                                |       | 75,278                       |       | 101,019 |   | 72,167 |   | 58,467 |   | — | (1) |
| Commercial loans                            |       | 23,051                       |       | 25,852 |   | 26,656 |   | 12,394 |   | — |   |
| Consumer loans                              |       | 12,374                       |       | 7,344 |   | 3,775 |   | 1,344 |   | 1,037 |   |
| Total originations (2)                      |       | 299,368                      |       | 278,573 |   | 261,576 |   | 241,112 |   | 73,723 |   |
|                                        |       |                         |       |   |   |   |   |   |   |   |   |
| Increase due to Harvest Home acquisition    |       | —                       |       | — |   | — |   | — |   | 62,334 |   |
| Increase due to Market acquisition          |       | —                       |       | — |   | — |   | 37,476 |   | — |   |
| Increase due to Kenwood acquisition         |       | —                       |       | — |   | 40,326 |   | — |   | — |   |
| Increase due to Ameriana branch acquisition |       | —                       |       | 32,769 |   | — |   | — |   | — |   |
| Total increases                             |       | —                       |       | 311,342 |   | 301,902 |   | 278,588 |   | 136,057 |   |
|                                        |       |                         |       |   |   |   |   |   |   |   |   |
| Transfers to real estate owned              |       | (513                         | )          | (2,863 | ) | (620 | ) | (197 | ) | (110 | ) |
| Charge-offs                                 |       | (2,360                       | )          | (2,122 | ) | (1,547 | ) | — |   | (4 | ) |
| Other increases (decreases) (3)             |       | (9,641                       | )          | 5,879 |   | (9,212 | ) | 22,285 |   | 10,772 |   |
| Repayments                                  |       | (236,398                     | )          | (247,086 | ) | (153,207 | ) | (92,571 | ) | (33,989 | ) |
| Net activity in loans                       |       | 50,456                       |       | 65,150 |   | 137,316 |   | 208,105 |   | 112,726 |   |
| Gross loans held at end of period           |       | $                            | 672,456    |   | $ | 622,000 |   | $ | 556,850 |   | $ | 419,534 |   | $ | 211,429 |   |

 

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(1)                      Construction loan originations  made during fiscal year 2000 are notseparately identified but are included in the total for single-familyresidential loan originations.

 

(2)                      Undisbursed portions of loans in process totaled $59.0 million $55.3million, $43.1 million, $36.8 million and $13.5 million at September 30, 2004, 2003,2002, 2001and 2000, respectively.

 

(3)                      Includes loan participations sold of $5.0 million, $10.2 million, $6.7million and $2.7 million in fiscal 2004, 2003, 2002 and 2001, respectively.  Peoples did not sell any loan participationsin fiscal 2000.  For fiscal 2004 only,includes loans sold of $9.9 million. The reduction in total loans resultingfrom sales of loans and loan participations in fiscal 2004, 2003, 2002 and 2001were offset (increased) by increases (decreases) in undisbursed loans inprocess, and other net items totaling approximately $5.3 million, $16.1million, ($2.5 million), and $25.0 million, respectively.

 

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Thesignificant repayments of $236.4 million and $247.1 million during fiscal 2004and 2003, respectively, were primarily due to the repayment of short-termconstruction loans and land development loans as well as the refinancing activityrelated to single-family residential loans in the low interest rate environmentduring such periods.  The transfers toreal estate owned of $513,000 during fiscal 2004 were due to three separateborrowers with residential real estate properties acquired through,foreclosure.

 

Charge-offs of $2.4million during fiscal 2004, consisted primarily of $1.4 million in loanssecured by multi-family residential real estate.  The increased level of charge-offs during thepast three years was due primarily to the increased risk of loss associatedwith the Bank’s diversification of its loan portfolio and increasedoriginations of multi-family loans, nonresidential real estate and land loans,construction loans 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. Subject to its loans-to-one borrower limitation, Peoples is permitted toinvest without limitation in residential mortgage loans and up to 400% of itscapital in loans secured by non-residential or commercial real estate.  Peoples may also invest in secured and unsecuredconsumer loans in an amount not exceeding 35% of total assets.  This 35% limitation may be exceeded forcertain types of consumer loans.  Inaddition, Peoples may invest up to 10% of its total assets in secured andunsecured loans for commercial, corporate, business or agriculturalpurposes.  At September 30, 2004,Peoples was within each of the above lending limits.

 

**One- to Four-Family Residential Real Estate Loans.**  Despitethe diversification of the loan portfolio over the past few years, the primaryreal estate lending activity of Peoples continues to be the origination ofloans secured by first mortgage liens on one- to four-family residences.  At September 30, 2004, $226.7 million,or 37.8% of the net loan portfolio of Peoples consisted of conventional firstmortgage, one- to four-family residential loans, compared to $230.8 million, or41.7% at September 30, 2003.  Thedecrease of $4.0 million, or 1.8%, was due primarily to the refinancingactivity in the low interest rate environment and Peoples’ reluctance tooriginate long-term fixed rate loans for portfolio in such environment.

 

The loan-to-value ratio, maturity and otherprovisions of the loans made by Peoples generally have reflected Peoples’policy of making less than the maximum loan permissible under applicableregulations, in accordance with sound lending practices, market conditions andunderwriting standards established by Peoples. Peoples’ generally limits the loan-to-value ratio on one- to four-familyresidential mortgage loans to 80% of the lesser of the appraised value orpurchase price of the property. Residential mortgage loans are amortized on amonthly basis with principal and interest due each month. The loans generallyinclude “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,  Peoplesintroduced a five year fixed rate balloon product and a five year fixed rateproduct which adjusts on an annual basis thereafter based on the one-year rateon the T-bill.  At September 30, 2004, $109.5million, or 48.3% of our single-family residential loans were adjustable rateand $117.2 million, or 51.7% 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-family Residential Loans.** Peoples also originates multi-family (over four units) residentialloans.  Peoples’ multi-family loans areprimarily secured by apartment buildings or apartments being converted tocondominium units.  The multi-familyresidential mortgage loans of Peoples are underwritten on substantially thesame basis as its nonresidential real estate loans, discussed below, althoughloan-to-value ratios are generally limited to 80%.  At September 30, 2004, Peoples had $106.8million in multi-family residential mortgage loans, which amounted to 17.8% ofPeoples’ net loan portfolio, compared to $95.5 million, or 17.2% of Peoples’net loan portfolio at September 30, 2003. During the year ended September 30, 2004, Peoples originated $29.4million of multi-family residential loans compared to $50.7 million duringfiscal 2003. The decrease was primarily due to competitive market forces andthe Bank’s reluctance to follow lower priced loan products offered by itscompetitors.

 

**Nonresidential Real Estate and Land Loans.** Peoples’ nonresidential real estate and land loan portfolio primarilyconsists of loans secured by land for development purposes, professionaloffices, small retail centers, warehouses

 

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and  building lots located within Peoples’ primarymarket area.  Nonresidential real estateand land loans amounted to $158.9 million, or 26.5% of the net loan portfolioat September 30, 2004, with an average loan balance of approximately $436,000.This compares to $131.4 million, or 23.7% at September 30, 2003, with anaverage loan balance of approximately $387,000.

 

The nonresidential real estate loans of Peoplestypically have a loan-to-value ratio of 75% or less and generally have higherinterest rates than single-family residential mortgage loans with similarterms and structure. The maximum term of Peoples’ nonresidential real estateloans is 25 years.  Decisions tolend are based on the economic viability of the property and thecreditworthiness of the borrower. Creditworthiness is determined by considering the character, experience,management and financial strength of the borrower, and the ability of theproperty to generate adequate funds to cover both operating expenses and debtservices.  In evaluating whether to makea nonresidential real estate loan, Peoples places primary emphasis on the ratioof net cash flow to debt service on the property and generally requires a ratioof cash flow to debt service of at least 120%, computed after deduction for avacancy factor and property expenses as Peoples deems appropriate.

 

The land loans of Peoples generally are secured bysingle-family residential lots or undeveloped land being held forresidential development.  Lot loans generallyhave a loan-to-value ratio of 80% or less (on an undeveloped basis) and aretypically interest only loans with one-year maturities.  Loans originated on developed land generallyhave a loan to value ratio of 75% or less with interest only over either a oneor two year term.  Land loans secured bysingle-family residential lots are generally structured similar toundeveloped land with a loan-to-value ratio of 80% or less.

 

Nonresidential real estate lending is generallyconsidered to involve a higher degree of risk than one- to four-familyresidential lending. Such lending typically involves large loan balancesconcentrated in a single borrower or groups of related borrowers for rental orbusiness properties. In addition, the payment experience on loans secured byincome-producing properties is typically dependent on the success of theoperation 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 using reasonableloan-to-value ratios in the underwriting process.

 

Landdevelopment and acquisition loans involve significant additional risks whencompared with loans on existing residential properties. These loans may involvelarger loan balances to single borrowers, and the payment experience may bedependent on the successful development of the land and the sale of the lots.These risks can be significantly impacted by supply and demand conditions aswell as local economic conditions.

 

**Construction Loans. **At September 30, 2004, Peoples hadapproximately $125.0 million, or 20.9% of the net loan portfolio, inconstruction loans, compared to $122.6 million, or 22.1% of the total loanportfolio at September 30, 2003.  Of thisamount, $93.2 million, or 74.6%, consisted of residential construction loansand $31.8 million, or 25.4%, consisted of nonresidential constructionloans.  The increase in constructionloans during fiscal 2004 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 the builder.  In addition, loans made to borrowers toconstruct their personal residences are originated at one closing as aconstruction/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 completedbasis.  At September 30, 2004,nonresidential construction loans amounted to $31.8 million, or 5.3% of the netloan portfolio.

 

Priorto making a commitment to fund a construction loan, Peoples requires anappraisal of the property.  Peoples’ alsogenerally requires third party inspections of each project prior todisbursement of funds.  Loan proceeds arethen disbursed based on a percentage of completion.

 

8

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Constructionlending is generally considered to involve a higher degree of risk of loss thanlong-term financing on improved, owner-occupied real estate because ofthe uncertainties of construction, including the possibility of costs exceedingthe initial estimates and the need to obtain a tenant or purchaser if theproperty will not be owner-occupied. Peoples generally attempts to mitigate the risks associated with constructionlending by, among other things, primarily lending in its market area, usingconservative underwriting guidelines, and monitoring the construction process.

 

**Commercial Loans.** Peoples’ commercial loansconsist primarily of unsecured lines of credit for working capital purposes,and to a lesser extent, loans secured by business equipment.  At September 30, 2004, commercial loansamounted to $33.2 million, or 5.5% of Peoples’ net loan portfolio, compared to$30.0 million, or 5.4% of the net loan portfolio at September 30, 2003.

 

**Consumer Loans.** Peoples’ consumer and otherloans consist of loans secured by deposit accounts, automobiles and stock.  At September 30, 2004, consumer and otherloans amounted to $21.8 million, or 3.6% of Peoples’ net loan portfolio,compared to $11.8 million, or 2.1% of Peoples’ net loan portfolio as ofSeptember 30, 2003.  The increase inconsumer loans was primarily due to the origination of $11.5 million in loanssecured by stock from initial public offerings of several financialinstitutions.

 

**Loan Origination and Other Fees.**  Inaddition to interest earned on loans, Peoples receives loan origination fees or“points” for originating loans.  Loanpoints are a percentage of the principal amount of the mortgage loan and arecharged to the borrower in connection with the origination of the loan.  In accordance with Statement of FinancialAccounting Standards No. 91, loan origination fees and certain relateddirect loan origination costs are offset, and the resulting net amount is deferredand amortized as interest income over the contractual life of the related loansas an adjustment to the yield of such loans. At September 30, 2004,Peoples had $2.9 million of deferred loan fees compared to $2.6 million ofdeferred loan fees at September 30, 2003.

 

**Contractual Principal Repayments and Interest Rates.**  Thefollowing table sets forth scheduled contractual amortization of Peoples’ loansat September 30, 2004 as well as the dollar amount of such loans which arescheduled to mature after one year which have fixed or adjustable interestrates.  Demand loans, loans having noschedule of repayments and no stated maturity and overdraft loans are reportedas due in one year or less.

 
| ** **                          | ** ** | **Principal Repayments Contractually Due  in Year(s) Ended September 30,** | ** **  |
|-------------------------------------|------------|----------------------------------------------------------------------------|-------------|
| ** **                          | ** ** | **2005**                                                                   | ** **  | **2006** | ** ** | **2007** | ** ** | **2008-  2009** | ** ** | **2010-  2015** | ** ** | **2016-  2020** | ** ** | **There-  after** | ** ** | **Total at  September 30,  2004** | ** ** |
| ** **                          | ** ** | **(In Thousands)**                                                         | ** **  |
|                                |       |                                                                       |        |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Mortgage loans:                     |       |                                                                       |        |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Single-family residential           |       | $                                                                          | 6,358       |   | $ | 1,248 |   | $ | 771 |   | $ | 2,924 |   | $ | 72,127 |   | $ | 30,073 |   | $ | 113,234 |   | $ | 226,735 |   |
| Multi-family residential            |       | 1,319                                                                      |        | 267 |   | 7,061 |   | 213 |   | 2,195 |   | 6,598 |   | 89,146 |   | 106,799 |   |
| Nonresidential real estate and land |       | 40,586                                                                     |        | 20,278 |   | 4,246 |   | 2,360 |   | 17,400 |   | 6,102 |   | 67,935 |   | 158,907 |   |
| Construction loans                  |       | 61,429                                                                     |        | 10,690 |   | 4,077 |   | 29,826 |   | 287 |   | 3,128 |   | 15,559 |   | 124,996 |   |
| Commercial loans                    |       | 23,142                                                                     |        | 767 |   | — |   | 6,350 |   | 2,979 |   | — |   | — |   | 33,238 |   |
| Consumer loans                      |       | 852                                                                        |        | 1,538 |   | 2,774 |   | 16,433 |   | 184 |   | — |   | — |   | 21,781 |   |
|                                |       |                                                                       |        |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Total (1)                           | ** ** | **$**                                                                      | **133,686** | ** ** | **$** | **34,788** | ** ** | **18,929** | ** ** | **$** | **58,106** | ** ** | **$** | **95,172** | ** ** | **$** | **45,901** | ** ** | **$** | **285,874** | ** ** | **$** | **672,456** | ** ** |
|                                     |            |                                                                            |             |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

----

(1)                      Of the $538.8 million of loan principalpayments contractually due after September 30, 2005, $157.0 million have fixedrates of interest and $381.8 million have adjustable rates of interest.

 

Scheduled contractual maturities of loans do not necessarily reflectthe actual expected term of the loan portfolio. The average life of mortgageloans is substantially less than their average contractual terms because ofprepayments. The average life of mortgage loans tends to increase when currentmortgage loan rates are higher than rates on existing mortgage loansand, conversely, decrease when rates on current mortgage loans are lower thanexisting mortgage loan rates 

 

9

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(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 most 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.

 

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 $301,000, $1.3million and $97,000 at September 30, 2004, 2003 and 2002, respectively.

 

**Delinquent Loans.**  Thefollowing table sets forth information concerning delinquent mortgage loans atthe dates indicated, in dollar amounts and as a percentage of each category ofPeoples’ loan portfolio. The amounts presented represent the total outstandingprincipal balances of the related loans, rather than the actual payment amountswhich are past due.

 
| ** **                          | ** ** | **At September 30,**             | ** ** |
|-------------------------------------|------------|----------------------------------|------------|
| ** **                          | ** ** | **2004  60-89 Days  Delinquent** | ** ** | **2003  60-89 Days  Delinquent** | ** ** | **2002  60-89 Days  Delinquent** | ** ** |
| ** **                          | ** ** | **Amount**                       | ** ** | **Percent  Of Loan  Category** | ** ** | **Amount** | ** ** | **Percent  of Loan  Category** | ** ** | **Amount** | ** ** | **Percent  of Loan  Category** |   |
| ** **                          | ** ** | **(Dollars  in Thousands)**      |       |
| Mortgage loans:                     |       |                             |       |   |   |   |   |   |   |   |   |   |   |
| Single-family                       |       | $                                | 821        |   | .36 | % | $ | 1,146 |   | .50 | % | $ | 3,027 |   | 1.02 | % |
| Multi-family                        |       | 16                               |       | .01 | % | — |   | — | % | 112 |   | .20 | % |
| Nonresidential real estate and land |       | —                           |       | — | % | 354 |   | .27 | % | 198 |   | .22 | % |
| Total                               |       | $                                | 837        |   | .12 | % | $ | 1,500 |   | .27 | % | $ | 3,337 |   | .66 | % |

 

10

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**Non-Performing Assets.**  Thefollowing table sets forth information with respect to non-performing assetsidentified by Peoples, including non-accrual loans and other real estate owned.Peoples did not have any loans more than 90 days past due and still accruinginterest at any of the dates indicated.

 
| ** **                              | ** ** | **At  September 30,**       | ** ** |
|-----------------------------------------|------------|-----------------------------|------------|
| ** **                              | ** ** | **2004**                    | ** ** | **2003** | ** ** | **2002** | ** ** | **2001** | ** ** | **2000** | ** ** |
|                                    |       | **(Dollars  in Thousands)** |       |
| Non-accrual loans:                      |       |                        |       |   |   |   |   |   |   |   |   |
| Single-family residential               |       | $                           | 2,090      |   | $ | 1,752 |   | $ | 1,274 |   | $ | 783 |   | $ | 1,062 |   |
| Multi-family residential                |       | 2,535                       |       | 3,557 |   | 3,217 |   | — |   | 194 |   |
| Nonresidential real estate and land     |       | 197                         |       | — |   | 232 |   | — |   | — |   |
| Construction loans                      |       | 1,039                       |       | 1,951 |   | 2,769 |   | — |   | — |   |
| Commercial loans                        |       | 165                         |       | — |   | — |   | — |   | — |   |
| Consumer loans                          |       | 3                           |       | 4 |   | — |   | — |   | — |   |
| Total non-accruing loans                |       | 6,029                       |       | 7,264 |   | 7,492 |   | 783 |   | 1,256 |   |
| Other real estate owned, net            |       | 301                         |       | 1,293 |   | 97 |   | — |   | 110 |   |
| Total non-performing assets             |       | $                           | 6,330      |   | $ | 8,557 |   | $ | 7,589 |   | $ | 783 |   | $ | 1,366 |   |
| Non-performing assets to total assets   |       | 0.71                        | %          | 1.16 | % | 1.30 | % | 0.19 | % | 0.43 | % |
| Non-performing loans to total loans-net |       | 1.01                        | %          | 1.31 | % | 1.49 | % | 0.21 | % | 0.64 | % |

 

The $2.2 million decrease in nonperforming assets resulted from adecrease of $1.2 million in non-accruing loans and a decrease of $992,000 inother real estate owned.  The decrease innon-accruing loans was primarily due to charge-offs on multi-family residentialloans.

 

If the $6.0 million ofnon-accruing loans of Peoples had been current in accordance with their termsduring fiscal 2004, the gross income on such loans would have beenapproximately $560,000.  A total ofapproximately $120,000 of interest income was actually recorded by Peoples onsuch loans in the fiscal year ended September 30, 2004.

 

**Classified Assets.**  Federal regulations requirethat each insured savings institution classify its assets on a regular basis.In addition, in connection with examinations of insured institutions, federalexaminers have authority to identify problem assets and, if appropriate,classify them. There are three classifications for problem assets: “substandard,”“doubtful” and “loss.” Substandard assets have one or more defined weaknessesand are characterized by the distinct possibility that the insured institutionwill sustain some loss if the deficiencies are not corrected. Doubtful assetshave the weaknesses of substandard assets with the additional characteristicthat the weaknesses make collection or liquidation in full on the basis ofcurrently existing facts, conditions and values questionable, and there is ahigher possibility of loss. An asset classified loss is considereduncollectible and of such little value that continuance as an asset of theinstitution is not warranted. Another category designated “special mention”also must be established and maintained for assets which do not currentlyexpose an insured institution to a sufficient degree of risk to warrantclassification 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 thereof isclassified loss, the insured institution must either establish specific allowancesfor loan losses in the amount of 100% of the portion of the asset classifiedloss, or charge-off such amount.  Generalloss allowances established to cover possible losses related to assetsclassified 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, 2004 amounted to $13.2 million,of which $851,000, $8.1 million and $4.3 million were classified as loss,substandard and special mention, respectively. The largest classified asset at September 30, 2004 consisted of a$2.0 million multi-family loan which was classified as substandard andsubsequently foreclosed upon in October 2004. The remaining $11.2 million of classified assets at September 30,2004 consisted of approximately $9.6 million of residential real estate loans,$301,000 of foreclosed real estate, $123,000 of nonresidential real estate andland loans, and $1.2 million of commercial loans.

 

11

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**Allowance for Loan Losses.**  Theallocation of the allowance for loan losses based on particular types of loansat September 30, 2004, 2003 and 2002 was as follows:

 
| ** **                          | ** ** | **2004**                    | ** ** | **2003**         | ** ** | **2002**    | ** ** |
|-------------------------------------|------------|-----------------------------|------------|------------------|------------|-------------|------------|
| ** **                          | ** ** | ** **                  | ** ** | **Percent  of**  | ** ** | ** **  | ** ** | **Percent  of** | ** ** | ** ** | ** ** | **Percent  of** | ** ** |
| ** **                          | ** ** | **Balance**                 | ** ** | **total  loans** | ** ** | **Balance** | ** ** | **total  loans** | ** ** | **Balance** | ** ** | **total  loans** | ** ** |
|                                |       | **(Dollars  in Thousands)** |       |
|                                |       | ** **                  |       |
| Single-family residential           |       | $                           | 1,100      |             | 33.7       | %           | $          | 1,120 |   | 37.1 | % | $ | 954 |   | 53.2 | % |
| Multi-family residential            |       | 1,661                       |       | 15.9             |       | 1,342       |       | 15.4 |   | 1,015 |   | 10.2 |   |
| Nonresidential real estate and land |       | 2,461                       |       | 23.7             |       | 1,721       |       | 21.1 |   | 1,428 |   | 15.8 |   |
| Construction loans                  |       | 2,211                       |       | 18.6             |       | 2,192       |       | 19.7 |   | 1,729 |   | 16.2 |   |
| Commercial loans                    |       | 3,122                       |       | 4.9              |       | 3,124       |       | 4.8 |   | 2,452 |   | 3.8 |   |
| Consumer loans                      |       | 470                         |       | 3.2              |       | 245         |       | 1.9 |   | 78 |   | .8 |   |
|                                |       |                        |       |             |       |        |       |   |   |   |   |   |   |
|                                |       | $                           | 11,025     |             | 100.0      | %           | $          | 9,744 |   | 100.0 | % | $ | 7,656 |   | 100.0 | % |

 

The allowance for loan losses is maintained by management at a levelconsidered sufficient to cover estimated losses inherent in the existingportfolio based on prior loan loss experience, known and probable risks in theportfolio, adverse situations that may affect the borrower’s ability to repay,the estimated value of any underlying collateral, general economic conditions,and other factors and estimates which are subject to change over time.

 

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

 

In the event that Peoplesdetermines there is an allowance required on unfunded commitments oroff-balance sheet items, such allowances are recorded as a component of otherliabilities on the balance sheet. Peoples determines the amount of the allowance based on a number offactors, including financial condition of the borrower, status of theunderlying project, if applicable, and economic conditions.  As of September 30, 2004, no such allowanceshad been recorded.

 

Peoples increased itsallowance for loan losses in fiscal 2004 by recording a $3.6 million provisionfor losses on loans due to an increase in the volume of loans, as well aschanges in the composition of the loan portfolio during the year and anincrease in the level of charge-offs. The change in the mix of the loan portfolio during the fiscal year 2004,resulted in increases to the allowance related to growth in multi-familyresidential loans, nonresidential real estate and land loans, constructionloans and unsecured commercial lines of credit, all of which are generallyconsidered to involve a higher degree of risk than single-family owner-occupiedresidential lending.   Peoples intends tocontinue to increase its allowance for loan losses as its loan portfolioincreases and will adjust its allowance should the composition and relativecredit risk of the portfolio change. While management believes that it determines the size of the allowancebased on the best information available at the time, the allowance will need tobe adjusted as circumstances change and assumptions are updated.  Future adjustments to the allowance couldsignificantly affect net earnings.

 

As previously stated, overthe past four years, the Bank has placed an increased emphasis on multi-familyresidential loans, non-residential real estate and land loans, constructionloans, commercial loans and consumer loans. Correspondingly, the allowance for loan losses has increased from$762,000 or .36% of total loans at September 30, 2000 to $11.0 million or 1.64%of total loans at September 30, 2004.

 

12

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The following table setsforth the activity in Peoples’ allowance for loan losses during the periodsindicated.

 
| ** **                                                                     | ** ** | **Year  Ended September 30,** | ** ** |
|--------------------------------------------------------------------------------|------------|-------------------------------|------------|
| ** **                                                                     | ** ** | **2004**                      | ** ** | **2003** | ** ** | **2002** | ** ** | **2001** | ** ** | **2000** | ** ** |
| ** **                                                                     | ** ** | **(Dollars  in Thousands)**   |
|                                                                           |       |                          |
| Allowance at beginning of period                                               |       | $                             | 9,744      |   | $ | 7,656 |   | $ | 3,662 |   | $ | 762 |   | $ | 415 |   |
| Increase due to Harvest Home Financial  acquisition                            |       | —                        |       | — |   | — |   | — |   | 195 |   |
| Increase due to Market acquisition                                             |       | —                        |       | — |   | — |   | 451 |   | — |   |
| Increase due to Kenwood acquisition                                            |       | —                        |       | — |   | 276 |   | — |   | — |   |
| Provision for losses on loans                                                  |       | 3,600                         |       | 4,198 |   | 5,265 |   | 2,449 |   | 156 |   |
| Charge-offs:                                                                   |       |                          |       |   |   |   |   |   |   |   |   |
| Single-family residential                                                      |       | (609                          | )          | (97 | ) | — |   | — |   | (4 | ) |
| Multi-family residential                                                       |       | (1,431                        | )          | — |   | — |   | — |   | — |   |
| Nonresidential real estate and land                                            |       | (151                          | )          | (1,097 | ) | — |   | — |   | — |   |
| Construction                                                                   |       | —                        |       | (62 | ) | — |   | — |   | — |   |
| Commercial                                                                     |       | (145                          | )          | (866 | ) | (1,547 | ) | — |   | — |   |
| Consumer and other loans                                                       |       | (24                           | )          | — |   | — |   | — |   | — |   |
| Total charge-offs                                                              |       | (2,360                        | )          | (2,122 | ) | (1,547 | ) | — |   | (4 | ) |
| Recoveries:                                                                    |       |                          |       |   |   |   |   |   |   |   |   |
| Single-family residential                                                      |       | —                        |       | 12 |   | — |   | — |   | — |   |
| Multi-family residential                                                       |       | —                        |       | — |   | — |   | — |   | — |   |
| Nonresidential real estate and land                                            |       | —                        |       | — |   | — |   | — |   | — |   |
| Construction                                                                   |       | —                        |       | — |   | — |   | — |   | — |   |
| Commercial                                                                     |       | 21                            |       | — |   | — |   | — |   | — |   |
| Consumer and other loans                                                       |       | 20                            |       | — |   | — |   | — |   | — |   |
| Total recoveries                                                               |       | 41                            |       | 12 |   | — |   | — |   | — |   |
|                                                                           |       |                          |       |   |   |   |   |   |   |   |   |
| Net loans charged-off to allowance for loan  losses                            |       | (2,319                        | )          | (2,110 | ) | (1,547 | ) | — |   | (4 | ) |
|                                                                           |       |                          |       |   |   |   |   |   |   |   |   |
| Allowance at end of period                                                     |       | $                             | 11,025     |   | $ | 9,744 |   | $ | 7,656 |   | $ | 3,662 |   | $ | 762 |   |
|                                                                           |       |                          |       |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Allowance for loan losses to total nonperforming  loans  at end of period |       | 182.87                        | %          | 134.15 | % | 102.19 | % | 467.69 | % | 60.67 | % |
|                                                                           |       |                          |       |   |   |   |   |   |   |   |   |
| Allowance for loan losses to total loans at  end of period                     |       | 1.64                          | %          | 1.57 | % | 1.37 | % | 0.87 | % | 0.36 | % |
|                                                                                |            |                               |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

**InvestmentSecurities**

 

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 ofPeoples is designed to maintain adequate liquidity, manage investment assets inconjunction with interest rate risk and maximize stability throughdiversification.  Excess funds notutilized to meet loan demand are typically invested using the guidelines of theinvestment policy to seek the maximum return with minimal risk. All investmentsare approved to be held as “Available for sale” or “Held to maturity”.  Peoples does not maintain any investments as “Trading”.  Peoples handles all investment activitythrough a select group of dealers in securities approved by the Board ofDirectors.

 

13

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The following table setsforth information regarding the carrying value and fair value of Peoples’securities at the dates indicated.

 
| ** **                   | ** ** | **September  30,**  | ** ** |
|------------------------------|------------|---------------------|------------|
| ** **                   | ** ** | **2004**            | ** ** | **2003** | ** ** | **2002** | ** ** |
| ** **                   | ** ** | **Amortized**       | ** ** | **Fair** | ** ** | **Amortized** | ** ** | **Fair** | ** ** | **Amortized** | ** ** | **Fair** | ** ** |
| ** **                   | ** ** | **Cost**            | ** ** | **Value** | ** ** | **Cost** | ** ** | **Value** | ** ** | **Cost** | ** ** | **Value** | ** ** |
|                         |       | **(In  Thousands)** |       |
|                         |       |                |       |   |   |   |   |   |   |   |   |   |   |
| Available for sale:          |       |                |       |   |   |   |   |   |   |   |   |   |   |
| Mortgage-backed securities   |       | $                   | 228,568    |   | $ | 228,085 |   | $ | 134,598 |   | $ | 133,828 |   | $ | 18,479 |   | $ | 18,763 |   |
| FHLMC stock                  |       | —              |       | — |   | 1,391 |   | 1,123 |   | 1,391 |   | 1,199 |   |
| Mutual funds                 |       | 1,091               |       | 1,069 |   | 1,039 |   | 1,033 |   | — |   | — |   |
| Other equity securities      |       | —              |       | — |   | — |   | — |   | 29 |   | 32 |   |
| Total                        |       | $                   | 229,659    |   | $ | 229,154 |   | $ | 137,028 |   | $ | 135,984 |   | $ | 19,899 |   | $ | 19,994 |   |
| Required investment:         |       |                |       |   |   |   |   |   |   |   |   |   |   |
| Federal Home Loan Bank stock |       | $                   | 10,841     |   | $ | 10,841 |   | $ | 10,221 |   | $ | 10,221 |   | $ | 9,907 |   | $ | 9,907 |   |
|                              |            |                     |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

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

 
| ** **                                                                                | ** ** | **Year Ended September 30,** | ** ** |
|-------------------------------------------------------------------------------------------|------------|------------------------------|------------|
| ** **                                                                                | ** ** | **2004**                     | ** ** | **2003** | ** ** | **2002** | ** ** |
| ** **                                                                                | ** ** | **(In  Thousands)**          |
|                                                                                      |       |                         |       |   |   |   |   |
| Securities at beginning of period                                                         |       | $                            | 146,205    |   | $ | 29,901 |   | $ | 9,244 |   |
| Purchases (1)                                                                             |       | 147,624                      |       | 209,532 |   | 21,664 |   |
| Sales of available for sale securities                                                    |       | (1,391                       | )          | (67,996 | ) | (3,523 | ) |
| Amortization of premiums and discounts                                                    |       | (1,493                       | )          | (1,058 | ) | (264 | ) |
| Repayments, prepayments and maturities                                                    |       | (51,489                      | )          | (23,032 | ) | (1,730 | ) |
| Securities acquired through acquisition –  net                                       |       | —                       |       | — |   | 4,386 |   |
| Increase (decrease) in unrealized gains  (losses) on  available-for-sale  securities |       | 539                          |       | (1,142 | ) | 124 |   |
|                                                                                      |       |                         |       |   |   |   |   |
| Securities at end of period (2)                                                           |       | $                            | 239,995    |   | $ | 146,205 |   | $ | 29,901 |   |
|                                                                                           |            |                              |            |  |  |  |  |  |  |  |  |  |

 

----

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

 

(2)                                  At September 30, 2004, 2003 and 2002, $228.1million or 95.0%, $133.8 million or 91.5%, and $18.8 million or 62.8%,respectively, of Peoples’ securities portfolio consisted of adjustable-ratesecurities.

 

14

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The following table setsforth certain information regarding the maturities of Peoples’ mortgage-backedsecurities at September 30, 2004.

 
| ** **                 | ** ** | **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)** |
|                       |       |                        |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Mortgage-backed securities |       | $                           | —     |   | — | % | $ | — |   | — | % | $ | — |   | — | % | $ | 228,085 |   | 3.22 | % |
|                            |            |                             |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

Mortgage-backed securitiesrepresent a participation interest in a pool of one- to four-family ormulti-family mortgages.  The mortgageoriginators use intermediaries (generally U.S. Government agencies andgovernment-sponsored enterprises) to pool and repackage the participationinterests in the form of securities, with investors receiving the principal andinterest payments on the mortgages.  SuchU.S. Government agencies and government-sponsored enterprises guarantee thepayment of principal and interest to investors.

 

Mortgage-backed securitiesare typically issued with stated principal amounts, and the securities arebacked by pools of mortgages that have loans with interest rates that arewithin 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 the certificate holder.  The life of a mortgage-backed pass-throughsecurity approximates the life of the underlying mortgages.

 

The mortgage-backedsecurities of Peoples may consist of Government National Mortgage Association (“GinnieMae”), Federal Home Loan Mortgage Corporation (“FHLMC”) and Federal NationalMortgage Association (“FNMA”) securities. Ginnie Mae is a government agency within the Department of Housing andUrban Development which is intended to help finance government-assisted housingprograms.  Ginnie Mae securities arebacked by loans insured by the Federal Housing Administration, or guaranteed bythe Veterans Administration, and the timely payment of principal and intereston Ginnie Mae securities are guaranteed by Ginnie Mae and backed by the fullfaith and credit of the U.S. Government.

 

Mortgage-backed securitiesgenerally yield less than the loans which underlie such securities because oftheir payment guarantees or credit enhancements which offer nominal creditrisk. In addition, mortgage-backed securities are more liquid than individualmortgage loans and may be used to collateralize borrowings or other obligationsof Peoples.  At September 30, 2004,Peoples had mortgage-backed securities with a fair value totaling $228.1million.

 

Duringfiscal year 2004, management purchased $147.0 million in adjustable-ratemortgage-backed securities as a tool to manage interest rate risk, as well asto provide interest income with minimal credit risk, due to the implicitguaranty of government-sponsored agencies.

 

**Sources ofFunds**

 

**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 and money market conditions. Borrowingsmay also be used on a short-term basis to compensate for reductions in theavailability of funds from other sources and on a longer-term basis for generalbusiness purposes.

 

**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.  Peoples offers traditional passbook savingsaccounts, money market accounts, checking accounts and certificates of deposit.

 

Peoples obtains depositsprimarily from residents of southwestern Ohio. Peoples does not solicit deposits from outside Ohio or pay fees tobrokers to solicit funds for deposit.

 

15

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Interestrates paid, maturity terms, service fees and withdrawal penalties areestablished on a periodic basis. Management determines the rates and termsbased on rates paid by competitors, the need for funds or liquidity, growthgoals and federal and state regulations.

 

Thefollowing table sets forth the activity in Peoples’ deposits during the periodsindicated.

 
| ** **                                         | ** ** | **Year Ended September 30,** | ** ** |
|----------------------------------------------------|------------|-----------------------------------|------------|
| ** **                                         | ** ** | **2004**                          | ** ** | **2003** | ** ** | **2002** | ** ** |
| ** **                                         | ** ** | **(In Thousands)**                | ** ** |
|                                               |       |                              |       |   |   |   |   |
| Beginning balance                                  |       | $                                 | 455,900    |   | $ | 369,080 |   | $ | 233,063 |   |
|                                               |       |                              |       |   |   |   |   |
| Net increase before interest credited              |       | 5,255                             |       | 76,378 |   | 125,999 |   |
| Interest credited                                  |       | 11,281                            |       | 10,442 |   | 10,018 |   |
|                                               |       |                              |       |   |   |   |   |
| Net increase in deposits (including  acquisitions) |       | 16,536                            |       | 86,820 |   | 136,017 |   |
|                                               |       |                              |       |   |   |   |   |
| Ending balance                                     |       | $                                 | 472,436    |   | $ | 455,900 |   | $ | 369,080 |   |
|                                                    |            |                                   |            |  |  |  |  |  |  |  |  |

 

Thefollowing table sets forth by various interest rate categories the certificatesof deposit with Peoples at the dates indicated.

 
| ** **     | ** ** | **September 30,** | ** ** |
|----------------|------------|------------------------|------------|
| ** **     | ** ** | **2004**               | ** ** | **2003** | ** ** | **2002** | ** ** |
| ** **     | ** ** | **(In Thousands)**     | ** ** |
|           |       |                   |       |   |   |   |   |
| 0.00% to 2.99% |       | $                      | 124,115    |   | $ | 104,180 |   | $ | 69,445 |   |
| 3.00% to 3.99% |       | 56,156                 |       | 56,216 |   | 62,981 |   |
| 4.00% to 4.99% |       | 55,199                 |       | 48,162 |   | 53,175 |   |
| 5.00% to 6.99% |       | 25,194                 |       | 35,713 |   | 43,266 |   |
| 7.00% to 8.99% |       | 137                    |       | 562 |   | 460 |   |
|           |       |                   |       |   |   |   |   |
| Total          |       | $                      | 260,801    |   | $ | 244,833 |   | $ | 229,327 |   |
|                |            |                        |            |  |  |  |  |  |  |  |  |

 

Thefollowing table sets forth the amount and remaining maturities of Peoples’certificates of deposit at September 30, 2004.

 
| ** **     | ** ** | ** **         | ** ** | **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% |       | $                  | 54,801     |         | $          | 35,832       |       | $            | 27,565     |       | $          | 5,917 |   | $ | — |   |
| 3.00% to 3.99% |       | 3,763              |       | 2,327        |       | 9,180        |       | 6,073        |       | 34,804     |       |
| 4.00% to 4.99% |       | 6,646              |       | 7,258        |       | 7,586        |       | 17,845       |       | 15,864     |       |
| 5.00% to 6.99% |       | 4,853              |       | 3,915        |       | 4,010        |       | 12,408       |       | 7          |       |
| 7.00% to 8.99% |       | 127                |       | 20           |       | —       |       | —       |       | —     |       |
|           |       |               |       |         |       |         |       |         |       |       |       |
| Total          |       | $                  | 70,190     |         | 49,352     |         | $          | 48,341       |       | $          | 42,243     |   | $ | 50,675 |   |
|                |            |                    |            |              |            |              |            |              |            |            |            |  |  |  |  |  |

 

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Asof September 30, 2004, the aggregate amount of outstanding certificates ofdeposit at Peoples, in amounts greater than $100,000, was approximately $52.2million.  The following table presentsthe maturity of these certificates of deposit at such date.

 
| ** **                      | ** ** | **September 30, 2004** | ** ** |
|---------------------------------|------------|-----------------------------|------------|
| ** **                      | ** ** | **(In Thousands)**          | ** ** |
|                            |       |                        |       |
| 3 months or less                |       | $                           | 4,643      |   |
| Over 3 months through 6 months  |       | 8,321                       |       |
| Over 6 months through 12 months |       | 6,188                       |       |
| Over 12 months                  |       | 33,072                      |       |
|                            |       |                        |       |
|                            |       | $                           | 52,224     |   |

 

Thefollowing table sets forth the dollar amount of deposits in various types ofdeposits offered by Peoples at the dates indicated.

 
| ** **                     | ** ** | **At September 30,**  | ** ** |
|--------------------------------|------------|----------------------------|------------|
| ** **                     | ** ** | **2004**                   | ** ** | **2003** | ** ** | **2002** | ** ** |
| ** **                     | ** ** | **Amount**                 | ** ** | **Percentage** | ** ** | **Amount** | ** ** | **Percentage** | ** ** | **Amount** | ** ** | **Percentage** | ** ** |
| ** **                     | ** ** | **(Dollars in Thousands)** | ** ** |
|                           |       |                       |       |   |   |   |   |   |   |   |   |   |   |
| Non-interest checking accounts |       | $                          | 17,638     |   | 3.74 | % | $ | 9,266 |   | 2.03 | % | $ | 6,075 |   | 1.65 | % |
| Savings and checking accounts  |       | 164,415                    |       | 34.80 |   | 164,369 |   | 36.06 |   | 104,413 |   | 28.29 |   |
| Certificates of deposit        |       | 260,801                    |       | 55.20 |   | 244,883 |   | 53.71 |   | 229,327 |   | 62.13 |   |
| Money market accounts          |       | 29,582                     |       | 6.26 |   | 37,382 |   | 8.20 |   | 29,265 |   | 7.93 |   |
|                           |       |                       |       |   |   |   |   |   |   |   |   |   |   |
| Total                          |       | $                          | 472,436    |   | 100.00 | % | $ | 455,900 |   | 100.00 | % | $ | 369,080 |   | 100.00 | % |

 

Peoplesattempts to control the flow of deposits by pricing its accounts to remaingenerally competitive with other financial institutions in its market area.

 

**Borrowings.**  Peoples may obtain advances fromthe Federal Home Loan Bank of Cincinnati upon the security of the common stockPeoples owns in that bank and certain of its residential mortgage loans andmortgage-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, 2004,Peoples was permitted to borrow, subject to security pledge agreements, up to$423.3 million from the Federal Home Loan Bank of Cincinnati.  At such date, Peoples had $324.5 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.  During 2004, such advanceswere used in large part to fund the purchase of $147.0 million of adjustablerate mortgage-backed securities.  Of the$324.5 million of advances at September 30, 2004, $172.0 million mature infiscal 2005.

 

Also,Peoples has a line of credit with another financial institution for $10million.  As of September 30, 2004,Peoples did not have an outstanding balance on this line of credit.  This line of credit matures on March 31,2005.

 

17

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Thefollowing table shows certain information regarding the borrowings of Peoplesat or for the dates indicated:

 
| ** **                                                     | ** ** | **At or for the Year**       | ** ** |
|----------------------------------------------------------------|------------|------------------------------|------------|
| ** **                                                     | ** ** | **Ended September 30,** | ** ** |
| ** **                                                     | ** ** | **2004**                     | ** ** | **2003** | ** ** | **2002** | ** ** |
| ** **                                                     | ** ** | **(Dollars in Thousands)**   | ** ** |
|                                                           |       |                         |       |   |   |   |   |
| Federal Home Loan Bank advances:                               |       |                         |       |   |   |   |   |
| Average balance outstanding                                    |       | $                            | 299,224    |   | $ | 173,731 |   | $ | 152,995 |   |
| Maximum amount outstanding at any month-end  during the period |       | $                            | 327,000    |   | $ | 218,500 |   | $ | 180,489 |   |
| Balance outstanding at end of period                           |       | $                            | 324,500    |   | $ | 218,500 |   | $ | 152,500 |   |
| Average interest rate during the period                        |       | 2.56                         | %          | 3.59 | % | 2.86 | % |
| Weighted-average interest rate at end of  period               |       | 2.85                         | %          | 3.08 | % | 3.93 | % |
|                                                           |       |                         |       |   |   |   |   |
| Line of Credit:                                                |       |                         |       |   |   |   |   |
| Average balance outstanding                                    |       | $                            | 1,100      |   | $ | 946 |   | $ | 113 |   |
| Maximum amount outstanding at any month-end  during the period |       | 1,900                        |       | $ | 1,400 |   | $ | 450 |   |
| Balance outstanding at end of period                           |       | —                       |       | $ | 1,400 |   | $ | 450 |   |
| Average interest rate during the period                        |       | 2.97                         | %          | 2.85 | % | 3.55 | % |
| Weighted-average interest rate at end of  period               |       | N/A                          |       | 2.62 | % | 3.31 | % |

 

**Subsidiaries**

 

AtSeptember 30, 2004, Peoples did not have any direct unconsolidatedsubsidiaries.

 

**Total Employees**

 

Peoples had 142 full-timeequivalent employees at September 30, 2004.  None of these employees are represented by acollective bargaining agent, and Peoples believes that it enjoys good relationswith its personnel.

 

**Competition**

 

Peoplesfaces significant competition both in attracting deposits and in makingloans.  Its most direct competition fordeposits has come historically from commercial banks, credit unions and othersavings institutions located in its primary market area, including many largefinancial institutions which have greater financial and marketing resourcesavailable to them. In addition, it faces significant competition for investors’funds from short-term money market securities, mutual funds and other corporateand government securities.  Peoples doesnot rely upon any individual group or entity for a material portion of itsdeposits.  The ability of Peoples toattract and retain deposits depends on its ability to generally provide a rateof return, liquidity and risk comparable to that offered by competinginvestment opportunities.

 

Peoples’competition for loans comes principally from mortgage banking companies,commercial banks, other savings institutions and credit unions.  It competes for loan originations primarilythrough the interest rates and loan fees it charges, and the efficiency andquality of services it provides borrowers. Factors which affect competition include general and local economicconditions, current interest rate levels and volatility in the mortgagemarkets. Competition may increase as a result of the continuing reduction ofrestrictions on the interstate operations of financial institutions and theanticipated slowing of refinancing activity.

 

18

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**REGULATION**

 

Thefollowing is a summary of certain statutes and regulations affecting Peoplesand the Bank.  This summary is qualifiedin its entirety by such statutes and regulations.  A change in applicable laws or regulationsmay have a material effect on Peoples, the Bank and the business of Peoples andthe Bank.

 

**General**

 

Financialinstitutions and their holding companies are extensively regulated underfederal and state law.  Consequently, thegrowth and earnings performance of Peoples and the Bank can be affected not onlyby management decisions and general economic conditions, but also by thestatutes administered by, and the regulations and policies of, variousgovernmental regulatory authorities. Those authorities include, but are not limited to, the Office of ThriftSupervision, the Federal Reserve Board, the FDIC, the Internal Revenue Service,and state taxing authorities.  The effectof such statutes, regulations and policies can be significant, and cannot bepredicted with a high degree of certainty.

 

Federaland state laws and regulations generally applicable to financial institutionsand their holding companies regulate, among other things, the scope ofbusiness, investments, reserves against deposits, capital levels relative tooperations, lending activities and practices, the nature and amount ofcollateral for loans, the establishment of branches, mergers, consolidationsand dividends.  The system of supervisionand regulation applicable to Peoples and the Bank establishes a comprehensiveframework for their respective operations and is intended primarily for theprotection of the FDIC’s deposit insurance funds, the depositors of the Bankand the public, rather than shareholders of the Bank or Peoples.

 

Federallaw and regulations establish supervisory standards applicable to the lendingactivities of the Bank, including internal controls, credit underwriting, loandocumentation and loan-to-value ratios for loans secured by real property.

 

**Peoples Community Bancorp**

 

**Holding Company Acquisitions.** Peoples is a registered savings and loan holding company within themeaning of Section 10 of the Home Owners’ Loan Act, and is subject toOffice of Thrift Supervision examination and supervision as well as certainreporting requirements.  Federal lawgenerally prohibits a savings and loan holding company, without prior Office ofThrift Supervision approval, from acquiring the ownership or control of anyother savings institution or savings and loan holding company, or all, orsubstantially all, of the assets or more than 5% of the voting sharesthereof.  These provisions also prohibit,among other things, any director or officer of a savings and loan holdingcompany, or any individual who owns or controls more than 25% of the voting sharesof such holding company, from acquiring control of any savings institution nota subsidiary of such savings and loan holding company, unless the acquisitionis approved by the Office of Thrift Supervision.

 

**Holding Company Activities.** Peoples operates as a unitary savings and loan holding company.  The activities of Peoples and its non-savingsinstitution subsidiaries are restricted to activities traditionally permittedto multiple savings and loan holding companies and to financial holdingcompanies under newly added provisions of the Bank Holding Company Act.Multiple savings and loan holding companies may:

 

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

 

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

 

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

 

19

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

 

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

 

Theactivities financial holding companies may engage in include:

 

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

 

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

 

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

 

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

 

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

 

•                  merchantbanking activities.

 

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

 

•                  thepayment of dividends by the savings institution;

•                  transactionsbetween the savings institution and its affiliates; and

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

 

Every savings institutionsubsidiary of a savings and loan holding company is required to give the Officeof Thrift Supervision at least 30 days’ advance notice of any proposeddividends to be made on its guaranty, permanent or other non-withdrawablestock, or else such dividend will be invalid. See “Peoples Community Bank - Capital Distributions.”

 

**Restrictions on Transactions With Affiliates.**  Transactionsbetween a savings institution and its “affiliates” are subject to quantitativeand qualitative restrictions under Sections 23A and 23B of the Federal ReserveAct and Office of Thrift Supervision regulations. Affiliates of a savingsinstitution generally include, among other entities, the savings institution’sholding company and companies that are controlled by or under common controlwith the savings institution.  However,most subsidiaries of savings institutions are not considered affiliates for thepurposes of these rules.

 

Ingeneral, a savings institution or its subsidiaries may engage in certain“covered transactions” with affiliates up to certain limits. In addition, asavings institution and its subsidiaries may engage in covered transactions andcertain other transactions only on terms and under circumstances that aresubstantially the same, or at least as favorable to the savings institution orits subsidiary, as those prevailing at the time for comparable transactionswith nonaffiliated companies. A “covered transaction” is defined to include aloan or extension of credit to an affiliate; a purchase of investmentsecurities issued by an affiliate; a purchase of assets from an affiliate, withcertain exceptions; the acceptance of securities issued by an affiliate ascollateral for a loan or extension of credit to any party; or the issuance of aguarantee, acceptance or letter of credit on behalf of an affiliate. Inaddition, a savings institution may not:

 

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

 

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

 

20

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•                  purchasea low-quality asset from an affiliate; or

 

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

 

Withcertain exceptions, each loan or extension of credit by a savings institutionto an affiliate must be secured by collateral with a market value ranging from100% to 130% (depending on the type of collateral) of the amount of the loan orextension of credit.

 

**Federal Securities Laws**. Peoples registered its common stock with the Securities and ExchangeCommission under Section 12(g) of the Securities Exchange Act of1934.  Peoples is subject to the proxyand tender offer rules, insider trading reporting requirements andrestrictions, and certain other requirements under the Exchange Act. Pursuantto Office of Thrift Supervision regulations and the Plan of Conversion, Peopleshas agreed to maintain such registration for a minimum of three years followingthe conversion in March 2000.

 

**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 consulting servicesby accounting firms.  To ensure auditorindependence, any non-audit services being provided to an audit client willrequire 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, tocertify to the accuracy of periodic reports filed with the SEC, subject tocivil and criminal penalties if they knowingly or willfully violate thiscertification requirement.  In addition,under the Act, counsel will be required to report evidence of a materialviolation of the securities laws or a breach of fiduciary duty by a company toits chief executive officer or its chief legal officer, and, if such officerdoes not appropriately respond, to report such evidence to the audit committeeor other similar 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.

 

TheAct also increases the oversight of, and codifies certain requirements relatingto audit committees of public companies and how they interact with the company’s“registered public accounting firm” (“RPAF”). Audit committee members must be independent and are barred fromaccepting consulting, advisory or other compensatory fees from the issuer.  In addition, companies must disclose whetherat least one member of the committee is a “financial expert” (as such term willbe defined by the SEC) and if not, why not. Under the Act, a RPAF is prohibited from performing statutorily mandatedaudit services for a company if such company’s chief executive officer, chieffinancial officer, comptroller, chief accounting officer or any person servingin equivalent positions has been employed by such firm and participated in theaudit of such company during the one-year period preceding the audit initiationdate.  The Act also prohibits any officeror director of a company or any other person acting under their direction fromtaking any action to fraudulently influence, coerce, manipulate or mislead anyindependent public or certified accountant engaged in the audit of the company’sfinancial statements for the purpose of rendering the financial statement’smaterially misleading.  The Act alsorequires the 

 

21

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SEC to prescribe rulesrequiring inclusion of an internal control report and assessment by managementin the annual report to stockholders. The Act requires the RPAF that issues the audit report to attest to andreport on management’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 of theSEC.

 

**Peoples Community Bank**

 

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

 

TheOffice of Thrift Supervision’s enforcement authority over all savingsinstitutions and their holding companies includes, among other things, theability to assess civil money penalties, to issue cease and desist or removalorders and to initiate injunctive actions. In general, these enforcement actions may be initiated for violations oflaws and regulations and unsafe or unsound practices. Other actions orinactions may provide the basis for enforcement action, including misleading oruntimely reports filed with the Office of Thrift Supervision.

 

**Insurance of Accounts.**  Thedeposits of the Bank are insured to the maximum extent permitted by the SavingsAssociation Insurance Fund, which is administered by the FDIC, and are backedby 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.

 

TheFDIC may terminate the deposit insurance of any insured depository institution,including the Bank, if it determines after a hearing that the institution hasengaged or is engaging in unsafe or unsound practices, is in an unsafe orunsound condition to continue operations, or has violated any applicable law,regulation, order or any 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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**Regulatory Capital Requirements.** Federally insured savings institutions are required to maintain minimumlevels of regulatory capital. The Office of Thrift Supervision has establishedcapital standards applicable to all savings institutions. These standards generallymust be as stringent as the comparable capital requirements imposed on nationalbanks. The Office of Thrift Supervision also is authorized to impose capitalrequirements in excess of these standards on individual institutions on acase-by-case basis.

 

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

 

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

 

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 capital determined under generally accepted accounting principles.

 

At September 30, 2004,the Bank exceeded all of its regulatory capital requirements, with tangible,core and risk-based capital ratios of 8.3%, 8.3% and 13.8%, respectively.

 

Anysavings institution that fails any of the capital requirements is subject topossible enforcement actions by the Office of Thrift Supervision or the FDIC.Such actions could include a capital directive, a cease and desist order, civilmoney penalties, the establishment of restrictions on the institution’soperations, termination of federal deposit insurance and the appointment of aconservator or receiver. The Office of Thrift Supervision’s capital regulationprovides that such actions, through enforcement proceedings or otherwise, couldrequire one or more of a variety of corrective actions.

 

**Prompt Corrective Action.**  Thefollowing table shows the amount of capital associated with the differentcapital categories set forth in the prompt 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%                 |

 

Inaddition, an institution is “critically undercapitalized” if it has a ratio oftangible equity to total assets that is equal to or less than 2.0%. Underspecified circumstances, a federal banking agency may reclassify a well capitalizedinstitution as adequately capitalized and may require an adequately capitalizedinstitution or an undercapitalized institution to comply with supervisoryactions as if it were in the next lower category (except that the FDIC may notreclassify a significantly undercapitalized institution as criticallyundercapitalized).

 

23

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

 

AtSeptember 30, 2004, the Bank was deemed a well capitalized institution forpurposes of the above regulations and as such is not subject to the abovementioned restrictions.

 

**Safety and Soundness Guidelines.**  TheOffice of Thrift Supervision and the other federal banking agencies haveestablished guidelines for safety and soundness, addressing operational andmanagerial standards, as well as compensation matters for insured financialinstitutions. Institutions failing to meet these standards are required tosubmit compliance plans to their appropriate federal regulators. The Office ofThrift Supervision and the other agencies have also established guidelinesregarding asset quality and earnings standards for insured institutions.  The Bank believes that it is in compliancewith these guidelines and standards.

 

**Capital Distributions.** Office of Thrift Supervision regulations govern capital distributions bysavings institutions, which include cash dividends, stock repurchases and othertransactions charged to the capital account of a savings institution to makecapital distributions. A savings institution must file an application forOffice of Thrift Supervision approval of the capital distribution if either(1) the total capital distributions for the applicable calendar yearexceed the sum of the institution’s retained net income for that year to dateplus the institution’s retained net income for the preceding two years,(2) the institution would not be at least adequately capitalized followingthe distribution, (3) the distribution would violate any applicablestatute, regulation, agreement or OTS-imposed condition, or (4) theinstitution is not eligible for expedited treatment of its filings. If anapplication is not required to be filed, savings institutions which are asubsidiary of a holding company (as well as certain other institutions) muststill file a notice with the Office of Thrift Supervision at least30 days before the board of directors declares a dividend or approves acapital distribution.

 

**Community Reinvestment 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.

 

**Qualified Thrift Lender Test.**  Allsavings institutions are required to meet a qualified thrift lender test toavoid certain restrictions on their operations. A savings institution cancomply with the qualified thrift lender test by either qualifying as a domesticbuilding and loan association as defined in the Internal Revenue Code or bymaintaining at least 65% of its portfolio assets in certain housing andconsumer-related assets such as:

 

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

 

•                  homeequity loans;

 

•                  mostmortgage-backed securities;

 

•                  stockissued by a Federal Home Loan Bank; and

 

•                  director indirect obligations of the FDIC.

 

24

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Asavings institution that does not meet the qualified thrift lender test musteither convert to a bank charter or comply with certain restrictions on itsoperations.

 

At September 30, 2004,the qualified thrift investments of the Bank were approximately 82.3% of itsportfolio assets.

 

**Federal Home Loan Bank System.**  TheBank is a member of the Federal Home Loan Bank of Cincinnati, which is one of12 regional Federal Home Loan Banks that administers the home financing creditfunction of savings institutions.  EachFederal Home Loan Bank serves as a reserve or central bank for its memberswithin its assigned region. It is funded primarily from proceeds derived fromthe sale of consolidated obligations of the Federal Home Loan Bank System. Itmakes loans to members (i.e., advances) in accordance with policies andprocedures established by the Board 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, 2004, the Bank had $10.8 million in FederalHome Loan Bank stock, which was in compliance with this requirement.

 

TheFederal Home Loan Banks are required to provide funds for the resolution oftroubled savings institutions and to contribute to affordable housing programsthrough direct loans or interest subsidies on advances targeted for communityinvestment and low- and moderate-income housing projects. These contributionshave adversely affected the level of Federal Home Loan Bank dividends paid inthe past and could do so in the future. These contributions also could have anadverse effect on the value of Federal Home Loan Bank stock in the future.

 

**Federal Reserve System.**  TheFederal Reserve Board requires all depository institutions to maintain reservesagainst their transaction accounts (primarily NOW and Super NOW checkingaccounts) and non-personal time deposits. Because required reserves must bemaintained in the form of vault cash or a noninterest-bearing account at aFederal Reserve Bank, the effect of this reserve requirement is to reduce aninstitution’s earning assets.

 

25

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**TAXATION**

 

**Federal Taxation**

 

**General.**  Peoples and the Bank aresubject to the corporate tax provisions of the Internal Revenue Code, and theBank is subject to certain additional provisions which apply to thrifts andother types of financial institutions. The following discussion of federaltaxation is intended only to summarize certain pertinent federal income taxmatters relevant to the taxation of Peoples and the Bank and is not acomprehensive discussion of the tax rules applicable to Peoples and the Bank.

 

**Fiscal Year.**  Peoples and the Bank filefederal income tax returns on the basis of a calendar year ending on December 31.

 

**Bad Debt Reserves.**  In 1996, legislation wasenacted that repealed the reserve method of accounting (including thepercentage of taxable income method) previously used by many savingsinstitutions to calculate their bad debt reserve for federal income taxpurposes. Savings institutions with $500 million or less in assets may,however, continue to use the experience method. The Bank must recapture that portion of its reserve which exceeds theamount that could have been taken under the experience method for post-1987 taxyears.  The Bank’s post-1987 excessreserves amounted to approximately $1.2 million.  The recapture will occur over a six-yearperiod, which commenced in fiscal 1999. The legislation also requires savingsinstitutions to account for bad debts for federal income tax purposes on thesame basis as commercial banks for tax years beginning after December 31,1995. This change in accounting method and recapture of excess bad debtreserves is adequately provided for in the Bank’s deferred tax liability.

 

AtSeptember 30, 2004, the federal income tax reserves of the Bank included$1.4 million for which no federal income tax has been provided.  Because of these federal income tax reservesand the liquidation account established for the benefit of certain depositorsof the Bank in connection with its conversion, the retained earnings of theBank are substantially restricted.

 

**Distributions.**  If Peoples were to distributecash or property to its stockholders, and the distribution was treated as beingfrom its accumulated bad debt reserves, the distribution would cause Peoples tohave additional taxable income.  Adistribution is from accumulated bad debt reserves if (a) the reservesexceed the amount that would have been accumulated on the basis of actual lossexperience, and (b) the distribution is a “non-qualified distribution.”  A distribution with respect to its stock is anon-qualified distribution to the extent that, for federal income tax purposes,

 

•                  itis in redemption of its shares,

 

•                  itis pursuant to a liquidation of the institution, or

 

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

 

Theamount of additional taxable income created by a non-qualified distribution isan amount that when reduced by the tax attributable to it is equal to theamount of the distribution.

 

**Minimum Tax.**  The Code imposes an alternativeminimum tax at a rate of 20%. The alternative minimum tax generally applies toa base of regular taxable income plus certain tax preferences (“alternativeminimum taxable income”) and is payable to the extent such alternative minimumtaxable income is in excess of an exemption amount. Tax preference itemsinclude the following:

 

•                  depreciation,and

 

26

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

 

(1)                                  alternative minimum taxable income determinedwithout regard to this preference and prior to reduction by net operatinglosses, over

 

(2)                                  adjusted current earnings as defined in theCode.

 

Peopleshas not been subject to the alternative minimum tax or had any such amountsavailable as credits for carry-over.

 

**Capital Gains 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.

 

**Other Matters.**  Federal legislation isintroduced from time to time that would limit the ability of individuals to deductinterest paid on mortgage loans. Individuals are currently not permitted todeduct interest on consumer loans. Significant increases in tax rates orfurther restrictions on the deductibility of mortgage interest could adverselyaffect Peoples.

 

Peoples’federal income tax returns for the tax years ended 2003, 2002 and 2001 are openunder the statute of limitations and are subject to review by the IRS.  Peoples has not been audited by the IRSduring the last five years.

 

**State Taxation**

 

**Ohio Taxation.**  Peoples is subject to the Ohiocorporation franchise tax, which is a tax measured by both net earnings and networth. The rate of tax is the greater of (i) 5.1% on the first $50,000 ofcomputed Ohio taxable income and 8.9% of computed Ohio taxable income in excessof $50,000 or (ii) 0.582% times taxable net worth.

 

Incomputing Peoples’ tax under the net worth method, 100% of the investment inthe capital stock of the Bank after the conversion may be excluded, asreflected on the balance sheet, in computing taxable net worth as long asPeoples owns at least 25% of the issued and outstanding capital stock of theBank.  The calculation of the exclusionfrom net worth is based on the ratio of the excludable investment (net of anyappreciation or goodwill included in such investment) to total assetsmultiplied by the net value of the stock. As a holding company, Peoples may be entitled to various otherdeductions in computing taxable net worth that are not generally available tooperating companies.

 

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

 

TheBank is a “financial institution” for State of Ohio tax purposes. As such, itis subject to the Ohio corporate franchise tax on “financial institutions,”which is imposed annually at a rate of 1.3% of the Bank’s book net worthdetermined in accordance with generally accepted accounting principles.  As a “financial institution”, the Bank is notsubject to any tax based upon net income or net profits imposed by the State ofOhio.

 

**Maryland Taxation.**  As a Maryland holding companynot earning income in Maryland, Peoples is exempt from Maryland corporateincome tax.

 

27

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

 

At September 30, 2004, Peoples conducted its business from itsmain office in West Chester, Ohio and thirteen other branch offices in Hamiltonand Warren counties.  The following tablesets forth the net book value (including leasehold improvement, furnishings andequipment) and certain other information with respect to the offices and otherproperties of Peoples at September 30, 2004.

 
| ** **                                        | ** ** | **Owned or  Leased** | ** ** | **Lease  Expiration  Date** | ** ** | **Net Book Value  of Property and  Leasehold  Improvements at  September 30,  2004** | ** ** | **Deposits at  September 30,  2004** | ** ** |
|---------------------------------------------------|------------|----------------------|------------|-----------------------------|------------|-------------------------------------------------------------------------------------------|------------|-------------------------------------------|------------|
| ** **                                        | ** ** | ** **           | ** ** | ** **                  | ** ** | **(In thousands)**                                                                        | ** ** |
| **Main  Office:**                                 |       |                 |       |                        |       |                                                                                      |       |                                      |       |
| 6100 West Chester Road  West Chester, Ohio 45069  |       | Owned                |       | N/A                         |       | $                                                                                         | 2,591      |                                      | $          | 57,334 |   |
|                                              |       |                 |       |                        |       |                                                                                      |       |                                      |       |   |   |
| **Branch  Offices:**                              |       |                 |       |                        |       |                                                                                      |       |                                      |       |
| 11 South Broadway  Lebanon, Ohio 45036            |       | Owned                |       | N/A                         |       | 701                                                                                       |       | 56,415                                    |       |
| 4825 Marburg Avenue  Cincinnati, Ohio 45209       |       | Owned                |       | N/A                         |       | 1,747                                                                                     |       | 24,821                                    |       |
| 3621 Harrison Avenue  Cheviot, Ohio 45211         |       | Owned                |       | N/A                         |       | 349                                                                                       |       | 66,541                                    |       |
| 3663 Ebenezer Road  Cincinnati, Ohio 45248        |       | Owned                |       | N/A                         |       | 244                                                                                       |       | 32,822                                    |       |
| 7522 Hamilton Avenue  Cincinnati, Ohio 45231      |       | Owned                |       | N/A                         |       | 1,287                                                                                     |       | 62,304                                    |       |
| 4100 State Route 128  Cleves, Ohio 45002          |       | Owned                |       | N/A                         |       | 1,053                                                                                     |       | 11,680                                    |       |
| 1101 Columbus Avenue  Lebanon, Ohio 45036         |       | Owned                |       | N/A                         |       | 1,405                                                                                     |       | 35,711                                    |       |
| 5797 South State Route 48  Maineville, Ohio 45039 |       | Owned                |       | N/A                         |       | 1,021                                                                                     |       | 15,314                                    |       |
| 8350 Arbor Square Drive  Mason, Ohio 45040        |       | Owned                |       | N/A                         |       | 1,440                                                                                     |       | 11,123                                    |       |
| 3530 Springdale Road  Cincinnati, Ohio 45251      |       | Owned                |       | N/A                         |       | 695                                                                                       |       | 19,460                                    |       |
| 7200 Blue Ash Road  Cincinnati, Ohio 45236        |       | Owned                |       | N/A                         |       | 834                                                                                       |       | 78,911                                    |       |
| 2906-6 West US 22 & 3  Maineville, OH 45039   |       | Leased               |       | 06/07                       |       | —                                                                                    |       | —                                    |       |

 

Additionally, the Company had construction in progress costs totalingapproximately $4.4 million at September 30, 2004, which consistedprimarily of $3.0 million for its Voice of America location, which opened in October 2004,$900,000 for its Deer Park location remodeling project and approximately $500,000for its Western Commons office relocation project.

 

**Item 3. Legal Proceedings**

 

The Company is not involved in any legalproceeding except nonmaterial litigation incidental to the ordinary course ofbusiness.

 

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

 

Not applicable

 

28

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**PART II**

 

**Item 5. Market for Registrant’s Common Equity,and Related Stockholder Matters and Issuer Purchases of Equity Securities**

 

(a)  The information required herein isincorporated by reference from page 3 of Peoples’ 2004 Annual Report toStockholders filed as Exhibit 13 hereto (“2004 Annual Report”) and from PartIII, 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 2004Annual Report.

 

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

 

The information requiredherein is incorporated by reference from pages 6 to 19 of the 2004 AnnualReport.

 

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

 

The information requiredherein is incorporated from pages 16 to 19 of the 2004 Annual Report.

 

**Item 8. Financial Statements andSupplementary Data**

 

The information required herein is incorporated by reference from pages20 to 59 of the 2004 Annual Report.

 

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

 

Not applicable.

 

**Item 9A. Controls and Procedures**

 

Our management evaluated, with the participation of our Chief ExecutiveOfficer and Chief Financial Officer, the effectiveness of our disclosurecontrols and procedures (as defined by Rules 13a-15(e) and 15d-15(e) under theSecurities Exchange Act of 1934) as of September 30, 2004.  Based on such evaluation, our Chief ExecutiveOfficer and Chief Financial Officer have concluded that our disclosure controlsand procedures are designed to ensure that information required to be disclosedby us in the reports that we file or submit under the Securities Exchange Actof 1934 is recorded, processed, summarized and reported within the time periodsspecified in the SEC’s rules and regulations and are operating in an effectivemanner.

 

No change in our internal control over financial reporting (as definedin Rules 13a-15(f) and 15(d)-15(f) under the Securities Exchange Act of 1934)occurred during the fourth fiscal quarter of fiscal 2004 that has materiallyaffected, or is reasonably likely to materially affect, our internal controlover financial reporting.

 

**Item 9B. Other Information**

 

Not applicable.

 

29

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**PART III**

 

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

 

The information required herein is incorporated by reference from theRegistrant’s Proxy Statement to be filed within 120 days after the end of thefiscal year covered by this Form 10-K (“Proxy Statement”).

 

**Item 11. Executive Compensation**

 

The information required herein is incorporated by reference from theProxy Statement.

 

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

 

The information required herein is incorporated by reference from theProxy Statement.

 

**Item 13. Certain Relationships and RelatedTransactions**

 

The information required herein is incorporated by reference from theProxy Statement.

 

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

##### ** **

The information required herein is incorporated by reference from theProxy Statement.

 

**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 2004 Annual Report:

 

Report of Registered Independent Public Accounting Firm.

 

Consolidated Statements of Financial Condition as of September 30,2004 and 2003.

 

Consolidated Statements of Earnings for the Years Ended September 30,2004, 2003 and 2002.

 

Consolidated Statements of Stockholders’ Equity for the Years Ended September 30,2004, 2003 and 2002.

 

Consolidated Statements of Cash Flows for the Years Ended September 30,2004, 2003 and 2002.

 

Notes to Consolidated Financial Statements.

 

(2)   All schedules are omitted because they are notrequired or applicable, or the required information is shown in theconsolidated financial statements or the notes thereto.

 

(b)  Exhibits.

 

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

 
| **No.** | ** ** | **Exhibits**                                                  |
|---------|------------|---------------------------------------------------------------|
| 3.1     |       | Articles of Incorporation of Peoples Community Bancorp, Inc.* |
| 3.2     |       | Bylaws of Peoples Community Bancorp, Inc.*                    |
| 4       |       | Stock Certificate of Peoples Community Bancorp, Inc.          |
| 10.1    |       | 2001 Stock Option Plan**                                      |
| 10.2    |       | 2001 Recognition and Retention Plan**                         |

 

30

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| 10.3 |   | 2004 Stock Option Plan***                                                                                                                                                    |
|------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.4 |   | 2004 Recognition and Retention Plan***                                                                                                                                       |
| 10.5 |   | Employment Agreements with each of Jerry D. Williams, Thomas J. Noe,  John E. Rathkamp and Teresa A. O’Quinn                                                            |
| 10.6 |   | Change in Control Agreement with Jerry Boate****                                                                                                                             |
| 13   |   | Annual Report to Stockholders for the Year Ended September 30,  2004                                                                                                    |
| 21   |   | List of Subsidiaries (See “Item I. Business — Subsidiaries” in this  Form 10-K)                                                                               |
| 23.1 |   | Consent of Grant Thornton LLP                                                                                                                                                |
| 23.2 |   | Consent of BKD 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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*                                         Incorporatedherein by reference to Peoples’ Proxy Statement dated January 28, 2002.

**                                  Incorporatedherein by reference to Peoples’ Proxy Statement dated January 29, 2001.

***                           Incorporatedherein by reference to Peoples’ Proxy Statement dated January 5, 2004.

****                    Incorporatedherein by reference to Peoples Quarterly Report on Form 10-Q for the quarterended March 31, 2003.

 

31

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**SIGNATURES**

 

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

 

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

 

 

Pursuant to therequirements of the Securities Exchange Act of 1934, as amended, this reporthas been signed below by the following persons on behalf of the registrant andin the capacities and on the dates indicated.

 

 
| /s/Jerry D.  Williams                          |   | December 29,  2004 |
|------------------------------------------------|--------|--------------------|
| Jerry D.  Williams                             |   |               |
| President,  Chief Executive                    |   |               |
|   Officer  and Director              |   |               |
| (principal  executive officer)                 |   |               |
|                                           |   |               |
|                                           |   |               |
| /s/Thomas J.  Noe                              |   | December 29,  2004 |
| Thomas J. Noe                                  |   |               |
| Treasurer  and Director                        |   |               |
|                                           |   |               |
|                                           |   |               |
| /s/Paul E.  Hasselbring                        |   | December 29,  2004 |
| Paul E.  Hasselbring                           |   |               |
| Chairman of  the Board and                     |   |               |
| Director                                       |   |               |
|                                           |   |               |
|                                           |   |               |
| /s/John E.  Rathkamp                           |   | December 29,  2004 |
| John E.  Rathkamp                              |   |               |
| Chief  Lending Officer, Secretary and Director |   |               |

 

32

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| /s/John L.  Buchanan                          |   | December 29,  2004 |
|-----------------------------------------------|--------|--------------------|
| John L.  Buchanan                             |   |               |
| Director                                      |   |               |
|                                          |   |               |
|                                          |   |               |
| /s/Donald L.  Hawke                           |   | December 29,  2004 |
| Donald L.  Hawke                              |   |               |
| Director                                      |   |               |
|                                          |   |               |
|                                          |   |               |
| /s/James R.  Van DeGrift                      |   | December 29,  2004 |
| James R. Van  DeGrift                         |   |               |
| Director                                      |   |               |
|                                          |   |               |
|                                          |   |               |
| /s/Nicholas  N. Nelson                        |   | December 29,  2004 |
| Nicholas N.  Nelson                           |   |               |
| Director                                      |   |               |
|                                          |   |               |
|                                          |   |               |
| /s/Teresa A.  O’Quinn                    |   | December 29,  2004 |
| Teresa A.  O’Quinn                       |   |               |
| Chief  Financial Officer                      |   |               |
| (principal  financial and accounting officer) |   |               |

 

33

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