**Exhibit 13**

 

**PEOPLESCOMMUNITY BANCORP, INC.**

 

**2005ANNUAL REPORT**

 

**TOSTOCKHOLDERS**

 

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**TABLEOF CONTENTS**

 
| ** **                                                                                  | ** ** | **Page** |
|---------------------------------------------------------------------------------------------|------------|----------|
|                                                                                        |       |     |
| President’s Letter to  Stockholders                                                    |       | 1        |
|                                                                                        |       |     |   |
| Business of Peoples  Community Bancorp, Inc.                                                |       | 2        |
|                                                                                        |       |     |   |
| Market Price of Peoples  Community Bancorp Common Shares and Related Stockholder Matters    |       | 3        |
|                                                                                        |       |     |   |
| Selected Consolidated  Financial and Other Data                                             |       | 4        |
|                                                                                        |       |     |   |
| Management’s Discussion  and Analysis of Financial Condition and Results of Operations |       | 6        |
|                                                                                        |       |     |   |
| Consolidated Financial  Statements:                                                         |       |     |   |
| Report of Registered Independent Public Accounting  Firm                                    |       | 20       |
| Consolidated  Statements of Financial Condition                                             |       | 21       |
| Consolidated  Statements of Earnings                                                        |       | 22       |
| Consolidated  Statements of Comprehensive Income                                            |       | 23       |
| Consolidated  Statements of Stockholders’ Equity                                       |       | 24       |
| Consolidated  Statements of Cash Flows                                                      |       | 25       |
| Notes  to Consolidated Financial Statements                                                 |       | 27       |
|                                                                                        |       |     |   |
| Directors and Executive  Officers                                                           |       | 59       |
|                                                                                        |       |     |   |
| Banking Locations                                                                           |       | 60       |
|                                                                                        |       |     |   |
| Stockholder Information                                                                     |       | 60       |

 

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DearStockholders:

 

On behalf of Peoples Community Bancorp, Inc., I am pleased topresent our Annual Report to Stockholders for fiscal year 2005. During fiscal2005 we continued to grow and expand our franchise consistent with ourpreviously stated plans and goals.  As aresult of acquisitions and internal growth, the Bank has grown significantlyfrom $416.0 million in total assets as of September 30, 2001 to $1.0billion in total assets as of September 30, 2005, with $612.2 million intotal deposits and $86.7 million in stockholders’ equity.

 

Fiscal year 2005 continued the Bank’s transition from a relatively smallthrift into a larger independent regional community bank.  The Bank has experienced continued costsassociated with this transformation.  Infiscal 2005, net earnings decreased $13,000, compared to fiscal year 2004.  The decrease in earnings resulted primarilyfrom the increase in general, administrative and other expenses, of which$722,000 was primarily due to an increase in employee compensation and benefits.  This increase was due to a significantexpansion in staffing levels, as well as the enhancement of our seniormanagement team to support growth in the overall infrastructure of theBank.  In addition, fifteen full-timeexperienced employees were obtained in conjunction with the acquisition ofAmerican State Corporation and its subsidiary American State Bank in June of2005. Also, on December 16, 2005 the Bank acquired PFS Bancrop, Inc.and its wholly owned subsidiary Peoples Federal Savings Bank of Aurora, Indianaadding an additional eighteen full-time employees and three office locations inthe Southeast Indiana market place. In conjunction with the American State Bankacquisition, we are anticipating the consolidation of two of the branches inthe area to improve efficiencies.  Theforegoing increases in expenses were partially offset by a $1.2 millionincrease in net interest income in fiscal 2005 compared to 2004, fueled bycontinued strong loan originations, despite the continued low interest rateenvironment.

 

We continued to experience asset growth with an increase of $117.5million, or 13.2% from September 30, 2004. This growth was primarily driven by an increase in loans of $105.2million or 17.6% of which the American State Bank acquisition accounted for$38.4 million.  We have continued todiversify our balance sheet with a loan portfolio of multi-family residentialloans, nonresidential real estate loans, construction loans and unsecuredcommercial loans.  These loans inherentlyhave a higher degree of risk than traditional one-to-four family lending and,as a result, the allowance for loan losses was increased by $2.7 million to atotal of $13.7 million during the year. The allowance for loan losses represented 1.72% of total loans and 70.7%of nonperforming loans at September 30, 2005, compared to 1.64% and182.9%, at September 30, 2004, respectively.  Although the provision for loan lossesremained the same for the twelve month period ended September 30, 2005compared to the same period in 2004, the Bank continues to make substantialprovisions to the allowance for loan losses due to the increase in the overallloan portfolio, in addition to elevated levels of classified assets andcharge-offs.

 

Deposits have increased from $233.1 million at September 30, 2001to $612.2 million at September 30, 2005. The Company continues to place an emphasis on deposit generation throughadditional branch locations and competitive market pricing.  Two new offices locations are under contractin Liberty Township in Butler County, Ohio and construction of one will becomplete and ready to open by the end of February 2006.

 

During fiscal 2005, we successfully completed a private stock offeringgenerating $10.3 million in net proceeds. We were very pleased with the participation by our shareholders and theinterest generated from the general public. The net proceeds from the offering, as well as continued earnings fromoperations, will facilitate our growth strategy and provide further financialflexibility.

 

As we look forward to 2006, we have entered into a definitive agreementto purchase Mercantile Savings Bank located in Kenwood, Ohio with total assetsat September 30, 2005 of $54.4 million and deposits of $44.7 million.  We consider this as a strategic enhancementto our branch network.  Subject toregulatory approval, we anticipate this transaction will close by the end of June 2006.  Also, in preparation for 2006 we have takenwhat we think are appropriate measures in adjustments to our balance sheet todeal with the increasing interest rate environment and challenging creditenvironment in which we find ourselves.

 

Over the past six years, we have structured our Bank to take advantageof the opportunities presented by our increasing market presence in the growthareas of the Tri-state region, and the potential for an increasing rateenvironment. Since our inception as a public company, we have endeavored totransform this Bank from a small thrift to a regional community bank.  After many years of hard work and developinga solid foundation for the Bank, it is with great anticipation that we look to2006 and the future to realize the results of our efforts through increasedearnings. We will continue to provide superior products and services to ourcustomers, which ultimately will enhance shareholder value.  On behalf of the Directors and Staff, we thankyou for your continued support.

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

 

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**PeoplesCommunity Bancorp, Inc.**

 

**BUSINESSOF PEOPLES COMMUNITY BANCORP, INC.**

 

Peoples CommunityBancorp, Inc., a Maryland corporation (“Peoples Bancorp” or the “Company”),is a bank holding company which owns all of the outstanding common shares ofPeoples Community Bank (“Peoples Bank” or the “Bank”), a federally charteredsavings bank.

 

TheCompany was formed in December 1999 in connection with the mutual to stockconversion of the Bank, and the sale of 1,190,000 shares of common stock todepositors and members of the community.  The Bank conducts its business from sixteenfull service offices in Hamilton, Warren and Butler counties in Southwest Ohioand Dearborn County in Southeast Indiana. The Bank’s business is conducted through an aggressive marketing andselling effort of its lending products and services to the communities in itsmarket area and through the continued development of innovative lendingprograms that give Peoples Bank a competitive advantage.  The Bank offers a wide variety of loanproducts, including single and multi-family residential loans, nonresidentialreal estate and land loans and construction loans.  In addition, the Bank invests insecurities.  The funds for the Bank’slending and investment activities are primarily provided by deposits and borrowings.  At September 30, 2005, the Company had $1.0billion in total assets, $612.2 million in deposits, $273.6 million inborrowings (excluding subordinated debentures) and $86.7 million ofstockholders’ equity.  The Company’sprincipal executive office is located at 6100 West Chester Road, P.O. Box1130, West Chester, Ohio 45071-1130.  TheCompany’s telephone number is (513) 870-3530.

 

Asa result of acquisitions and internal growth, the Company has grownsignificantly from $416.0 million in total assets as of September 30, 2001to $1.0 billion in total assets as of September 30, 2005.  Between the completion of the initial publicoffering in March 2000 and September 30, 2005, the Company acquired fourfinancial institutions with aggregate total assets as of the time ofacquisition of $304.3 million.  Inaddition, in September 2003, the Company purchased $32.8 million in loansand assumed $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 its marketarea.  Loan originations increased from$241.1 million in fiscal 2001, $261.6 million in fiscal 2002, $278.6 million infiscal 2003, and $289.5 million in fiscal 2004 to $337.0 million in fiscal2005.  Loans receivable, net increasedfrom $377.7 million at September 30, 2001 to $704.7 million at September 30,2005.    In addition, since September 30, 2000, theCompany has expanded its franchise through the opening of five full servicebranch offices. These new branch offices, as well as acquired branch offices,have expanded the Company’s market presence and facilitated its loan productiongrowth.  The Company’s loan growth hasbeen funded in part by deposits.  TheCompany has placed an emphasis on deposit generation both internally andthrough whole bank and branch acquisitions. Deposits have increased from $233.1 million at September 30, 2001to $612.2 million at September 30, 2005.

 

TheCompany completed the acquisition of PFS Bancorp, Inc, the parent company ofPeoples Federal Savings Bank on December 16, 2005.  This acquisition continues the expansion ofthe Company in Southeast Indiana and is accounted for using the purchase methodof accounting.

 

TheCompany intends to continue to pursue growth both internally and throughstrategic acquisitions.  The Companybelieves its internal growth will continue to come from loan originations, and,in particular, multi-family residential loans, nonresidential real estate andland loans and construction loans.  Theseloan types complement its single-family lending, diversify its loan portfolioand are expected to increase its yield on interest-earning assets.  The Company’s primary funding vehicle willcontinue to be deposits.  The Companyintends to increase its deposit generation by expanding its products andservices, increasing its branch network and cross-selling its current andprospective business customers.  Theexpansion of its market share through selective branching and opportunisticacquisitions will depend on market and economic conditions.

 

2

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**PeoplesCommunity Bancorp, Inc.**

 

**MARKETPRICE OF PEOPLES COMMUNITY BANCORP COMMON SHARESAND RELATED STOCKHOLDER MATTERS**

 

Peoples Bancorp is subjectto regulation, supervision and examination by the Federal Reserve Bank ofCleveland.  Peoples Bank is subject toregulation, supervision and examination by the Office of Thrift Supervision(the “OTS”) as its primary federal regulator and the Federal Deposit InsuranceCorporation (the “FDIC”), which administers the Savings Association InsuranceFund and the Bank Insurance Fund.  TheFDIC insures deposits in Peoples Bank up to applicable limits.

 

Peoples Bancorp’s common shares have been listedon the Nasdaq National Market (“Nasdaq”) since March 29, 2000, under thesymbol “PCBI.”  Presented below are thehigh and low trading prices for Peoples Bancorp’s common shares for the threeyears ended September 30, 2005. Such prices do not include retail financial markups, markdowns orcommissions.  Information relating toprices has been obtained from Nasdaq.  Inaddition, Peoples Bancorp initiated a quarterly cash dividend of $.15 per shareeffective with the quarter ended June 30, 2004.  Peoples Bancorp did not pay any dividends infiscal 2003.

 
| **Fiscal  2005**         | ** ** | **High** | ** ** | **Low** | ** ** | **Dividends** | ** ** |
|--------------------------|------------|----------|------------|---------|------------|---------------|------------|
|                     |       |     |       |    |       |          |       |
| Quarter ended:           |       |     |       |    |       |          |       |
| September 30,  2005 |       | $        | 22.27      |    | $          | 19.80         |       | $ | .15 |   |
| June 30,  2005      |       | 24.10    |       | 18.77   |       | .15           |       |
| March 31,  2005     |       | 24.18    |       | 22.57   |       | .15           |       |
| December 31,  2004  |       | 24.00    |       | 22.08   |       | .15           |       |
|                          |            |          |            |         |            |               |            |  |  |  |

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

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

 

As of December 27, 2005, Peoples Bancorphad 4,424,449 common shares outstanding held of record by approximately 1,178 stockholders.  The number of stockholders does not reflectthe number of persons or entities who may hold stock in nominee or “street”name through brokerage firms or others.

 

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**PeoplesCommunity Bancorp, Inc.**

 

**SELECTEDCONSOLIDATED FINANCIAL AND OTHER DATA**

 

The following selected consolidated financialand other data does not purport to be complete and is qualified in its entiretyby reference to the more detailed financial information, including theConsolidated Financial Statements and related notes, appearing elsewhereherein.

 
| **Selected  Consolidated Financial**                               | ** ** | **At September 30,** | ** ** |
|--------------------------------------------------------------------|------------|---------------------------|------------|
| **Condition  Data:****(1)**                                        | ** ** | **2005**                  | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** | **2001** | ** ** |
| ** **                                                         | ** ** | **(In thousands)**        | ** ** |
|                                                               |       |                      |       |   |   |   |   |   |   |   |   |
| Total assets                                                       |       | $                         | 1,006,654  |   | $ | 889,121 |   | $ | 738,683 |   | $ | 581,632 |   | $ | 415,970 |   |
| Cash and cash  equivalents                                         |       | 17,061                    |       | 14,430 |   | 10,244 |   | 26,637 |   | 14,595 |   |
| Investment securities  available for sale                          |       | 7,650                     |       | 1,069 |   | 2,156 |   | 1,231 |   | 1,364 |   |
| Mortgage-backed securities  available for sale                     |       | 199,716                   |       | 228,085 |   | 133,828 |   | 18,763 |   | — |   |
| Loans receivable, net                                              |       | 704,714                   |       | 599,466 |   | 554,351 |   | 504,012 |   | 377,727 |   |
| Deposits                                                           |       | 612,199                   |       | 472,436 |   | 455,900 |   | 369,080 |   | 233,063 |   |
| Advances  from the Federal Home Loan Bank and other borrowed money |       | 301,920                   |       | 324,500 |   | 232,400 |   | 165,450 |   | 140,000 |   |
| Stockholders’ equity  (2)                                     |       | 86,700                    |       | 75,775 |   | 46,699 |   | 42,990 |   | 38,778 |   |
|                                                                    |            |                           |            |  |  |  |  |  |  |  |  |  |  |  |  |  |

 
| **Selected  Consolidated Operating**                     | ** ** | **Year Ended September 30,**         | ** ** |
|----------------------------------------------------------|------------|-------------------------------------------|------------|
| **Data:****(1)**                                         | ** ** | **2005**                                  | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** | **2001** | ** ** |
| ** **                                               | ** ** | **(In thousands, except per share data)** | ** ** |
|                                                     |       |                                      |       |   |   |   |   |   |   |   |   |
| Interest income                                          |       | $                                         | 47,748     |   | $ | 40,171 |   | $ | 37,169 |   | $ | 33,712 |   | $ | 25,897 |   |
| Interest expense                                         |       | 26,204                                    |       | 19,813 |   | 18,072 |   | 15,598 |   | 15,543 |   |
| Net interest income                                      |       | 21,544                                    |       | 20,358 |   | 19,097 |   | 18,114 |   | 10,354 |   |
|                                                     |       |                                      |       |   |   |   |   |   |   |   |   |
| Provision for losses on  loans                           |       | 3,600                                     |       | 3,600 |   | 4,198 |   | 5,265 |   | 2,449 |   |
| Net  interest income after provision for losses on loans |       | 17,944                                    |       | 16,758 |   | 14,899 |   | 12,849 |   | 7,905 |   |
| Other income                                             |       | 2,114                                     |       | 1,181 |   | 1,251 |   | 2,509 |   | 4,847 |   |
| General, administrative  and other expense               |       | 15,827                                    |       | 13,750 |   | 10,504 |   | 9,817 |   | 8,124 |   |
|                                                     |       |                                      |       |   |   |   |   |   |   |   |   |
| Earnings before income  taxes                            |       | 4,231                                     |       | 4,189 |   | 5,646 |   | 5,541 |   | 4,628 |   |
| Federal income taxes                                     |       | 1,375                                     |       | 1,320 |   | 1,922 |   | 2,392 |   | 2,304 |   |
| Net earnings                                             | ** ** | **$**                                     | **2,856**  | ** ** | **$** | **2,869** | ** ** | **$** | **3,724** | ** ** | **$** | **3,149** | ** ** | **$** | **2,324** | ** ** |
|                                                     |       |                                      |       |   |   |   |   |   |   |   |   |
| Earnings per share                                       |       |                                      |       |   |   |   |   |   |   |   |   |
| Basic                                                    | ** ** | **$**                                     | **0.73**   | ** ** | **$** | **0.92** | ** ** | **$** | **1.51** | ** ** | **$** | **1.29** | ** ** | **$** | **1.08** | ** ** |
| Diluted                                                  | ** ** | **$**                                     | **0.72**   | ** ** | **$** | **0.91** | ** ** | **$** | **1.48** | ** ** | **$** | **1.27** | ** ** | **$** | **1.08** | ** ** |

 

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(See footnotes on next page)

 

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| ** **                                                               | ** ** | **At or for the year ended September 30,** | ** ** |
|--------------------------------------------------------------------------|------------|-------------------------------------------------|------------|
| **Key  Operating Ratios:****(1)**                                        | ** ** | **2005**                                        | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** | **2001** | ** ** |
|                                                                     |       |                                            |       |   |   |   |   |   |   |   |   |
| **Performance Ratios: (1)**                                              |       |                                            |       |   |   |   |   |   |   |   |   |
| Return  on average assets                                                |       | .30                                             | %          | .34 | % | .59 | % | .67 | % | .65 | % |
| Return  on average equity                                                |       | 3.65                                            |       | 4.97 |   | 8.28 |   | 8.09 |   | 6.46 |   |
| Average  interest-earning assets to average interest-bearing liabilities |       | 106.63                                          |       | 104.82 |   | 105.83 |   | 107.27 |   | 110.13 |   |
| Interest  rate spread (2)                                                |       | 2.25                                            |       | 2.40 |   | 2.96 |   | 3.74 |   | 2.57 |   |
| Net  interest margin (2)                                                 |       | 2.45                                            |       | 2.52 |   | 3.13 |   | 3.99 |   | 3.03 |   |
| General,  administrative and other expense to average assets             |       | 1.69                                            |       | 1.61 |   | 1.65 |   | 2.07 |   | 2.26 |   |
|                                                                     |       |                                            |       |   |   |   |   |   |   |   |   |
| **Asset Quality Ratios:**                                                |       |                                            |       |   |   |   |   |   |   |   |   |
| Nonperforming  assets to total assets at end of period (3)               |       | 2.07                                            | %          | .71 | % | 1.16 | % | 1.30 | % | .19 | % |
| Allowance  for loan losses to nonperforming loans at end of period       |       | 66.32                                           |       | 182.87 |   | 134.15 |   | 102.19 |   | 467.69 |   |
| Allowance  for loan losses to total loans at end of period               |       | 1.72                                            |       | 1.64 |   | 1.57 |   | 1.37 |   | .87 |   |
|                                                                     |       |                                            |       |   |   |   |   |   |   |   |   |
| **Capital and Other Ratios:**                                            |       |                                            |       |   |   |   |   |   |   |   |   |
| Average  stockholders’ equity to average assets                     |       | 8.35                                            | %          | 6.77 | % | 7.07 | % | 8.22 | % | 10.00 | % |
| Tangible  stockholders’ equity to tangible assets                   |       | 9.75                                            |       | 8.38 |   | 7.51 |   | 8.75 |   | 8.60 |   |
| Tier  1 capital to risk-weighted assets                                  |       | 14.29                                           |       | 13.79 |   | 11.94 |   | 13.69 |   | 14.01 |   |

 

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(1)                                  Allratios are based on average monthly balances during the respective periodsprior to fiscal year ended September 2004. With respect to the fiscal year ended September 30, 2004 and 2005,all ratios are based on average daily balances.

 

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

 

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

 

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**PeoplesCommunity Bancorp, Inc.**

 

**MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION**

**AND RESULTS OF OPERATION**

 

###### **General**

###### ** **

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

 

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

 

Duringthe period between September 30, 2003 and September 30, 2005, totalassets increased $268.0 million or 36.3% from $738.7 million to $1.0billion.  Peoples Bancorp’s growth hasbeen funded primarily by deposits and supplemented by borrowings from theFederal Home Loan Bank.   Net income forfiscal 2005, 2004, and 2003 amounted to $2.9 million, $2.9 million, and $3.7million, respectively.  Net income forfiscal 2005 remained consistent with fiscal 2004 as Peoples Bancorp continuesto pursue its growth and expansion goals.

 

**CriticalAccounting Policies**

 

The“Management’s Discussion and Analysis of Financial Condition and Results ofOperations,” as well as disclosures found elsewhere in this annual report, arebased upon the Company’s consolidated financial statements, which are preparedin accordance with generally accepted accounting principles in the UnitedStates (“US GAAP”).  The preparation ofthese financial statements requires management to make estimates and judgmentsthat affect the reported amounts of assets, liabilities, revenues andexpenses.  Several factors are consideredin determining whether or not a policy is critical in the preparation offinancial statements.  These factorsinclude, among other things, whether the estimates are significant to thefinancial statements, the nature of the estimates, the ability to readilyvalidate the estimates with other information, including third parties oravailable prices,  sensitivity of theestimates to changes in economic conditions, and whether alternative accountingmethods may be utilized under US GAAP.

 

Materialestimates that are particularly susceptible to significant change in the nearterm relate to the determination of the allowance for loan losses and goodwillimpairment.  Actual results could differfrom those estimates.

 

**Allowancefor Loan Losses.**  The procedures for assessing the adequacy ofthe allowance for loan losses reflect management’s evaluation of credit riskafter consideration of all information available.  In developing this assessment, managementmust rely on estimates and exercise judgment regarding matters where theultimate outcome is unknown, such as economic factors, developments affectingcompanies in specific industries and issues with respect to singleborrowers.  Depending on changes incircumstances, future assessments of credit risk may yield materially differentresults, which may require an increase or a decrease in the allowance for loanlosses.

 

Theallowance is regularly reviewed by management to determine whether the amountis considered adequate to absorb probable losses.  This evaluation includes specific lossestimates on certain individually reviewed loans, statistical loss estimatesfor loan pools that are based on historical loss experience, and general lossestimates that are based upon the size, quality, and concentrationcharacteristics of the various loan portfolios, adverse situations that

 

6

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mayaffect a borrower’s ability to repay, and current economic and industryconditions.   Also considered as part ofthat judgment is a review of the Bank’s trends in delinquencies and loanlosses, as well as trends in delinquencies and losses for the region andnationally, and economic factors.

 

**Goodwill.**  TheCompany has developed procedures to test goodwill for impairment on an annualbasis using September 30 financial data. The evaluation of possible impairment is outsourced to a third party.  This evaluation is based on the analysis setforth below.

 

Thetest involves assigning tangible assets and liabilities, identified intangibleassets and goodwill of the Bank (which is the Company’s reporting unit asdefined under SFAS No. 142) and comparing the fair value of this reportingunit to its carrying value including goodwill. The value is determined assuming a freely negotiated transaction betweena willing buyer and a willing seller, neither being under any compulsion to buyor sell and both having reasonable knowledge of relevant facts.  The third party selected by managementutilizes the following common approaches to valuing business combinationtransactions involving financial institutions to derive the fair value of thereporting unit:  (1) the comparabletransactions approach which is specifically based on earnings, book value,assets and deposit premium multiples received in recent sales of comparablebank franchises; and (2) the discounted cash flow approach.  The application of the valuation techniquestakes into account the reporting unit’s operating history, the current marketenvironment and future prospects.  As ofthe most recent evaluation, the only reporting unit carrying goodwill is theBank.

 

Ifthe fair value of a reporting unit exceeds its carrying amount, goodwill of thereporting unit is considered not impaired and no second step is required.  If the fair value does not exceed thecarrying amount, a second test is required to measure the amount of goodwillimpairment.  The second test of theoverall goodwill impairment compares the implied fair value of the reportingunit goodwill with the carrying amount of the goodwill.  The impairment loss shall equal the excess ofcarrying value over fair value.  Anyimpairment loss would require an immediate charge to earnings.

 

Aftereach testing period, the third party compiles a summary of the test that isthen provided to the audit committee for review.

 

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

 

Certainstatements are made in this document as to what management expects may happenin the future.  These statements usuallycontain the words “believe,” “estimate,” “project,” “expect,” “anticipate,” “intend”or similar expressions.  Because thesestatements look to the future, they are based on management’s currentexpectations and beliefs.  Actual resultsor events may differ materially from those reflected in the forward-lookingstatements.  Management’s currentexpectations and beliefs as to future events are subject to change at any time,and no assurances can be provided that the future events will actually occur.  All forward-looking statements in thisdocument are based on information available to us on the date this document isfiled.  We do not intend to, and assumeno responsibility for, updating any forward-looking statements that may be madeby us or on our behalf in this document or otherwise.

 

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**Peoples Community Bancorp, Inc.**

 

# **AVERAGE BALANCES, NET INTERESTINCOME, YIELDS EARNED AND RATES PAID**

#  

Thefollowing table presents for the periods indicated the total dollar amount ofinterest income from average interest-earning assets and the resultant yields,as well as interest expense on average interest-bearing liabilities, expressedboth in dollars and rates, and the net interest margin. Average balances forfiscal year end September 30, 2004 and 2005 are based on daily balances. Forfiscal year end September 30, 2003, average balances are based on monthlybalances.  Management does not believethat the monthly averages differ significantly from the daily average balances.

 
| ** **                                                               | ** ** | **Year ended September 30,** | ** **  |
|--------------------------------------------------------------------------|------------|-----------------------------------|-------------|
| ** **                                                               | ** ** | **2005**                          | ** **  | **2004** | ** ** | **2003** | ** ** |
| ** **                                                               | ** ** | **Average**                       | ** **  | **Interest** | ** ** | ** ** | ** ** | **Average** | ** ** | **Interest** | ** ** | ** ** | ** ** | **Average** | ** ** | **Interest** | ** ** | ** ** | ** ** |
| ** **                                                               | ** ** | **outstanding**                   | ** **  | **earned/** | ** ** | **Yield/** | ** ** | **outstanding** | ** ** | **earned/** | ** ** | **Yield/** | ** ** | **outstanding** | ** ** | **earned/** | ** ** | **Yield/** | ** ** |
| ** **                                                               | ** ** | **balance**                       | ** **  | **paid** | ** ** | **rate** | ** ** | **balance** | ** ** | **paid** | ** ** | **rate** | ** ** | **balance** | ** ** | **paid** | ** ** | **rate** | ** ** |
|                                                                     |       | **(Dollars in thousands)**        |        |
| Interest-earning  assets:                                                |       |                              |        |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Loans  receivable (1)                                                    |       | $                                 | 655,256     |   | $ | 41,628 |   | 6.35 | % | $ | 588,251 |   | $ | 34,712 |   | 5.90 | % | $ | 520,647 |   | $ | 34,952 |   | 6.71 | % |
| Mortgage-backed  securities                                              |       | 204,500                           |        | 5,292 |   | 2.59 |   | 203,638 |   | 4,908 |   | 2.41 |   | 62,688 |   | 1,568 |   | 2.50 |   |
| Investment  securities (2)                                               |       | 13,992                            |        | 664 |   | 4.75 |   | 12,509 |   | 480 |   | 3.84 |   | 12,079 |   | 479 |   | 3.97 |   |
| Interest-earning  deposits                                               |       | 5,327                             |        | 164 |   | 3.08 |   | 4,175 |   | 71 |   | 1.70 |   | 15,089 |   | 170 |   | 1.13 |   |
|                                                                     |       |                              |        |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Total  interest-earning assets                                           |       | 879,075                           |        | 47,748 |   | 5.43 |   | 808,573 |   | 40,171 |   | 4.97 |   | 610,503 |   | 37,169 |   | 6.09 |   |
|                                                                     |       |                              |        |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Non-interest-earning  assets                                             |       | 57,477                            |        |   |   |   |   | 43,683 |   |   |   |   |   | 25,514 |   |   |   |   |   |
|                                                                     |       |                              |        |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Total  assets                                                            | ** ** | **$**                             | **936,552** | ** ** | ** ** | ** ** | ** ** |   | **$** | **852,256** |   |   |   |   |   | **$** | **636,017** |   |   |   |   |   |
|                                                                     |       |                              |        |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Interest-bearing  liabilities:                                           |       |                              |        |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Savings  and checking accounts                                           |       | $                                 | 190,901     |   | 4,250 |   | 2.23 |   | $ | 151,613 |   | 2,790 |   | 1.84 |   | $ | 135,640 |   | 2,666 |   | 1.97 |   |
| Money  market deposit accounts                                           |       | 25,019                            |        | 306 |   | 1.22 |   | 33,482 |   | 407 |   | 1.22 |   | 30,653 |   | 604 |   | 1.97 |   |
| Certificates  of deposit                                                 |       | 295,636                           |        | 10,671 |   | 3.61 |   | 273,428 |   | 8,275 |   | 3.03 |   | 223,390 |   | 7,990 |   | 3.58 |   |
| FHLB  advances and other borrowings                                      |       | 296,527                           |        | 9,934 |   | 3.35 |   | 300,324 |   | 7,702 |   | 2.56 |   | 174,677 |   | 6,263 |   | 3.59 |   |
| Subordinated  debentures                                                 |       | 16,299                            |        | 1,043 |   | 6.40 |   | 12,566 |   | 639 |   | 5.09 |   | 12,500 |   | 549 |   | 4.39 |   |
|                                                                     |       |                              |        |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Total  interest-bearing liabilities                                      |       | 824,382                           |        | 26,204 |   | 3.18 |   | 771,413 |   | 19,813 |   | 2.57 |   | 576,860 |   | 18,072 |   | 3.13 |   |
|                                                                     |       |                              |        |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Non-interest-bearing  liabilities                                        |       | 33,933                            |        |   |   |   |   | 23,107 |   |   |   |   |   | 14,202 |   |   |   |   |   |
|                                                                     |       |                              |        |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Total  liabilities                                                       |       | 858,315                           |        |   |   |   |   | 794,520 |   |   |   |   |   | 591,062 |   |   |   |   |   |
|                                                                     |       |                              |        |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Stockholders’  equity                                               |       | 78,237                            |        |   |   |   |   | 57,736 |   |   |   |   |   | 44,955 |   |   |   |   |   |
|                                                                     |       |                              |        |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Total  liabilities and stockholders’ equity                         | ** ** | **$**                             | **936,552** | ** ** | ** ** | ** ** | ** ** |   | **$** | **852,256** |   |   |   |   |   | **$** | **636,017** |   |   |   |   |   |
|                                                                     |       |                              |        |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Net  interest income                                                     | ** ** | ** **                        | ** **  | **$** | **21,544** | ** ** | ** ** |   |   |   | **$** | **20,358** |   |   |   |   |   | **$** | **19,097** |   |   |   |
|                                                                     |       |                              |        |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Interest  rate spread                                                    | ** ** | ** **                        | ** **  | ** ** | ** ** | **2.25** | **%** |   |   |   |   | **2.40** | **%** |   |   |   |   | **2.96** | **%** |
|                                                                     |       |                              |        |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   | ** ** |
| Net  interest margin (3)                                                 | ** ** | ** **                        | ** **  | ** ** | ** ** | **2.45** | **%** |   |   |   |   | **2.52** | **%** |   |   |   |   | **3.13** | **%** |
|                                                                     |       |                              |        |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   | ** ** |
| Average  interest-earning assets to average interest-bearing liabilities | ** ** | ** **                        | ** **  | ** ** | ** ** | **106.63** | **%** |   |   |   |   | **104.82** | **%** |   |   |   |   | **105.83** | **%** |

 

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(1)                                  Includesnon-accruing loans.

 

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

 

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

 

8

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# Rate/Volume Analysis

 

Thefollowing table shows the extent to which changes in interest rates and changesin volume of interest-related assets and liabilities affected Peoples Bancorp’sinterest income and expense during the periods indicated.  For each category of interest-earning assetsand interest-bearing liabilities, information is provided on changesattributable to (i) changes in volume (change in volume multiplied byprior year rate), and (ii) changes in rate (change in rate multiplied byprior year volume).  The combined effectof changes in both rate and volume has been allocated proportionately to thechange due to rate and the change due to volume.

 
| ** **                          | ** ** | **Year ended September 30,** | ** ** |
|-------------------------------------|------------|-----------------------------------|------------|
| ** **                          | ** ** | **2005 vs. 2004**                 | ** ** | ** ** | ** ** | **2004 vs. 2003** | ** ** | ** ** | ** ** |
| ** **                          | ** ** | **Increase**                      | ** ** | ** ** | ** ** | **Increase** | ** ** | ** ** | ** ** |
| ** **                          | ** ** | **(decrease)**                    | ** ** | ** ** | ** ** | **(decrease)** | ** ** | ** ** | ** ** |
| ** **                          | ** ** | **due to**                        | ** ** | ** ** | ** ** | **due to** | ** ** | ** ** | ** ** |
| ** **                          | ** ** | **Rate**                          | ** ** | **Volume** | ** ** | **Total** | ** ** | **Rate** | ** ** | **Volume** | ** ** | **Total** | ** ** |
| ** **                          | ** ** | **(In thousands)**                | ** ** |
| Interest-earning  assets:           |       |                              |       |   |   |   |   |   |   |   |   |   |   |
| Loans  receivable                   |       | $                                 | 2,816      |   | $ | 4,100 |   | $ | 6,916 |   | $ | (4,480 | ) | $ | 4,240 |   | $ | (240 | ) |
| Mortgage-backed  securities         |       | 363                               |       | 21 |   | 384 |   | (56 | ) | 3,396 |   | 3,340 |   |
| Investment  securities (1)          |       | 123                               |       | 61 |   | 184 |   | (16 | ) | 17 |   | 1 |   |
| Interest-earning  deposits          |       | 69                                |       | 24 |   | 93 |   | 61 |   | (160 | ) | (99 | ) |
| Total  interest-earning assets      |       | 3,371                             |       | 4,206 |   | 7,577 |   | (4,491 | ) | 7,493 |   | 3,002 |   |
|                                |       |                              |       |   |   |   |   |   |   |   |   |   |   |
| Interest-bearing  liabilities:      |       |                              |       |   |   |   |   |   |   |   |   |   |   |
| Savings  and checking accounts      |       | 656                               |       | 804 |   | 1,460 |   | (182 | ) | 306 |   | 124 |   |
| Money  market deposit accounts      |       | —                            |       | (101 | ) | (101 | ) | (248 | ) | 51 |   | (197 | ) |
| Certificates  of deposit            |       | 1,683                             |       | 713 |   | 2,396 |   | (1,340 | ) | 1,625 |   | 285 |   |
| FHLB  advances and other borrowings |       | 2,328                             |       | (96 | ) | 2,232 |   | (2,167 | ) | 3,606 |   | 1,439 |   |
| Subordinated  debentures            |       | (152                              | )          | 556 |   | 404 |   | 88 |   | 2 |   | 90 |   |
| Total  interest-bearing liabilities |       | 4,515                             |       | 1,876 |   | 6,391 |   | (3,849 | ) | 5,590 |   | 1,741 |   |
|                                |       |                              |       |   |   |   |   |   |   |   |   |   |   |
| Increase in net  interest income    | ** ** | **$**                             | **(1,144** | **)** | **$** | **2,330** | ** ** | **$** | **1,186** | ** ** | **$** | **(642** | **)** | **$** | **1,903** | ** ** | **$** | **1,261** | ** ** |

 

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(1)                                  Includes Federal Home Loan Bank stock andcertificates of deposit at other institutions.

 

9

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**Discussion of Financial Condition Changes from September 30,2004 to September 30, 2005**

 

AtSeptember 30, 2005, Peoples Bancorp’s total assets amounted to $1.0billion, an increase of $117.5 million, or 13.2%, compared to the $889.1 milliontotal at September 30, 2004.  Theincrease in assets was comprised primarily of a $105.2 million increase in loansreceivable and $15.0 million of bank-owned life insurance purchased in 2005.The increase in assets was funded by growth in deposits of $139.8 million, andproceeds from a private stock offering totaling $10.3 million.

 

Liquidassets (i.e. cash and interest-bearing deposits) totaled $17.1 million at September 30,2005, an increase of $2.6 million, or 18.2%, compared to the amount at September 30,2004.  Investment securities, includingU.S. treasury and agency investments, totaled $7.7 million at September 30,2005, an increase of $6.6 million from September 30, 2004 levels.

 

Mortgage-backedsecurities totaled $199.7 million at September 30, 2005, a decrease of$28.4 million, or 12.4%, over the amount at September 30, 2004.  The Company purchased $88.1 million inadjustable rate mortgage-backed securities during fiscal 2005 as a tool tomanage interest rate risk, as well as to provide interest income with minimalcredit risk, due to the implicit guarantee of government sponsoredagencies.  During fiscal 2005, the Companysold $41.9 million of mortgage-backed securities to take advantage of strongmarket prices, and recorded principal repayments on mortgage-backed securitiestotaled $76.5 million.  The proceeds fromthe sale and repayment of mortgage-backed securities were generally used topurchase additional mortgage-backed securities and fund loan originationsduring the period.

 

Loansreceivable totaled $704.7 million at September 30, 2005, an increase of $105.2million, or 17.6%, over September 30, 2004 levels. Loan disbursementsamounted to $337.0 million during fiscal 2005, which were partially offset byprincipal repayments of $263.6 million and loans and participations soldtotaling $1.1 million.  The overallgrowth in the loan portfolio during the year was comprised primarily of $61.3million in loans secured by residential real estate, $49.7 million in loanssecured by nonresidential real estate and land, and $10.7 million in commercialand consumer loans.  Over the past fourfiscal years, the Bank has placed an increasing emphasis on multi-familyresidential loans, nonresidential real estate and land loans, constructionloans, unsecured commercial loans and consumer loans.  As a result, as a percentage of the totalloan portfolio, single-family residential loans have decreased from 57.8% at September 30,2001 to 31.8% at September 30, 2005, while multi-family residential loans,nonresidential real estate and land loans, construction loans, commercial loansand consumer loans have increased during the same time period from 8.7% to15.5%, 15.7% to 16.7%, 15.0% to 27.8%, 2.3% to 5.4% and 0.5% to 2.8%,respectively.  Nonresidential real estatelending and unsecured commercial lending are generally considered to involve ahigher degree of risk than residential real estate lending due to therelatively larger loan amounts and the effect of general economic conditions onthe successful operation of the related business and/or income-producingproperties.  Peoples Bank has endeavoredto reduce such risk by evaluating the credit history and past performance ofthe borrower, the location of the real estate, the quality of the borrowers’management, the debt service ratio, the quality and characteristics of theincome stream generated by the business or the property and appraisalssupporting the property’s valuation, as applicable.

 

Theallowance for loan losses totaled $13.7 million at September 30, 2005, anincrease of $2.7 million, or 24.2%, compared to the allowance at September 30,2004.  Loans charged-off amounted to $1.1million during fiscal 2005 and $3.6 million was added through the provision forlosses on loans, due primarily to the overall growth in the loan portfolio fromSeptember 30, 2004, and the changes in the composition of the loanportfolio and the level of charge-offs and nonperforming loans.

 

Theallowance for loan losses represented 1.72% and 1.64% of total loans at September 30,2005 and 2004, respectively.  Theallowance for loan losses represented 70.7% and 182.9% of nonperforming loansat September 30, 2005 and 2004, respectively.  Nonperforming assets totaled $20.9 millionand $6.3 million at September 30, 2005 and 2004, respectively.  Nonperforming assets at September 30,2005 consisted of $6.7 million of loans secured by single-family residentialreal estate, $2.3 million of loans secured by multi-family residential realestate, $3.8 million of loans secured by nonresidential real estate and land,$2.6 million in construction loans, $4.0 million of commercial and consumerloans, $1.3 million of loans 90 days or more past due and still accruing, and$207,000 in foreclosed real estate. The Bank’s management continues to aggressivelypursue the collection and resolution of all delinquent loans.  In addition, approximately $2.8 million ofnon-performing loans were obtained in the acquisition of American State Bank inJune 2005. The increase in nonperforming loans was due in large part toloan concentrations in a small number of borrowers, primarily with respect tosingle-family investment properties and unsecured commercial loans.  These borrowers have experienced financialdifficulties due to a decline in the local real estate market and the volume oftheir respective inventories.

 

10

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Non-accrualloans secured by single-family residential real estate consist of $2.4 millionin owner-occupied residences with an average balance of $103,000, and $4.3million in non-owner occupied residential real estate, with an average balanceof $81,000.   Five borrowers represent$3.2 million of the non-owner occupied single-family residential non-accrualloans, with the largest borrower owing $1.4 million.

 

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

 

Approximately$4.8 million of the non-performing loans consist of a series of unsecured andreal estate secured loans made to a small group of real estate investors whoare in the process of liquidating their assets.

 

Managementhas considered these loan concentrations as a part of its overall evaluation ofthe adequacy of the Bank’s allowance for loan losses.  Although management believes that itsallowance for loan losses at September 30, 2005 was appropriate based uponthe available facts and circumstances, there can be no assurance that additionsto such allowance will not be necessary in future periods, which wouldadversely affect the Bank’s results of operations.

 

Depositstotaled $612.2 million at September 30, 2005, an increase of $139.8 million,or 29.6%, over the total at September 30, 2004.  Total demand, transaction and savingsdeposits increased by $39.0 million to $250.6 million at September 30,2005,  while total certificates of depositincreased by $100.8 million to $361.6 million at September 30, 2005.  A total of $58.0 million in deposits wereobtained in the acquisition of American State Bancorp, Inc. in June 2005.  The additional increase in deposits wasprimarily attributable to management’s efforts to maintain deposit growththrough competitive pricing strategies on all deposit products, which includedadvertised special rates on certificates of deposit.  Proceeds from deposit growth were generallyused to fund new loan originations, to purchase mortgage-backed securities andto repay advances from the Federal Home Loan Bank.

 

Advancesfrom the Federal Home Loan Bank and other borrowings totaled $301.9 million at September 30,2005, a decrease of $35.5 million, or 10.5%, compared to September 30,2004 totals.  In June 2005, a whollyowned trust of the Company issued $15.0 million of subordinateddebentures.  The net proceeds were usedfor general corporate purposes.  Alsoduring the fiscal year, the Bank experienced a net reduction of $54.0 millionin overnight advances from the Federal Home Loan Bank.  The overnight advances are repriced daily andare utilized to handle the daily cash flow of the Bank.

 

Stockholders’equity totaled $86.7 million at September 30, 2005, an increase of $10.9 million,or 14.4%, over the amount at September 30, 2004.  The increase resulted primarily from $10.3million in proceeds received for 500,000 shares of common stock sold inconnection with the Company’s private stock offering completed in August 2005,net earnings of $2.9 million, the amortization effects of the stock benefitplans totaling $797,000 and a $219,000 decrease in net unrealized losses onavailable for sale securities which were partially offset by dividends paid oncommon stock totaling $2.4 million and shares acquired for the Employee Stock OwnershipPlan totaling $962,000.

 

11

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**Comparisonof Results of Operations for the Fiscal Years Ended September 30, 2005 and2004**

 

# **General**

 

Theinclusion of the accounts of American State Bank, which the Company acquired inJune 2005, in a transaction accounted for using the purchase method ofaccounting, contributed to the increases in the level of income and expenseduring the fiscal year ended September 30, 2005, compared to fiscal 2004.  In accordance with the purchase method ofaccounting, the consolidated statement of earnings for the fiscal year ended September 30,2004 was not restated for the acquisition.

 

PeoplesBancorp recorded net earnings of $2.9 million for both fiscal years ended September 30,2005 and September 30, 2004.  Netinterest income increased by $1.2 million, or 5.8% to $21.6 million and totalother income increased by $933,000, or 79.0% to $2.1 million for the fiscalyear ended September 30, 2005 as compared to the fiscal year ended September 30,2004.  These increases in income weresubstantially offset by an increase of $2.1 million, or 15.1%, to $15.8 millionin general, administrative and other expenses for the fiscal year ended September 30,2005.

 

# **Net Interest Income**

 

Totalinterest income amounted to $47.7 million for the fiscal year ended September 30,2005, a $7.6 million, or 18.9%, increase over fiscal 2004.  The increase was due to a $70.5 million, or 8.7%,increase in average interest-earning assets, coupled with a 46 basis pointincrease in the average yield year to year.

 

Interestincome on loans totaled $41.6 million for the fiscal year ended September 30,2005, an increase of $6.9 million, or 19.9%, from fiscal 2004.  This increase was primarily due to a $67.0million, or 11.4%, increase in the average portfolio balance outstanding yearto year, coupled with a 45 basis point increase in the weighted-average yield,to 6.35% for fiscal 2005. The increase in the average balance was due tocontinued strong loan origination activity, particularly with respect tosingle-family residential loans and nonresidential real estate and landloans.  The increase in the Bank’s yieldon its loan portfolio was due primarily to an increase in market interestrates. Interest income on mortgage-backed securities totaled $5.3 million forfiscal 2005, an increase of $384,000, or 7.8%, over fiscal 2004, due to a$862,000, or 0.4%, increase in the average balance outstanding year to year andan 18 basis point increase in the weighted-average yield.  Interest income on investment securities andinterest-bearing deposits and other totaled $828,000, an increase of $277,000,or 50.3%, due primarily to a $2.6 million, or 15.8%, increase in the averagebalance of the related assets, in conjunction with a 99 basis point increase inthe weighted-average yield year to year.

 

Interestexpense on deposits totaled $15.2 million for the fiscal year ended September 30,2005, an increase of $3.8 million, or 32.7%, over the $11.5 million recorded infiscal 2004.  The increase was dueprimarily to a $53.0 million, or 11.6%, increase in the average balance ofdeposits outstanding year to year, coupled with increase in the weighted-averagecost of deposits of 48 basis points, to 2.98% for fiscal 2005.  Certificates of deposits increased by $22.2million in average balance outstanding year to year, with a 58 basis pointincrease in the average rate.  Theincrease in the average cost of deposits was primarily due to the increase inmarket interest rates, as well as advertised special rates on certificates ofdeposits throughout the year.

 

Interestexpense on borrowings totaled $11.0 million for fiscal 2005, an increase of$2.6 million, or 31.6%, compared to fiscal 2004, due primarily to 84 basispoint increase in the average cost of borrowings, to 3.51% for fiscal 2005,partially offset with a $64,000 decrease in the average balance of borrowingsoutstanding.  The increase in the averagecost resulted primarily from the increase in interest rates on overnightadjustable-rate advances from the Federal Home Loan Bank, which the Bankutilizes primarily to manage the daily cash flow.

 

12

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Asa result of the foregoing changes in interest income and interest expense, netinterest income increased by $1.2 million, or 5.8%, during the fiscal yearended September 30, 2005, compared to fiscal 2004.  The interest rate spread amounted to 2.25%for fiscal 2005 compared to 2.40% for fiscal 2004.  The net interest margin totaled 2.45% and2.52% for the fiscal years ended September 30, 2005 and 2004,respectively.

 

# **Provision for Losses on Loans**

 

Aprovision for losses on loans is charged to earnings to bring the totalallowance for loan losses to a level considered appropriate by management basedon historical loss experience, the volume and type of lending conducted by theBank, the status of past due principal and interest payments, general economicconditions, particularly as such conditions relate to the Bank’s market area,and other factors related to the collectibility of the Bank’s loanportfolio.  After considering the abovefactors, management recorded a provision for losses on loans totaling $3.6million for both fiscal years ended September 30, 2005 and 2004.  The provision recorded during the fiscal 2005period was predicated primarily upon the $120.9 million, or 18.0%, of growth inthe gross loan portfolio, as well as the increase in loans secured bymulti-family and nonresidential real estate, the origination of approximately $35.8million in unsecured commercial lines of credit during fiscal 2005 and the increasein the level of nonperforming loans year to year.  Multi-family loans, nonresidential realestate loans and unsecured commercial lines of credit are generally consideredto involve a higher degree of risk than one-to-four family residentiallending.  There can be no assurance thatthe allowance for loan losses will be sufficient to cover losses onnonperforming loans in the future.

 

# **Other Income**

 

Otherincome totaled $2.1 million for the fiscal year ended September 30, 2005,an increase of $933,000, or 79.0%, compared to fiscal 2004.  The increase was due primarily to a $722,000increase in gain on the sale of mortgage-backed and investment securities, a$419,000, or 53.0%, increase in other operating income, and $158,000 in incomefrom bank-owned life insurance, which was partially offset by a $336,000 decreasein gain on sale of branch premises, deposits and loans.  The increase in other operating incomeresulted primarily from $95,000 undistributed earnings in Columbia Bancorp, Inc.and increases in fees related to the growth of loan and deposit transactionsfrom year to year.

 

# **General, Administrative and Other Expense**

 

General,administrative and other expense totaled $15.8 million for the fiscal yearended September 30, 2005, an increase of $2.1 million, or 15.1%, comparedto fiscal 2004.  This increase resulted primarilyfrom a $722,000, or 9.6%, increase in employee compensation and benefits, a$550,000, or 27.1%, increase in occupancy and equipment expense, a $168,000, or23.8%, increase in franchise tax, and a $778,000, or 31.8%, increase in otheroperating expense, offset by a $141,000, or 13.3%, decrease in data processingexpense.

 

TheBank employed approximately 169 and 142 full-time employees as of September 30,2005 and 2004, respectively. Fifteen full-time employees were added in conjunctionwith the acquisition of American State Corporation in June, 2005. The increasein employee compensation and benefits was also due to the increase in staffinglevels to support growth in the overall infrastructure of the Company, as wellas normal merit increases and increases in other employee benefit costs.

 

The increase in occupancy and equipment expenseprimarily reflects increased depreciation and maintenance costs associated withthe Company’s new branch offices, including the three offices in SoutheastIndiana acquired with the purchase of American State Corporation in June 2005.  Theincrease in franchise taxes reflects the continued growth of the equity in the Bank.  The increase in other operating expense wasdue primarily to an increase in costs related to maintaining real estateacquired through foreclosure, an increase in costs for compliance with theSarbanes Oxley Act, and an increase in other operating costs associated withthe Company’s overall growth year to year. The decrease in data processingexpenses was due to nonrecurring costs of approximately $640,000 incurred infiscal year 2004 directly associated with a full data conversion to a new coreprocessor in June 2004.

 

# **Federal Income Taxes**

 

PeoplesBancorp recorded a tax provision totaling $1.4 million for the fiscal yearended September 30, 2005, compared to a provision of $1.3 million forfiscal 2004.  The effective tax rateswere 32.4% and 31.5% for the fiscal years ended September 30, 2005 and2004, respectively.

 

13

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**Comparisonof Results of Operations for the Fiscal Years Ended September 30, 2004 and2003**

 

# **General**

 

Theinclusion of the accounts of two branch locations of Ameriana Bank and Trust,which the Company acquired in September 2003, in a transaction accountedfor using the purchase method of accounting, contributed to the increases inthe level of income and expense during the fiscal year ended September 30,2004, compared to fiscal 2003.  Inaccordance with the purchase method of accounting, the consolidated statementof earnings for the fiscal year ended September 30, 2003 was not restatedfor the acquisition.

 

PeoplesBancorp recorded net earnings of $2.9 million for the fiscal year ended September 30,2004, a decrease of $855,000, or 23.0%, compared to fiscal 2003.  The decrease in earnings resulted primarilyfrom a $3.2 million increase in general, administrative and other expense and a$70,000 decrease in other income, which were partially offset by a $1.3 millionincrease in net interest income, a $598,000 decrease in the provision forlosses on loans and a $602,000 decrease in federal income taxes.

 

# **Net Interest Income**

 

Totalinterest income amounted to $40.2 million for the fiscal year ended September 30,2004, a $3.0 million, or 8.1%, increase over fiscal 2003.  The increase was due to a $198.1 million, or32.4%, increase in average interest-earning assets, partially offset by a 112basis point decline in the average yield year to year.

 

Interestincome on loans totaled $34.7 million for the fiscal year ended September 30,2004, a decrease of $240,000, or .7%, from fiscal 2003.  This decrease was due primarily to an 81basis point decline in the weighted-average yield, to 5.90% for fiscal 2004,which was partially offset by a $67.6 million, or 13.0%, increase in theaverage portfolio balance outstanding year to year. The increase in the averagebalance was due to continued strong loan origination activity, particularlywith respect to single-family residential loans and nonresidential real estateand land loans.  The decrease in the Bank’syield on its loan portfolio was due primarily to a decrease in market interestrates, through the repricing of its adjustable-rate loans and refinancing ofthe portfolio at lower rates. Interest income on mortgage-backed securitiestotaled $4.9 million for fiscal 2004, an increase of $3.3 million, or 213.0%,over fiscal 2003, due primarily to a $141.0 million, or 224.8%, increase in theaverage balance outstanding year to year. The Company purchased $147.0 million in adjustable rate mortgage-backedsecurities during fiscal 2004 as a tool to manage interest rate risk, as wellas to provide interest income with minimal credit risk, due to the implicitguarantee of government sponsored agencies.** **Interest income on investmentsecurities and interest-bearing deposits and other totaled $551,000, a decreaseof $98,000, or 15.1%, due primarily to an $10.5 million, or 38.6%, decrease inthe average balance of the related assets, partially offset by a 91 basis pointincrease in the weighted-average yield year to year.

 

Interestexpense on deposits totaled $11.5 million for the fiscal year ended September 30,2004, an increase of $212,000, or 1.9%, over the $11.3 million recorded infiscal 2003.  The increase was dueprimarily to a $68.9 million, or 17.7%, increase in the average balance ofdeposits outstanding year to year, partially offset by a decrease in theweighted-average cost of deposits of 39 basis points, to 2.50% for fiscal2004.  The increase in the averagebalance was due to the acquisition of $55.6 million in deposits from anotherfinancial institution, as well as management’s efforts to maintain depositgrowth through competitive pricing strategies on all deposit products.  The decrease in the average cost of depositswas primarily due to the decrease in market interest rates and an $8.4 millionor 90.4% increase in non-interest bearing checking accounts year to year.

 

Interestexpense on borrowings totaled $8.3 million for fiscal 2004, an increase of $1.5million, or 22.4%, compared to fiscal 2003, due primarily to a $125.6 million,or 71.9%, increase in the average balance of borrowings outstanding, which waspartially offset by a 103 basis point decrease in the average cost ofborrowings, to 2.56% for fiscal 2004. The decrease in the average cost resulted from the utilization ofovernight adjustable-rate advances from the Federal Home Loan Bank to provide amore favorable interest rate. The increase in the average balance was due tothe use of borrowings as an additional source of funds for investment inmortgage-backed securities and the origination of loans.

 

14

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Asa result of the foregoing changes in interest income and interest expense, netinterest income increased by $1.3 million, or 6.6%, during the fiscal year endedSeptember 30, 2004, compared to fiscal 2003.  The interest rate spread amounted to 2.40%for fiscal 2004 compared to 2.96% for fiscal 2003.  The net interest margin totaled 2.52% and3.13% for the fiscal years ended September 30, 2004 and 2003, respectively.

 

# **Provision for Losses on Loans**

 

Aprovision for losses on loans is charged to earnings to bring the totalallowance for loan losses to a level considered appropriate by management basedon historical loss experience, the volume and type of lending conducted by theBank, the status of past due principal and interest payments, general economicconditions, particularly as such conditions relate to the Bank’s market area,and other factors related to the collectibility of the Bank’s loanportfolio.  After considering the abovefactors, management recorded a provision for losses on loans totaling $3.6million and $4.2 million for the fiscal years ended September 30, 2004 and2003, respectively.  The provisionrecorded during the fiscal 2004 period was predicated primarily upon the $45.1million, or 8.1%, of growth in the gross loan portfolio, as well as theincrease in loans secured by multi-family and nonresidential real estate, theorigination of approximately $23.1 million in unsecured commercial lines ofcredit during fiscal 2004 and an increase in the level of charge-offs year toyear.  Such types of lending aregenerally considered to involve a higher degree of risk than one- tofour-family residential lending.  Therecan be no assurance that the allowance for loan losses will be sufficient tocover losses on nonperforming loans in the future.

 

# **Other Income**

 

Otherincome totaled $1.2 million for the fiscal year ended September 30, 2004,a decrease of $70,000, or 5.6%, compared to fiscal 2003.  The decrease was due primarily to a $474,000,or 96.1%, decrease in gain on the sale of mortgage-backed and investmentsecurities, which was partially offset by a $223,000 increase in gain on saleof branch premises, deposits and loans and a $181,000, or 29.7%, increase inother operating income during fiscal 2004. The increase in other operating income resulted primarily from increasesin fees related to the growth of loan and deposit transactions from year toyear. During fiscal 2004 the Bank sold two former branch locations for a totalgain of $352,000.

 

# **General, Administrative and Other Expense**

 

General,administrative and other expense totaled $13.8 million for the fiscal yearended September 30, 2004, an increase of $3.2 million, or 30.9%, comparedto fiscal 2003.  This increase resultedprimarily from a $2.3 million, or 44.3%, increase in employee compensation andbenefits, a $103,000, or 5.35%, increase in occupancy and equipment expense, a$111,000, or 18.7%, increase in franchise tax, a $433,000, or 69.4%, increasein data processing, and a $292,000, or 13.6%, increase in other operatingexpense.

 

Aspreviously noted, the addition of the accounts of the Ameriana branches, whichthe Company acquired in September 2003, contributed to the increases inthe level of expenses during the fiscal year ended September 30, 2004,compared to fiscal 2003. A full year of expenses on these acquired assets andliabilities was recognized in fiscal 2004 compared to a portion of one month infiscal 2003. Of the $3.2 million increase in general, administrative and otherexpenses recorded in fiscal 2004, approximately $1.1 million was directlyassociated with the inclusion of accounts, staff and branches acquired in theAmeriana acquisition.

 

TheBank employed approximately 142 and 117 full-time employees as of September 30,2004 and 2003, respectively. Sixteen full-time employees were obtained in thetwo branch office acquisitions from Ameriana in September, 2003. The increasein employee compensation and benefits was due to the increase in staffinglevels to support growth in the overall infrastructure of the Company, as wellas normal merit increases and increases in health insurance and other benefitcosts.

 

15

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#  

The increase in occupancy and equipment expenseprimarily reflects increased depreciation and maintenance costs associated withthe Company’s new branch offices. Two newoffices replacing existing branch buildings were opened in the third and fourthquarter of fiscal 2003. These projects reflect the effects of theCompany’s ongoing commitment to expand its branch office network throughacquisition and construction of new branch facilities.  The increase in data processing reflectscontinued growth in loan and deposit accounts, as well as expenses related tothe conversion of systems for the accounts acquired from Ameriana and theoverall costs associated with a full data conversion to a new core processor inJune 2004.  Nonrecurring costsassociated with these conversions totals approximately $630,000, with $150,000of these costs to be incurred during the first quarter of fiscal 2005.  The increase in franchise taxes reflects thecontinued growth and profitability of the Company.  The increase in other operating expense was dueprimarily to an increase in costs related to maintaining real estate acquiredthrough foreclosure, and an increase in other operating costs associated withthe Company’s overall growth year to year.

 

During January 2004, the Company enteredinto an agreement to change its data processing provider, based upon anine-month evaluation of available alternatives.  The conversion to this new system wascompleted in June 2004.  The newsystem provides an enhanced framework for expanded products and services andcontinued growth.

 

# **Federal Income Taxes**

 

PeoplesBancorp recorded a tax provision totaling $1.3 million for the fiscal yearended September 30, 2004, compared to a provision of $1.9 million forfiscal 2003.  The effective tax rateswere 31.5% and 34.0% for the fiscal years ended September 30, 2004 and2003, respectively.  The decrease in thetax provision from year to year was due to lower pre-tax income in 2004 and adecrease in the effective tax rate.

 

**Exposure to Changes in Interest Rates**

 

PeoplesBancorp’s ability to maintain net interest income depends upon its ability toearn a higher yield on interest-earning assets than the rates paid on depositsand borrowings.  Peoples Bank’s abilityto maintain a positive spread between the interest earned on assets and theinterest paid on deposits and borrowings can be adversely affected when marketrates of interest fluctuate. Historically long-term, fixed-rate mortgage loans made up a significantportion of Peoples Bank’s interest-earning assets.  A predominance of long-term fixed rate loanswould make Peoples Bank particularly susceptible to the risk of changinginterest rates, particularly in a rising rate environment.  However, during fiscal 2000, Peoples Bankbegan to emphasize the origination of adjustable-rate mortgage (“ARM”) loansand shorter-term loans such as non-residential real estate loans, constructionloans, commercial loans and consumer loans, in an effort to improve itsinterest rate risk position.  As aresult, at September 30, 2005, approximately $241.0 million, or 34.2%, ofthe Company’s loan portfolio consisted of loans with fixed rates of interestand approximately $463.7 million, or 65.8%, had adjustable rates ofinterest.  In addition, during fiscalyear 2005, management purchased $88.7 million in adjustable-ratemortgage-backed securities as a tool to manage liquidity and interest raterisk, as well as to provide interest income with minimal credit risk, due tothe implicit guarantee of government sponsored agencies.  Further, nonresidential real-estate and landloans, construction loans, commercial loans and consumer loans totaled $419.0million or 52.8% of the total loan portfolio at September 30, 2005compared to $140.5 million or 33.5% of the total loan portfolio at September 30,2001.  These loans typically have higherrates and/or shorter terms to maturity compared to single-family residentialmortgage loans.

 

16

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**Quantitative Analysis**

 

The OTS provides a quarterly report on thepotential impact of interest rate changes upon the market value of portfolioequity.  Management reviews the quarterlyreports from the OTS that show the impact of changing interest rates on netportfolio value.  Net portfolio value (“NPV”)is the difference between incoming and outgoing discounted cash flows fromassets, liabilities, and off-balance sheet contracts.  The application of the methodology attemptsto quantify interest rate risk and the change in NPV which would result from atheoretical 100, 200 and 300 basis point increase in market interest rates anda theoretical 100 and 200 basis point decrease in market interest rates.

 

Thefollowing tables present Peoples Bank’s net portfolio value as of September 30,2005 and 2004, as calculated by the OTS, based on information provided to theOTS by Peoples Bank.

 
| **September 30, 2005** | ** ** |
|-----------------------------|------------|
| ** **                  | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | **Change in** | ** ** |
| **Change in**               | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | **Net Portfolio** | ** ** | **Net Portfolio** | ** ** |
| **Interest Rates**          | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | **Value as a % of** | ** ** | **Value as a % of** | ** ** |
| **In Basis Points**         | ** ** | ** ** | ** ** | **Net Portfolio** | ** ** | ** ** | ** ** | **Portfolio Value** | ** ** | **Portfolio Value** | ** ** |
| **(Rate Shock)**            | ** ** | **Amount** | ** ** | **Value $ Change** | ** ** | **% Change** | ** ** | **of Assets** | ** ** | **of Assets** | ** ** |
|                        |       | **(Dollars in thousands)** |   |   |   |   |   |   |   |
|                        |       |   |   |   |   |   |   |   |   |   |   |
| 300                         | bp         |   | $ | 112,415 |   | $ | (3,045 | ) | (3 | )% | 11.41 | % | (1 | )bp |
| 200                         |       |   | 114,090 |   | (1,371 | ) | (1 | ) | 11.48 |   | 6 |   |
| 100                         |       |   | 115,121 |   | (340 | ) | 0 |   | 11.49 |   | 6 |   |
| 0                           |       |   | 115,461 |   | — |   | — |   | 11.43 |   | — |   |
| (100                        | )          |   | 112,699 |   | (2,762 | ) | (2 | ) | 11.08 |   | (35 | ) |
| (200                        | )          |   | 106,454 |   | (9,007 | ) | (8 | ) | 10.40 |   | (102 | ) |
|                             |            |  |  |  |  |  |  |  |  |  |  |  |  |  |

 
| **September 30, 2004** | ** ** |
|-----------------------------|------------|
| ** **                  | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | **Change in** | ** ** |
| **Change in**               | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | **Net Portfolio** | ** ** | **Net Portfolio** | ** ** |
| **Interest Rates**          | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | **Value as a % of** | ** ** | **Value as a % of** | ** ** |
| **In Basis Points**         | ** ** | ** ** | ** ** | **Net Portfolio** | ** ** | ** ** | ** ** | **Portfolio Value** | ** ** | **Portfolio Value** | ** ** |
| **(Rate Shock)**            | ** ** | **Amount** | ** ** | **Value $ Change** | ** ** | **% Change** | ** ** | **of Assets** | ** ** | **of Assets** | ** ** |
|                        |       | **(Dollars in thousands)** |   |   |   |   |   |   |   |
|                        |       |   |   |   |   |   |   |   |   |   |   |
| 300                         | bp         |   | $ | 81,064 |   | $ | (8,030 | ) | (9 | )% | 9.21 | % | (59 | )bp |
| 200                         |       |   | 86,333 |   | (2,761 | ) | (3 | ) | 9.68 |   | (12 | ) |
| 100                         |       |   | 89,396 |   | 302 |   | 0 |   | 9.92 |   | 12 |   |
| 0                           |       |   | 89,094 |   | — |   | — |   | 9.80 |   | — |   |
| (100                        | )          |   | 84,957 |   | (4,137 | ) | (5 | ) | 9.29 |   | (51 | ) |
|                             |            |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

Asshown by the 2005 table above, a 100 basis point increase in interest rateswould result in a slight decrease in Peoples Bank’s net portfolio value basedon OTS calculations as of September 30, 2005.  A 200 and 300 basis point increase wouldresult in somewhat larger decreases in net portfolio value.  The 2005 table also indicates a decrease innet portfolio value at a 100 and 200 basis point decrease in interestrates.  The instantaneous shock asindicated in the table is subject to periodic interest rate adjustments andcaps as dictated by the underlying notes.

 

17

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

 

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

 

(2)                                  Increasing originations of nonresidentialreal estate mortgage loans, which generally have higher yields and shorterterms to maturity than single-family residential mortgage loans;

 

(3)                                  Originating home equity lines of credit withinterest rates that adjust monthly based on an index;

 

(4)                                  Originating unsecured lines of credit with interestrates that adjust monthly based on an index;

 

(5)                                  Purchasing adjustable-rate mortgage-backedsecurities;

 

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

 

(7)                                  Developing a strongcore deposit base.

 

**Liquidity and Capital Resources**

 

Peoples,like other financial institutions, is required under applicable federalregulations to maintain sufficient funds to meet deposit withdrawals, loancommitments and expenses.  Liquid assetsconsist of cash and interest-bearing deposits in other financial institutions,investments and mortgage-backed securities. Management monitors and assesses liquidity needs daily in order to meetdeposit withdrawals, loan commitments and expenses.

 

Theprimary sources of funds included deposits, principal and interest repaymentson loans and on mortgage-backed securities and borrowings.  The Bank’s first preference is to fundliquidity needs with core deposits, if available, in the marketplace.  Core deposits include noninterest-bearing andinterest-bearing retail deposits.  Otherfunding sources include Federal Home Loan Bank advances.

 

Liquidassets as of September 30, 2005, included cash and deposits in otherfinancial institutions totaling $17.1 million, in addition to investmentsecurities and mortgage-backed securities available for sale at a total marketvalue of $207.4 million.  These liquidassets as well as the ability to borrow funds, sell loan participations and attractdeposits through local pricing or through brokers will allow the Bank to meetits obligations and commitments as indicated in the table below.   Any future excess liquidity generated viaoperations will be utilized to repay borrowings or purchase investment andmortgage-backed securities.

 

18

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Thefollowing table sets forth information regarding the Bank’s obligations andcommitments to make future payments under contract as of September 30,2005.

 
| ** **                                                     | ** ** | **Payments due by period** | ** **  |
|----------------------------------------------------------------|------------|----------------------------|-------------|
| ** **                                                     | ** ** | **Less**                   | ** **  | ** ** | ** ** | ** ** | ** ** | **More** | ** ** | ** ** | ** ** |
| ** **                                                     | ** ** | **than**                   | ** **  | **1-3** | ** ** | **3-5** | ** ** | **than** | ** ** | ** ** | ** ** |
| ** **                                                     | ** ** | **1 year**                 | ** **  | **years** | ** ** | **years** | ** ** | **5 years** | ** ** | **Total** | ** ** |
|                                                           |       | **(In thousands)**         |        |
|                                                           |       |                       |        |   |   |   |   |   |   |   |   |
| Contractual  obligations:                                      |       |                       |        |   |   |   |   |   |   |   |   |
| Operating  lease obligations                                   |       | $                          | 58          |   | $ | 88 |   | $ | 77 |   | $ | 93 |   | $ | 316 |   |
| Contracts  to purchase office premises                         |       | —                     |        | — |   | — |   | — |   | — |   |
| Advances  from the Federal Home Loan Bank and other borrowings |       | 119,982                    |        | 1,500 |   | — |   | 152,087 |   | 273,569 |   |
| Certificates  of deposit                                       |       | 167,893                    |        | 105,354 |   | 88,329 |   | — |   | 361,576 |   |
|                                                           |       |                       |        |   |   |   |   |   |   |   |   |
| Amount of commitments  expiring per period                     |       |                       |        |   |   |   |   |   |   |   |   |
| Commitments  to originate loans:                               |       |                       |        |   |   |   |   |   |   |   |   |
| Consumer  lines of credit                                      |       | 36,776                     |        | — |   | — |   | — |   | 36,776 |   |
| Commercial  lines of credit                                    |       | 15,414                     |        | — |   | — |   | — |   | 15,414 |   |
| One-to-four  family and multi-family loans                     |       | 8,254                      |        | — |   | — |   | — |   | 8,254 |   |
| Non-residential  real estate and land loans                    |       | —                     |        | — |   | — |   | — |   | — |   |
| Commitments  to fund commercial or other:                      |       |                       |        |   |   |   |   |   |   |   |   |
| Letters  of credit                                             |       | 8,848                      |        | — |   | — |   | — |   | 8,848 |   |
|                                                           |       |                       |        |   |   |   |   |   |   |   |   |
| Total  contractual obligations                                 | ** ** | **$**                      | **357,225** | ** ** | **$** | **106,942** | ** ** | **$** | **88,406** | ** ** | **$** | **152,180** | ** ** | **$** | **704,753** | ** ** |

 

PeoplesBank is required to maintain regulatory capital sufficient to meet tangible,core and risk-based capital ratios of at least 1.5%, 4.0% and 8.0%, respectively.  At September 30, 2005, Peoples Bankexceeded each of the capital requirements with tangible, core and risk-basedcapital ratios of 9.7%, 9.7% and 14.6%, respectively.

 

**Impact of Inflation and Changing Prices**

 

Theconsolidated financial statements and related financial data presented hereinregarding Peoples Bancorp have been prepared in accordance with accountingprinciples generally accepted in the United States of America, which generallyrequire the measurement of financial position and operating results in terms ofhistorical dollars, without considering changes in relative purchasing powerover time due to inflation.  Unlike mostindustrial companies, virtually all of Peoples Bancorp’s assets and liabilitiesare monetary in nature.  As a result,interest rates generally have a more significant impact on Peoples Bancorp’sperformance than does the effect of inflation. Interest rates do not necessarily move in the same direction or in thesame magnitude as the prices of goods and services, since such prices areaffected by inflation to a larger extent than interest rates.

 

19

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**REPORT OF REGISTERED INDEPENDENT PUBLIC ACCOUNTING FIRM**

 

 

**Report of Registered Independent Public Accounting Firm**

 

AuditCommittee, Board of Directors and Stockholders

PeoplesCommunity Bancorp, Inc.

WestChester, Ohio

 

Wehave audited the consolidated statement of financial condition of PeoplesCommunity Bancorp, Inc. as of September 30, 2005 and 2004, and the relatedconsolidated statements of earnings, comprehensive income, stockholders’ equity and cash flows for each of thetwo years in the period ended September 30, 2005. These consolidated financial statements are the responsibility of theCorporation’smanagement.  Our responsibility is toexpress an opinion on these consolidated financial statements based on ouraudit.  The financial statements ofPeoples Community Bancorp, Inc. as of any for the year ended September 30,2003,  were audited by other accountantswhose report dated October 30, 2003, expressed an unqualified opinion on thosestatements.

 

Weconducted our audits in accordance with standards of the Public CompanyAccounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtainreasonable assurance about whether the financial statements are free ofmaterial misstatement.  An audit includesexamining, on a test basis, evidence supporting the amounts and disclosures inthe financial statements.  An audit alsoincludes assessing the accounting principles used and significant estimatesmade by management, as well as evaluating the overall financial statementpresentation.  We believe that our auditsprovide a reasonable basis for our opinion.

 

Inour opinion, the financial statements referred to above present fairly, in allmaterial respects, the consolidated financial position of Peoples CommunityBancorp, Inc. as of September 30, 2005 and 2004, and the consolidatedresults of its operations and its cash flows for each of the two years in theperiod ended September 30, 2005, in conformity with accountingprinciples generally accepted in the United States of America.

 

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

 

20

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**PEOPLESCOMMUNITY BANCORP, INC.**

 

**CONSOLIDATEDSTATEMENTS OF FINANCIAL CONDITION**

 

September 30, 2005 and 2004

(In thousands,except share data)

 
| ** **                                                                                                                                               | ** ** | **2005**   | ** **    | **2004**   | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------|---------------|------------|------------|
|                                                                                                                                                     |       |       |          |       |       |
| **ASSETS**                                                                                                                                               |       |       |          |       |       |
| ** **                                                                                                                                               |       |       |          |       |       |
| Cash and due from banks                                                                                                                                  |       | $          | 10,787        |       | $          | 10,807 |   |
| Interest-bearing  deposits in other financial institutions                                                                                               |       | 6,274      |          | 3,623      |       |
| Cash  and cash equivalents                                                                                                                               |       | 17,061     |          | 14,430     |       |
|                                                                                                                                                     |       |       |          |       |       |
| Securities designated  as available for sale                                                                                                             |       | 207,366    |          | 229,154    |       |
| Loans receivable - net                                                                                                                                   |       | 704,714    |          | 599,466    |       |
| Office premises and  equipment                                                                                                                           |       | 23,967     |          | 17,816     |       |
| Real estate acquired  through foreclosure                                                                                                                |       | 207        |          | 301        |       |
| Federal Home Loan Bank  stock                                                                                                                            |       | 11,871     |          | 10,841     |       |
| Accrued interest  receivable                                                                                                                             |       | 4,774      |          | 3,599      |       |
| Bank-owned life  insurance                                                                                                                               |       | 15,158     |          | —     |       |
| Prepaid expenses and  other assets                                                                                                                       |       | 5,161      |          | 3,320      |       |
| Goodwill                                                                                                                                                 |       | 10,028     |          | 6,089      |       |
| Intangible Assets                                                                                                                                        |       | 1,743      |          | —     |       |
| Deferred federal income  taxes                                                                                                                           |       | 4,604      |          | 4,105      |       |
|                                                                                                                                                     |       |       |          |       |       |
| Total  assets                                                                                                                                            | ** ** | **$**      | **1,006,654** | ** ** | **$**      | **889,121** |   |
| ** **                                                                                                                                               | ** ** | ** ** | ** **    | ** ** | ** ** |
| **LIABILITIES AND STOCKHOLDERS’ EQUITY**                                                                                                            |       |       |          |       |       |
|                                                                                                                                                     |       |       |          |       |       |
| Deposits                                                                                                                                                 |       | $          | 612,199       |       | $          | 472,436 |   |
| Advances from the  Federal Home Loan Bank                                                                                                                |       | 273,569    |          | 324,500    |       |
| Subordinated debentures                                                                                                                                  |       | 28,351     |          | 12,887     |       |
| Accrued interest  payable                                                                                                                                |       | 845        |          | 228        |       |
| Other liabilities                                                                                                                                        |       | 4,990      |          | 3,295      |       |
|                                                                                                                                                     |       |       |          |       |       |
| Total  liabilities                                                                                                                                       |       | 919,954    |          | 813,346    |       |
|                                                                                                                                                     |       |       |          |       |       |
| Commitments and  contingent liabilities                                                                                                                  |       | —     |          | —     |       |
|                                                                                                                                                     |       |       |          |       |       |
| Stockholders’ equity                                                                                                                                |       |       |          |       |       |
| Common  stock - 15,000,000 shares of $.01 par value authorized; 4,424,449 and  3,898,910 shares issued at September 30, 2005 and 2004, respectively |       | 44         |          | 39         |       |
| Additional  paid-in capital                                                                                                                              |       | 62,872     |          | 51,901     |       |
| Retained  earnings                                                                                                                                       |       | 25,362     |          | 24,891     |       |
| Shares  acquired by stock benefit plan                                                                                                                   |       | (1,464     | )             | (723       | )          |
| Accumulated  comprehensive loss                                                                                                                          |       | (114       | )             | (333       | )          |
| Total  stockholders’ equity                                                                                                                         |       | 86,700     |          | 75,775     |       |
|                                                                                                                                                     |       |       |          |       |       |
| Total  liabilities and stockholders’ equity                                                                                                         | ** ** | **$**      | **1,006,654** | ** ** | **$**      | **889,121** |   |

 

The accompanying notesare an integral part of these statements.

 

21

----

 

**PEOPLESCOMMUNITY BANCORP, INC.**

 

**CONSOLIDATEDSTATEMENTS OF EARNINGS**

 

Years ended September 30,2005, 2004 and 2003

(In thousands,except share data)

 
| ** **                                                  | ** ** | **2005**   | ** ** | **2004**   | ** ** | **2003**   | ** ** |
|-------------------------------------------------------------|------------|------------|------------|------------|------------|------------|------------|
|                                                        |       |       |       |       |       |       |       |
| Interest income                                             |       |       |       |       |       |       |       |
| Loans                                                       |       | $          | 41,628     |       | $          | 34,712     |       | $ | 34,952 |   |
| Mortgage-backed  securities                                 |       | 5,292      |       | 4,908      |       | 1,568      |       |
| Investment  securities                                      |       | 664        |       | 480        |       | 479        |       |
| Interest-bearing  deposits and other                        |       | 164        |       | 71         |       | 170        |       |
| Total  interest income                                      |       | 47,748     |       | 40,171     |       | 37,169     |       |
|                                                        |       |       |       |       |       |       |       |
| Interest expense                                            |       |       |       |       |       |       |       |
| Deposits                                                    |       | 15,226     |       | 11,472     |       | 11,260     |       |
| Borrowings                                                  |       | 10,978     |       | 8,341      |       | 6,812      |       |
| Total  interest expense                                     |       | 26,204     |       | 19,813     |       | 18,072     |       |
|                                                        |       |       |       |       |       |       |       |
| Net  interest income                                        |       | 21,544     |       | 20,358     |       | 19,097     |       |
|                                                        |       |       |       |       |       |       |       |
| Provision for losses on  loans                              |       | 3,600      |       | 3,600      |       | 4,198      |       |
|                                                        |       |       |       |       |       |       |       |
| Net  interest income after provision for losses on loans    |       | 17,944     |       | 16,758     |       | 14,899     |       |
|                                                        |       |       |       |       |       |       |       |
| Other income                                                |       |       |       |       |       |       |       |
| Gain  on sale of investments and mortgage-backed securities |       | 741        |       | 19         |       | 493        |       |
| Gain  (loss) on sale of branch premises, deposits and loans |       | (58        | )          | 371        |       | 148        |       |
| Income  from bank-owned life insurance                      |       | 158        |       | —     |       | —     |       |
| Other  operating                                            |       | 1,273      |       | 791        |       | 610        |       |
| Total  other income                                         |       | 2,114      |       | 1,181      |       | 1,251      |       |
|                                                        |       |       |       |       |       |       |       |
| General, administrative  and other expense                  |       |       |       |       |       |       |       |
| Employee  compensation and benefits                         |       | 8,235      |       | 7,513      |       | 5,206      |       |
| Occupancy  and equipment                                    |       | 2,579      |       | 2,029      |       | 1,926      |       |
| Franchise  taxes                                            |       | 873        |       | 705        |       | 594        |       |
| Data  processing                                            |       | 916        |       | 1,057      |       | 624        |       |
| Other  operating                                            |       | 3,224      |       | 2,446      |       | 2,154      |       |
| Total  general, administrative and other expense            |       | 15,827     |       | 13,750     |       | 10,504     |       |
|                                                        |       |       |       |       |       |       |       |
| Earnings  before income taxes                               |       | 4,231      |       | 4,189      |       | 5,646      |       |
|                                                        |       |       |       |       |       |       |       |
| Federal income taxes                                        |       |       |       |       |       |       |       |
| Current                                                     |       | 1,945      |       | 2,265      |       | 2,800      |       |
| Deferred                                                    |       | (570       | )          | (845       | )          | (878       | )          |
| Total  federal income taxes                                 |       | 1,375      |       | 1,320      |       | 1,922      |       |
|                                                        |       |       |       |       |       |       |       |
| NET  EARNINGS                                               | ** ** | **$**      | **2,856**  | ** ** | **$**      | **2,869**  | ** ** | **$** | **3,724** |   |
|                                                        |       |       |       |       |       |       |       |
| EARNINGS  PER SHARE                                         |       |       |       |       |       |       |       |
| Basic                                                       | ** ** | **$**      | **.73**    | ** ** | **$**      | **.92**    | ** ** | **$** | **1.51** |   |
|                                                        | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |       |
| Diluted                                                     | ** ** | **$**      | **.72**    | ** ** | **$**      | **.91**    | ** ** | **$** | **1.48** |   |

 

The accompanying notesare an integral part of these statements.

 

22

----

 

**PEOPLESCOMMUNITY BANCORP, INC.**

 

**CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME**

 

Years ended September 30, 2005, 2004 and2003

(In thousands)

 
| ** **                                                                                                                                                      | ** ** | **2005** | ** ** | **2004**   | ** ** | **2003**  | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|----------|------------|------------|------------|-----------|------------|
|                                                                                                                                                            |       |     |       |       |       |      |       |
| Net earnings                                                                                                                                                    |       | $        | 2,856      |       | $          | 2,869     |       | $ | 3,724 |   |
|                                                                                                                                                            |       |     |       |       |       |      |       |
| Other comprehensive  income, net of tax:                                                                                                                        |       |     |       |       |       |      |       |
| Unrealized  holding gains (losses) on securities during the year, net of tax effects  (benefits) of $365, $177, and $(220) in 2005, 2004 and 2003, respectively |       | 708      |       | 369        |       | (427      | )          |
|                                                                                                                                                            |       |     |       |       |       |      |       |
| Reclassification  adjustment for realized gains included in earnings, net of tax benefits of  $(252), $(6) and $(168) in 2005, 2004 and 2003, respectively |       | (489     | )          | (13        | )          | (325      | )          |
|                                                                                                                                                            |       |     |       |       |       |      |       |
| Comprehensive income                                                                                                                                            | ** ** | **$**    | **3,075**  | ** ** | **$**      | **3,225** | ** ** | **$** | **2,972** | ** ** |
|                                                                                                                                                            |       |     |       |       |       |      |       |
| Accumulated  comprehensive income (loss)                                                                                                                        | ** ** | **$**    | **(114**   | **)**      | **$**      | **(333**  | **)**      | **$** | **(689** | **)** |

 

The accompanying notesare an integral part of these statements.

 

23

----

 

**PEOPLESCOMMUNITY BANCORP, INC.**

 

**CONSOLIDATEDSTATEMENTS OF STOCKHOLDERS’ EQUITY**

 

Years ended September 30,2005, 2004 and 2003

(In thousands)

 
| ** **                                                                                     | ** ** | ** ** | ** ** | ** **     | ** ** | ** **   | ** ** | ** **   | ** ** | **Unrealized**     | ** ** | ** ** | ** ** |
|------------------------------------------------------------------------------------------------|------------|------------|------------|----------------|------------|--------------|------------|--------------|------------|--------------------|------------|------------|------------|
| ** **                                                                                     | ** ** | ** ** | ** ** | ** **     | ** ** | ** **   | ** ** | **Shares**   | ** ** | **gains (losses)** | ** ** | ** ** | ** ** |
| ** **                                                                                     | ** ** | ** ** | ** ** | ** **     | ** ** | ** **   | ** ** | **acquired** | ** ** | **on securities**  | ** ** | ** ** | ** ** |
| ** **                                                                                     | ** ** | ** ** | ** ** | **Additional** | ** ** | ** **   | ** ** | **by stock** | ** ** | **designated**     | ** ** | ** ** | ** ** |
| ** **                                                                                     | ** ** | **Common** | ** ** | **paid-in**    | ** ** | **Retained** | ** ** | **benefit**  | ** ** | **as available**   | ** ** | ** ** | ** ** |
| ** **                                                                                     | ** ** | **stock**  | ** ** | **capital**    | ** ** | **earnings** | ** ** | **plan**     | ** ** | **for sale**       | ** ** | **Total**  | ** ** |
|                                                                                           |       |       |       |           |       |         |       |         |       |               |       |       |       |
| Balance  at October 1, 2002                                                               |       | $          | 25         |           | $          | 23,931       |       | $            | 19,447     |               | $          | (476       | )          | $ | 63 |   | 42,990 |   |
|                                                                                           |       |       |       |           |       |         |       |         |       |               |       |       |       |   |   |   |   |   |
| Amortization  expense of stock benefit plan                                                    |       | —     |       | 391            |       | —       |       | 190          |       | —             |       | 581        |       |
| Compensation  expense relating to vested stock options                                         |       | —     |       | 149            |       | —       |       | —       |       | —             |       | 149        |       |
| Exercise  of stock options                                                                     |       | —     |       | 7              |       | —       |       | —       |       | —             |       | 7          |       |
| Net  earnings for the year ended September 30, 2003                                       |       | —     |       | —         |       | 3,724        |       | —       |       | —             |       | 3,724      |       |
| Unrealized  losses on securities designated as available for sale, net of related tax  effects |       | —     |       | —         |       | —       |       | —       |       | (752               | )          | (752       | )          |
|                                                                                           |       |       |       |           |       |         |       |         |       |               |       |       |       |
| Balance  at September 30, 2003                                                            |       | 25         |       | 24,478         |       | 23,171       |       | (286         | )          | (689               | )          | 46,699     |       |
|                                                                                           |       |       |       |           |       |         |       |         |       |               |       |       |       |
| Amortization  expense of stock benefit plans                                                   |       | —     |       | 432            |       | 19           |       | 263          |       | —             |       | 714        |       |
| Compensation  expense relating to vested stock options                                         |       | —     |       | 191            |       | —       |       | —       |       | —             |       | 191        |       |
| Issuance  of common shares                                                                     |       | 14         |       | 26,800         |       | —       |       | (700         | )          | —             |       | 26,114     |       |
| Net  earnings for the year ended September 30, 2004                                       |       | —     |       | —         |       | 2,869        |       | —       |       | —             |       | 2,869      |       |
| Dividends  paid of $.30 per common share                                                       |       | —     |       | —         |       | (1,168       | )          | —       |       | —             |       | (1,168     | )          |
| Unrealized  gains on securities designated as available for sale, net of related tax  effects  |       | —     |       | —         |       | —       |       | —       |       | 356                |       | 356        |       |
|                                                                                           |       |       |       |           |       |         |       |         |       |               |       |       |       |
| Balance  at September 30, 2004                                                            |       | $          | 39         |           | $          | 51,901       |       | $            | 24,891     |               | $          | (723       | )          | $ | (333 | ) | $ | 75,775 |   |
|                                                                                           |       |       |       |           |       |         |       |         |       |               |       |       |       |   |   |   |   |   |   |
| Amortization  expense of stock benefit plans                                                   |       | —     |       | 392            |       | —       |       | 221          |       | —             |       | 613        |       |
| Compensation  expense relating to vested stock options                                         |       | —     |       | 184            |       | —       |       | —       |       | —             |       | 184        |       |
| Issuance  of common shares                                                                     |       | 5          |       | 10,245         |       | —       |       | (962         | )          | —             |       | 9,288      |       |
| Exercise  of stock options                                                                     |       | —     |       | 150            |       | —       |       | —       |       | —             |       | 150        |       |
| Net  earnings for the year ended September 30, 2005                                       |       | —     |       | —         |       | 2,856        |       | —       |       | —             |       | 2,856      |       |
| Dividends  paid of $.60 per common share                                                       |       | —     |       | —         |       | (2,385       | )          | —       |       | —             |       | (2,385     | )          |
| Unrealized  gains on securities designated as available for sale, net of related tax  effects  |       | —     |       | —         |       | —       |       | —       |       | 219                |       | 219        |       |
|                                                                                           |       |       |       |           |       |         |       |         |       |               |       |       |       |
| Balance  at September 30, 2005                                                            | ** ** | **$**      | **44**     | ** **     | **$**      | **62,872**   | ** ** | **$**        | **25,362** | ** **         | **$**      | **(1,464** | **)**      | **$** | **(114** | **)** | **$** | **86,700** | ** ** |

 

The accompanying notesare an integral part of these statements.

 

24

----

 

**PEOPLESCOMMUNITY BANCORP, INC.**

 

**CONSOLIDATEDSTATEMENTS OF CASH FLOWS**

 

Years ended September 30,2005, 2004 and 2003

(In thousands)

 
| ** **                                                                                                    | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** |
|---------------------------------------------------------------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
|                                                                                                          |       |     |       |     |       |     |       |
| Cash flows provided by  (used in) operating activities:                                                       |       |     |       |     |       |     |       |
| Net  earnings for the year                                                                                    |       | $        | 2,856      |     | $          | 2,869    |       | $ | 3,724 |   |
| Adjustments  to reconcile net earnings to net cash provided by (used in) operating  activities:               |       |     |       |     |       |     |       |
| Amortization  of premiums and discounts on securities                                                         |       | 1,768    |       | 1,493    |       | 1,058    |       |
| Amortization  of deferred loan origination fees & premiums                                           |       | (1,630   | )          | (730     | )          | (1,574   | )          |
| Expense  of stock benefit plans                                                                               |       | 797      |       | 905      |       | 730      |       |
| Amortization  of other intangible assets                                                                      |       | 116      |       | —   |       | —   |       |
| Reduction  of goodwill associated with sale of loans and deposits                                             |       | —   |       | —   |       | 1,650    |       |
| Depreciation                                                                                                  |       | 1,116    |       | 893      |       | 879      |       |
| Provision  for losses on loans                                                                                |       | 3,600    |       | 3,600    |       | 4,198    |       |
| Mutual  fund dividends                                                                                        |       | (46      | )          | (51      | )          | (39      | )          |
| Federal  Home Loan Bank stock dividends                                                                       |       | (510     | )          | (424     | )          | (414     | )          |
| Income  from bank-owned life insurance                                                                        |       | (158     | )          | —   |       | —   |       |
| Undistributed  income from Columbia                                                                           |       | (95      | )          | —   |       | —   |       |
| Gain  on sale of securities                                                                                   |       | (741     | )          | (19      | )          | (493     | )          |
| (Gain)  loss on sale of branch premises and deposits                                                          |       | 58       |       | (261     | )          | (148     | )          |
| Gain  on sale of loans                                                                                        |       | (93      | )          | (110     | )          | —   |       |
| Deferred  income tax                                                                                          |       | (570     | )          | (845     | )          | (878     | )          |
| Loss  on sale of foreclosed real estate                                                                       |       | 33       |       | —   |       | —   |       |
| Proceeds  from sale of loans in the secondary market                                                          |       | 6,714    |       | 10,013   |       | —   |       |
| Loans  originated for sale in the secondary market                                                            |       | (6,543   | )          | (9,903   | )          | —   |       |
| Increase (decrease) in  cash, due to changes in:                                                              |       |     |       |     |       |     |       |
| Accrued  interest receivable                                                                                  |       | (882     | )          | (1,030   | )          | (87      | )          |
| Prepaid  expenses and other assets                                                                            |       | 1,150    |       | (1,500   | )          | (1,523   | )          |
| Accrued  interest payable and other liabilities                                                               |       | 2,062    |       | (161     | )          | (440     | )          |
| Net  cash provided by operating activities                                                                    |       | 9,002    |       | 4,739    |       | 6,643    |       |
|                                                                                                          |       |     |       |     |       |     |       |
| Cash flows provided by  (used in) investing activities:                                                       |       |     |       |     |       |     |       |
| Purchase  of investment in Columbia                                                                           |       | (2,524   | )          | —   |       | —   |       |
| Purchase  of bank-owned life insurance                                                                        |       | (15,000  | )          | —   |       | —   |       |
| Purchases  of investment securities and mortgage-backed securities                                            |       | (88,111  | )          | (146,953 | )          | (209,079 | )          |
| Proceeds  from sale of investment securities and mortgage-backed securities designated  as available for sale |       | 41,919   |       | 1,410    |       | 68,389   |       |
| Principal  repayments on mortgage-backed securities                                                           |       | 76,510   |       | 51,489   |       | 23,032   |       |
| Proceeds  from sale of loans and loan participations                                                          |       | 1,055    |       | 5,003    |       | 10,180   |       |
| Principal  repayments on loans                                                                                |       | 263,580  |       | 236,398  |       | 247,086  |       |
| Loan  disbursements                                                                                           |       | (336,967 | )          | (289,465 | )          | (278,573 | )          |
| Purchase  of office premises and equipment                                                                    |       | (6,880   | )          | (6,380   | )          | (2,132   | )          |
| Proceeds  from sale of branch premises and deposits                                                           |       | 565      |       | 988      |       | —   |       |
| Purchase  of Federal Home Loan Bank stock                                                                     |       | —   |       | (196     | )          | —   |       |
| Proceeds  from sale of real estate acquired through foreclosure                                               |       | 880      |       | 1,071    |       | 65       |       |
| Sale  of Federal Home Loan Bank stock                                                                         |       | —   |       | —   |       | 100      |       |
| Cash  received in branch acquisition transaction-net                                                          |       | —   |       | —   |       | 19,730   |       |
| Cash  received in acquisition of American State Corporation - net                                             |       | 8,349    |       | —   |       | —   |       |
| Net  cash used in investing activities                                                                        |       | (56,624  | )          | (146,635 | )          | (121,202 | )          |
|                                                                                                          |       |     |       |     |       |     |       |
| Net  cash used in operating and investing activities (balance carried forward)                                |       | $        | (47,622    | )        | $          | (141,896 | )          | $ | (114,559 | ) |

 

The accompanying notesare an integral part of these statements.

 

25

----

 
| ** **                                                                      | ** ** | **2005**   | ** ** | **2004**   | ** ** | **2003**   | ** ** |
|---------------------------------------------------------------------------------|------------|------------|------------|------------|------------|------------|------------|
|                                                                            |       |       |       |       |       |       |       |
| Net  cash used in operating and investing activities (balance brought forward)  |       | $          | (47,622    | )          | $          | (141,896   | )          | $ | (114,559 | ) |
|                                                                            |       |       |       |       |       |       |       |
| Cash flows provided by  (used in) financing activities:                         |       |       |       |       |       |       |       |
| Net  increase in deposit accounts                                               |       | 81,768     |       | 16,536     |       | 31,209     |       |
| Proceeds  from Federal Home Loan Bank advances and other borrowings             |       | 213,000    |       | 210,800    |       | 162,950    |       |
| Repayment  of Federal Home Loan Bank advances and other borrowings              |       | (267,032   | )          | (106,200   | )          | (96,000    | )          |
| Proceeds  from issuance of subordinated debentures                              |       | 15,464     |       | —     |       | —     |       |
| Proceeds  from issuance of common stock                                         |       | 10,250     |       | 26,814     |       | —     |       |
| Dividends  paid on common stock                                                 |       | (2,385     | )          | (1,168     | )          | —     |       |
| Proceeds  from exercise of stock options                                        |       | 150        |       | —     |       | 7          |       |
| Shares  acquired by ESOP                                                        |       | (962       | )          | (700       | )          | —     |       |
| Net  cash provided by financing activities                                      |       | 50,253     |       | 146,082    |       | 98,166     |       |
|                                                                            |       |       |       |       |       |       |       |
| Net increase (decrease)  in cash and cash equivalents                           |       | 2,631      |       | 4,186      |       | (16,393    | )          |
|                                                                            |       |       |       |       |       |       |       |
| Cash and cash  equivalents at beginning of year                                 |       | 14,430     |       | 10,244     |       | 26,637     |       |
|                                                                            |       |       |       |       |       |       |       |
| Cash and cash  equivalents at end of year                                       | ** ** | **$**      | **17,061** | ** ** | **$**      | **14,430** | ** ** | **$** | **10,244** | ** ** |
|                                                                            | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Supplemental disclosure  of cash flow information:                              |       |       |       |       |       |       |       |
| Cash  paid during the year for:                                                 |       |       |       |       |       |       |       |
| Federal  income taxes                                                           | ** ** | **$**      | **1,200**  | ** ** | **$**      | **3,500**  | ** ** | **$** | **4,530** | ** ** |
|                                                                            |       |       |       |       |       |       |       |
| Interest  on deposits and borrowings                                            | ** ** | **$**      | **25,587** | ** ** | **$**      | **20,294** | ** ** | **$** | **18,206** | ** ** |
|                                                                            |       |       |       |       |       |       |       |
| Supplemental disclosure  of noncash investing activities:                       |       |       |       |       |       |       |       |
| Transfers  from loans to real estate acquired through foreclosure               | ** ** | **$**      | **1,854**  | ** ** | **$**      | **513**    | ** ** | **$** | **2,863** | ** ** |
|                                                                            |       |       |       |       |       |       |       |
| Loans  disbursed to facilitate sale of real estate acquired through foreclosure | ** ** | **$**      | **1,276**  | ** ** | **$**      | **339**    | ** ** | **$** | **2,325** | ** ** |
|                                                                            |       |       |       |       |       |       |       |
| Loans  disbursed to facilitate sale of real estate                              | ** ** | **$**      | **—** | ** ** | **$**      | **490**    | ** ** | **$** | **—** | ** ** |

 

The accompanying notesare an integral part of these statements.

 

26

----

 

**PEOPLESCOMMUNITY BANCORP, INC.**

 

**NOTES TOCONSOLIDATED FINANCIAL STATEMENTS**

 

September 30,2005, 2004 and 2003

 

**NOTE A - SUMMARY OF SIGNIFICANTACCOUNTING POLICIES**

 

Peoples CommunityBancorp, Inc. (“Peoples” or “the Corporation”) is a federal bank holdingcompany whose activities are primarily limited to holding the stock of PeoplesCommunity Bank (“the Bank”) and a 38% interest in Columbia Bancorp, Inc.,an unconsolidated financial institution subsidiary.  Peoples conducts a general banking businessin southwestern Ohio which consists of attracting deposits from the generalpublic and primarily applying those funds to the origination of loans forresidential, consumer and nonresidential purposes.  Peoples’ profitability is significantlydependent on net interest income, which is the difference between interestincome generated from interest-earning assets (i.e. loans and investments) andthe interest expense paid on interest-bearing liabilities (i.e. customerdeposits and borrowed funds).  Netinterest income is affected by the relative amount of interest-earning assetsand interest-bearing liabilities and the interest received or paid on thesebalances.  The level of interest ratespaid or received by Peoples can be significantly influenced by a number offactors, such as governmental monetary policy, that are outside of management’scontrol.

 

The Corporation hasentered into a number of acquisitions, divestitures and other materialfinancial transactions during the years covered by these financial statements.

 

On July 25, 2003,the Bank sold Kenwood Savings Bank consisting primarily of $10.0 million indeposits and $10.1 million of loans to Fort Washington Trust Company, asubsidiary of Western and Southern Life Insurance Company, for total cashconsideration of $1.7 million.

 

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

 

On April 27, 2004,Peoples Community Bancorp completed a secondary offering of 1,365,674 shares ofcommon stock.  The net proceeds of theoffering, totaling approximately $26.8 million, have been used to fund PeoplesCommunity Bancorp’s growth strategy and for general corporate purposes.

 

On January 14,2005, Peoples Community Bancorp acquired 69,925 shares of Columbia Bancorp, Inc.(“Columbia”), Cincinnati, Ohio, a privately held bank holding company for anaggregate purchase price of $2.5 million. These shares represent approximately 38% of Columbia’s issued andoutstanding common stock.  At this point,Peoples Community Bancorp, Inc. became a bank holding company.

 

On May 4, 2005, theCompany entered into a definitive agreement and plan of merger whereby theCompany will acquire PFS Bancorp, Inc. (“PFS”), the parent company of PeoplesFederal Savings Bank (“Peoples Federal”). Peoples Federal operates three offices in the Southeast Indianacommunities of Aurora, Rising Sun, and Vevay, offering a wide range of bankproducts and services.  Under the termsof the agreement, the Company will pay $23.00 in cash for each of theoutstanding common shares of PFS, resulting in aggregate merger considerationof approximately $33.8 million.   Themerger was completed on December 16, 2005 and was accounted for using thepurchase method of accounting.

 

27

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On June 10, 2005,the Company acquired American State Corporation, the parent company of AmericanState Bank (“American”) with three branch offices in the Southeast Indianacommunities of Lawrenceburg, Aurora and Bright. The Bank paid $4.79 in cash for each of the 1,469,062 outstanding commonshares of American.  American’soutstanding preferred stock was redeemed for cash at par value, totaling$700,000.   The expansion in thisSoutheast Indiana community further enhances Peoples Community Bank’s abilityto increase its market share and scale of operations, as well as expand itsdistribution network within the greater Cincinnati area.

 

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

 

The consolidatedfinancial information presented herein has been prepared in accordance withaccounting principles generally accepted in the United States of America (“U.S.GAAP”) and general accounting practices within the financial servicesindustry.  In preparing consolidatedfinancial statements in accordance with U.S. GAAP, management is required tomake estimates and assumptions that affect the reported amounts of assets andliabilities and the disclosure of contingent assets and liabilities at the dateof the financial statements and revenues and expenses during the reportingperiod.  Actual results could differ fromsuch estimates.

 

The following is asummary of the Corporation’s significant accounting policies which have beenconsistently applied in the preparation of the accompanying consolidatedfinancial statements.

 

1.  Principles of Consolidation

 

Theaccompanying consolidated financial statements include the accounts of theCompany and the Bank, it’s wholly-owned subsidiary.  All significant intercompany items have beeneliminated.  In December 2003, FASBissued a revision to FIN 46 to clarify certain provisions that affected theaccounting for trust preferred securities. As a result of the provisions in FIN 46, Peoples Bancorp Capital Trust Iwas deconsolidated as of June 30, 2004, with the Company accounting forits investment in Peoples Community Bancorp Capital Trust I as an asset, itssubordinated debentures as debt, and the interest paid thereon as interestexpense.  The Company had previouslyclassified the trust preferred securities as debt, but eliminated its commonstock investment. The investment in Peoples Community Bancorp Capital Trust IIis accounted for using provisions of FIN 46 as revised by the FASB.

 

2.  Investment Securities and Mortgage-BackedSecurities

 

The Corporation accountsfor investments in debt and equity securities as held-to-maturity, trading, oravailable for sale.  Securitiesclassified as held-to-maturity are carried at cost only if the Corporation hasthe positive intent and ability to hold these securities to maturity.Securities designated as available for sale are carried at fair value withresulting unrealized gains or losses recorded to stockholders’ equity.

 

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Realized gains andlosses on sales of securities are recognized using the specific identificationmethod.  Amortization of premiums andaccretion of discounts are recorded on a principal paydown method based on theestimated duration of the underlying security.

 

3.  Loans Receivable

 

Loansreceivable are stated at the principal amount outstanding, adjusted fordeferred loan origination fees and the allowance for loan losses.  Interest is accrued as earned unless thecollectibility of the loan is in doubt. Uncollectible interest on loans that are contractually past due ischarged off, or an allowance is established based on management’s periodicevaluation.  The allowance is establishedby a charge to interest income equal to all interest previously accrued.  Income is subsequently recognized only to theextent that cash payments are received until, in management’s judgment, theborrower’s ability to make periodic interest and principal payments has returnedto normal.  In this case the loan isreturned to accrual status.  If theultimate collectibility of principal is in doubt, in whole or in part, allpayments received on nonaccrual loans are applied to reduce principal untilsuch doubt is eliminated.

 

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

 

TheCorporation recognizes as separate assets, rights to service mortgage loans forothers, regardless of how those servicing rights are acquired.  An institution that acquires mortgageservicing rights through either the purchase or origination of mortgage loansand sells those loans with servicing rights retained must allocate some of thecost of the loans to mortgage servicing rights.

 

TheCorporation assesses the impairment of the capitalized mortgage servicingrights based on fair value.  The mortgageservicing rights recorded by Peoples were segregated into pools for valuationpurposes, using as pooling criteria the loan term and coupon rate.  Once pooled, each grouping of loans wasevaluated on a discounted earnings basis to determine the present value offuture earnings that a purchaser could expect to realize from each portfolio.  Earnings were projected from a variety of sources,including loan servicing fees, interest earned on float, net interest earned onescrows, miscellaneous income, and costs to service the loans.  The present value of future earnings is the “economic”value for the pool, i.e., the net realizable present value to an acquirer ofthe acquired servicing.

 

The Bank recorded amortization related tomortgage servicing rights totaling $111,000 and $37,000 for the fiscal yearsended September 30, 2004 and 2003, respectively.  At September 30, 2003, the fair valueand carrying value of the Bank’s mortgage servicing rights totaledapproximately $111,000.  No mortgageservicing rights existed at September 30, 2005 or 2004.

 

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4.  Loan Origination Fees

 

Peoples accounts forloan origination fees received from loans, net of direct origination costs, asdeferred items, and amortizes such amounts to interest income using thelevel-yield method, giving effect to actual loan prepayments.  Loan origination costs are limited to thedirect costs of originating a loan, i.e., principally direct personnelcosts.  Fees received for loancommitments that are expected to be drawn upon, based on Peoples’ experiencewith similar commitments, are deferred and amortized over the life of the loanusing the level-yield method.  Fees forother loan commitments are deferred and amortized over the loan commitmentperiod on a straight-line basis.

 

5.  Allowance for Loan Losses

 

It is Peoples’ policy toprovide valuation allowances for estimated losses on loans based on past lossexperience, trends in the level of delinquent and problem loans, adversesituations that may affect the borrower’s ability to repay, the estimated valueof any underlying collateral and current and anticipated economic conditions inthe primary lending area.  When thecollection of a loan becomes doubtful, or otherwise troubled, Peoples records aloan charge-off equal to the difference between the fair value of the propertysecuring the loan and the loan’s carrying value.  Major loans (including development projects)and major lending areas are reviewed periodically to determine potentialproblems at an early date.  The allowancefor loan losses is increased by charges to earnings and decreased bycharge-offs (net of recoveries).

 

Peoples accounts forimpaired loans based upon the present value of expected future cash flowsdiscounted at the loan’s effective interest rate or, as an alternative, at theloan’s observable market price or fair value of the collateral.  Peoples’ current procedures for evaluatingimpaired loans result in carrying such loans at the lower of cost or fairvalue.

 

A loan is defined asimpaired when, based on current information and events, it is probable that acreditor will be unable to collect all amounts due according to the contractualterms of the loan agreement.  The Bankconsiders its investment in one-to-four family residential loans and consumerloans to be homogeneous and therefore excluded from separate identification forevaluation of impairment.  With respectto Peoples’ investment in multi-family, nonresidential real estate and landloans, and its evaluation of impairment thereof, such loans are collateraldependent, and as a result, are carried as a practical expedient at the lowerof cost or fair value.  With respect tothe Bank’s investment in unsecured commercial lines of credit, impairment ismeasured based upon the present value of expected future cash flows.

 

It is Peoples’ policy tocharge off unsecured credits that are more than ninety days delinquent.  Similarly, collateral dependent loans whichare more than ninety days delinquent are considered to constitute more than aminimum delay in repayment and are evaluated for impairment at that time.

 

30

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6.  Office Premises and Equipment

 

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

 

7.  Real Estate Acquired Through Foreclosure

 

Real estate acquiredthrough foreclosure is carried at fair value less estimated selling expenses atthe date of acquisition.  Real estateloss provisions are recorded if the properties’ fair value subsequentlydeclines below the amount determined at the recording date.  In determining the fair value at acquisition,costs relating to development and improvement of property are capitalized.  Costs relating to holding real estateacquired through foreclosure, net of rental income, are charged againstearnings as incurred.

 

8.               Investmentin Columbia Bancorp, Inc.

 

In January 2005,the Corporation acquired 69,925 shares of Columbia Bancorp, Inc.,Cincinnati, Ohio, a privately held bank holding company for an aggregatepurchase price of $2.5 million.   Theseshares represent approximately 38% of Columbia’s issued and outstanding commonstock.  The investment is carried atcost, adjusted for the Corporation’s equity in the undistributed income ofColumbia Bancorp, Inc.  As of September 30,2005, Columbia Bancorp, Inc. had $5.1 million in retained earnings whichrepresent undistributed earnings.

 

9.               Goodwill

 

InJune 2001, the Financial Accounting Standards Board issued SFAS No. 142“Goodwill and Intangible Assets,” which prescribes accounting for all purchasedgoodwill and intangible assets.  Pursuantto SFAS No. 142, acquired goodwill is not amortized, but is tested forimpairment at the reporting unit level annually and whenever an impairmentindicator arises.  Goodwill has beenassigned to the Bank as the reporting unit that is expected to benefit from thegoodwill.

 

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

In June 2005, the Bank acquired anIndiana financial institution resulting in goodwill of approximately $3.9million.

 

Peoples evaluated the unamortizedgoodwill balance during fiscal 2005 in accordance with the provisions of SFAS No. 142.  The evaluation showed no indication ofimpairment.

 

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The changes in thecarrying amount of goodwill for the years ended September 30, 2005, 2004and 2003, were:

 
| ** **                      | ** ** | **2005**           | ** ** | **2004** | ** ** | **2003** | ** ** |
|---------------------------------|------------|--------------------|------------|----------|------------|----------|------------|
| ** **                      | ** ** | **(In thousands)** | ** ** |
|                            |       |               |       |     |       |     |       |
| Balance as of October 1    |       | $                  | 6,089      |     | $          | 6,089    |       | $ | 4,875 |   |
| Sale  of Kenwood                |       | —             |       | —   |       | (1,089   | )          |
| Purchase  of Ameriana branches  |       | —             |       | —   |       | 2,303    |       |
| Purchase  of American State     |       | 3,939              |       | —   |       | —   |       |
|                            |       |               |       |     |       |     |       |
| Balance as of September 30 |       | $                  | 10,028     |     | $          | 6,089    |       | $ | 6,089 |   |

 

10.         OtherIntangible Assets

 

The Bank had no otherintangible assets at September 30, 2004. In June 2005, the Bank recorded $1.9 million of core depositintangibles in conjunction with the acquisition of American StateCorporation.  The carrying basis andaccumulated amortization of recognized intangible assets at September 30,2005 were:

 

| ** **    | ** ** | **Gross Carrying**        | ** ** | **Accumulated**                 | ** ** |
|---------------|------------|---------------------------|------------|---------------------------------|------------|
| ** **    | ** ** | **Amount (in thousands)** | ** ** | **Amoritzation (in thousands)** | ** ** |
|          |       |                      |       |                            |       |
| Core deposits |       | $                         | 1,859      |                            | $          | 116 |   |
|               |            |                           |            |                                 |            |  |  |

 

Amortization expense of $116,000 wasrecorded in fiscal year 2005.  Noamortization expense was recorded in fiscal 2004 or 2003.  The following table summarizes the Bank’scurrent estimates for future amortization expense of the core depositintangible

 

| ** **          | ** ** | **(In thousands)** | ** ** |
|---------------------|------------|--------------------|------------|
|                |       |               |       |
| 2006                |       | $                  | 448        |   |
| 2007                |       | $                  | 382        |   |
| 2008                |       | $                  | 315        |   |
| 2009                |       | $                  | 249        |   |
| 2010 and thereafter |       | $                  | 349        |   |

 

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10.  Federal Income Taxes

 

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

 

11.  Benefit Plans

 

Peoples has anoncontributory unfunded retirement plan that covers all members of its Boardof Directors.  Peoples’ policy is tomaintain an accrued liability equal to the present value of benefits computedusing a predetermined annual benefit amount at retirement.  The plan provides for immediate and totalvesting for all participants.  Theprovision for directors retirement expense totaled $19,000, $45,000 and $84,000for the fiscal years ended September 30, 2005, 2004 and 2003,respectively.

 

The Bank has an EmployeeStock Ownership Plan (“ESOP”) which provides retirement benefits forsubstantially all full-time employees who have completed one year of service.The Bank makes annual contributions to the ESOP equal to the ESOP’s debtservice less dividends received by the ESOP on unallocated shares.  All shares in the ESOP were acquired usingfunds provided by a loan from the Corporation and accordingly the cost of thoseshares is shown as a reduction of stockholders’ equity.  Shares are released to participantsproportionately as the loan is repaid. Dividends on allocated shares are recordedas dividends and charged to retained earnings. Dividends on unallocated shares are used to repay the loan and aretreated as compensation expense. Compensation expense is recorded equal to the fair market value of thestock for shares committed to be released. The Bank accounts for the ESOP inaccordance with Statement of Position (“SOP”) 93-6, “Employers’ Accounting forEmployee Stock Ownership Plans.”  SOP 93-6requires that compensation expense recorded by employers equal the fair valueof ESOP shares allocated to participants during a given fiscal year.  In April 2004, the Bank added 35,000shares to the ESOP plan in connection with its secondary stock offering at atotal value of $700,000.  In March 2005,an additional 40,000 shares were acquired and added to the ESOP plan at a totalvalue of approximately $962,000.  Expenserecognized related to the ESOP totaled $261,000, $484,000 and $438,000 for thefiscal years ended September 30, 2005, 2004 and 2003, respectively.

 

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| ** **                                                                    | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** |
|-------------------------------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
|                                                                          |       |     |       |     |       |     |       |
| Allocated  shares                                                             |       | 99,013   |       | 86,309   |       | 62,180   |       |
| Shares  committed to be released                                              |       | —   |       | —   |       | —   |       |
| Unearned  shares                                                              |       | 65,629   |       | 39,523   |       | 28,560   |       |
|                                                                          |       |     |       |     |       |     |       |
| Total  ESOP shares                                                            |       | 164,642  |       | 125,832  |       | 90,740   |       |
|                                                                          |       |     |       |     |       |     |       |
| Fair  value of unearned shares at September 30  (expressed in thousands) |       | $        | 1,401      |     | $          | 910      |       | $ | 657 |   |
|                                                                               |            |          |            |          |            |          |            |  |  |  |

 

TheCorporation also has a 2001 Management Recognition Plan (“2001 MRP”) whichprovides for awards of up to 79,109 shares of the Corporation’s common stock tomembers of the Board of Directors, management and employees.  As of September 30, 2005, all sharesfrom the 2001 MRP had been awarded to members of the Board of Directors,management and employees.  Common sharesawarded to outside members of the Board of Directors were fully expensed whengranted, while shares awarded to members of management and employees will vestover a five year period beginning with the date of the award.  Shares awarded under the MRP are distributedfrom previously authorized but unissued shares.

 

Shares distributed to recipients of the awardstotaled 40,532 shares as of September 30, 2005.  The Corporation recorded expense related tothe MRP totaling approximately $323,000, $263,000 and $128,000 for the fiscalyears ended September 30, 2005, 2004 and 2003, respectively.

 

In 2004, thestockholders approved a 2004 Management Recognition Plan (“2004 MRP”) whichprovides for awards of an additional 60,000 shares of the Corporation’s commonstock to management and employees.  As ofSeptember 30, 2005, no shares have been awarded from the 2004 MRP.

 

12.  Stock Option Plan

 

Duringfiscal 2001 the Board of Directors adopted the Peoples Community Bancorp, Inc.Stock Option and Incentive Plan (the “2001 Plan”) that provides for theissuance of 197,773 shares of authorized but unissued shares of common stock atfair value at the date of grant.  ThroughSeptember 30, 2005, the Corporation has granted options of 196,170 shares,net of forfeitures, under the 2001 Plan. The 2004 Stock Option and Incentive Plan (the “2004 Plan”), as approvedby stockholders, provides for the issuance of 150,000 shares of authorized butunissued shares of common stock at fair value at the date of grant.  As of September 30, 2005, no optionshave been granted under the 2004 Plan.

 

Bothplans provide that one-fifth of the options granted become exercisable on eachof the first five anniversaries of the date of grant.  The remaining shares in the plans may begranted to employees in increments of 20% per year based on management’sdiscretion.

 

TheBank accounts for the plans using a fair value-based method for valuingstock-based compensation, which measures compensation cost at the grant datebased on the fair value of the award. Compensation is then recognized over the service period, which isusually the vesting period.

 

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Beginning with fiscal 2002, the Corporation elected to record the expenserelated to the vesting of its stock options in accordance with the provisionsof SFAS No. 123.  Total expenserecognized related to stock options amounted to $184,000, $191,000 and $149,000for fiscal years ended September 30, 2005, 2004 and 2003, respectively.

 

The fair value of theoption grants are estimated on the date of grant using the modifiedBlack-Scholes options-pricing model with the following assumptions used forgrants in fiscal 2005, 2004 and 2003: dividend yield of 3.8% for 2005, 2.5% for 2004 and no dividend yield for2003; expected volatility of 19.5% and 26.6% and 21.4%, respectively; arisk-free interest rate of 4.0 %, 4.6% and 3.6% in fiscal 2005, 2004 and 2003,respectively, and an expected life of ten years for all grants.

 

A summary of the statusof the Plan as of and for the years ended September 30 is presented below:

 
| ** **                                                      | ** ** | **2005**    | ** ** | **2004**      | ** ** | **2003**   | ** **  |
|-----------------------------------------------------------------|------------|-------------|------------|---------------|------------|------------|-------------|
| ** **                                                      | ** ** | ** **  | ** ** | **Weighted-** | ** ** | ** ** | ** **  | **Weighted-** | ** ** | ** ** | ** ** | **Weighted-** | ** ** |
| ** **                                                      | ** ** | ** **  | ** ** | **average**   | ** ** | ** ** | ** **  | **average** | ** ** | ** ** | ** ** | **average** | ** ** |
| ** **                                                      | ** ** | ** **  | ** ** | **exercise**  | ** ** | ** ** | ** **  | **exercise** | ** ** | ** ** | ** ** | **exercise** | ** ** |
| ** **                                                      | ** ** | **Shares**  | ** ** | **price**     | ** ** | **Shares** | ** **  | **price** | ** ** | **Shares** | ** ** | **price** | ** ** |
|                                                            |       |        |       |          |       |       |        |   |   |   |   |   |   |
| Outstanding  at beginning of year                               |       | 170,336     |       | $             | 17.76      |       | 144,528     |   | $ | 16.75 |   | 120,329 |   | $ | 15.34 |   |
| Granted                                                         |       | 35,208      |       | 19.92         |       | 26,969     |        | 23.20 |   | 26,391 |   | 23.22 |   |
| Exercised                                                       |       | (12,112     | )          | 14.00         |       | —     |        | — |   | (468 | ) | 14.00 |   |
| Forfeited &  Expired                                   |       | (9,842      | )          | 20.15         |       | (1,161     | )           | 18.60 |   | (1,724 | ) | 17.99 |   |
|                                                            |       |        |       |          |       |       |        |   |   |   |   |   |   |
| Outstanding  at end of year                                     | ** ** | **183,590** | ** ** | **$**         | **18.29**  | ** ** | **170,336** | ** ** | **$** | **17.76** | ** ** | **144,528** | ** ** | **$** | **16.75** | ** ** |
|                                                            |       |        |       |          |       |       |        |   |   |   |   |   |   |
| Options  exercisable at year-end                                | ** ** | **91,047**  | ** ** | **$**         | **16.42**  | ** ** | **70,839**  | ** ** | **$** | **15.53** | ** ** | **42,152** | ** ** | **$** | **14.73** | ** ** |
|                                                            | ** ** | ** **  | ** ** | ** **    | ** ** | ** ** | ** **  | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Weighted-average  fair value of options granted during the year | ** ** | ** **  | ** ** | **$**         | **4.17**   | ** ** | ** **  | ** ** | **$** | **4.50** | ** ** | ** ** |   | **$** | **9.41** |   |

 

Thefollowing information applies to options outstanding at September 30,2005:

 
| Number  outstanding                                       |   | 78,746          |   |
|-----------------------------------------------------------|--------|-----------------|--------|
| Exercise price                                            |   | $14.00          |   |
| Weighted-average  exercise price                          |   | $14.00          |   |
| Weighted-average  remaining contractual life              |   | 5.75 years      |   |
| Options exercisable at  year end                          |   | 62,971          |   |
|                                                      |   |            |   |
| Number outstanding                                        |   | 56,098          |   |
| Range of exercise  prices                                 |   | $19.92 - $20.25 |   |
| Weighted-average  exercise price                          |   | $20.04          |   |
| Weighted-average remaining  contractual life              |   | 8.63 years      |   |
| Options exercisable at  year end                          |   | 13,068          |   |
|                                                      |   |            |   |
| Number  outstanding                                       |   | 48,746          |   |
| Range of exercise  prices                                 |   | $23.20 - $23.22 |   |
| Weighted-average  exercise price                          |   | $23.21          |   |
| Weighted-average  remaining contractual life              |   | 8.27 years      |   |
| Options exercisable at  year end                          |   | 15,008          |   |
|                                                      |   |            |   |
| Weighted-average  exercise price (all outstanding shares) |   | $18.29          |   |
| Weighted-average  remaining contractual life              |   | 7.30 years      |   |
| Options exercisable at  year end                          |   | 91,047          |   |
|                                                           |        |                 |        |  |

 

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13.  Earnings Per Share 

 

Basicearnings per share for the fiscal years ended September 30, 2005, 2004 and2003 is based upon the weighted-average shares outstanding during the year,less 65,629, 39,523 and 28,560 unallocated ESOP shares, respectively.  Diluted earnings per share is computed takinginto consideration common shares outstanding and dilutive potential commonshares to be issued under the Corporation’s stock option plan.  The computations were as follows:

 
| ** **                                            | ** ** | **2005**      | ** ** | **2004**      | ** ** | **2003**      | ** ** |
|-------------------------------------------------------|------------|---------------|------------|---------------|------------|---------------|------------|
| Weighted-average common  shares outstanding (basic)   |       | 3,920,398     |       | 3,106,694     |       | 2,474,673     |       |
| Dilutive effect of  assumed exercise of stock options |       | 38,741        |       | 42,657        |       | 45,323        |       |
| Weighted-average common  shares outstanding (diluted) | ** ** | **3,959,139** | ** ** | **3,149,351** | ** ** | **2,519,996** | ** ** |

 

Options to purchase 48,746, 53,019 and 35,005 sharesof common stock and MRP awards of 14,486, 20,564, and 11,359 shares at aweighted-average price of $23.21, $23.21, and $23.22 were outstanding at September 30,2005, 2004 and 2003, respectively, but were excluded from the computation ofdiluted earnings per share for the year because the exercise price was greaterthan the average market price of the common shares.

 

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14.  Fair Value of Financial Instruments

 

SFAS No. 107, “DisclosuresAbout Fair Value of Financial Instruments,” requires disclosure of the fairvalue of financial instruments, both assets and liabilities whether or notrecognized in the consolidated statement of financial condition, for which itis practicable to estimate that value. For financial instruments where quoted market prices are not available,fair values are based on estimates using present value and other valuationmethods.

 

The methods used aregreatly affected by the assumptions applied, including the discount rate andestimates of future cash flows. Therefore, the fair values presented may not represent amounts thatcould be realized in an exchange for certain financial instruments.

 

The following methodsand assumptions were used by the Corporation in estimating its fair valuedisclosures for financial instruments at September 30, 2005 and 2004:

 

Cash and cashequivalents:  Thecarrying amounts presented in the consolidated statements of financialcondition for cash and cash equivalents are deemed to approximate fair value.

 

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

 

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

 

FederalHome Loan Bank stock:  The carrying amount presented in theconsolidated statements of financial condition is deemed to approximate fairvalue.

 

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

 

Advances from theFederal Home Loan Bank: The fair value of these advances is estimated using the rates currentlyoffered for similar advances of similar remaining maturities.

 

Other borrowedmoney:  The fair valueof other borrowed money is estimated using the rates currently offered forsimilar borrowings of similar remaining maturities.

 

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

 

Commitmentsto extend credit:  Forfixed-rate and adjustable-rate loan commitments, the fair value estimateconsiders the difference between current levels of interest rates and committedrates.  At September 30, 2005 and2004, the difference between the fair value and notional amount of loancommitments was not material.

 

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

 

Based on the foregoingmethods and assumptions, the carrying value and fair value of the Corporation’sfinancial instruments at September 30 are as follows:

 
| ** **                                | ** ** | **2005**           | ** **  | **2004**   | ** ** |
|-------------------------------------------|------------|--------------------|-------------|------------|------------|
| ** **                                | ** ** | **Carrying**       | ** **  | **Fair**   | ** ** | **Carrying** | ** ** | **Fair** | ** ** |
| ** **                                | ** ** | **value**          | ** **  | **value**  | ** ** | **value** | ** ** | **value** | ** ** |
| ** **                                | ** ** | **(In thousands)** | ** **  |
| Financial assets                          |       |               |        |       |       |   |   |   |   |
| Cash  and cash equivalents                |       | $                  | 17,061      |       | $          | 17,061 |   | $ | 14,430 |   | $ | 14,430 |   |
| Investment  securities                    |       | 7,650              |        | 7,650      |       | 1,069 |   | 1,069 |   |
| Mortgage-backed  securities               |       | 199,716            |        | 199,716    |       | 228,085 |   | 228,085 |   |
| Loans  receivable                         |       | 704,714            |        | 704,367    |       | 599,466 |   | 601,222 |   |
| Accrued  interest receivable              |       | 4,774              |        | 4,774      |       | 3,599 |   | 3,599 |   |
| Federal  Home Loan Bank stock             |       | 11,871             |        | 11,871     |       | 10,841 |   | 10,841 |   |
|                                      |       |               |        |       |       |   |   |   |   |
| ** **                                | ** ** | **$**              | **945,786** | ** ** | **$**      | **945,439** | ** ** | **$** | **857,490** | ** ** | **$** | **859,246** |   |
| Financial liabilities                     |       |               |        |       |       |   |   |   |   |
| Deposits                                  |       | $                  | 612,199     |       | $          | 612,708 |   | $ | 472,436 |   | $ | 475,567 |   |
| Advances  from the Federal Home Loan Bank |       | 273,569            |        | 273,577    |       | 324,500 |   | 330,054 |   |
| Accrued  interest payable                 |       | 845                |        | 845        |       | 228 |   | 228 |   |
| Subordinated  debentures                  |       | 28,351             |        | 28,351     |       | 12,887 |   | 12,887 |   |
|                                      |       |               |        |       |       |   |   |   |   |
| ** **                                | ** ** | **$**              | **914,964** | ** ** | **$**      | **915,481** | ** ** | **$** | **810,051** | ** ** | **$** | **818,736** |   |

 

15.  Capitalization

 

The Corporation’sauthorized capital stock includes 1,000,000 shares of $.01 per share par valuevoting preferred stock.  No preferredshares were issued at September 30, 2005 and 2004.

 

16.  Cash and Cash Equivalents

 

For purposes ofreporting cash flows, cash and cash equivalents include cash and due from banksand interest-bearing deposits in other financial institutions.

 

17.          Restriction on Cashand Due From Banks

 

The Bank isrequired to maintain reserve funds in cash or in deposits with Federal ReserveBank or Federal Home Loan Bank.  Thereserve required at September 30, 2005 was $1,681,000.

 

38

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18.  Reclassifications

 

Certain prior yearamounts have been reclassified to conform to the 2005 consolidated financialstatement presentation.

 

**NOTE B - INVESTMENTS ANDMORTGAGE-BACKED SECURITIES**

 

The amortized cost,gross unrealized gains, gross unrealized losses and estimated fair values ofsecurities at September 30, 2005 and 2004, are summarized as follows:

 

**2005**

 
| ** **                        | ** ** | ** **         | ** **  | **Gross**      | ** ** | **Gross**      | ** ** | **Estimated** | ** ** |
|-----------------------------------|------------|--------------------|-------------|----------------|------------|----------------|------------|---------------|------------|
| ** **                        | ** ** | **Amortized**      | ** **  | **unrealized** | ** ** | **unrealized** | ** ** | **fair**      | ** ** |
| ** **                        | ** ** | **cost**           | ** **  | **gains**      | ** ** | **losses**     | ** ** | **value**     | ** ** |
| ** **                        | ** ** | **(In thousands)** | ** **  |
| **Available for sale:**           | ** ** | ** **         | ** **  | ** **     | ** ** | ** **     | ** ** | ** **    | ** ** |
|                              |       |               |        |           |       |           |       |          |       |
| US  Treasury Securities           |       | $                  | 499         |           | $          | —         |       | $             | —     |   | $ | 499 |   |
|                              |       |               |        |           |       |           |       |          |       |
| US  Government Agency Obligations |       | 5,050              |        | 3              |       | 17             |       | 5,036         |       |
|                              |       |               |        |           |       |           |       |          |       |
| Municipal  Securities             |       | 1,009              |        | 19             |       | 9              |       | 1,019         |       |
|                              |       |               |        |           |       |           |       |          |       |
| Mutual  Funds                     |       | 1,136              |        | —         |       | 40             |       | 1,096         |       |
|                              |       |               |        |           |       |           |       |          |       |
| Mortgage  Backed Securities       |       | 199,845            |        | 413            |       | 542            |       | 199,716       |       |
|                              |       |               |        |           |       |           |       |          |       |
| ** **                        | ** ** | **$**              | **207,539** | ** **     | **$**      | **435**        | ** ** | **$**         | **608**    | ** ** | **$** | **207,366** |   |

 

**2004**

 
| ** **                  | ** ** | ** **         | ** **  | **Gross**      | ** ** | **Gross**      | ** ** | **Estimated** | ** ** |
|-----------------------------|------------|--------------------|-------------|----------------|------------|----------------|------------|---------------|------------|
| ** **                  | ** ** | **Amortized**      | ** **  | **unrealized** | ** ** | **unrealized** | ** ** | **fair**      | ** ** |
| ** **                  | ** ** | **cost**           | ** **  | **gains**      | ** ** | **losses**     | ** ** | **value**     | ** ** |
| ** **                  | ** ** | **(In thousands)** | ** **  |
| **Available for sale:**     | ** ** | ** **         | ** **  | ** **     | ** ** | ** **     | ** ** | ** **    | ** ** |
|                        |       |               |        |           |       |           |       |          |       |
| Mutual  Funds               |       | $                  | 1,091       |           | $          | —         |       | $             | 22         |   | $ | 1,069 |   |
|                        |       |               |        |           |       |           |       |          |       |
| Mortgage  Backed Securities |       | 228,568            |        | 681            |       | 1,164          |       | 228,085       |       |
|                        |       |               |        |           |       |           |       |          |       |
| ** **                  | ** ** | **$**              | **229,659** | ** **     | **$**      | **681**        | ** ** | **$**         | **1,186**  | ** ** | **$** | **229,154** |   |

 

39

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Theamortized cost and fair value of available-for-sale securities at September 30,2005, by contractual maturity, are shown below. There were no held-to-maturity securities at September 30,2005.  Expected maturities will differfrom contractual maturities because issuers may have the right to call orprepay obligations with or without call or prepayment penalties.

 

| ** **                  | ** ** | **Available-for-sale** | ** ** |
|-----------------------------|------------|------------------------|------------|
| ** **                  | ** ** | **Amortized**          | ** ** | **Fair** | ** ** |
| ** **                  | ** ** | **Cost**               | ** ** | **Value** | ** ** |
| ** **                  | ** ** | **(In Thousands)**     | ** ** |
|                        |       |                   |       |   |   |
| Within one year             |       | $                      | 1,005      |   | $ | 1,004 |   |
| One to five years           |       | 2,017                  |       | 2,010 |   |
| Five to ten years           |       | 1,439                  |       | 1,448 |   |
| After ten years             |       | 2,097                  |       | 2,092 |   |
|                        |       | 6,558                  |       | 6,554 |   |
|                        |       |                   |       |   |   |
| Mortgage-backed  securities |       | 199,845                |       | 199,716 |   |
| Mutual funds                |       | 1,136                  |       | 1,096 |   |
|                        |       |                   |       |   |   |
| Totals                      |       | $                      | 207,539    |   | $ | 207,366 |   |

 

Inconjunction with the purchase of American State Corporation in June 2005,the Bank acquired $9.2 million in investment securities, which are held asavailable for sale and included in the above schedule.

 

Proceedsfrom the sale of mortgage-backed securities during fiscal year 2005 amounted to$41.9 million, with realized gains totaling $741,000 and a related tax effectof $252,000. During fiscal 2004 the Bank sold it’s investment in FHLMC stockfor proceeds of $1.4 million resulting in a realized gain of $19,000 and arelated tax effect of $7,000. Proceeds from sales of investment andmortgage-backed securities amounted to $68.4 million during the fiscal yearended September 30, 2003, resulting in gross realized gains totaling$493,000 and a related tax effect of $168,000.

 

At September 30,2005, People’s had $13.5 million of mortgage-backed securities pledged tosecure public deposits, and $174.1 million of mortgage-backed securitiespledged to secure advances from the Federal Home Loan Bank.  At September 30, 2004, People’s had $23.0million of mortgage-backed securities pledged to secure public deposits, and$174.6 million of mortgage-backed securities pledged to secure advances fromthe Federal Home Loan Bank.

 

Certain investments indebt and marketable equity securities are reported in the financial statementsat an amount less than their historical cost. Total fair value of these investments at September 30, 2005 and2004, were $128.2 million and $130.0 million, which approximated 61.8% and56.7% of the Corporation’s investment portfolio.  These declines primarily resulted from recentincreases in market rates.  Based onevaluation of the available evidence, including recent changes in market rates,credit rating information and information obtained from regulatory filings,management believes the declines in fair value for these securities aretemporary.

 

Should the impairment ofany of these securities become other than temporary, the cost basis of theinvestment will be reduced and the resulting loss recognized in net earnings inthe period in which the other-than-temporary impairment is identified.

 

40

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The following tablesreflect the investments’ gross unrealized loses and fair value, aggregated byinvestment category and length of time that individual securities have been ina continuous unrealized loss position at September 30, 2005 and 2004.

 
| ** **                             | ** ** | **2005**                | ** ** |
|----------------------------------------|------------|-------------------------|------------|
| ** **                             | ** ** | **Less than 12 months** | ** ** | **12 Months or Longer** | ** ** | **Total** | ** ** |
| **Description**                        | ** ** | **Number of**           | ** ** | **Fair** | ** ** | **Unrealized** | ** ** | **Number of** | ** ** | **Fair** | ** ** | **Unrealized** | ** ** | **Fair** | ** ** | **Unrealized** | ** ** |
| **of  securities**                     | ** ** | **investments**         | ** ** | **value** | ** ** | **Losses** | ** ** | **investments** | ** ** | **value** | ** ** | **Losses** | ** ** | **value** | ** ** | **Losses** | ** ** |
| ** **                             | ** ** | **(In Thousands)**      | ** ** |
|                                   |       |                    |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| US  Government agency obligations      |       | 5                       |       | $ | 2,451 |   | $ | 17 |   | $ | — |   | $ | — |   | $ | — |   | $ | 2,451 |   | $ | 17 |   |
| Municipal  securities                  |       | 3                       |       | 443 |   | 9 |   | — |   | — |   | — |   | 443 |   | 9 |   |
| Mutual funds                           |       | —                  |       | — |   | — |   | 2 |   | 1,096 |   | 40 |   | 1,096 |   | 40 |   |
| Mortgage-backed  securities            |       | 22                      |       | 91,104 |   | 352 |   | 6 |   | 33,141 |   | 190 |   | 124,245 |   | 542 |   |
|                                   |       |                    |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Total  temporarily impaired securities | ** ** | **30**                  | ** ** | **$** | **93,998** | ** ** | **$** | **378** | ** ** | **8** | ** ** | **$** | **34,237** | ** ** | **$** | **230** | ** ** | **$** | **128,235** | ** ** | **$** | **608** | ** ** |
|                                        |            |                         |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 
| ** **                             | ** ** | **2004**                | ** ** |
|----------------------------------------|------------|-------------------------|------------|
| ** **                             | ** ** | **Less than 12 months** | ** ** | **12 Months or Longer** | ** ** | **Total** | ** ** |
| **Description**                        | ** ** | **Number of**           | ** ** | **Fair** | ** ** | **Unrealized** | ** ** | **Number of** | ** ** | **Fair** | ** ** | **Unrealized** | ** ** | **Fair** | ** ** | **Unrealized** | ** ** |
| **of  securities**                     | ** ** | **investments**         | ** ** | **value** | ** ** | **Losses** | ** ** | **investments** | ** ** | **value** | ** ** | **Losses** | ** ** | **value** | ** ** | **Losses** | ** ** |
| ** **                             | ** ** | **(In Thousands)**      | ** ** |
|                                   |       |                    |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Mutual  funds                          |       | 2                       |       | $ | 1,069 |   | $ | 22 |   | — |   | $ | — |   | $ | — |   | $ | 1,096 |   | $ | 22 |   |
| Mortgage-backed  securities            |       | 9                       |       | 69,679 |   | 393 |   | 8 |   | 59,244 |   | 771 |   | 128,922 |   | 1,164 |   |
|                                   |       |                    |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Total  temporarily impaired securities |       | 11                      | ** ** | **$** | **68,748** | ** ** | **$** | **415** | ** ** | **8** | ** ** | **$** | **59,244** | ** ** | **$** | **771** | ** ** | **$** | **129,991** | ** ** | **$** | **1.186** | ** ** |

 

41

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**NOTE C - LOANS RECEIVABLE**

 

The composition of theloan portfolio at September 30 is summarized as follows:

 
| ** **                               | ** ** | **2005**           | ** **  | **2004**   | ** ** |
|------------------------------------------|------------|--------------------|-------------|------------|------------|
| ** **                               | ** ** | **(In thousands)** | ** **  |
| Residential real estate                  |       |               |        |       |       |
| One-to-four  family                      |       | $                  | 252,424     |       | $          | 226,735 |   |
| Multifamily                              |       | 122,802            |        | 106,799    |       |
| Construction                             |       | 112,814            |        | 93,217     |       |
| Nonresidential real  estate and land     |       | 132,502            |        | 158,907    |       |
| Nonresidential real  estate construction |       | 107,919            |        | 31,779     |       |
| Commercial                               |       | 43,231             |        | 33,238     |       |
| Consumer and other                       |       | 22,502             |        | 21,781     |       |
| Total  loans receivable                  |       | 794,194            |        | 672,456    |       |
|                                     |       |               |        |       |       |
| Less:                                    |       |               |        |       |       |
| Undisbursed  portion of loans in process |       | 72,894             |        | 59,045     |       |
| Deferred  loan origination fees          |       | 2,889              |        | 2,920      |       |
| Allowance  for loan losses               |       | 13,697             |        | 11,025     |       |
|                                     |       |               |        |       |       |
| Loans  receivable – net             | ** ** | **$**              | **704,714** | ** ** | **$**      | **599,466** | ** ** |

 

Peopleshas continued to change the composition of the loan portfolio with the additionof loans secured by multi-family residential and nonresidential real estatefrom the original primary focus of one-to-four family residential loans.  One-to-four-family residential loanscomprised 35.8% and 37.8% of the net loan portfolio at September 30 2005and 2004, respectively.  Multi-familyresidential loans comprised approximately $122.8 million, or 17.4%, of the netloan portfolio at September 30, 2005, and $106.8 million or 17.8%, of thenet loan portfolio at September 30, 2004. Nonresidential real estate lending comprised approximately $240.4million, or 34.1%, and $190.7 million, or 31.8%, of the net loan portfolio at September 30,2005 and September 30, 2004, respectively. Generally, real estate loans have been underwritten on the basis of nomore than an 80% loan-to-value ratio, which has historically provided Peopleswith adequate collateral coverage in the event of default.  Nevertheless, Peoples, as with any lendinginstitution, issubject to the risk that real estate values could deteriorate in its primarylending area of southwestern Ohio, thereby impairing collateral values.  However, management believes that real estatevalues in Peoples’ primary lending area are presently stable.

 

In the ordinary course of business, Peoples hasgranted loans to some of its directors, officers and their related businessinterests.  All loans to related partieshave been made on substantially the same terms as those prevailing at the timefor unrelated third parties.  Theaggregate dollar amount of loans to executive officers and directors wasapproximately $975,000 and $1.1 million at September 30, 2005 and 2004,respectively.  During the fiscal yearended September 30, 2005, there were no loans originated to executiveofficers and directors, while principal repayments of approximately $76,000were received from executive officers and directors.

 

42

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**NOTE D - ALLOWANCE FOR LOANLOSSES**

 

The activity in theallowance for loan losses is summarized as follows for the years ended September 30:

 
| ** **                     | ** ** | **2005**           | ** ** | **2004**   | ** ** | **2003**   | ** ** |
|--------------------------------|------------|--------------------|------------|------------|------------|------------|------------|
| ** **                     | ** ** | **(In thousands)** | ** ** |
|                           |       |               |       |       |       |       |       |
| Balance at beginning of  year  |       | $                  | 11,025     |       | $          | 9,744      |       | $ | 7,656 |   |
| Provision for losses on  loans |       | 3,600              |       | 3,600      |       | 4,198      |       |
| Charge-off of loans            |       | (1,081             | )          | (2,360     | )          | (2,122     | )          |
| Recoveries                     |       | 153                |       | 41         |       | 12         |       |
|                           |       |               |       |       |       |       |       |
| Balance at end of year         | ** ** | **$**              | **13,697** | ** ** | **$**      | **11,025** | ** ** | **$** | **9,744** | ** ** |

 

At September 30,2005, 2004 and 2003, the non-accruing loans amounted to $19.4 million, $6.0million and $7.3 million, respectively. At September 30, 2005 loans greater than 90 days delinquent andstill accruing totaled $1.3 million and were deemed to be in process ofcollection of both principal and interest. There were no loans greater than 90days delinquent and still accruing at September 30, 2004.  Interest income which would have beenrecognized if such loans had performed pursuant to contractual terms totaledapproximately $1.1 million, $560,000 and $266,000 for the fiscal years ended September 30,2005, 2004 and 2003, respectively.

 

Information with respectto the Bank’s impaired loans at and for the years ended September 30, 2005and 2004 is as follows:

 
| ** **                                                    | ** ** | **2005**           | ** ** | **2004**   | ** ** |
|---------------------------------------------------------------|------------|--------------------|------------|------------|------------|
| ** **                                                    | ** ** | **(In thousands)** | ** ** |
|                                                          |       |               |       |       |       |
| Impaired loans with  related allowance                        |       | $                  | 6,361      |       | $          | 4,097 |   |
| Impaired loans with no  related allowance                     |       | —             |       | 54         |       |
|                                                          |       |               |       |       |       |
| Total  impaired loans                                         | ** ** | **$**              | **6,361**  | ** ** | **$**      | **4,151** | ** ** |
|                                                          |       |               |       |       |       |
| Allowance for losses on  impaired loans                       |       |               |       |       |       |
| Beginning  balance                                            |       | $                  | 1,368      |       | $          | 666 |   |
| Provision  for losses on loans                                |       | 3,172              |       | 2,177      |       |
| Charge  off of loans                                          |       | (867               | )          | (1,475     | )          |
|                                                          |       |               |       |       |       |
| Ending  balance                                               | ** ** | **$**              | **3,673**  | ** ** | **$**      | **1,368** | ** ** |
|                                                          |       |               |       |       |       |
| Average recorded  investment in impaired loans                | ** ** | **$**              | **3,744**  | ** ** | **$**      | **5,995** | ** ** |
|                                                          |       |               |       |       |       |
| Interest income  recognized on impaired loans                 | ** ** | **$**              | **134**    | ** ** | **$**      | **44** | ** ** |
|                                                          |       |               |       |       |       |
| Interest income  recognized on a cash basis on impaired loans | ** ** | **$**              | **129**    | ** ** | **$**      | **44** | ** ** |

 

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

 

43

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**NOTE E - OFFICE PREMISES ANDEQUIPMENT**

 

Office premises andequipment are comprised of the following at September 30:

 
| ** **                         | ** ** | **2005**           | ** ** | **2004**   | ** ** |
|------------------------------------|------------|--------------------|------------|------------|------------|
| ** **                         | ** ** | **(In thousands)** | ** ** |
|                               |       |               |       |       |       |
| Land and improvements              |       | $                  | 8,266      |       | $          | 5,102 |   |
| Office buildings and  improvements |       | 13,441             |       | 8,384      |       |
| Construction in  progress          |       | 794                |       | 4,445      |       |
| Furniture, fixtures and  equipment |       | 5,739              |       | 3,837      |       |
|                               |       | 28,240             |       | 21,768     |       |
|                               |       |               |       |       |       |
| Less  accumulated depreciation     |       | 4,273              |       | 3,952      |       |
|                               |       |               |       |       |       |
| ** **                         | ** ** | **$**              | **23,967** | ** ** | **$**      | **17,816** |   |

 

Inthe second quarter of fiscal 2004, the Corporation completed construction of abranch office in Warren County at a cost of $1.4 million.  A new office at the Voice of America Park inButler County was completed in October 2004 with a cost of $3.8million.  This office houses a portion ofthe Company’s corporate staff, with approximately 50% of the building leased toa local Chamber of Commerce.

 

Additionally,two branch offices to replace existing structures were completed in the thirdquarter of fiscal 2005 with a total cost of approximately $3.4 million.   During the fourth quarter of fiscal 2005,construction began for a new office in Liberty Township with an anticipatedtotal cost of approximately $1.6 million.

 

**NOTE F - DEPOSITS**

 

Deposits consist of thefollowing major classifications at September 30:

 
| ** **                                       | ** ** | **2005**                   | ** **  | **2004**   | ** ** |
|--------------------------------------------------|------------|----------------------------|-------------|------------|------------|
| ** **                                       | ** ** | **(Dollars in thousands)** | ** **  |
|                                             |       |                       |        |       |       |
| Non-interest bearing  checking accounts          |       | $                          | 20,150      |       | $          | 17,638 |   |
| Checking accounts                                |       | 37,428                     |        | 18,978     |       |
| Savings accounts                                 |       | 173,162                    |        | 145,437    |       |
| Money market demand  deposit                     |       | 19,883                     |        | 29,582     |       |
| Total  demand, transaction and passbook deposits |       | 250,623                    |        | 211,635    |       |
|                                             |       |                       |        |       |       |
| Certificates of  deposit:                        |       |                       |        |       |       |
| Original  maturities of:                         |       |                       |        |       |       |
| Less  than 12 months                             |       | 17,596                     |        | 16,517     |       |
| 12  months to 36 months                          |       | 176,027                    |        | 130,433    |       |
| More  than 36 months                             |       | 91,182                     |        | 62,879     |       |
| Individual  retirement accounts                  |       | 76,771                     |        | 50,972     |       |
|                                             |       |                       |        |       |       |
| Total  certificates of deposit                   |       | 361,576                    |        | 260,801    |       |
|                                             |       |                       |        |       |       |
| Total  deposits                                  | ** ** | **$**                      | **612,199** | ** ** | **$**      | **472,436** | ** ** |

 

44

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AtSeptember 30, 2005 and 2004, Peoples had certificate of deposit accountswith balances greater than $100,000 totaling $88.0 million and $52.2 million,respectively.

 

Maturitiesof outstanding certificates of deposit are summarized as follows at September 30:

 
| ** **          | ** ** | **2005**           | ** **  | **2004**   | ** ** |
|---------------------|------------|--------------------|-------------|------------|------------|
| ** **          | ** ** | **(In thousands)** | ** **  |
|                |       |               |        |       |       |
| One year or less    |       | $                  | 167,632     |       | $          | 119,542 |   |
| One to two years    |       | 77,002             |        | 48,341     |       |
| Two to three years  |       | 28,351             |        | 42,243     |       |
| Three to four years |       | 34,311             |        | 21,300     |       |
| Four to five years  |       | 54,280             |        | 29,375     |       |
|                |       |               |        |       |       |
| ** **          | ** ** | **$**              | **361,576** | ** ** | **$**      | **260,801** |   |

 

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

 

Advancesfrom the Federal Home Loan Bank, collateralized at September 30, 2005 bypledges of certain residential mortgage loans totaling $255.1 million, certainmortgage backed securities totaling $174.1 million, and Peoples’ investment inFederal Home Loan Bank stock, are summarized as follows:

 
| ** **                      | ** ** | **Maturing fiscal** | ** ** | ** **                 | ** ** |
|---------------------------------|------------|---------------------|------------|----------------------------|------------|
| **Interest  Rate**              | ** ** | **year ending in**  | ** ** | **(Dollars in thousands)** | ** ** |
|                            |       |                |       |                       |       |
| 2.13% - 3.82%                   |       | 2006                |       | 119,982                    |       |
| 5.22%                           |       | 2008                |       | 1,500                      |       |
| 4.13%                           |       | 2011                |       | 1,000                      |       |
| 3.58% - 4.24%                   |       | 2012                |       | 150,000                    |       |
| 6.61%                           |       | 2019                |       | 1,087                      |       |
|                            |       |                |       |                       |       |
| ** **                      |       |                |       | **$**                      | 273,569    |   |
|                            |       |                |       |                       |       |
| Weighted-average  interest rate | ** ** | ** **          |       | **3.89**                   | **%**      |
|                                 |            |                     |            |                            |            |  |

 

**NOTE H - OTHER BORROWED MONEY**

 

The Corporationhas a $20.0 million line of credit with another financial institution, withinterest payable at LIBOR plus 150 basis points.  No balance was outstanding at September 30,2005 or 2004. This line of credit expires in the second quarter of fiscal2006.  The loan is secured by theoutstanding shares of the Bank.

 

45

----

 

**NOTE I -GUARANTEED PREFFERED BENEFICIAL INTERESTS IN JUNIOR SUBORDINATED DEBENTURES**

 

Infiscal 2002, a Delaware trust owned by the Corporation (the “Trust I”), issued$12.5 million of mandatorily redeemable debt securities.  The debt securities issued by the Trust I areincluded in the Corporation’s regulatory capital, specifically as a componentof Tier I capital.  The subordinateddebentures are the sole assets of the Trust I, and the Corporation owns all ofthe common securities of the Trust I. Interest payments on the debt securities are made semi-annually at anannual variable interest rate equal to the six-month LIBOR rate plus 375 basispoints, or equal to 7.37% and 5.61% at September 30, 2005, and 2004,respectively, and are reported as a component of interest expense onborrowings.  The net proceeds received bythe Corporation from the sale of the debt securities were used for generalcorporate purposes, including to facilitate the growth of the Bank.  The subordinated debentures mature in December 2031,but can be redeemed through prior approval by the OTS in any June or December beginningin 2006.

 

In June 2005, theCorporation formed a second wholly owned trust (the “Trust II”), which issued$15.0 million of mandatorily redeemable debt securities. These debt securitiesare included as a component of Tier I capital for regulatory capitalpurposes.  The subordinated debenturesare the sole assets of the Trust II, and the Corporation owns all of the commonsecurities of the Trust II.  Interestpayments on the debt securities are made quarterly at an annual variableinterest rate equal to the three-month LIBOR rate plus 175 basis points, orequal to 5.62% at September 30, 2005, and are reported as a component ofinterest expense on borrowings.   The netproceeds received by the Corporation from the sale of the debt securities wereused for general corporate purposes.  Thesubordinated debentures mature in 2035, but can be redeemed through priorapproval by the OTS in any June, September, December or March beginningin 2010.

 

**NOTE J - COMMITMENTS**

 

Peoples is a party tofinancial instruments with off-balance-sheet risk in the normal course ofbusiness to meet the financing needs of its customers, including commitments toextend credit.  Such commitments involve,to varying degrees, elements of credit and interest-rate risk in excess of theamount recognized in the consolidated statement of financial condition.  The contract or notional amounts of thecommitments reflect the extent of Peoples’ involvement in such financialinstruments.

 

Peoples’ exposure tocredit loss in the event of nonperformance by the other party to the financialinstrument for commitments to extend credit is represented by the contractualnotional amount of those instruments. Peoples uses the same credit policies in making commitments andconditional obligations as those utilized for on-balance-sheet instruments.

 

46

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At September 30,2005, Peoples had commitments to originate loans totaling $8.3 million of which$4.1 million were fixed rate and $4.2 million were adjustable rate.Additionally, Peoples had adjustable rate commitments for unused lines ofcredit under home equity loans totaling $36.8 million, adjustable ratecommitments for unused commercial lines of credit totaling $15.4 million, andfixed rate commitments for unused consumer overdraft protection lines totaling$165,000.  Management believes that suchloan commitments are able to be funded through normal cash flow from operations.  Additionally, Peoples had fixed rate standbyletters of credit for customers totaling $8.8 million at September 30,2005.  From time to time balances withcorrespondent banks may exceed the FDIC $100,000 insurable limit.

 

At September 30,2004, Peoples had commitments to originate loans totaling $4.3 million of which$2.1 million were fixed rate and $2.2 million were adjustable rate.  Additionally, Peoples had adjustable ratecommitments for unused lines of credit under home equity loans totaling $33.1 millionand adjustable rate commitments for unused commercial lines of credit totaling$9.2 million.   Additionally, Peoples hadcommitments to purchase variable rate mortgage-backed securities totaling $30.2million and fixed rate standby letters of credit for customers totaling $6.6million at September 30, 2004.

 

Commitments to extendcredit are agreements to lend to a customer as long as there is no violation ofany condition established in the contract. Commitments generally have fixed expiration dates or other terminationclauses and may require payment of a fee. Since many of the commitments may expire without being drawn upon, thetotal commitment amounts do not necessarily represent future cashrequirements.  Peoples evaluates eachcustomer’s creditworthiness on a case-by-case basis.  The amount of collateral obtained, if it isdeemed necessary by Peoples upon extension of credit, is based on management’scredit evaluation of the counterparty. Collateral on loans may vary but the preponderance of loans grantedgenerally include a mortgage interest in real estate as security.

 

Peopleshas also entered into lease agreements for office premises under operatingleases which expire at various dates through 2013. Rent expense totaled$37,000, $95,000 and $94,000 for the years ended September 30, 2005, 2004and 2003, respectively. The following table summarizes minimum payments dueunder lease agreements by year.

 
| **Year  ending**       | ** ** | ** **                 | ** ** |
|------------------------|------------|----------------------------|------------|
| **September 30,** | ** ** | **(Dollars in thousands)** | ** ** |
|                   |       |                       |       |
| 2006                   |       | $                          | 58         |   |
| 2007                   |       | 50                         |       |
| 2008                   |       | 38                         |       |
| 2009                   |       | 38                         |       |
| 2010                   |       | 39                         |       |
| Thereafter             |       | 93                         |       |
|                   |       |                       |       |
| ** **             |       | **$**                      | **316**    |   |

 

47

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**NOTE K - FEDERAL INCOME TAXES**

 

Federal income taxesdiffer from the amounts computed at the statutory corporate tax rate for theyears ended September 30 as follows:

 
| ** **                                                  | ** ** | **2005**                   | ** ** | **2004** | ** ** | **2003** | ** ** |
|-------------------------------------------------------------|------------|----------------------------|------------|----------|------------|----------|------------|
| ** **                                                  | ** ** | **(Dollars in thousands)** | ** ** |
|                                                        |       |                       |       |     |       |     |       |
| Federal income taxes at  statutory rate                     |       | $                          | 1,439      |     | $          | 1,424    |       | $ | 1,920 |   |
| Increase in taxes  resulting from:                          |       |                       |       |     |       |     |       |
| Bank  owned life insurance undistributed earnings           |       | (54                        | )          | —   |       | —   |       |
| Tax  exempt interest on municipal securities                |       | (5                         | )          |     |       |     |       |
| Other                                                       |       | (5                         | )          | (104     | )          | 2        |       |
| Federal income taxes  per consolidated financial statements |       | $                          | 1,375      |     | $          | 1,320    |       | $ | 1,922 |   |
|                                                        |       |                       |       |     |       |     |       |
| Effective tax rate                                          | ** ** | **32.4**                   | **%**      | **31.5** | **%**      | **34.0** | **%**      |

 

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

 
| ** **                                                                             | ** ** | **2005**           | ** ** | **2004**   | ** ** |
|----------------------------------------------------------------------------------------|------------|--------------------|------------|------------|------------|
| ** **                                                                             | ** ** | **(In thousands)** | ** ** |
|                                                                                   |       |               |       |
| Taxes  (payable) refundable on temporary differences at estimated corporate tax  rate: |       |               |       |       |       |
| Deferred  tax assets:                                                                  |       |               |       |       |       |
| General  loan loss allowance                                                           |       | $                  | 4,614      |       | $          | 3,751 |   |
| Deferred  compensation                                                                 |       | 467                |       | 485        |       |
| Stock  benefit plans                                                                   |       | 29                 |       | 26         |       |
| Deferred  loan origination fees                                                        |       | 991                |       | 994        |       |
| Net  operating loss carry forward from acquired financial institution                  |       | 952                |       | —     |       |
| Unrealized  losses on securities designated as available for sale                      |       | 59                 |       | 172        |       |
| Total  deferred tax assets                                                             |       | 7,112              |       | 5,428      |       |
|                                                                                   |       |               |       |       |       |
| Deferred  tax liabilities:                                                             |       |               |       |       |       |
| Federal  Home Loan Bank stock dividends                                                |       | (1,432             | )          | (1,241     | )          |
| Book/tax  depreciation differences                                                     |       | (193               | )          | (17        | )          |
| Core  deposit intangible and other purchase accounting adjustments                     |       | (848               | )          | (52        | )          |
| Other                                                                                  |       | (35                | )          | (13        | )          |
| Total  deferred tax liabilities                                                        |       | (2,508             | )          | (1,323     | )          |
|                                                                                   |       |               |       |       |       |
| Net  deferred tax asset                                                                | ** ** | **$**              | **4,604**  | ** ** | **$**      | **4,105** | ** ** |

 

48

----

 

As of September 30,2005, the Company had approximately $2.4 million of net operating loss carryforward available to offset future federal taxable income.  The net operating loss carry forward expiresin 2025.

 

Prior to fiscal 1997,Peoples was allowed a special bad debt deduction based on a percentage ofearnings, generally limited to 8% of otherwise taxable income and subject tocertain limitations based on aggregate loans and savings account balances atthe end of the year.  This deductiontotaled approximately $4.9 million as of September 30, 2005.  If the amounts that qualified as deductionsfor federal income tax purposes are later used for purposes other than for baddebt losses, including distributions in liquidation, such distributions will besubject to federal income taxes at the then current corporate income taxrate.  The approximate amount of theunrecognized deferred tax liability relating to the cumulative bad debtdeduction is $1.4 million.

 

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

 

**NOTE L - REGULATORY CAPITAL**

 

The Bank is subject tovarious regulatory capital requirements administered by the federal bankingagencies.  Failure to meet minimumcapital requirements can initiate certain mandatory – and possibly additionaldiscretionary – actions by regulators that, if undertaken, could have a directmaterial effect on the Bank’s financial statements.   Under capital adequacy guidelines and theregulatory framework for prompt corrective action, the Bank must meet specificcapital guidelines that involve quantitative measures of the bank’s assets,liabilities, and certain off-balance sheet items as calculated under regulatoryaccounting practices.  The Bank’s capitalamounts and classification are also subject to qualitative judgments by theregulators about components, risk weightings, and other factors.

 

Quantitative measuresestablished by regulation to ensure capital adequacy require the Bank tomaintain minimum amounts and ratios (set forth in the table below) of total andTier 1 capital (as defined in the regulation) to risk-weighted assets (asdefined), and of Tier 1 capital (as defined) to average assets (asdefined).  Management believes, as of September 30,2005, that the Bank meets all capital adequacy requirements to which it issubject.

 

Duringfiscal 2005, the Bank was notified by the OTS that it was categorized as “well-capitalized”under the regulatory framework for prompt corrective action.  To be categorized as “well-capitalized” theBank must maintain minimum capital ratios as set forth in the followingtables.  There are no conditions orevents since that notification that management believes have changed the Bank’scategory.

 

49

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As of September 30,2005, Peoples Community Bank and Peoples Community Bancorp exceeded all capitaladequacy requirements to which it was subject.

 
| ** **                                    | ** ** | **As of September 30, 2005** | ** ** |
|-----------------------------------------------|------------|-----------------------------------|------------|
| ** **                                    | ** ** | ** **                        | ** ** | ** ** | ** ** | **Adequately** | ** ** | **Well** | ** ** |
| ** **                                    | ** ** | **Actual**                        | ** ** | **Capitalized** | ** ** | **Capitalized** | ** ** |
| ** **                                    | ** ** | **Amount**                        | ** ** | **Ratio** | ** ** | **Amount** | ** ** | **Ratio** | ** ** | **Amount** | ** ** | **Ratio** | ** ** |
| ** **                                    | ** ** | **(Dollars in thousands)**        | ** ** |
| **Total Capital (to Risk Weighted Assets):**  |       |                              |       |   |   |   |   |   |   |   |   |   |   |
|                                          |       |                              |       |   |   |   |   |   |   |   |   |   |   |
| Consolidated                                  |       | $                                 | 111,878    |   | 16.5 | % | 3$54,148 |   | 38.0 | % | 3$67,685 |   | 3  10.0 | % |
| Peoples  Community Bank                       |       | $                                 | 105,583    |   | 14.6 | % | 3$57,758 |   | 38.0 | % | 3$72,198 |   | 3  10.0 | % |
|                                          |       |                              |       |   |   |   |   |   |   |   |   |   |   |
| **Tier 1 Capital (to Risk-Weighted Assets):** |       |                              |       |   |   |   |   |   |   |   |   |   |   |
|                                          |       |                              |       |   |   |   |   |   |   |   |   |   |   |
| Consolidated                                  |       | $                                 | 96,697     |   | 14.3 | % | 3$27,074 |   | 34.0 | % | 3$40,611 |   | 3   6.0 | % |
| Peoples  Community Bank                       |       | $                                 | 96,554     |   | 13.4 | % | 3$28,879 |   | 34.0 | % | 3$43,319 |   | 3   6.0 | % |
|                                          |       |                              |       |   |   |   |   |   |   |   |   |   |   |
| **Tier 1 Capital (to Average Assets):**       |       |                              |       |   |   |   |   |   |   |   |   |   |   |
|                                          |       |                              |       |   |   |   |   |   |   |   |   |   |   |
| Consolidated                                  |       | $                                 | 96,697     |   | 9.7 | % | 3$39,976 |   | 34.0 | % | 3$49,970 |   | 3   5.0 | % |
| Peoples  Community Bank                       |       | $                                 | 96,554     |   | 9.7 | % | 3$39,642 |   | 34.0 | % | 3$49,553 |   | 3   5.0 | % |

 

As of September 30,2005, Peoples Community Bank exceeded all capital adequacy requirements towhich it was subject.  Peoples CommunityBancorp was a savings institution holding company at September 30, 2004and was not subject to regulatory capital requirements separate from those ofthe bank.

 

**PeoplesCommunity Bank**

 
| ** **                                    | ** ** | **As of September 30, 2004** | ** ** |
|-----------------------------------------------|------------|-----------------------------------|------------|
| ** **                                    | ** ** | ** **                        | ** ** | ** ** | ** ** | **Adequately** | ** ** | **Well** | ** ** |
| ** **                                    | ** ** | **Actual**                        | ** ** | **Capitalized** | ** ** | **Capitalized** | ** ** |
| ** **                                    | ** ** | **Amount**                        | ** ** | **Ratio** | ** ** | **Amount** | ** ** | **Ratio** | ** ** | **Amount** | ** ** | **Ratio** | ** ** |
| ** **                                    | ** ** | **(Dollars in thousands)**        | ** ** |
| **Total Capital (to Risk Weighted Assets):**  |       | $                                 | 80,884     |   | 13.8 | % | 3$46,986 |   | 38.0 | % | 3$58,733 |   | 3  10.0 | % |
|                                          |       |                              |       |   |   |   |   |   |   |   |   |   |   |
| **Tier 1 Capital (to Risk-Weighted Assets):** |       | $                                 | 73,507     |   | 8.3 | % | 3$35,436 |   | 34.0 | % | 3$53,155 |   | 3   6.0 | % |
|                                          |       |                              |       |   |   |   |   |   |   |   |   |   |   |
| **Tangible Capital**                          |       | $                                 | 73,507     |   | 8.3 | % | 3$13,289 |   | 31.5 | % | 3$44,296 |   | 3   5.0 | % |

 

 

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

 

50

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**NOTE M - CONDENSED FINANCIALSTATEMENTS OF PEOPLES COMMUNITY BANCORP, INC.**

 

The following condensedfinancial statements summarize the financial position of Peoples CommunityBancorp, Inc. as of September 30, 2005 and 2004, and the results ofits operations and its cash flows for the periods ended September 30,2005, 2004 and 2003.

 

**PEOPLES COMMUNITY BANCORP, INC.**

**STATEMENTS OF FINANCIAL CONDITION**

September 30, 2005 and 2004

(In thousands)

 
| ** **                                                                            | ** ** | **2005**   | ** **  | **2004**   | ** ** |
|---------------------------------------------------------------------------------------|------------|------------|-------------|------------|------------|
| **ASSETS**                                                                            | ** ** | ** ** | ** **  | ** ** | ** ** |
| ** **                                                                            |       |       |        |       |       |
| Cash and cash  equivalents                                                            |       | $          | 2,319       |       | $          | 8,969 |   |
| Loan receivable from  Bank                                                            |       | 1,464      |        | 723        |       |
| Investment in Peoples  Community Bank                                                 |       | 108,237    |        | 79,286     |       |
| Investment in Columbia                                                                |       | 2,619      |        | —     |       |
| Prepaid federal income  taxes and other assets                                        |       | 2,239      |        | 1,368      |       |
|                                                                                  |       |       |        |       |       |
| Total  assets                                                                         | ** ** | **$**      | **116,878** | ** ** | **$**      | **90,346** | ** ** |
|                                                                                  |       |       |        |       |       |
| **LIABILITIES AND STOCKHOLDERS’  EQUITY**                                        |       |       |        |       |       |
|                                                                                  |       |       |        |       |       |
| Accrued expenses and  other liabilities                                               |       | $          | 331         |       | $          | 222 |   |
| Accounts payable to  subsidiary                                                       |       | 1,496      |        | 1,462      |       |
| Subordinated debentures                                                               |       | 28,351     |        | 12,887     |       |
| Total  liabilities                                                                    |       | 30,178     |        | 14,571     |       |
|                                                                                  |       |       |        |       |       |
| Stockholders’ equity                                                             |       |       |        |       |       |
| Common  stock and additional paid-in capital                                          |       | 61,442     |        | 51,217     |       |
| Retained  earnings                                                                    |       | 25,372     |        | 24,891     |       |
| Unrealized  losses on securities designated as available for sale, net of tax effects |       | (114       | )           | (333       | )          |
| Total  stockholders’ equity                                                      |       | 86,700     |        | 75,775     |       |
|                                                                                  |       |       |        |       |       |
| Total  liabilities and stockholders’ equity                                      | ** ** | **$**      | **116,878** | ** ** | **$**      | **90,346** | ** ** |

 

51

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**PEOPLES COMMUNITY BANCORP, INC.**

##### **STATEMENTSOF EARNINGS**

 

Forthe years ended September 30, 2005, 2004 and 2003

(In thousands)

 
| ** **                                    | ** ** | **2005** | ** ** | **2004**   | ** ** | **2003**  | ** ** |
|-----------------------------------------------|------------|----------|------------|------------|------------|-----------|------------|
| Revenue                                       |       |     |       |       |       |      |       |
| Interest  income                              |       | $        | 55         |       | $          | 28        |       | $ | 2 |   |
| Equity  in earnings of Peoples Community Bank |       | 3,611    |       | 3,480      |       | 4,266     |       |
| Equity  in earnings of Columbia               |       | 95       |       | —     |       | —    |       |
| Total  revenue                                |       | 3,761    |       | 3,508      |       | 4,268     |       |
|                                          |       |     |       |       |       |      |       |
| Expense                                       |       |     |       |       |       |      |       |
| Interest  expense                             |       | 1,043    |       | 667        |       | 575       |       |
| General  and administrative expenses          |       | 270      |       | 287        |       | 248       |       |
| Total  expense                                |       | 1,313    |       | 954        |       | 823       |       |
|                                          |       |     |       |       |       |      |       |
| Earnings  before income taxes                 |       | 2,448    |       | 2,554      |       | 3,445     |       |
|                                          |       |     |       |       |       |      |       |
| Federal income tax  benefits                  |       | (408     | )          | (315       | )          | (279      | )          |
|                                          |       |     |       |       |       |      |       |
| NET EARNINGS                                  | ** ** | **$**    | **2,856**  | ** ** | **$**      | **2,869** | ** ** | **$** | **3,724** |   |

 

52

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**PEOPLES COMMUNITY BANCORP, INC.**

**STATEMENTS OF CASH FLOWS**

Years ended September 30, 2005, 2004 and 2003

(In thousands)

 
| ** **                                                                                     | ** ** | **2005** | ** ** | **2004**   | ** ** | **2003**  | ** ** |
|------------------------------------------------------------------------------------------------|------------|----------|------------|------------|------------|-----------|------------|
|                                                                                           |       |     |       |       |       |      |       |
| Cash provided by (used  in) operating activities:                                              |       |     |       |       |       |      |       |
| Net earnings  for the year                                                                     |       | $        | 2,856      |       | $          | 2,869     |       | $ | 3,724 |   |
| Adjustments  to reconcile net earnings to net cash provided by (used in) operating  activities |       |     |       |       |       |      |       |
| Undistributed  earnings of Peoples Community Bank                                              |       | (3,691   | )          | (3,480     | )          | (4,272    | )          |
| Undistributed  earnings of Columbia                                                            |       | (95      | )          | —     |       | —    |       |
| Increase  (decrease) in cash due to changes in:                                                |       |     |       |       |       |      |       |
| Other  assets                                                                                  |       | (793     | )          | (317       | )          | (249      | )          |
| Other  liabilities                                                                             |       | 143      |       | 1,194      |       | (336      | )          |
| Net  cash provided by (used in) operating activities                                           |       | (1,580   | )          | 266        |       | (1,133    | )          |
|                                                                                           |       |     |       |       |       |      |       |
| Cash flows provided by  (used in) investing activities:                                        |       |     |       |       |       |      |       |
| Proceeds  from repayment of loan to ESOP                                                       |       | 221      |       | 264        |       | 190       |       |
| Purchase  of interest in Columbia                                                              |       | (2,524   | )          | —     |       | —    |       |
| Loan  disbursed to ESOP                                                                        |       | (962     | )          | (700       | )          | —    |       |
| Contribution  to Peoples Community Bank                                                        |       | (25,250  | )          | (14,438    | )          | —    |       |
|                                                                                           |       |     |       |       |       |      |       |
| Net  cash provided by (used in) investing activities                                           |       | (28,515  | )          | (14,874    | )          | 190       |       |
|                                                                                           |       |     |       |       |       |      |       |
| Cash flows provided by  financing activities:                                                  |       |     |       |       |       |      |       |
| Proceeds  from borrowings                                                                      |       | —   |       | 500        |       | 950       |       |
| Repayment  of borrowings                                                                       |       | —   |       | (1,900     | )          | —    |       |
| Dividends  paid on common stock                                                                |       | (2,419   | )          | (1,168     | )          | —    |       |
| Proceeds  from issuance of common stock-net                                                    |       | 10,250   |       | 26,114     |       | —    |       |
| Proceeds  from exercise of stock options                                                       |       | 150      |       | —     |       | 7         |       |
| Proceeds  from issuance of subordinated debentures                                             |       | 15,464   |       | —     |       | —    |       |
|                                                                                           |       |     |       |       |       |      |       |
| Net  cash provided by financing activities                                                     |       | 23,445   |       | 23,546     |       | 957       |       |
|                                                                                           |       |     |       |       |       |      |       |
| Net increase (decrease)  in cash and cash equivalents                                          |       | (6,650   | )          | 8,938      |       | 14        |       |
|                                                                                           |       |     |       |       |       |      |       |
| Cash and cash  equivalents at beginning of year                                                |       | 8,969    |       | 31         |       | 17        |       |
|                                                                                           |       |     |       |       |       |      |       |
| Cash and cash  equivalents at end of year                                                      | ** ** | **$**    | **2,319**  | ** ** | **$**      | **8,969** | ** ** | **$** | **31** | ** ** |

 

53

----

 

The Bank issubject to regulations imposed by the OTS regarding the amount of capitaldistributions payable by the Bank to the Corporation.  Generally, the Bank’s payment of dividends islimited, without prior OTS approval, to net earnings for the current calendaryear plus the two preceding calendar years, less capital distributions paidover the comparable time period.  Insuredinstitutions are required to file an application with the OTS for capitaldistributions in excess of this limitation. At September 30, 2005 thedividend payment amount available without prior approval approximated $10.2million.

 

Historically, management has carefully managed stockholders’ equity ina manner whereby the Corporation’s capital structure is aligned with theperceived risks inherent in its various lines of business.  In this regard, the Board and management arecontinually evaluating regulatory capital levels in view of projected growth,as well as changes in the asset mix. Management strives to maintain excess regulatory capital at all timesand, if necessary, will offer additional common shares in the future in orderto maintain the desired levels of capital.

 

**NOTE N - BUSINESS COMBINATIONS**

 

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

 

OnJune 10, 2005, the Company acquired American State Corporation (“AmericanState”), the parent company of American State Bank, included $38.4 million inloans receivable, $1.3 million in fixed assets, and $58.0 million in deposits.Goodwill and other intangible assets of approximately $5.8 million was recordedin the acquisition.

 

Each of the foregoing acquisitions focused onincreasing the Corporation’s market share and scale of operations, as well asexpanding its distribution network within its primary market area.  The results of operations of each of theseacquisitions have been included in the consolidated financial statements as oftheir acquisition date.

 

54

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Presented below are the estimated fair values ofthe assets acquired and liabilities assumed from Ameriana as of September 26,2003, the date of acquisition.

 
| ** **                     | ** ** | **(In thousands)** | ** ** |
|--------------------------------|------------|--------------------|------------|
|                           |       |               |       |
| Loans                          |       | $                  | 32,769     |   |
| Office premises and  equipment |       | 830                |       |
| Other assets                   |       | 142                |       |
| Goodwill                       |       | 2,303              |       |
|                           |       |               |       |
| Total  assets acquired         |       | 36,044             |       |
|                           |       |               |       |
| Deposits                       |       | 55,611             |       |
| Other Liabilities              |       | 163                |       |
|                           |       |               |       |
| Total  liabilities assumed     |       | 55,774             |       |
|                           |       |               |       |
| Net  liabilities assumed       |       | $                  | 19,730     |   |

 

Presented below are the estimated fair values ofthe assets acquired and liabilities assumed from American State Corp. as of June 10,2005, the date of acquisition.

 
| ** **                     | ** ** | **(In thousands)** | ** ** |
|--------------------------------|------------|--------------------|------------|
|                           |       |               |       |
| Cash and investments           |       | $                  | 16,086     |   |
| Investment securities          |       | 9,699              |       |
| Loans                          |       | 38,358             |       |
| Office premises and  equipment |       | 1,277              |       |
| Core deposits                  |       | 1,859              |       |
| Goodwill                       |       | 3,939              |       |
| Other assets                   |       | 1,910              |       |
|                           |       |               |       |
| Total  assets acquired         |       | 73,128             |       |
|                           |       |               |       |
| Deposits                       |       | 57,995             |       |
| Borrowings                     |       | 5,601              |       |
| Other liabilities              |       | 1,475              |       |
|                           |       |               |       |
| Total  liabilities assumed     |       | 65,071             |       |
|                           |       |               |       |
| Net  assets acquired           |       | $                  | 8,057      |   |

 

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Presented below are pro-forma condensedconsolidated statements of earnings which have been prepared as if the Amerianatransaction had been consummated as of the beginning of the fiscal year ended September 30,2003 and as if the American State acquisition had been consummated as of thebeginning of the fiscal years ended September 30, 2005, 2004 and 2003.

 
| ** **                                 | ** ** | **2005**           | ** ** | **2004**   | ** ** | **2003**  | ** ** |
|--------------------------------------------|------------|--------------------|------------|------------|------------|-----------|------------|
| ** **                                 | ** ** | **(In thousands)** | ** ** |
|                                       |       |               |       |       |       |      |       |
| Total interest income                      |       | $                  | 50,177     |       | $          | 44,053    |       | $ | 43,548 |   |
| Total interest expense                     |       | 26,951             |       | 20,736     |       | 20,887    |       |
| Net  interest income                       |       | 23,226             |       | 23,317     |       | 22,661    |       |
|                                       |       |               |       |       |       |      |       |
| Provision for losses on  loans             |       | 5,948              |       | 3,924      |       | 4,885     |       |
| Other income                               |       | 2,511              |       | 1,886      |       | 2,261     |       |
| General, administrative  and other expense |       | 18,992             |       | 16,618     |       | 14,624    |       |
| Earnings  before income taxes              |       | 797                |       | 4,661      |       | 5,413     |       |
|                                       |       |               |       |       |       |      |       |
| Federal income taxes                       |       | 328                |       | 1,371      |       | 1,837     |       |
|                                       |       |               |       |       |       |      |       |
| Net  earnings                              | ** ** | **$**              | **469**    | ** ** | **$**      | **3,290** | ** ** | **$** | **3,576** | ** ** |
|                                       |       |               |       |       |       |      |       |
| Pro-forma  basic earnings per share        | ** ** | **$**              | **.12**    | ** ** | **$**      | **1.06**  | ** ** | **$** | **1.44** | ** ** |
|                                       |       |               |       |       |       |      |       |
| Pro-forma  diluted earnings per share      | ** ** | **$**              | **.12**    | ** ** | **$**      | **1.04**  | ** ** | **$** | **1.42** | ** ** |

 

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**NOTE O - QUARTERLY RESULTS OFOPERATIONS (UNAUDITED)**

 

The following table summarizesthe Corporation’s quarterly results for the fiscal years ended September 30,2005 and 2004.  Certain amounts, aspreviously reported, have been reclassified to conform to the 2005presentation.

 
| ** **                                 | ** ** | **Three Months Ended**                    | ** ** |
|--------------------------------------------|------------|-------------------------------------------|------------|
| **2005:**                                  | ** ** | **December 31,**                     | ** ** | **March 31,** | ** ** | **June 30,** | ** ** | **September 30,** | ** ** |
| ** **                                 | ** ** | **(In thousands, except per share data)** | ** ** |
|                                       |       |                                      |       |   |   |   |   |   |   |
| Total interest income                      |       | $                                         | 10,785     |   | $ | 11,324 |   | $ | 12,163 |   | $ | 13,476 |   |
| Total interest expense                     |       | 5,559                                     |       | 6,039 |   | 6,691 |   | 7,915 |   |
|                                       |       |                                      |       |   |   |   |   |   |   |
| Net interest income                        |       | 5,226                                     |       | 5,285 |   | 5,472 |   | 5,561 |   |
| Provision for losses on  loans             |       | 900                                       |       | 900 |   | 900 |   | 900 |   |
| Gain (loss) on sale of  assets             |       | 747                                       |       | 35 |   | 19 |   | (55 | ) |
| Other income                               |       | 225                                       |       | 302 |   | 309 |   | 532 |   |
| General, administrative  and other expense |       | 3,882                                     |       | 3,831 |   | 3,824 |   | 4,290 |   |
|                                       |       |                                      |       |   |   |   |   |   |   |
| Earnings before income  taxes              |       | 1,416                                     |       | 891 |   | 1,076 |   | 848 |   |
| Federal income taxes                       |       | 481                                       |       | 297 |   | 366 |   | 231 |   |
|                                       |       |                                      |       |   |   |   |   |   |   |
| Net earnings                               | ** ** | **$**                                     | **935**    | ** ** | **$** | **594** | ** ** | **$** | **710** | ** ** | **$** | **617** | ** ** |
|                                       |       |                                      |       |   |   |   |   |   |   |
| Earnings per share                         |       |                                      |       |   |   |   |   |   |   |
| Basic                                      | ** ** | **$**                                     | **.24**    | ** ** | **$** | **.15** | ** ** | **$** | **.19** | ** ** | **$** | **.15** | ** ** |
|                                       |       |                                      |       |   |   |   |   |   |   |
| Diluted                                    | ** ** | **$**                                     | **.24**    | ** ** | **$** | **.15** | ** ** | **$** | **.18** | ** ** | **$** | **.15** | ** ** |

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

 

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**NOTE P – SUBSEQUENT EVENTS**

 

OnNovember 1, 2005, the Company entered into a definitive agreement and planof merger whereby the Company will acquire Mercantile Financial Corporation,parent of Mercantile Savings Bank, and Mercantile Savings Bank will merge withPeoples Community Bank.  MercantileFinancial Corporation plans to sell certain fixed assets in a separatetransaction prior to consummating the merger. Mercantile Savings Bank operates one office in Cincinnati and offers awide range of bank products and services. Under the term of the agreement, the Company will pay a combination ofstock and cash as set forth in the agreement and plan of merger for eachoutstanding common share of Mercantile, resulting in aggregate mergerconsideration of approximately $8.3 million. The merger is expected to be consummated in our second fiscal quarter of2006, pending receipt of regulatory approvals and other customary conditions ofclosing.  This transaction will beaccounted for using the purchase method of accounting.

 

OnDecember 16, 2005, the Company completed its previously announcedacquisition of PFS Bancorp, Inc., the parent company of Peoples FederalSavings Bank with three branch offices in the Southeast Indiana communities ofAurora, Rising Sun and Vevay.  The Bankpaid $23.00 in cash for each outstanding common shares of PFS Bancorp, Inc.resulting in aggregate merger consideration of approximately $33.8million.  This acquisition continues theexpansion of the Company in southeast Indiana.

 

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**PEOPLES COMMUNITY BANCORP, INC.**

 

**DIRECTORS AND OFFICERS**

 

 

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

**DIRECTORS**

 
| Paul E. Hasselbring                             |     | Thomas J. Noe                             |
|-------------------------------------------------|----------|-------------------------------------------|
| *Chairman of the Board*                         | * * | *Treasurer and Executive  Vice-President* |
|                                            |     |                                      |
| Jerry D. Williams                               |     | John E. Rathkamp                          |
| *President and Chief Executive  Officer*        | * * | *Secretary and Chief Lending  Officer*    |
|                                            |     |                                      |
| John L. Buchanan                                |     | Nicholas N. Nelson                        |
| *President of Buchanan’s Power  Equipment* | * * | *County Auditor, Warren County,  Ohio*    |
| *Center, Inc.*                             | * * |                                      |
|                                            |     |                                      |
| James R. Van DeGrift                            |     | Donald L. Hawke                           |
| *Trustee, Turtlecreek Township,*                | * * | *Retired*                                 |
| *Lebanon, Ohio*                                 | * * |                                      |

 

**EXECUTIVE OFFICERS**

 
| Jerry D. Williams                                   |     | Thomas J. Noe                                   |
|-----------------------------------------------------|----------|-------------------------------------------------|
| *President and Chief Executive  Officer*            | * * | *Treasurer and Executive Vice  President*       |
|                                                |     |                                            |
| Teresa A. O’Quinn                              |     | Lori M. Henn                                    |
| *Chief Operating Officer, Chief  Financial Officer* | * * | *Compliance Officer and Senior  Vice President* |
| *and Executive Vice President*                      | * * |                                            |
|                                                |     |                                            |
| Fred L. Darlington                                  |     | Stephen P. Wood                                 |
| *General Counsel and Senior Vice  President*        | * * | *Senior Vice President, Lending*                |

 

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**PEOPLES COMMUNITY BANCORP, INC.**

 

**BANKING LOCATIONS AND STOCKHOLDERINFORMATION**

 

 

**BANKING LOCATIONS**

 

Peoples CommunityBancorp, Inc. is a Maryland-incorporated bank holding company conductingbusiness through its wholly-owned subsidiary, Peoples Community Bank.  Peoples Community Bank is afederally-chartered, SAIF-insured stock savings bank operating through sixteenoffices in Hamilton, Warren, and Butler counties in southwest Ohio and DearbornCounty in southeast Indiana.

 
|                                                |   | **Main  Office**                                |   |                                            |
|-----------------------------------------------------|--------|-------------------------------------------------|--------|-------------------------------------------------|
|                                                |   | 6100  West Chester RoadWest Chester, Ohio 45069 |   |                                            |
|                                                |   |                                            |   |                                            |
|                                                |   | **Branch  Offices in Ohio**                     |   |                                            |
|                                                |   |                                            |   |                                            |
| 7615 Voice of America DriveWest Chester, Ohio 45069 |   | 11 South BroadwayLebanon, Ohio 45036            |   | 4825 Marburg AvenueCincinnati, Ohio 45209       |
|                                                |   |                                            |   |                                            |
| 5712 Bridgetown RoadCincinnati, Ohio 45248          |   | 6570 Harrison AvenueCincinnati, Ohio 45247      |   | 7522 Hamilton AvenueCincinnati, Ohio 45231      |
|                                                |   |                                            |   |                                            |
| 4100 State Route 128Cleves, Ohio 45002              |   | 1101 Columbus AvenueLebanon, Ohio 45036         |   | 5797 South State Route 48Maineville, Ohio 45039 |
|                                                |   |                                            |   |                                            |
| 8350 Arbor Square DriveMason, Ohio 45040            |   | 3530 Springdale RoadCincinnati, Ohio 45251      |   | 7200 Blue Ash RoadCincinnati, Ohio 45236        |
|                                                |   |                                            |   |                                            |
|                                                |   | **Branch Offices in Indiana**                   |   |                                            |
|                                                |   |                                            |   |                                            |
| 131 Walnut StreetLawrenceburg, Indiana 47025        |   | 320 Importing StreetAurora, Indiana 47001       |   | 24128 State Line RoadBright, Indiana 47025      |

 

**ANNUAL MEETING**

 

The Annual Meetingof Stockholders of Peoples Community Bancorp will be held on February 15,2006 at 10:00 AM Eastern Standard Time, at the Company’s Voice of Americalocation, 7615 Voice of America Centre Drive, West Chester, Ohio  45069.

 

**TRANSFER AGENT/REGISTRAR**

 

Registrar and Transfer Company

10 Commerce Drive

Cranford, New Jersey  07016

(908) 272-8511

 

 

**STOCKHOLDER REQUESTS**

 

Requests forannual reports, quarterly reports and related stockholder literature should bedirected to Thomas J. Noe, Treasurer, Peoples Community Bancorp, Inc.,6100 West Chester Road, P. O. Box 1130, West Chester, Ohio  45071

 

Stockholdersneeding assistance with stock records, transfers or lost certificates, pleasecontact Peoples Community Bancorp’s transfer agent, Registrar and TransferCompany.

 

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