**Exhibit 13**

 

 

**PEOPLES COMMUNITY BANCORP, INC.**

 

 

 

**2003 ANNUAL REPORT**

 

**TO STOCKHOLDERS**

 

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**TABLE OFCONTENTS**

 
|                                                                                        | **Page**                                              |
|---------------------------------------------------------------------------------------------|-------------------------------------------------------|
| President’s Letter to Stockholders                                                     | 1                                                     |
|                                                                                        |                                                  |
| Business of Peoples Community  Bancorp, Inc                                                 | 2                                                     |
|                                                                                        |                                                  |
| Market Price of Peoples 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 Independent Certified  Public Accountants   | 21 |
|                                                                                        | Consolidated  Statements of Financial Condition       | 22 |
|                                                                                        | Consolidated  Statements of Earnings                  | 23 |
|                                                                                        | Consolidated  Statements of Comprehensive Income      | 24 |
|                                                                                        | Consolidated  Statements of Stockholders’ Equity | 25 |
|                                                                                        | Consolidated  Statements of Cash Flows                | 26 |
|                                                                                        | Notes to  Consolidated Financial Statements           | 28 |
|                                                                                        |                                                  |   |
| Directors and Executive Officers                                                            | 59                                                    |
|                                                                                        |                                                  |   |
| Banking Locations and Stockholder  Information                                              |                                                  | 60 |
|                                                                                             |                                                       |  |  |

 

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Dear Stockholders:

 

Peoples Community Bancorp, Inc. entered fiscal 2003poised to continue its asset and earnings growth as a premier, independentcommunity bank.  Since our conversion toa public company in March 2000, we have focused on executing our business planby diversifying our lending and deposit products and pursuing growth bothinternally and through strategic acquisitions. Although the economic environment proved to be difficult in fiscal 2003,we continued our positive asset and earnings trend as total assets increased$157.1 million or 27.0% and net earning increased $575,000 or 18.3%.  In addition, we are pleased to report basicearnings per share of $1.51 a share, an increase of $0.22 or 17.1%.

 

We have increased our visibility and market sharethrough de novo branching and strategic acquisitions.  In fiscal 2002, we opened two new branch offices, both in WarrenCounty, and acquired two other branch offices in Hamilton County in the mergerwith Kenwood Bancorp, Inc.  In fiscal2003, we acquired two branches from Ameriana Bank and Trust, one each inHamilton and Warren County.  Inconnection with this transaction, we acquired $32.8 million in loans and $55.6million in deposits.  We have also filedregulatory applications to open new branch offices in fiscal 2004 in Warren andButler Counties.  This strategy hasresulted in significant deposit growth from $233.1 million at September 30,2001 to $455.9 million at September 30, 2003. We intend to continue to expand our coverage through de novo branchopenings, increased promotion of products and services and continued emphasison competitive pricing and excellent customer service.

 

Entering fiscal 2004, we are optimistic that we willbe able to implement our strategic plan as a premier, independent communitybank providing superior products and services to customers and enhanced valueto our stockholders.  We would like totake this opportunity to express our appreciation to our customers andstockholders for your continued support.

 
|   |   |   |   |   |   | Sincerely,                            |
|--------|--------|--------|--------|--------|--------|---------------------------------------|
|   |   |   |   |   |   |                                  |
|   |   |   |   |   |   |                                  |
|   |   |   |   |   |   | /s/ Jerry D. Williams                 |   |
|   |   |   |   |   |   | Jerry D. Williams                     |
|   |   |   |   |   |   | President and Chief Executive Officer |

 

1

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**Peoples Community Bancorp, Inc.**

 

 

**BUSINESS OF PEOPLES****COMMUNITY BANCORP, INC.**

 

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

 

Peoples Bank was organized in 1889 as anOhio-chartered mutual savings and loan association under the name “People’sBuilding, Loan and Savings Co.”  OnSeptember 30, 1999, Peoples Bank and The Oakley Improved Building and LoanCompany (“Oakley”), jointly executed an Agreement and Plan of Merger, whichprovided for the merger of Oakley with and into Peoples Bank (the“Merger”).  The Merger was accounted forunder the pooling-of-interests method of accounting.  Consequently, the 1999 financial statements have previously beenrestated to include the accounts of Oakley. In addition, Peoples Bank adopted a Plan of Conversion (the“Conversion”), which provided for the conversion of Peoples Bank to a federallychartered stock savings bank, the formation of Peoples Bancorp and the sale ofPeoples Bancorp’s common stock.

 

Immediately following the Merger and theConversion, Peoples Bancorp acquired Harvest Home Financial Corporation(“Harvest Home”).  The acquisition wasaccounted for using the purchase method of accounting.  At the time of the Merger and theConversion, Peoples Bank changed its name to Peoples Community Bank.

 

The activities of PeoplesBancorp have been limited primarily to holding the stock of Peoples Bank.  Peoples Bank conducts a general bankingbusiness in southwestern Ohio which consists of attracting deposits from thegeneral public and primarily applying those funds to the origination of loans forresidential, consumer, commercial and nonresidential purposes.  Peoples Bank’s business is conducted throughan aggressive marketing and selling effort of its lending products and servicesto the communities in its market area and through the continued development ofinnovative lending programs that give Peoples Bank a competitive advantage.

 

Peoples Bank also investsin U.S. government guaranteed mortgage-backed securities and investmentsecurities issued by the U.S. government and agencies thereof.  Funds for lending and investment are obtainedprimarily from savings deposits, loan principal and interest repayments andborrowings from the Federal Home Loan Bank (the “FHLB”) of Cincinnati, of whichPeoples Bank is a member.

 

Peoples Bancorp is subject to regulation, supervision and examination bythe Office of Thrift Supervision of the U.S. Department of Treasury (the“OTS”).  Peoples Bank is subject toregulation, supervision and examination by the OTS as its primary federalregulator and the Federal Deposit Insurance Corporation (the “FDIC”), whichadministers the Savings Association Insurance Fund.  The FDIC insures deposits in Peoples Bank up to applicablelimits.

 

2

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**PeoplesCommunity Bancorp, Inc.**

 

**MARKETPRICE OF P****EOPLES BANCORP COMMON SHARES**

**AND RELATED STOCKHOLDER MATTERS**

 

Peoples Bancorp’s common shares have beenlisted on the Nasdaq National Market (“Nasdaq”) since March 29, 2000,under the symbol “PCBI.”  Presentedbelow are the high and low trading prices for Peoples Bancorp’s common sharesfor the three years ended September 30, 2003. Such prices do not include retail financial markups, markdowns orcommissions.  Information relating toprices has been obtained from Nasdaq.

 
| **Fiscal 2003**     |   | **High** |       | **Low** |       |
|---------------------|--------|----------|------------|---------|------------|
|                |   |     |       |    |       |
| Quarter ended:      |   |     |       |    |       |
| September  30, 2003 |   | $        | 24.24      |    | $          | 21.50 |   |
| June 30, 2003       |   | 25.25    |       | 20.51   |       |
| March 31, 2003      |   | 22.90    |       | 20.88   |       |
| December  31, 2002  |   | 23.50    |       | 20.95   |       |
|                |   |     | ** ** |    | ** ** |
| **Fiscal 2002**     |   | **High** | ** ** | **Low** | ** ** |
|                |   |     |       |    |       |
| Quarter ended:      |   |     |       |    |       |
| September  30, 2002 |   | $        | 23.73      |    | $          | 19.90 |   |
| June 30, 2002       |   | 22.73    |       | 20.05   |       |
| March 31, 2002      |   | 20.80    |       | 18.75   |       |
| December  31, 2001  |   | 20.70    |       | 15.50   |       |
|                |   |     | ** ** |    | ** ** |
| **Fiscal 2001**     |   | **High** | ** ** | **Low** | ** ** |
|                |   |     |       |    |       |
| Quarter ended:      |   |     |       |    |       |
| September  30, 2001 |   | $        | 18.12      |    | $          | 13.90 |   |
| June 30, 2001       |   | 16.44    |       | 13.50   |       |
| March 31, 2001      |   | 16.25    |       | 14.25   |       |
| December  31, 2000  |   | 16.00    |       | 11.94   |       |

 

As of December 3, 2003,Peoples Bancorp had 2,522,088 common shares outstanding held of record byapproximately 996 stockholders.  Thenumber of stockholders does not reflect the number of persons or entities whomay hold stock in nominee or “street” name through brokerage firms orothers.  Peoples Bancorp did not declareor pay any dividends during the fiscal years ended September 30, 2003, 2002 or2001.

 

3

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**Peoples Community Bancorp, Inc.**

 

 

**SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA**

 

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

 
|                                                               |   | **At  September 30,** |    |
|--------------------------------------------------------------------|--------|-----------------------|---------|
| **Selected Consolidated Financial  Condition Data: (1)**           |   | **2003**              |    | **2002** |   | **2001** |   | **2000** |   | **1999** |   |
|                                                               |   | **(In  thousands)**   |    |
|                                                               |   |                  |    |   |   |   |   |   |   |   |   |
| Total assets                                                       |   | $                     | 738,683 |   | $ | 581,632 |   | $ | 415,970 |   | $ | 320,620 |   | $ | 107,313 |   |
| Cash and cash  equivalents                                         |   | 10,023                |    | 26,637 |   | 14,595 |   | 4,627 |   | 5,183 |   |
| Investment  securities available for sale                          |   | 2,156                 |    | 1,231 |   | 1,364 |   | 8,211 |   | 3,650 |   |
| Mortgage-backed  securities available for sale                     |   | 133,828               |    | 18,763 |   | — |   | 94,050 |   | 1,185 |   |
| Loans  receivable, net                                             |   | 554,351               |    | 504,012 |   | 377,727 |   | 196,485 |   | 94,551 |   |
| Deposits                                                           |   | 455,900               |    | 369,080 |   | 233,063 |   | 151,353 |   | 91,018 |   |
| Advances from  the Federal Home Loan Bank and other borrowed money |   | 232,400               |    | 165,450 |   | 140,000 |   | 134,500 |   | — |   |
| Stockholders’  equity (2)                                     |   | 46,699                |    | 42,990 |   | 38,778 |   | 31,664 |   | 14,677 |   |
|                                                                    |        |                       |         |  |  |  |  |  |  |  |  |  |  |  |  |  |

 
|                                                     |   | **Year Ended  September 30,**              |       |
|----------------------------------------------------------|--------|--------------------------------------------|------------|
| **Selected Consolidated Operating  Data: (1)**           |   | **2003**                                   |       | **2002** |   | **2001** |   | **2000** |   | **1999** |   |
|                                                     |   | **(In  thousands, except per share data)** | ** ** |
|                                                     |   |                                       |       |   |   |   |   |   |   |   |   |
| Interest  income                                         |   | $                                          | 37,169     |   | $ | 33,712 |   | $ | 25,897 |   | $ | 15,429 |   | $ | 7,872 |   |
| Interest expense                                         |   | 18,072                                     |       | 15,598 |   | 15,543 |   | 10,091 |   | 4,581 |   |
| Net interest  income                                     |   | 19,097                                     |       | 18,114 |   | 10,354 |   | 5,338 |   | 3,291 |   |
|                                                     |   |                                       |       |   |   |   |   |   |   |   |   |
| Provision for losses  on loans                           |   | 4,198                                      |       | 5,265 |   | 2,449 |   | 156 |   | 175 |   |
| Net interest  income after provision for losses on loans |   | 14,899                                     |       | 12,849 |   | 7,905 |   | 5,182 |   | 3,116 |   |
| Other  income                                            |   | 1,251                                      |       | 2,509 |   | 4,847 |   | 101 |   | 20 |   |
| General,  administrative and other expense               |   | 10,504                                     |       | 9,817 |   | 8,124 |   | 4,273 |   | 2,030 |   |
|                                                     |   |                                       |       |   |   |   |   |   |   |   |   |
| Earnings  before income taxes                            |   | 5,646                                      |       | 5,541 |   | 4,628 |   | 1,010 |   | 1,106 |   |
| Federal income  taxes                                    |   | 1,922                                      |       | 2,392 |   | 2,304 |   | 462 |   | 371 |   |
| Net earnings                                             |   | **$**                                      | **3,724**  | ** ** | **$** | **3,149** | ** ** | **$** | **2,324** | ** ** | **$** | **548** | ** ** | **$** | **735** | ** ** |
|                                                     |   |                                       |       |   |   |   |   |   |   |   |   |
| Earnings per share                                       |   |                                       |       |   |   |   |   |   |   |   |   |
| Basic                                                    |   | **$**                                      | **1.51**   | ** ** | **$** | **1.29** | ** ** | **$** | **1.08** | ** ** | **N/A** | ** ** | **N/A** | ** ** |
| Diluted                                                  |   | **$**                                      | **1.48**   | ** ** | **$** | **1.27** | ** ** | **$** | **1.08** | ** ** | **N/A** | ** ** | **N/A** | ** ** |

 

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(Seefootnotes on next page)

 

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|                                                                     |   | **At or for  the year ended September 30,** |   |
|--------------------------------------------------------------------------|--------|---------------------------------------------|--------|
| **Key Operating Ratios:   (1)**                                     |   | **2003**                                    |   | **2002** |   | **2001** |   | **2000** |   | **1999** |   |
|                                                                     |   |                                        |   |   |   |   |   |   |   |   |   |
| **Performance  Ratios: **(3)                                        |   |                                        |   |   |   |   |   |   |   |   |   |
| Return  on average assets                                                |   | .59                                         | %      | .67 | % | .65 | % | .26 | % | .70 | % |
| Return on  average equity                                                |   | 8.28                                        |   | 8.09 |   | 6.46 |   | 2.41 |   | 5.14 |   |
| Average interest-earning  assets to average interest-bearing liabilities |   | 105.83                                      |   | 107.27 |   | 110.13 |   | 110.39 |   | 115.48 |   |
| Interest rate  spread (4)                                                |   | 2.96                                        |   | 3.74 |   | 2.57 |   | 2.12 |   | 2.48 |   |
| Net interest margin (4)                                                  |   | 3.13                                        |   | 3.99 |   | 3.03 |   | 2.63 |   | 3.17 |   |
| General,  administrative and other expense to average assets             |   | 1.65                                        |   | 2.07 |   | 2.26 |   | 2.04 |   | 1.92 |   |
|                                                                     |   |                                        |   |   |   |   |   |   |   |   |   |
| **Asset  Quality Ratios:**                                               |   |                                        |   |   |   |   |   |   |   |   |   |
| Nonperforming  assets to total assets at end of period (5)               |   | 1.16                                        | %      | 1.30 | % | .19 | % | .43 | % | 1.01 | % |
| Allowance for  loan losses to nonperforming loans at end of period       |   | 134.15                                      |   | 102.19 |   | 467.69 |   | 60.67 |   | 38.46 |   |
| Allowance for  loan losses to total loans at end of period               |   | 1.57                                        |   | 1.37 |   | .87 |   | .36 |   | .42 |   |
|                                                                     |   |                                        |   |   |   |   |   |   |   |   |   |
| **Capital  and Other Ratios:** (2)                                       |   |                                        |   |   |   |   |   |   |   |   |   |
| Average  stockholders’ equity to average assets                     |   | 7.07                                        | %      | 8.22 | % | 10.00 | % | 10.84 | % | 13.54 | % |
| Tangible  stockholders’ equity to tangible assets                   |   | 7.51                                        |   | 8.75 |   | 8.60 |   | 8.10 |   | 12.80 |   |
| Total capital to  risk-weighted assets                                   |   | 12.09                                       |   | 13.69 |   | 14.01 |   | 18.05 |   | 24.60 |   |

 

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(1)                                  Theinformation as of and for the fiscal year ended September 30, 1999, haspreviously been restated to reflect the effects of the merger with The OakleyImproved Building and Loan Company in March 2000.

 

(2)                                  Consistssolely of retained earnings at September 30, 1999.

 

(3)                                  Allratios are based on average monthly balances during the respective periods.

 

(4)                                  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.

 

(5)                                  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.

 

5

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**PeoplesCommunity Bancorp, Inc.**

 

**MANAGEMENT’S DISCUSSION AND ANALYSIS**

**OF FINANCIALCONDITION AND RESULTS OF OPERATIONS**

 

**General**

 

Peoples Bancorp’s profitability depends primarily onnet interest income, which is the difference between interest and dividendincome on interest-earning assets, principally loans, mortgage-backedsecurities, investment securities and interest-earning deposits in otherfinancial institutions, and interest expense, principally on interest-bearingdeposits and borrowings from the Federal Home Loan Bank of Cincinnati.  Net interest income is dependent upon thelevel of interest rates and the extent to which such rates are changing.  Peoples Bancorp’s profitability alsodepends, to a lesser extent, on the level of other income, the provision forlosses on loans, general, administrative and other expenses and federal incometaxes.

 

Peoples Bancorp’s operations and profitability aresubject to changes in interest rates, applicable statutes and regulations andgeneral economic conditions, as well as other factors beyond management’scontrol.

 

On March 29, 2000 the following transactions werecompleted:

 

•                  TheOakley Improved Building and Loan was merged with and into Peoples Bank;

•                  PeoplesBank converted to a federally chartered stock savings bank and Peoples Bancorpsold 1,190,000 shares of its common stock; and

•                  PeoplesBancorp acquired Harvest Home Financial Corporation and its wholly owned subsidiary,Harvest Home Savings Bank.

 

Peoples Bancorp’s consolidated financial statementsgive effect to the conversion, the merger between Peoples Bank and Oakley usingthe pooling of interests method of accounting and the merger between PeoplesBancorp and Harvest Home Financial using the purchase method ofaccounting.  In the conversion, PeoplesBancorp issued 1,190,000 shares of common stock, which resulted in net proceedsof approximately $10.3 million.  Inaddition, Peoples Bancorp issued 787,733 common shares in connection with theacquisition of Harvest Home.

 

On March 30, 2001, Peoples Bancorp acquired MarketFinancial Corporation for consideration of $7.8 million in cash and 527,930shares of common stock.  Under the termsof the agreement, each share of Market’s common stock was exchanged for acombination of cash and shares of Peoples Bancorp totaling $13.00 pershare.  The acquisition was accountedfor using the purchase method of accounting and, consequently, prior periodamounts were not restated.  As of March30, 2001, Market Financial Corporation had approximately $56.7 million inassets, $50.7 million in liabilities and $6.0 million in stockholders’ equity.

 

On January 18,2002, the Bank sold $11.0 million in total loans and $9.9 million in totaldeposits to another financial institution pursuant to a Purchase and AssumptionAgreement.  These assets and liabilitieshad been assigned to the Bank’s branch office located in Blanchester, Ohio.

 

On April 26, 2002,the Company completed its acquisition of Kenwood Bancorp, Inc. forconsideration of $25.22 per outstanding share, totaling $7.9 million incash.  Kenwood was merged with and intothe Company and Kenwood’s wholly-owned banking subsidiary, Kenwood SavingsBank, became a wholly-owned subsidiary of Peoples Bank.  The Company acquired $56.6 million in totalassets and initially recorded approximately $3.4 million in goodwill as part ofthe transaction.

 

6

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On July 25, 2003, Peoples Bank sold theKenwood Savings Bank charter, along with $10.0 million in deposits and $10.1million of loans to Fort Washington Trust Company, a subsidiary of Western andSouthern Life Insurance Company.

 

On September 26, 2003, Peoples Bankacquired two Ohio branch offices from Ameriana Bank and Trust, including $32.8million in loans and $55.6 million in deposits.  Peoples Bank recorded approximately $2.3 million in goodwill as aresult of this transaction.

 

**Forward-LookingStatements Are Subject to Change**

 

Certain statements are made in this document as towhat management expects may happen in the future.  These statements usually contain the words “believe,” “estimate,”“project,” “expect,” “anticipate,” “intend” or similar expressions.  Because these statements look to the future,they are based on management’s current expectations and beliefs.  Actual results or events may differmaterially from those reflected in the forward-looking statements.  Management’s current expectations andbeliefs as to future events are subject to change at any time, and noassurances can be provided that the future events will actually occur.

 

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**PeoplesCommunity Bancorp, Inc.**

 

# **AVERAGEBALANCES, NET INTEREST INCOME AND YIELDS EARNED AND RATES PAID**

 

The following table presents for the periods indicated the total dollaramount of interest income from average interest-earning assets and theresultant yields, as well as interest expense on average interest-bearingliabilities, expressed both in dollars and rates, and the net interestmargin.  All average balances are basedon monthly balances.  Management doesnot believe that the monthly averages differ significantly from the dailyaverage balances.

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

 

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(1)                                  Includes non-accruing loans.

 

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

 

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

 

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**PeoplesCommunity Bancorp, Inc.**

 

**MANAGEMENT’SDISCUSSION AND ANALYSIS**

**OF FINANCIALCONDITION AND RESULTS OF OPERATIONS**

 

**Rate/Volume Analysis**

 

The followingtable shows the extent to which changes in interest rates and changes in volumeof interest-related assets and liabilities affected Peoples Bancorp’s interestincome and expense during the periods indicated.  For each category of interest-earning assets and interest-bearingliabilities, information is provided on changes attributable to(i) changes in volume (change in volume multiplied by prior year rate),and (ii) changes in rate (change in rate multiplied by prior year volume).  The combined effect of changes in both rateand volume has been allocated proportionately to the change due to rate and thechange due to volume.

 
|                                |   | **Year ended  September 30,**    |       |
|-------------------------------------|--------|----------------------------------|------------|
|                                |   | **2003 vs.  2002**               |       | **2002 vs.  2001** |   |
|                                |   | **Increase  (decrease)  due to** |       |   |   | **Increase  (decrease)  due to** |   |   |   |
|                                |   | **Rate**                         |       | **Volume** | ** ** | **Total** | ** ** | **Rate** | ** ** | **Volume** | ** ** | **Total** | ** ** |
|                                |   | **(In  thousands)**              | ** ** |
| Interest-earning  assets:           |   |                             |       |   |   |   |   |   |   |   |   |   |   |
| Loans receivable                    |   | $                                | (4,253     | ) | $ | 6,415 |   | $ | 2,162 |   | $ | (316 | ) | $ | 11,008 |   | $ | 10,692 |   |
| Mortgage-backed securities          |   | (55                              | )          | 1,262 |   | 1,207 |   | (1,112 | ) | (1,394 | ) | (2,506 | ) |
| Investment  securities (1)          |   | (61                              | )          | 94 |   | 33 |   | (152 | ) | (171 | ) | (323 | ) |
| Interest-earning  deposits          |   | (45                              | )          | 100 |   | 55 |   | (58 | ) | 10 |   | (48 | ) |
| Total interest-earning assets       |   | (4,414                           | )          | 7,871 |   | 3,457 |   | (1,638 | ) | 9,453 |   | 7,815 |   |
|                                |   |                             |       |   |   |   |   |   |   |   |   |   |   |
| Interest-bearing liabilities:       |   |                             |       |   |   |   |   |   |   |   |   |   |   |
| Savings and  checking accounts      |   | (556                             | )          | 1,612 |   | 1,056 |   | (137 | ) | 868 |   | 731 |   |
| Money market  deposit accounts      |   | (220                             | )          | 48 |   | (172 | ) | (218 | ) | 176 |   | (42 | ) |
| Certificates of  deposit            |   | (1,739                           | )          | 1,651 |   | (88 | ) | (1,331 | ) | 2,130 |   | 799 |   |
| FHLB advances and  other borrowings |   | 1,110                            |       | 769 |   | 1,879 |   | (3,206 | ) | 1,023 |   | (2,183 | ) |
| Subordinated  debentures            |   | (292                             | )          | 91 |   | (201 | ) | — |   | 750 |   | 750 |   |
| Total  interest-bearing liabilities |   | (1,697                           | )          | 4,171 |   | 2,474 |   | (4,892 | ) | 4,947 |   | 55 |   |
|                                |   |                             |       |   |   |   |   |   |   |   |   |   |   |
| Increase in net  interest income    |   | **$**                            | **(2,717** | **)** | **$** | **3,700** | ** ** | **$** | **983** | ** ** | **$** | **3,254** | ** ** | **$** | **4,506** | ** ** | **$** | **7,760** | ** ** |

 

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(1)           Includes Federal Home Loan Bank stockand certificates of deposit at other institutions.

 

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###### **Discussion of Financial Condition Changes fromSeptember 30, 2002 to September 30, 2003**

 

At September 30, 2003, Peoples Bancorp’s total assets amounted to$738.7 million, an increase of $157.1 million, or 27.0%, compared to the $581.6million total at September 30, 2002. The increase in assets was comprised primarily of a $50.3 millionincrease in loans and a $115.1 million increase in mortgage-backed securities.The increase in assets was funded by growth in deposits of $86.8 million and anincrease in advances from the Federal Home Loan Bank and other borrowingstotaling $67.0 million.

 

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

 

Mortgage-backed securities totaled $133.8 million at September 30,2003, an increase of $115.1 million over September 30, 2002.  The Company purchased $208.1 million inadjustable rate mortgage-backed securities during fiscal 2003 as a tool tomanage liquidity and interest rate risk, as well as to provide interest incomewith minimal credit risk, due to the implicit guarantee of government sponsoredagencies.  During fiscal 2003, principalrepayments on mortgage-backed securities totaled $23.0 million and salesamounted to $68.4 million.  The proceedsfrom the sale and repayment of mortgage-backed securities were generally usedto fund loan originations during the period.

 

Loans receivable totaled $554.4 million at September 30, 2003, anincrease of $50.3 million, or 10.0%, over September 30, 2002 levels.  The Company obtained loans totaling $32.8million in September 2003 through the acquisition of two branch offices ofAmeriana Bank and Trust.  Loandisbursements amounted to $278.6 million during fiscal 2003, which werepartially offset by principal repayments of $247.1 million and loans soldtotaling $10.2 million.  The overall growth in the loan portfolio duringthe year was comprised primarily of $38.5 million in loans secured bymulti-family residential real estate, $32.6 million in construction loans,$43.4 million in loans secured by nonresidential real estate and land, and$16.2 million in commercial and consumer loans.  Over the past three fiscal years, the Bank has placed anincreasing emphasis on multi-family residential loans, nonresidential realestate and land loans, construction loans, unsecured commercial loans andconsumer loans.  As a result, as apercentage of the total loan portfolio, single-family residential loans havedecreased from 72.7% at September 30, 2000 to 37.1% at September 30, 2003,while multi-family residential loans, nonresidential real estate and landloans, construction loans, commercial loans and consumer loans have increasedduring the same time period from 4.3% to 15.3%, 9.7% to 21.1%, 12.8% to 19.7%,0.0% to 4.8% and 0.1% to 1.9%, respectively. Nonresidential real estate lending and unsecured commercial lending aregenerally considered  to involve  a higher degree of risk than residentialreal estate lending due to the relatively larger loan amounts and the effect of general economic conditions on thesuccessful operation of the related business and/or income-producing properties.  Peoples Bank has endeavored to reduce suchrisk by evaluating the credit history and past performance of the borrower, thelocation of the real estate, the quality of the borrowers’ management, the debtservice ratio, the quality and characteristics of the income stream generatedby the business or the property and appraisals supporting the property’svaluation, as applicable.

 

The allowance for loan losses totaled $9.7 million at September 30,2003, an increase of $2.1 million, or 27.3%, compared to September 30,2002.  Loans charged-off amounted to$2.1 million during fiscal 2003 and $4.2 million was added through theprovision for losses on loans, due primarily to the overall growth in the loanportfolio from September 30, 2002, as well as the changes in the composition ofthe loan portfolio and the level of charge-offs and nonperforming loans.

 

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The allowance for loan losses represented 1.57% and 1.37% of totalloans at September 30, 2003 and 2002, respectively.  The allowance for loan losses represented 134.1% and 102.2% ofnonperforming loans at September 30, 2003 and 2002, respectively.  Nonperforming and impaired loans totaled$9.6 million and $7.5 million at September 30, 2003 and 2002, respectively.Nonperforming multi-family residential loans, totaling $3.6 million, or 49.0%,of total nonperforming loans, consisted primarily of a $3.5 million loan in theprocess of foreclosure.  Nonperforming construction loans totaling$2.0 million, or 26.9% of total nonperforming loans, consisted primarily of aseries of condominium loans to a financially troubled builder aggregating $1.8million.  The Bank is closely monitoringthe construction progress and the builder has commitments to sell four individualunits.  Management has considered theseloan concentrations as a part of its overall evaluation of the adequacy of theBank’s allowance for loan losses. Although management believes that its allowance for loan losses atSeptember 30, 2003 was appropriate based upon the available facts andcircumstances, there can be no assurance that additions to such allowance willnot be necessary in future periods, which would adversely affect the Bank’sresults of operations.

 

Deposits totaled $455.9 million at September 30, 2003, an increase of$86.8 million, or 23.5%, over the total at September 30, 2002.  Total demand, transaction and savingsdeposits increased to $211.0 million at September 30, 2003, from $139.8 millionat September 30, 2002, while total certificates of deposit increased from$229.3 million to $244.9 million, respectively.  The increase in deposits was primarily attributable to theaddition of $55.6 million in deposits in connection with the acquisition of twobranch offices purchased from Ameriana Bank and Trust in September 2003, aswell as management’s efforts to maintain deposit growth through marketingstrategies.  Proceeds from depositgrowth were generally used to fund new loan originations and the purchasemortgage-backed securities.

 

Advances from the Federal Home Loan Bank and other borrowings totaled$219.9 million at September 30, 2003, an increase of $67.0 million, or 43.8%,compared to September 30, 2002 totals. Borrowings totaling $96.0 million were repaid during fiscal 2003, primarilyusing proceeds from deposit growth and principal repayments on loans, while newborrowings of $163.0 million were obtained, generally to fund new loanoriginations and purchase mortgage-backed securities.

 

Stockholders’ equity totaled $46.7 million at September 30, 2003, anincrease of $3.7 million, or 8.6%, over September 30, 2002.  The increase resulted primarily from netearnings of $3.7 million and the amortization effects of the stock benefit andoption plans totaling $730,000, which were partially offset by a $752,000decrease in net unrealized gains on available for sale securities.

 

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

 

# **General**

 

The inclusion of the accounts of Kenwood, which the Company acquired inApril 2002, 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, 2003, compared to fiscal 2002.  In accordance with the purchase method ofaccounting, the consolidated statement of earnings for the fiscal year endedSeptember 30, 2002 was not restated for the acquisition.

 

Peoples Bancorp recorded net earnings of $3.7 million for the fiscalyear ended September 30, 2003, an increase of $575,000, or 18.3%, compared tofiscal 2002.  The increase in earningsresulted primarily from a $983,000 increase in net interest income, a $1.1million decrease in the provision for losses on loans and a $470,000 decreasein federal income taxes, which were partially offset by a $1.3 million decreasein other income and a $687,000 increase in general, administrative and otherexpense.

 

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# **Net Interest Income**

 

Total interest income amounted to $37.2 million for the fiscal yearended September 30, 2003, a $3.5 million, or 10.3%, increase over fiscal2002.  The increase was due to a $157.0million, or 34.6%, increase in average interest-earning assets, partiallyoffset by a 134 basis point decline in the average yield year to year.

 

Interest income on loans totaled $35.0 million for the fiscal yearended September 30, 2003, an increase of $2.2 million, or 6.6%, over fiscal2002.  This increase was due primarilyto a $95.3 million, or 22.4%, increase in the average portfolio balanceoutstanding year to year, partially offset by a 100 basis point decline in theweighted-average yield, to 6.71% for fiscal 2003.  The increase in the average balance was due to continued strongloan origination activity, particularly with respect to single and multi-familyresidential loans, construction and nonresidential real estate and landloans.  The impact on the Bank’s yieldon its loan portfolio from the increased emphasis on higher yieldingmulti-family and nonresidential real estate, as well as unsecured commercialloans was offset by  the decrease inmarket interest rates, such as the repricing of its adjustable-rate loans andrefinancing at lower rates. Interest income on mortgage-backed securitiestotaled $1.6 million for fiscal 2003, an increase of $1.2 million, or 334.3%,over fiscal 2002, due primarily to a $50.4 million, or 412.2%, increase in theaverage balance outstanding year to year. Interest income on investment securities and interest-bearing depositsand other totaled $649,000, an increase of $88,000, or 15.7%, due primarily toan $11.3 million, or 70.7%, increase in the average balance of the relatedassets, partially offset by a decrease in the weighted-average yield year toyear.

 

Interest expense on deposits totaled $11.3 million for the fiscal yearended September 30, 2003, an increase of $796,000, or 7.6%, over the $10.5million recorded in fiscal 2002.  Theincrease was due primarily to a $130.5 million, or 50.3%, increase in theaverage balance of deposits outstanding year to year, partially offset by adecrease in the weighted-average cost of deposits of 115 basis points, to 2.89%for fiscal 2003.  The decrease in theaverage cost of deposits was primarily due to the decrease in market interestrates.

 

Interest expense on borrowings totaled $6.8 million for fiscal 2003, anincrease of $1.7 million, or 32.7%, compared to fiscal 2002, due primarily to a$23.7 million, or 14.5%, increase in the average balance of borrowingsoutstanding, and a 50 basis point increase in the average cost of borrowings,to 3.64% for fiscal 2003.  The increasein the average cost resulted from management converting existing short-termadjustable-rate advances from the Federal Home Loan Bank to fixed-ratelong-term advances to provide a more favorable interest rate riskposition.  The increase in the averagebalance was due to the use of borrowings as an additional source of funds forinvestment in mortgage-backed securities and the origination of loans.

 

As a result of the foregoing changes in interest income and interestexpense, net interest income increased by $983,000, or 5.4%, during the fiscalyear ended September 30, 2003, compared to fiscal 2002.  The interest rate spread amounted to 2.96%for fiscal 2003 compared to 3.74% for fiscal 2002.  The net interest margin totaled 3.13% and 3.99% for the fiscalyears ended September 30, 2003 and 2002, respectively.

 

# **Provision for Losses on Loans**

 

A provision forlosses on loans is charged to earnings to bring the total allowance for loanlosses to a level considered appropriate by management based on historical lossexperience, the volume and type of lending conducted by the Bank, the status ofpast due principal and interest payments, general economic conditions, particularlyas such conditions relate to the Bank’s market area, and other factors relatedto the collectibility of the Bank’s loan portfolio.  After considering the above factors, management recorded aprovision for losses on loans totaling $4.2 million and $5.3 million for thefiscal years ended September 30, 2003 and 2002, respectively.  The provision recorded during the 

 

12

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fiscal 2003 period was predicated primarily upon the $65.2 million, or11.7%, of growth in the gross loan portfolio, as well as the increase in loanssecured by multi-family and nonresidential real estate, the origination ofapproximately $25.7 million in unsecured commercial lines of credit duringfiscal 2003 and an increase in the level of charge-offs and impaired andnonperforming loans year to year.  Suchtypes of lending are generally considered to involve a higher degree of riskthan one- to four-family residential lending. There can be no assurance that the allowance for loan losses will besufficient to cover losses on nonperforming loans in the future.

 

# **Other Income**

 

Other income totaled $1.3 million for the fiscal year ended September30, 2003, a decrease of $1.3 million, or 50.1%, compared to fiscal 2002.  The decrease was due primarily to a $2.0million, or 93.1%, decrease in gain on the sale of branch premises, depositsand loans, which was partially offset by a $496,000 increase in gain on sale ofinvestment and mortgage-backed securities and a $238,000, or 64.0%, increase inother operating income during fiscal 2003. In January 2002, the Bank sold $11.0 million in total loans and $9.9million in total deposits associated with its Blanchester branch office.  The increase in other operating incomeresulted primarily from increases in fees related to the growth of loan anddeposit transactions from year to year.

 

# **General, Administrative and OtherExpense**

 

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

 

Generally, as previouslynoted, the level of general, administrative and other expenses increased due tothe effects of the Kenwood acquisition and overall growth from year toyear.  Additionally, the increase inemployee compensation and benefits was due primarily to an increase in staffinglevels to support the growth and branch structure of the Bank, normal meritincreases and increases in health insurance and other benefit costs.  The increase in occupancy and equipmentexpense primarily reflects increased depreciation and maintenance costsassociated with the Company’s new branch offices.  Two new offices replacing existing branch buildings were openedin the third and fourth quarter of fiscal 2003.  These projects reflect the effects of the Company’s ongoingcommitment to expand its branch office network through the acquisition andconstruction of new branch facilities. The increase in franchise taxes was due to the Company’s growth year toyear.  The increase in data processingreflects continued growth in loan and deposit accounts.  The decrease in goodwill amortizationreflects the Company’s adoption of SFAS No. 142 effective October 1,2002.  Pursuant to SFAS No. 142,goodwill is no longer amortized, but is subject to a periodic impairmentevaluation.

 

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# **Federal Income Taxes**

 

Peoples Bancorp recorded a tax provision totaling $1.9 million for thefiscal year ended September 30, 2003, compared to a provision of $2.4 millionfor fiscal 2002.  The effective taxrates were 34.0% and 43.2% for the fiscal years ended September 30, 2003 and2002, respectively.  The highereffective tax rate for fiscal 2002 was primarily due to nondeductibleamortization and other charges related to goodwill.

 

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

 

# **General**

 

The inclusion of the accounts of Kenwood, which the Company acquired inApril 2002, in a transaction accounted for using the purchase method ofaccounting, significantly contributed to the increases in the level of incomeand expense during the fiscal year ended September 30, 2002, compared to fiscal2001.  In accordance with the purchasemethod of accounting, the statement of earnings for the fiscal year endedSeptember 30, 2001, was not restated for the acquisition.

 

Peoples Bancorp recorded net earnings of $3.1 million for the fiscalyear ended September 30, 2002, an increase of $825,000, or 35.5%, compared tofiscal 2001.  The increase in earningsresulted primarily from a $7.8 million increase in net interest income, whichwas partially offset by a $2.8 million increase in the provision for losses onloans, a $2.3 million decrease in other income and a $1.7 million increase ingeneral, administrative and other expense.

 

# **Net Interest Income**

 

Total interest income amounted to $33.7 million for the fiscal yearended September 30, 2002, a $7.8 million, or 30.2%, increase over fiscal2001.  The increase was due to a $111.3million, or 32.5%, increase in average interest-earning assets, partiallyoffset by a 14 basis point decline in the average yield year to year.

 

Interest income on loans totaled $32.8 million for the fiscal yearended September 30, 2002, an increase of $10.7 million, or 48.4%, over fiscal2001.  This increase was due primarilyto a $142.9 million, or 50.6%, increase in the average portfolio balanceoutstanding year to year, partially offset by an 11 basis point decline inweighted-average yield, to 7.71% for fiscal 2002.  The impact on the Bank’s yield on its loan portfolio from the decreasein market interest rates, such as the repricing of its adjustable-rate loansand refinancing at lower rates, was substantially offset by the Bank’sincreased emphasis on higher yielding multi-family, commercial real estate andunsecured commercial

 

14

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loans.  Interest income oninvestment and mortgage-backed securities and interest-bearing deposits andother totaled $922,000, a decrease of $2.9 million, or 75.7%, due primarily toa $31.6 million, or 52.9%, decrease in the average balance of the relatedassets, a 308 basis point decrease in the weighted-average yield year to yearand a $264,000 write down of premiums on mortgage-backed securities based uponmanagement’s estimate of prepayment speeds. The decrease in the average yield was primarily due to the decrease inmarket interest rates.  The decrease inthe average outstanding balance of these assets was due to repayments andsales, which proceeds were used to fund loan originations.

 

Interest expense on deposits totaled $10.5 million for the fiscal yearended September 30, 2002, an increase of $1.5 million, or 16.6%, over the $9.0million recorded in fiscal 2001.  Theincrease was due primarily to a $78.5 million, or 43.4%, increase in theaverage balance of deposits outstanding year to year, which included theaddition of $48.4 million in deposits from the acquisition of Kenwood,partially offset by a decrease in the weighted-average cost of deposits of 93basis points, to 4.04% for fiscal 2002. The decrease in the average rate was primarily due to the decrease inmarket interest rates.

 

Interest expense on borrowings totaled $5.1 million for fiscal 2002, adecrease of $1.4 million, or 21.8%, compared to fiscal 2001, due primarily to a191 basis point decrease in the average cost of borrowings, to 3.14% for fiscal2002, partially offset by a $33.6 million, or 25.9%, increase in the averagebalance of borrowings outstanding for fiscal 2002.  The decrease in the average cost of borrowings was primarily dueto a decrease in market interest rates.

 

As a result of the foregoing changes in interest income and interestexpense, net interest income increased by $7.8 million, or 74.9%, during thefiscal year ended September 30, 2002, compared to fiscal 2001.  The interest rate spread amounted to 3.74%for fiscal 2002 compared to 2.57% for fiscal 2001.  The net interest margin totaled 3.99% and 3.03% for the fiscalyears ended September 30, 2002 and 2001, respectively.

 

# **Provision for Losses on Loans**

 

A provision for losses on loans is charged to earnings to bring thetotal allowance for loan losses to a level considered appropriate by managementbased on historical loss experience, the volume and type of lending conductedby the Bank, the status of past due principal and interest payments, generaleconomic conditions, particularly as such conditions relate to the Bank’smarket area, and other factors related to the collectibility of the Bank’s loanportfolio.  After considering the abovefactors, management recorded a provision for losses on loans totaling $5.3million and $2.4 million for the fiscal years ended September 30, 2002 and2001, respectively.  The provisionrecorded during the fiscal 2002 period was predicated primarily upon the $137.3million, or 32.7%, of growth in the gross loan portfolio, taking into accountthe increase in loans secured by multi-family, nonresidential real estate, theorigination of approximately $26.7 million in unsecured commercial lines ofcredit during fiscal 2002 and the increase in the level of nonperforming loansyear to year.  Such types of lending aregenerally considered to involve a higher degree of risk than one- tofour-family residential lending.

 

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# **Other Income**

 

Other income totaled $2.5 million for the fiscal year ended September30, 2002, a decrease of $2.3 million, or 48.2%, compared to fiscal 2001.  The decrease was due primarily to theeffects of a $4.7 million gain on securities transactions recorded during fiscal2001, which was partially offset by a $2.1 million gain on the sale of branchoffices during fiscal 2002 and a $238,000, or 177.6%, increase in otheroperating income.  During fiscal 2002,in connection with it’s building, branch renovation and branch relocationprojects, the Corporation sold three of its former branch buildings, as well as$11.0 million in loans and $9.9 million in deposits from it’s formerBlanchester office, all of which resulted in the $2.1 million gain on sale.  The increase in other operating incomeresulted primarily from the inclusion of Kenwood Savings’ operations andincreases in fees related to loans and deposits transactions year to year.

 

# **General, Administrative and OtherExpense**

 

General, administrative and other expense totaled $9.8 million for thefiscal year ended September 30, 2002, an increase of $1.7 million, or 20.8%,compared to fiscal 2001.  This increaseresulted primarily from a $409,000, or 12.1%, increase in employee compensationand benefits, a $1.0 million, or 168.0%, increase in occupancy and equipmentexpense, and a $1.1 million, or 94.1%, increase in other operating expense,which were partially offset by a $402,000 decrease in goodwill amortization.  Amortization of goodwill will be eliminated in future periodsupon adoption of a recently issued accounting pronouncement. Management adoptedSFAS No. 142 effective October 1, 2002, which will result in annual expensereduction totaling approximately $460,000 beginning in fiscal 2003.

 

Generally, as previously noted, the level of general, administrativeand other expenses increased year to year due to the effects of the Kenwoodacquisition.  The increase in employeecompensation and benefits was due primarily to an increase in staffing levels,normal merit increases and $143,000 expensed for stock option awards vestingduring the fiscal year.  The increase inoccupancy and equipment expense primarily reflects increased depreciation andmaintenance costs associated with the Company’s new main office and additionsand improvements made at several branch office locations.  During fiscal 2002, the Corporationcommitted to begin construction of four new branch office facilities located insouthwestern Ohio.  Two of the newoffices will replace existing branch buildings and two represent expansion intonew markets.  The new offices arescheduled to be opened over the period through the second quarter of fiscal2004.  These improvements reflect theeffects of the Company’s previously announced ongoing commitment to expand itsbranch office network through the acquisition and construction of new branchfacilities. Additionally, during fiscal 2002 management reduced its estimate ofdepreciable lives for certain furniture and equipment assets.  As a result of this downward change inestimate, the Corporation recognized additional depreciation expense duringfiscal 2002 of approximately $215,000, or $.06 per share on an after-taxbasis.  The increase in other operatingexpense relates primarily to expenses related to the trust preferred offeringtotaling $385,000, an increase in legal expenses, including those related tononperforming loans, an increase in advertising costs, office supplies andpro-rata increases in costs associated with the Company’s overall growth yearto year.

 

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# **Federal Income Taxes**

 

Peoples Bancorp recorded a tax provision totaling $2.4 million for thefiscal year ended September 30, 2002, compared to a provision of $2.3 millionfor fiscal 2001.  The increase was dueprimarily to the increase in pre-tax earnings of $913,000, or 19.7%.  The effective tax rates were 43.2% and 49.8%for the fiscal years ended September 30, 2002 and 2001, respectively.  The relatively high effective tax rates wereprimarily due to nondeductible amortization and other charges related togoodwill.  The effective tax rate forfiscal 2001 was also affected by nondeductible merger-related expenses.

 

**Exposure to Changes in Interest Rates**

 

Peoples Bancorp’s ability to maintain net interest income depends uponits ability to earn a higher yield on interest-earning assets than the ratespaid on deposits and borrowings. Peoples Bank’s ability to maintain a positive spread between theinterest earned on assets and the interest paid on deposits and borrowings canbe adversely affected when market rates of interest rise.  Historically long-term, fixed-rate mortgageloans made up the dominant portion 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.  However, during fiscal2000, Peoples Bank began to emphasize the origination of adjustable-ratemortgage (“ARM”) loans and shorter-term loans secured by non-residential real estate,in an effort to improve its interest rate risk position.   At September 30, 2003, approximately $174.5million, or 31.5%, of the Company’s loan portfolio consisted of loans withfixed rates of interest and approximately $379.9 million, or 68.5%, hadadjustable rates of interest.  Duringfiscal year 2003, management purchased $208.1 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.

 

**Quantitative Analysis**

 

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

 

17

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The following tables present Peoples Bank’s netportfolio value as of September 30, 2003 and 2002, as calculated by the OTS,based on information provided to the OTS by Peoples Bank.  The information presented is based on thefeature in Peoples Bank’s mortgage loans which permits the loans to be calledany time after three years from the date of origination and the assumedrepricing of called loans at a higher rate in a rising rate environment.

 
|                                                         |   | **September 30, 2003**     |   |
|--------------------------------------------------------------|--------|----------------------------|--------|
| **Change in  Interest Rates  In Basis Points  (Rate Shock)** |   | **Amount**                 |   | **Net  Portfolio Value  $ Change** |   | **% Change** |   | **Net  Portfolio  Value as a % of  Portfolio Value  of Assets** |   | **Change in****Net Portfolio  Value as a % of  Portfolio Value  of Assets** |   |
|                                                         |   | **(Dollars in thousands)** |   |   |   |   |   |   |   |
|                                                         |   |                       |   |   |   |   |   |   |   |   |   |
| 300                                                          | bp     | $                          | 59,047 |   | $ | (548 | ) | (1 | )% | 8.09 | % | 21 | bp  |
| 200                                                          |   | 62,184                     |   | 2,589 |   | 4 |   | 8.39 |   | 51 |   |
| 100                                                          |   | 62,625                     |   | 3,030 |   | 5 |   | 8.35 |   | 47 |   |
| 0                                                            |   | 59,595                     |   | — |   | — |   | 7.88 |   | — |   |
| (100                                                         | )      | 54,391                     |   | (5,204 | ) | (9 | ) | 7.15 |   | (74 | ) |
|                                                              |        |                            |        |  |  |  |  |  |  |  |  |  |  |

 
|                                                         |   | **September 30, 2002**     |   |
|--------------------------------------------------------------|--------|----------------------------|--------|
| **Change in  Interest Rates  In Basis Points  (Rate Shock)** |   | **Amount**                 |   | **Net Portfolio  Value  $ Change** |   | **% Change** |   | **Net  Portfolio  Value as a % of  Portfolio Value  of Assets** |   | **Change in****Net Portfolio  Value as a % of  Portfolio Value  of Assets** |   |
|                                                         |   | **(Dollars in thousands)** |   |   |   |   |   |   |   |
|                                                         |   |                       |   |   |   |   |   |   |   |   |   |
| 300                                                          | bp     | $                          | 53,285 |   | $ | (4,472 | ) | (8 | )% | 9.34 | % | (27 | )bp |
| 200                                                          |   | 56,980                     |   | (777 | ) | (1 | ) | 9.79 |   | 18 |   |
| 100                                                          |   | 59,105                     |   | 1,348 |   | 2 |   | 9.97 |   | 36 |   |
| 0                                                            |   | 57,757                     |   | — |   | — |   | 9.61 |   | — |   |
| (100                                                         | )      | 53,081                     |   | (4,676 | ) | (8 | ) | 8.73 |   | (88 | ) |
|                                                              |        |                            |        |  |  |  |  |  |  |  |  |  |  |

 

As shown by the 2003 table above, a 100 basis pointincrease in interest rates would result in an increase in Peoples Bank’s netportfolio value based on OTS calculations as of September 30, 2003, primarilydue to Peoples Bank’s efforts to originate adjustable-rate loans andshorter-term fixed-rate loans in recent periods.  The table also indicates a decrease in net portfolio value at a300 basis point increase in interest rates. The instantaneous shock as indicated in the table is subject to periodicinterest rate adjustments and caps as dictated by the underlying notes.

 

Peoples Bank’sfixed-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 would adverselyaffect its interest rate spread.  Inorder to counter the potential effects of dramatic increases in market rates ofinterest, Peoples Bank has focused primarily on developing a strong coredeposit base.  Historically, PeoplesBank has been able to maintain relatively stable levels of net interest incomedespite the interest rate risk inherent in its operations.  Peoples Bank attempts to mitigate potentialexposure to interest rate risk by:

 

(1)           Originating one-yearand three-year adjustable-rate mortgage loans;

 

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

 

18

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

 

(4)                                  Originatingunsecured lines of credit with interest rates that adjust monthly based on anindex;

 

(5)           Purchasingadjustable-rate mortgage-backed securities; and

 

(6)           Utilizingfixed-rate longer-term advances offered by the Federal Home Loan Bank.

 

**Liquidityand Capital Resources**

 

Peoples, like other financial institutions, isrequired under applicable federal regulations to maintain sufficient funds tomeet deposit withdrawals, loan commitments and expenses.  Liquid assets consist of cash andinterest-bearing deposits in other financial institutions, investments andmortgage-backed securities.  Managementmonitors and assesses liquidity needs daily in order to meet depositwithdrawals, loan commitments and expenses.

 

The primary sources of funds include deposits,borrowings and principal and interest repayments on loans.  The Bank’s first preference is to fundliquidity needs with core deposits, if available, in the marketplace.  Core deposits include noninterest-bearingand interest-bearing retail deposits. Other funding sources included Federal Home Loan Bank advances.

 

The following table sets forth information regardingthe Bank’s obligations and commitments to make future payments under contractas of September 30, 2003.

 
|                                                           |   | **Payments due by period** |        |
|----------------------------------------------------------------|--------|----------------------------|-------------|
|                                                           |   | **Less  than  1 year**     |        | **1-3  years** |   | **3-5  years** |   | **More  than  5 years** |   | **Total** |   |
|                                                           |   | **(In  thousands)**        |        |
|                                                           |   |                       |        |   |   |   |   |   |   |   |   |
| Contractual  obligations:                                      |   |                       |        |   |   |   |   |   |   |   |   |
| Operating lease  obligations                                   |   | $                          | 123         |   | $ | 242 |   | $ | 212 |   | $ | 334 |   | $ | 911 |   |
| Contracts to  purchase office premises                         |   | 3,200                      |        | — |   | — |   | — |   | 3,200 |   |
| Advances from  the Federal Home Loan Bank and other borrowings |   | 67,400                     |        | — |   | 1,500 |   | 151,000 |   | 219,900 |   |
| Certificates of  deposit                                       |   | 125,197                    |        | 67,782 |   | 51,861 |   | 43 |   | 244,883 |   |
|                                                           |   |                       |        |   |   |   |   |   |   |   |   |
| Amount of  commitments expiration per period                   |   |                       |        |   |   |   |   |   |   |   |   |
| Commitments to  originate loans:                               |   |                       |        |   |   |   |   |   |   |   |   |
| Consumer lines  of credit                                      |   | 23,832                     |        | — |   | — |   | — |   | 23,832 |   |
| Commercial lines  of credit                                    |   | 2,567                      |        | — |   | — |   | — |   | 2,567 |   |
| One- to  four-family and multi-family loans                    |   | 9,446                      |        | — |   | — |   | — |   | 9,446 |   |
| Non-residential  real estate and land loans                    |   | 6,888                      |        | — |   | — |   | — |   | 6,888 |   |
| Commitments to  purchase mortgage-backed securities            |   | 70,000                     |        | — |   | — |   | — |   | 70,000 |   |
|                                                           |   |                       |        |   |   |   |   |   |   |   |   |
| Total  contractual obligations                                 |   | **$**                      | **308,653** | ** ** | **$** | **68,024** | ** ** | **$** | **53,573** | ** ** | **$** | **151,377** | ** ** | **$** | **581,627** | ** ** |

 

19

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Peoples Bank isrequired to maintain regulatory capital sufficient to meet tangible, core andrisk-based capital ratios of at least 1.5%, 4.0% and 8.0%, respectively.  At September 30, 2003, Peoples Bank exceededeach of the capital requirements.  PeoplesBank’s tangible, core and risk-based capital ratios were 7.5%, 7.5% and 12.1%,respectively.

 

**Impactof Inflation and Changing Prices**

 

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

 

20

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**REPORT OF INDEPENDENT****CERTIFIED PUBLIC ACCOUNTANTS**

 

Board of Directors

PeoplesCommunity Bancorp, Inc.

 

Wehave audited the consolidated statements of financial condition of PeoplesCommunity Bancorp, Inc. as of September 30, 2003 and 2002, and the relatedconsolidated statements of earnings, comprehensive income, stockholders’ equityand cash flows for each of the years in the three year period endedSeptember 30, 2003.  Theseconsolidated financial statements are the responsibility of the Corporation’smanagement.  Our responsibility is toexpress an opinion on these consolidated financial statements based on ouraudits.

 

Weconducted our audits in accordance with auditing standards generally acceptedin the United States of America.  Thosestandards require that we plan and perform the audit to obtain reasonableassurance about whether the financial statements are free of materialmisstatement.  An audit includesexamining, on a test basis, evidence supporting the amounts and disclosures inthe financial statements.  An audit alsoincludes assessing the accounting principles used and significant estimatesmade by management, as well as evaluating the overall financial statementpresentation.  We believe that ouraudits provide a reasonable basis for our opinion.

 

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

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

Cincinnati,Ohio

October30, 2003

 

21

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**PEOPLES COMMUNITY BANCORP, INC.**

 

**CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION**

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

 

The accompanying notesare an integral part of these statements.

 

22

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**PEOPLES COMMUNITY BANCORP, INC.**

 

 

**CONSOLIDATEDSTATEMENTS OF EARNINGS**

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

 

The accompanying notesare an integral part of these statements.

 

23

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**PEOPLES COMMUNITY BANCORP, INC.**

 

 

**CONSOLIDATEDSTATEMENTS OF COMPREHENSIVE INCOME**

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

 

The accompanying notesare an integral part of these statements.

 

24

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**PEOPLES COMMUNITY BANCORP, INC.**

 

**CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY**

 
|                                                                                           |   | **Common  stock**   |   | **Additional  Paid-in  capital** |   | **Retained  earnings** |       | **Shares  acquired  by stock  benefit  plan** |       | **Unrealized  gains (losses)  on securities  designated  as available  for sale** |   | **Total** |   |
|------------------------------------------------------------------------------------------------|--------|---------------------|--------|----------------------------------|--------|------------------------|------------|-----------------------------------------------|------------|-----------------------------------------------------------------------------------|--------|-----------|--------|
|                                                                                           |   | **(In  thousands)** |   |
| Balance at  October 1, 2000                                                                    |   | $                   | 20     |                             | $      | 17,140                 |       | $                                             | 13,974     |                                                                              | $      | (857      | )      | $ | 1,387 |   | $ | 31,664 |   |
|                                                                                           |   |                |   |                             |   |                   |       |                                          |       |                                                                              |   |      |   |
| Issuance of  shares in connection with acquisition of Market Financial                         |   | 5                   |   | 5,999                            |   | —                 |       | —                                        |       | —                                                                            |   | 6,004     |   |
| Amortization  expense of stock benefit plan                                                    |   | —              |   | —                           |   | —                 |       | 191                                           |       | —                                                                            |   | 191       |   |
| Net earnings for  the year ended September 30, 2001                                            |   | —              |   | —                           |   | 2,324                  |       | —                                        |       | —                                                                            |   | 2,324     |   |
| Unrealized  losses on securities designated as available for sale, net of related tax  effects |   | —              |   | —                           |   | —                 |       | —                                        |       | (1,405                                                                            | )      | (1,405    | )      |
|                                                                                           |   |                |   |                             |   |                   |       |                                          |       |                                                                              |   |      |   |
| Balance at  September 30, 2001                                                                 |   | 25                  |   | 23,139                           |   | 16,298                 |       | (666                                          | )          | (18                                                                               | )      | 38,778    |   |
|                                                                                           |   |                |   |                             |   |                   |       |                                          |       |                                                                              |   |      |   |
| Amortization  expense of stock benefit plan                                                    |   | —              |   | 649                              |   | —                 |       | 190                                           |       | —                                                                            |   | 839       |   |
| Compensation  expense relating to vested stock options                                         |   | —              |   | 143                              |   | —                 |       | —                                        |       | —                                                                            |   | 143       |   |
| Net earnings for  the year ended September 30, 2002                                            |   | —              |   | —                           |   | 3,149                  |       | —                                        |       | —                                                                            |   | 3,149     |   |
| Unrealized gains  on securities designated as available for sale, net of related tax effects   |   | —              |   | —                           |   | —                 |       | —                                        |       | 81                                                                                |   | 81        |   |
|                                                                                           |   |                |   |                             |   |                   |       |                                          |       |                                                                              |   |      |   |
| Balance at  September 30, 2002                                                                 |   | 25                  |   | 23,931                           |   | 19,447                 |       | (476                                          | )          | 63                                                                                |   | 42,990    |   |
|                                                                                           |   |                |   |                             |   |                   |       |                                          |       |                                                                              |   |      |   |
| Amortization  expense of stock benefit plan                                                    |   | —              |   | 391                              |   | —                 |       | 190                                           |       | —                                                                            |   | 581       |   |
| Compensation  expense relating to vested stock options                                         |   | —              |   | 149                              |   | —                 |       | —                                        |       | —                                                                            |   | 149       |   |
| Proceeds from  exercise of stock options                                                       |   | —              |   | 7                                |   | —                 |       | —                                        |       | —                                                                            |   | 7         |   |
| Net earnings for  the year ended September 30, 2003                                            |   | —              |   | —                           |   | 3,724                  |       | —                                        |       | —                                                                            |   | 3,724     |   |
| Unrealized  losses on securities designated as available for sale, net of related tax  effects |   | —              |   | —                           |   | —                 |       | —                                        |       | (752                                                                              | )      | (752      | )      |
|                                                                                           |   |                |   |                             |   |                   |       |                                          |       |                                                                              |   |      |   |
| Balance at  September 30, 2003                                                                 |   | **$**               | **25** | ** **                       | **$**  | **24,478**             | ** ** | **$**                                         | **23,171** | ** **                                                                        | **$**  | **(286**  | **)**  | **$** | **(689** | **)** | **$** | **46,699** | ** ** |

 

The accompanying notes are an integral part of these statements.

 

25

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**PEOPLES COMMUNITY BANCORP, INC.**

 

**CONSOLIDATED STATEMENTS OF CASH FLOWS**

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

 

26

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

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

** **

The accompanying notesare an integral part of these statements.

 

27

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**PEOPLES COMMUNITY BANCORP, INC.**

 

 

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

 

 

**NOTE A -SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES**

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

28

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Theconsolidated financial information presented herein has been prepared in accordancewith accounting 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 reporting period.  Actual results could differ from suchestimates.

 

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

 

1.  Principles of Consolidation

 

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

 

2.  Investment Securities and Mortgage-BackedSecurities

 

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

 

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

 

3.  Loans Receivable

 

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

 

29

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

 

Peoples accounts formortgage servicing rights pursuant to the provisions of SFAS No. 140,“Accounting for Transfers and Servicing of Financial Assets and Extinguishmentsof Liabilities,” which requires that Peoples recognize as separate assets,rights to service mortgage loans for others, regardless of how those servicingrights are acquired.  An institutionthat acquires mortgage servicing rights through either the purchase or originationof mortgage loans and sells those loans with servicing rights retained mustallocate some of the cost of the loans to mortgage servicing rights.

 

SFAS No. 140 requiresthat capitalized mortgage servicing rights be assessed for impairment.  Impairment is measured based on fairvalue.  The mortgage servicing rightsrecorded by the Peoples, calculated in accordance with the provisions of SFASNo. 140, were segregated into pools for valuation purposes, using as poolingcriteria the loan term and coupon rate. Once pooled, each grouping of loans was evaluated on a discountedearnings basis to determine the present value of future earnings that apurchaser could expect to realize from each portfolio.  Earnings were projected from a variety ofsources, including loan servicing fees, interest earned on float, net interestearned on escrows, 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 anacquirer of the acquired servicing.

 

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

 

4.  Loan Origination Fees

 

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

 

30

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5.  Allowance for Loan Losses

 

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

 

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

 

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

 

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

 

31

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

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

 

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

 

6.  Office Premises and Equipment

 

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

 

7.  Real Estate Acquired Through Foreclosure

 

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

 

32

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8.  Goodwill

 

Priorto adoption of SFAS No. 142, goodwill was amortized over a ten year periodusing the straight-line method. Management had periodically evaluated the carrying value of intangibleassets in relation to the continuing earnings capacity of the acquired assetsand assumed liabilities.  During fiscal2002, the Corporation recorded a charge to goodwill totaling $1.0 millionfollowing a review of diminished net interest income arising from loans anddeposits acquired in the fiscal 2000 purchase of Harvest Home FinancialCorporation.

 

During fiscal 2003, the Bank acquired two branchoffices from another financial institution resulting in recognition of $2.3million in goodwill.  Additionally, theBank sold its Kenwood Savings Bank charter, resulting in a write-off ofapproximately $1.7 million of goodwill related to the fiscal 2002 acquisitionof Kenwood.

 

In June 2001, the Financial Accounting Standards Boardissued SFAS No. 142 “Goodwill and Intangible Assets,” which prescribesaccounting for all purchased goodwill and intangible assets.  Pursuant to SFAS No. 142, acquired goodwillis not amortized, but is tested for impairment at the reporting unit levelannually and whenever an impairment indicator arises.  Goodwill has been assigned to the Bank as the reporting unit thatis expected to benefit from the goodwill.

 

Peoples evaluated the unamortized goodwill balance of$5.5 million during fiscal 2003 in accordance with the provisions of SFAS No.142.  The evaluation showed noindication of impairment.  The adoptionof SFAS No. 142 has resulted in the elimination of annual goodwill amortizationof approximately $460,000.

 

The following table displays the pro forma effects onnet earnings and earnings per share as if SFAS No. 142 had been applicable tothe fiscal years ended September 30, 2002 and 2001.

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

 

33

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9.  Federal Income Taxes

 

TheCorporation accounts for federal income taxes in accordance with the provisionsof SFAS No. 109, “Accounting for Income Taxes.”  Pursuant to the provisions of SFAS No. 109, a deferred taxliability or deferred tax asset is computed by applying the current statutorytax rates to net taxable or deductible differences between the tax basis of anasset or liability and its reported amount in the consolidated financialstatements that will result in taxable or deductible amounts in futureperiods.  Deferred tax assets arerecorded only to the extent that the amount of net deductible temporarydifferences or carryforward attributes may be utilized against current periodearnings, carried back against prior years’ earnings, offset against taxabletemporary differences reversing in future periods, or utilized to the extent ofmanagement’s estimate of future taxable income.  A valuation allowance is provided for deferred tax assets to theextent that the value of net deductible temporary differences and carryforwardattributes exceeds management’s estimates of taxes payable on future taxableincome.  Deferred tax liabilities are providedon the total amount of net temporary differences taxable in the future.

 

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

 

10.  Benefit Plans

 

Peopleshas a noncontributory unfunded retirement plan that covers all members of itsBoard of Directors.  Peoples’ policy isto maintain an accrued liability equal to the present value of benefitscomputed using a predetermined annual benefit amount at retirement.  The plan provided that each director wasvested at 65% upon adoption with an additional vesting of 15% after three yearsand 5% per year thereafter until 100% vesting is reached.  During fiscal 2001, the plan was amended toprovide for total vesting for all participants.  The provision for directors retirement expense totaled $84,000,$84,000 and $547,000 for the fiscal years ended September 30, 2003, 2002 and2001, respectively.

 

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

 

34

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

 

11.  Stock Option Plan

 

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

 

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

 

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

 

35

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

 

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

 

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

 

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

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

 

36

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

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

 

12.  Earnings Per Share 

 

Basic earnings per share for the fiscalyears ended September 30, 2003, 2002 and 2001 is based upon theweighted-average shares outstanding during the year, less 28,560, 47,600 and85,680 unallocated ESOP shares, respectively. Diluted earnings per share is computed taking into consideration commonshares outstanding and dilutive potential common shares to be issued under theCorporation’s stock option plan.  Thecomputations were as follows:

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

 

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

 

37

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13. Fair Value of Financial Instruments

 

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

 

Themethods used are greatly affected by the assumptions applied, including thediscount rate and estimates of future cash flows.  Therefore, the fair values presented may not represent amountsthat could be realized in an exchange for certain financial instruments.

 

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

 

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.

 

Federal Home LoanBank stock:  Thecarrying amount presented in the consolidated statements of financial conditionis deemed to approximate fair value.

 

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

 

Advances from 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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Subordinateddebentures:  The fairvalue of the Corporation’s subordinated debentures has been estimated usingdiscounted cash flow analysis, based on the interest rates currently offeredfor instruments of similar remaining maturities.

 

Commitments toextend 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, 2003 and 2002,the difference between the fair value and notional amount of loan commitmentswas not material.

 

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

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

 

14.  Capitalization

 

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

 

15.  Advertising

 

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

 

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16.  Cash and Cash Equivalents

 

Forpurposes of reporting cash flows, cash and cash equivalents include cash anddue from banks and interest-bearing deposits in other financial institutionswith original maturities of less than ninety days.

 

17.  Reclassifications

 

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

 

18.  RecentAccounting Pronouncements

 

In August 2001, the Financial Accounting StandardsBoard (the “FASB”) issued Statement of Financial Accounting Standards (“SFAS”)No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets.”  SFAS No. 144 carries over the recognitionand measurement provisions in SFAS No. 121. Accordingly, an entity must recognize an impairment loss if the carryingvalue of a long-lived asset or asset group (a) is not recoverable and (b)exceeds its fair value.  Similar to SFASNo. 121, SFAS No. 144 requires an entity to test an asset or asset group forimpairment whenever events or changes in circumstances indicate that itscarrying amount may not be recoverable. SFAS No. 144 differs from SFAS No. 121 in that it provides guidance onestimating future cash flows to test recoverability.  An entity may use either a probability-weighted approach orbest-estimate approach in developing estimates of cash flows to testrecoverability.  SFAS No. 144 iseffective for financial statements issued for fiscal years beginning afterDecember 15, 2001 and interim periods within those fiscal years.  Management adopted SFAS No. 144 effectiveOctober 1, 2002, without material effect on the Corporation’s financialcondition or results of operations.

 

In June 2002, the FASB issued SFAS No. 146,“Accounting for Costs Associated with Exit or Disposal Activities.”  SFAS No. 146 provides financial accountingand reporting guidance for costs associated with exit or disposal activities,including one-time termination benefits, contract termination costs other thanfor a capital lease, and costs to consolidate facilities or relocateemployees.  SFAS No. 146 is effectivefor exit or disposal activities initiated after December 31, 2002.  Management adopted SFAS No. 146 effectiveJanuary 1, 2003, without material effect on the Corporation’s financialcondition or results of operations.

 

In October 2002, the FASB issued SFAS No. 147,“Accounting for Certain Financial Institutions:  An Amendment of FASB Statements No. 72 and 144 and FASBInterpretation No. 9,” which removes acquisitions of financial institutionsfrom the scope of SFAS No. 72, “Accounting for Certain Acquisitions of Bankingand Thrift Institutions,” except for transactions between mutualenterprises.  Accordingly, the excess ofthe fair value of liabilities assumed over the fair value of tangible andintangible assets acquired in a business combination should be recognized andaccounted for as goodwill in accordance with SFAS No. 141, “BusinessCombinations,” and SFAS No. 142, “Goodwill and Other Intangible Assets.”

 

40

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SFAS No. 147 also requires that the acquisition of aless-than-whole financial institution, such as a branch, be accounted for as abusiness combination if the transferred assets and activities constitute abusiness.  Otherwise, the acquisitionshould be accounted for as the acquisition of net assets.

 

SFAS No. 147 also amends the scope of SFAS No. 144,“Accounting for the Impairment or Disposal of Long-Lived Assets,” to includelong-term customer relationship assets of financial institutions (includingmutual enterprises) such as depositor- and borrower-relationship intangibleassets and credit cardholder intangible assets.

 

The provisions of SFAS No. 147 related tounidentifiable intangible assets and the acquisition of a less-than-wholefinancial institution are effective for acquisitions for which the date ofacquisition is on or after October 1, 2002. The provisions related to impairment of long-term customer relationshipassets are effective October 1, 2002. Transition provisions for previously recognized unidentifiableintangible assets are effective on October 1, 2002, with earlier applicationpermitted.

 

Management adopted SFAS No. 147 on October 1, 2002,without material effect on the Corporation’s financial condition or results ofoperations.

 

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

 

In November 2002, the FASB issued FASB InterpretationNo. 45 (“FIN 45”), “Guarantor’s Accounting and Disclosure Requirements forGuarantees, Including Indirect Guarantees of Indebtedness of Others.”  FIN 45 requires a guarantor entity, at theinception of a guarantee covered by the measurement provisions of theinterpretation, to record a liability for the fair value of the obligationundertaken in issuing the guarantee. The Bank has financial letters of credit which require the Bank to makepayment if the customer’s financial condition deteriorates, as defined in theagreements.  FIN 45 requires the Bank torecord an initial liability, generally equal to the fees received for theseletters of credit when guaranteeing obligations.  FIN 45 applies prospectively to letters of credit the Bank issuesor modifies subsequent to December 31, 2002.

 

41

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The Bank defines the initial fair value of theseletters of credit as the fee received from the customer.  The maximum potential undiscounted amount offuture payments of these letters of credit as of September 30, 2003 was$874,000 and they expire through fiscal 2006. Amounts due under these letters of credit would be reduced by any proceedsthat the Bank would be able to obtain in liquidating the collateral for theloans, which varies depending on the customer.

 

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

 

In April 2003, the FASB issued SFAS No. 149,“Amendment of Statement 133 on Derivative Instruments and Hedging Activities,”which clarifies certain implementation issues raised by constituents and amendsSFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities,”to include the conclusions reached by the FASB on certain FASB StaffImplementation Issues that, while inconsistent with Statement 133’sconclusions, were considered by the Board to be preferable; amends SFAS No.133’s discussion of financial guarantee contracts and the application of theshortcut method to an interest-rate swap agreement that includes an embeddedoption and amends other pronouncements.

 

The guidance in Statement 149 is effective for newcontracts entered into or modified after June 30, 2003 and for hedgingrelationships designated after that date. Management adopted SFAS No. 149 effective July 1, 2003, as required,without material effect on the Corporation’s financial position or results ofoperations.

 

In May 2003, the FASB issued SFAS No. 150, “Accountingfor Certain Financial Instruments with Characteristics of both Liabilities andEquity,” which changes the classification in the statement of financialposition of certain common financial instruments from either equity ormezzanine presentation to liabilities and requires an issuer of those financialstatements to recognize changes in fair value or redemption amount, asapplicable, in earnings.  SFAS No. 150requires an issuer to classify certain financial instruments as liabilities,including mandatorily redeemable preferred and common stocks.

 

SFAS No. 150 is effective for financial instrumentsentered into or modified after May 31, 2003 and, with one exception, iseffective at the beginning of the first interim period beginning after June 15,2003 (July 1, 2003 as to the Corporation). The effect of adopting SFAS No. 150 must be recognized as a cumulativeeffect of an accounting change as of the beginning of the period ofadoption.  Restatement of prior periodsis not permitted.  Management adoptedSFAS No. 150 effective July 1, 2003, without material effect on theCorporation’s financial position or results of operations.

 

42

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**NOTE B -INVESTMENTS AND MORTGAGE-BACKED SECURITIES**

 

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

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

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

 

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

 

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

 

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

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

 

43

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

 

The amortized cost of mortgage-backed securities, bycontractual terms to maturity, are shown below.  Expected maturities will differ from contractual maturitiesbecause borrowers may generally prepay obligations without prepaymentpenalties.

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

 

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

 

At September 30, 2003, People’s had $25.3 million ofmortgage-backed securities pledged to secure public deposits, and $49.6 millionof mortgage-backed securities pledged to secure advances from the Federal HomeLoan Bank.

 

44

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**NOTE C -LOANS RECEIVABLE**

 

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

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

 

Asdepicted above, Peoples has continued to change the composition of its loanportfolio from a primary focus on one- to four-family residential loans, to theaddition of loans secured by multi-family residential and nonresidential realestate.  One- to four-family residentialloans comprised 41.6% and 58.8% of the total net loan portfolio at September30, 2003 and 2002, respectively.  Multi-familyresidential loans comprised approximately $95.5 million, or 17.2%, of the netloan portfolio at September 30, 2003, and $57.0 million or 11.3%, of the netloan portfolio at September 30, 2002. Nonresidential real estate lending comprised approximately $163.3million, or 29.4%, and $126.5 million, or 25.1%, of the net loan portfolio atSeptember 30, 2003 and September 30, 2002, respectively.  Generally, real estate loans have beenunderwritten on the basis of no more than an 80% loan-to-value ratio, which hashistorically provided Peoples with adequate collateral coverage in the event ofdefault.  Nevertheless, Peoples, as withany lending institution, is subject to the risk that real estate values coulddeteriorate in its primary lending area of southwestern Ohio, thereby impairingcollateral values.  However, managementbelieves that real estate values in Peoples’ primary lending area are presentlystable.

 

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 $893,000 and $1.2 million at September 30, 2003 and 2002, respectively.  During the fiscal year ended September 30,2003, there were no loans originated to executive officers and directors, whileprincipal repayments of $265,000 were received from executive officers anddirectors.

 

45

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**NOTE D -ALLOWANCE FOR LOAN LOSSES**

 

The activity in the allowance for loan losses issummarized as follows for the fiscal years ended September 30:

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

 

At September 30, 2003, the Bank’s allowance for loanlosses was solely general in nature and is includible as a component ofregulatory risk-based capital, subject to certain percentage limitations.

 

At September 30, 2003, 2002 and 2001, the Bank’snonperforming loans, including impaired loans, totaled $9.6 million, $7.5million and $783,000, respectively. Interest income which would have been recognized if such loans hadperformed pursuant to contractual terms totaled approximately $266,000,$343,000 and $27,000 for the fiscal years ended September 30, 2003, 2002 and2001, respectively.

 

**NOTE E -OFFICE PREMISES AND EQUIPMENT**

 

Office premises and equipment are comprised of thefollowing at September 30:

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

 

During fiscal 2002, the Corporation committed to beginconstruction of four new branch office facilities located in southwesternOhio.  Two of the new offices replacedexisting branch buildings and were completed and opened in the third and fourthquarter of fiscal 2003.  The cost ofthese two projects amounted to approximately $2.1 million.  During the fourth quarter of fiscal 2003,the Corporation began construction of a branch office in Warren County.  This office is expected to be completed inthe second quarter of fiscal 2004 at an estimated cost of $1.2 million.   A commitment was also made during fiscal2003 to construct a new office in Butler County with expected completion in thethird quarter of fiscal 2004.  The costof this project is estimated at $3.2 million.

 

46

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**NOTE F -DEPOSITS**

 

Deposits consist of the following majorclassifications at September 30:

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

 

At September 30, 2003 and 2002, Peoples hadcertificate of deposit accounts with balances greater than $100,000 totaling$46.2 million and $55.2 million, respectively.

 

Interest expense on deposit accounts is summarized asfollows for the fiscal years ended September 30:

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

 

47

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

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

 

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

 

Advances from the Federal Home Loan Bank,collateralized at September 30, 2003 by pledges of certain residential mortgageloans totaling $215.5 million, certain mortgage backed securities totaling$49.6 million, and Peoples’ investment in Federal Home Loan Bank stock, aresummarized as follows:

 
|                            |   | **Maturing  fiscal** |   | **September  30,**         |        |
|---------------------------------|--------|----------------------|--------|----------------------------|-------------|
| **Interest Rate**               |   | **year  ending in**  |   | **2003**                   |        | **2002** |   |
|                            |   |                 |   | **(Dollars in thousands)** |        |
|                            |   |                 |   |                       |        |   |   |
| 1.10%                           |   | 2004                 |   | $                          | 66,000      |   | $ | — |   |
| 5.22%                           |   | 2008                 |   | 1,500                      |        | 1,500 |   |
| 3.97% - 4.13%                   |   | 2011                 |   | 1,000                      |        | 1,000 |   |
| 3.58% - 4.24%                   |   | 2012                 |   | 150,000                    |        | 150,000 |   |
|                            |   |                 |   |                       |        |   |   |
|                            |   |                 |   | **$**                      | **218,500** |   | **$** | **152,500** |   |
|                            |   |                 |   |                       |        |   |   |
| Weighted-average  interest rate |   |                 |   | **3.08**                   | **%**       | **3.93** | **%** |

 

**NOTE H -OTHER BORROWED MONEY**

 

The Corporation has a $10.0 million line of creditwith another financial institution, with interest payable at LIBOR plus 150basis points.  At September 30, 2003 and2002, the Corporation had $1.4 million and $450,000 outstanding at an interestrate of 2.62% and 3.31%, respectively. This line of credit expires in the second quarter of fiscal 2004.  The loan is secured by the outstandingshares of the Bank.

 

48

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

 

In November 2001, a Delaware trust owned by theCorporation (the “Trust”), issued $12.5 million of mandatorily redeemable debtsecurities.  The debt securities issuedby the Trust are included in the Corporation’s regulatory capital, specificallyas a component of Tier I capital.  Thesubordinated debentures are the sole assets of the Trust, and the Corporationowns all of the common securities of the Trust.  Interest payments on the debt securities are made semi-annuallyat an annual variable interest rate equal to the six-month LIBOR rate plus 375basis points, or equal to 4.81% and 5.78% at September 30, 2003 and 2002,respectively, and are reported as a component of interest expense onborrowings.  The net proceeds receivedby the Corporation from the sale of the debt securities were used for generalcorporate purposes, including to facilitate the growth of the Bank.

 

**NOTE J -COMMITMENTS**

 

Peoples is a party to financial instruments withoff-balance-sheet risk in the normal course of business to meet the financingneeds of its customers, including commitments to extend credit.  Such commitments involve, to varyingdegrees, elements of credit and interest-rate risk in excess of the amountrecognized 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 to credit loss in the event ofnonperformance by the other party to the financial instrument for commitmentsto extend credit is represented by the contractual notional amount of thoseinstruments.  Peoples uses the samecredit policies in making commitments and conditional obligations as thoseutilized for on-balance-sheet instruments.

 

At September 30, 2003, Peoples had commitments tooriginate loans totaling $16.3 million, commitments for unused lines of creditunder home equity loans totaling $23.8 million, commitments for unusedcommercial lines of credit totaling $2.6 million, and commitments for lettersof credit under commercial loans totaling $1.0 million.  Management believes that such loancommitments are able to be funded through normal cash flow from operations.  Fees received in connection with thecommitments to originate loans have not been recognized in earnings.  Additionally, Peoples had commitments topurchase mortgage-backed securities totaling $70.0 million at September 30,2003.

 

Commitments to extend credit are agreements to lend toa customer as long as there is no violation of any condition established in thecontract.  Commitments generally havefixed expiration dates or other termination clauses and may require payment ofa fee.  Since many of the commitmentsmay expire without being drawn upon, the total commitment amounts do notnecessarily represent future cash requirements.  Peoples evaluates each customer’s creditworthiness on acase-by-case basis.  The amount ofcollateral obtained, if it is deemed necessary by Peoples upon extension ofcredit, is based on management’s credit evaluation of the counterparty.  Collateral on loans may vary but thepreponderance of loans granted generally include a mortgage interest in realestate as security.

 

Peoples had also entered into lease agreements foroffice premises under operating leases which expire at various dates through2012.  The following table summarizesminimum payments due under lease agreements by year.

 

49

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

 

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

 

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

 

50

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The composition of the Corporation’s net deferred taxasset at September 30 is as follows:

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

 

Prior to fiscal 1997, Peoples was allowed a specialbad debt deduction based on a percentage of earnings, generally limited to 8%of otherwise taxable income and subject to certain limitations based onaggregate loans and savings account balances at the end of the year.  This deduction totaled approximately $4.9million as of September 30, 2003.  Ifthe amounts that qualified as deductions for federal income tax purposes arelater used for purposes other than for bad debt losses, including distributionsin liquidation, such distributions will be subject to federal income taxes atthe then current corporate income tax rate. The approximate amount of the unrecognized deferred tax liabilityrelating to the cumulative bad debt deduction is $1.6 million.

 

As a result of fiscal 1997 legislative changes,Peoples is required to recapture as taxable income approximately $1.2 millionof its tax bad debt reserve, which represents the post-1987 additions to the reserve,and is unable to utilize the percentage of earnings method to compute its baddebt deduction in the future.  Peopleshas provided deferred taxes for this amount and began to amortize the recaptureof the bad debt reserve into taxable income over a six year period in fiscal1999.

 

51

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**NOTE L -REGULATORY CAPITAL**

 

Peoples is subject to minimum regulatory capitalstandards promulgated by the Office of Thrift Supervision (the “OTS”).  Failure to meet minimum capital requirementscan initiate certain mandatory — and possibly additional discretionary —actions by regulators that, if undertaken, could have a direct material effecton the consolidated financial statements. Under capital adequacy guidelines and the regulatory framework forprompt corrective action, the Bank must meet specific capital guidelines thatinvolve quantitative measures of its assets, liabilities, and certainoff-balance-sheet items as calculated under regulatory accounting practices.  The Bank’s capital amounts andclassification are also subject to qualitative judgments by the regulatorsabout components, risk weightings, and other factors.

 

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

 

During fiscal 2003, the Bank was notified by the OTSthat it was categorized as “well-capitalized” under the regulatory frameworkfor prompt corrective action.  To becategorized as “well-capitalized” the Bank must maintain minimum capital ratiosas set forth in the following table.

 

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

 
| **Peoples Community Bank** |   | **As of  September 30, 2003** |   |
|----------------------------|--------|-------------------------------|--------|
|                       |   | **Actual**                    |   | **For  capital  adequacy purposes** |   | **To be  “well-  capitalized” under  prompt corrective  action provisions** |   |
|                       |   | **Amount**                    |   | **Ratio** |   | **Amount** |   | **Ratio** |   | **Amount** |   | **Ratio** |   |
|                       |   | **(Dollars  in thousands)**   |   |
|                       |   |                          |   |
| Tangible capital           |   | $                             | 55,081 |   | 7.5 | % | 3$ | 11,004 |   | 31.5 | % | 3$ | 36,681 |   | 35.0 | % |
|                       |   |                          |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Core capital               |   | $                             | 55,081 |   | 7.5 | % | 3$ | 29,345 |   | 34.0 | % | 3$ | 44,017 |   | 36.0 | % |
|                       |   |                          |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Risk-based  capital        |   | $                             | 61,429 |   | 12.1 | % | 3$ | 40,628 |   | 38.0 | % | 3$ | 50,785 |   | 310.0 | % |

 

52

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|                |   | **As of  September 30, 2002** |   |
|---------------------|--------|-------------------------------|--------|
|                |   | **Actual**                    |   | **For  capital  adequacy purposes** |   | **To be  “well-  capitalized” under  prompt corrective  action provisions** |   |
|                |   | **Amount**                    |   | **Ratio** |   | **Amount** |   | **Ratio** |   | **Amount** |   | **Ratio** |   |
|                |   | **(Dollars  in thousands)**   |   |
|                |   |                          |   |   |   |   |   |   |   |   |   |   |   |
| Tangible capital    |   | $                             | 50,793 |   | 8.8 | % | 3$ | 8,704 |   | 31.5 | % | 3$ | 29,013 |   | 35.0 | % |
|                |   |                          |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Core capital        |   | $                             | 50,793 |   | 8.8 | % | 3$ | 23,210 |   | 34.0 | % | 3$ | 34,815 |   | 36.0 | % |
|                |   |                          |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Risk-based  capital |   | $                             | 55,689 |   | 13.7 | % | 3$ | 32,549 |   | 38.0 | % | 3$ | 40,686 |   | 310.0 | % |

 
| **Kenwood Savings Bank** |   | **As of  September 30, 2002** |   |
|--------------------------|--------|-------------------------------|--------|
|                     |   | **Actual**                    |   | **For  capital  adequacy purposes** |   | **To be  “well-  capitalized” under  prompt corrective  action provisions** |   |
|                     |   | **Amount**                    |   | **Ratio** |   | **Amount** |   | **Ratio** |   | **Amount** |   | **Ratio** |   |
|                     |   | **(Dollars  in thousands)**   |   |
|                     |   |                          |   |   |   |   |   |   |   |   |   |   |   |
| Tangible capital         |   | $                             | 4,355  |   | 7.7 | % | 3$ | 849 |   | 31.5 | % | 3$ | 2,830 |   | 35.0 | % |
|                     |   |                          |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Core capital             |   | $                             | 4,355  |   | 7.7 | % | 3$ | 2,264 |   | 34.0 | % | 3$ | 3,396 |   | 36.0 | % |
|                     |   |                          |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Risk-based  capital      |   | $                             | 4,456  |   | 16.2 | % | 3$ | 2,205 |   | 38.0 | % | 3$ | 2,756 |   | 310.0 | % |

 

Management believes that, under the current regulatorycapital regulations, the Bank will continue to meet its minimum capitalrequirements in the foreseeable future. However, events beyond the control of the Bank, such as increasedinterest rates or a downturn in the economy in the Bank’s market area, couldadversely affect future earnings and, consequently, the ability to meet futureminimum regulatory capital requirements.

 

53

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

 

The following condensed financial statements summarizethe financial position of Peoples Community Bancorp, Inc. as of September 30,2003 and 2002, and the results of its operations and its cash flows for thefiscal years ended September 30, 2003, 2002 and 2001.

 

## **PEOPLES COMMUNITYBANCORP, INC.**

**STATEMENTS OF FINANCIAL CONDITION**

September 30, 2003and 2002

(In thousands)

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

 

54

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**PEOPLES COMMUNITY BANCORP, INC.**

##### **STATEMENTSOF EARNINGS**

**For the years ended September 30, 2003, 2002 and2001**

(In thousands)

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

 

55

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**PEOPLES COMMUNITY BANCORP, INC.**

**STATEMENTS OF CASH FLOWS**

Years endedSeptember 30, 2003, 2002 and 2001

(In thousands)

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

 

The Bank is subject to regulations imposed by the OTSregarding the amount of capital distributions payable by the Bank to theCorporation.  Generally, the Bank’spayment of dividends is limited, without prior OTS approval, to net earningsfor the current calendar year plus the two preceding calendar years, less capitaldistributions paid over the comparable time period.  Insured institutions are required to file an application with theOTS for capital distributions in excess of this limitation.

 

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

 

56

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**NOTE N -BUSINESS COMBINATIONS**

 

On March 30, 2001, the Corporation acquired Marketutilizing the purchase method of accounting. Market was dissolved upon consummation, with Market’s bankingsubsidiary, Market Bank, merging with and into Peoples.  The results of Market’s operationssubsequent to March 30, 2001, are included in the consolidated financialstatements.  The Corporation paid $7.8million in cash and issued 527,930 of its common shares in connection with theacquisition.  Under the terms of theagreement each share of Market’s common stock was exchanged for cash and/orshares of the Corporation totaling $13.00 per share.

 

On April 26, 2002, the Corporation completed itsacquisition of Kenwood Bancorp, Inc. (“Kenwood”) for consideration of $25.22per outstanding share, totaling $7.9 million in cash.  The results of Kenwood’s operations subsequent to April 26, 2002,are included in the consolidated financial statements.  The Corporation acquired $56.6 million intotal assets and recorded approximately $3.4 million in goodwill as part of thetransaction.

 

Presented beloware pro-forma condensed consolidated statements of earnings which have beenprepared as if the Kenwood acquisition had been consummated as of the beginningof each of the fiscal years ended September 30, 2002 and 2001, and as if theMarket acquisition had been consummated as of the beginning of the fiscal yearended September 30, 2001.

 
|                                       |   | **2002**           |       | **2001**   |       |
|--------------------------------------------|--------|--------------------|------------|------------|------------|
|                                       |   | **(In thousands)** |       |
|                                       |   | **(Unaudited)**    |       |
|                                       |   |               | ** ** |       | ** ** |
| **Total interest income**                  |   | **$**              | **35,606** | ** ** | **$**      | **30,903** | ** ** |
| Total interest  expense                    |   | 17,170             |       | 18,918     |       |
| **Net interest income**                    |   | **18,436**         | ** ** | **11,985** | ** ** |
|                                       |   |               |       |       |       |
| Provision for  losses on loans             |   | 5,265              |       | 2,614      |       |
| Other income                               |   | 2,687              |       | 5,201      |       |
| General,  administrative and other expense |   | 10,195             |       | 10,092     |       |
| Earnings before  income taxes              |   | 5,663              |       | 4,480      |       |
|                                       |   |               |       |       |       |
| Federal income  taxes                      |   | 2,431              |       | 2,272      |       |
|                                       |   |               |       |       |       |
| Net earnings                               |   | **$**              | **3,232**  | ** ** | **$**      | **2,208** | ** ** |

 

57

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

 

The following table summarizes the Corporation’s quarterlyresults for the fiscal years ended September 30, 2003 and 2002.  Certain amounts, as previously reported,have been reclassified to conform to the 2003 presentation.

 
|                                       |   | **Three  Months Ended**                    |    |
|--------------------------------------------|--------|--------------------------------------------|---------|
| **2003:**                                  |   | **December  31,**                          |    | **March 31,** |   | **June 30,** |   | **September  30,** |   |
|                                       |   | **(In  thousands, except per share data)** |    |
|                                       |   |                                       |    |   |   |   |   |   |   |
| Total interest  income                     |   | $                                          | 9,543   |   | $ | 9,277 |   | $ | 9,292 |   | $ | 9,057 |   |
| Total interest  expense                    |   | 4,833                                      |    | 4,616 |   | 4,603 |   | 4,020 |   |
|                                       |   |                                       |    |   |   |   |   |   |   |
| Net interest  income                       |   | 4,710                                      |    | 4,661 |   | 4,689 |   | 5,037 |   |
| Provision for  losses on loans             |   | 1,051                                      |    | 1,059 |   | 1,188 |   | 900 |   |
| Other income                               |   | 152                                        |    | 133 |   | 644 |   | 322 |   |
| General,  administrative and other expense |   | 2,345                                      |    | 2,529 |   | 2,681 |   | 2,949 |   |
|                                       |   |                                       |    |   |   |   |   |   |   |
| Earnings before  income taxes              |   | 1,466                                      |    | 1,206 |   | 1,464 |   | 1,510 |   |
| Federal income  taxes                      |   | 500                                        |    | 410 |   | 498 |   | 514 |   |
|                                       |   |                                       |    |   |   |   |   |   |   |
| Net earnings                               |   | **$**                                      | **966** | ** ** | **$** | **796** | ** ** | **$** | **966** | ** ** | **$** | **996** | ** ** |
|                                       |   |                                       |    |   |   |   |   |   |   |
| Earnings per  share                        |   |                                       |    |   |   |   |   |   |   |
| Basic                                      |   | **$**                                      | **.39** | ** ** | **$** | **.32** | ** ** | **$** | **.39** | ** ** | **$** | **.41** | ** ** |
|                                       |   |                                       |    |   |   |   |   |   |   |
| Diluted                                    |   | **$**                                      | **.39** | ** ** | **$** | **.32** | ** ** | **$** | **.38** | ** ** | **$** | **.39** | ** ** |

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

 

58

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**Peoples Community Bancorp, Inc.**

 

**DIRECTORS AND OFFICERS**

 

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

 

**DIRECTORS**

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

 

**EXECUTIVE OFFICERS**

 
| Paul  E. Hasselbring                        |
|---------------------------------------------|
| *Chairman of the Board*                     |
|                                        |
| Jerry  D. Williams                          |
| *President and Chief Executive Officer*     |
|                                        |
| Thomas  J. Noe                              |
| *Treasurer and Executive Vice-President*    |
|                                        |
| Teresa  A. O’Quinn                     |
| *Chief Financial Officer*                   |
|                                        |
| John  E. Rathkamp                           |
| *Secretary and Chief Lending Officer*       |
|                                        |
| Dennis  J. Slattery                         |
| *Chief Operating Officer*                   |
|                                        |
| Jerry  L. Boate                             |
| *Director of Human Resources and Marketing* |
|                                        |
| Lori  M. Henn                               |
| *Compliance Officer*                        |

 

59

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**Peoples Community Bancorp, Inc.**

 

**BANKING LOCATIONS AND STOCKHOLDERINFORMATION**

 

**BANKING LOCATIONS**

 

Peoples Community Bancorp, Inc. is aMaryland-incorporated thrift holding company conducting business through itswholly-owned subsidiary, Peoples Community Bank.  Peoples Community Bank is a federally-chartered, SAIF-insuredstock savings bank operating through thirteen offices in Hamilton, Warren, andButler counties in southwest Ohio.

 

**Main Office**

 

6100 West Chester Road

West Chester, Ohio  45069

 

**Branch Offices**

 

| 3621 Harrison Avenue         |   | 4825 Marburg Avenue          |   | 3663 Ebenezer Road           |
|------------------------------|--------|------------------------------|--------|------------------------------|
| Cheviot, Ohio   45211   |   | Cincinnati, Ohio  45209 |   | Cincinnati, Ohio 45248       |
|                         |   |                         |   |                         |
| 7522 Hamilton Avenue         |   | 11 South Broadway            |   | 1101 Columbus Avenue         |
| Cincinnati, Ohio  45248 |   | Lebanon, Ohio   45036   |   | Lebanon, Ohio   45036   |
|                         |   |                         |   |                         |
| 5797 South State Route 48    |   | 4100 State Route 128         |   | 7711 Montgomery Road         |
| Maineville, Ohio 45039       |   | Cleves, Ohio 45002           |   | Cincinnati, Ohio 45236       |
|                         |   |                         |   |                         |
| 7200 Blue Ash Road           |   | 3530 Springdale Road         |   | 2906-6 West US 22 & 3    |
| Cincinnati, Ohio  45236 |   | Cincinnati, Ohio 45251       |   | Maineville, Ohio  45039 |

 

**ANNUAL MEETING**

 

The Annual Meeting of Stockholders of Peoples Community Bancorp will beheld on February 4, 2004, at 10:00 AM Eastern Standard Time, at the SharonvilleConvention Center, 11355 Chester Road, Sharonville, Ohio  45246.

 

**TRANSFERAGENT/REGISTRAR**

 

Registrar and TransferCompany

10 Commerce Drive

Cranford, New Jersey  07016

(908) 272-8511

 

**STOCKHOLDERREQUESTS**

 

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

 

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

 

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