UNITED
      STATES


SECURITIES
      AND EXCHANGE COMMISSION


Washington,
      D.C.  20549





Form
      10-K





[X]     Annual
                Report Pursuant to Section 13 or 15(d) of the Securities Exchange
                Act of
                1934


For
                the fiscal year ended September 30, 2007


or


[   ]     Transition
                Report Pursuant to Section 13 or 15(d) of the Securities Exchange
                Act of
                1934


For
                the transition period from ________ to ________





Commission
                File Number 0-18991





PEOPLES
      BANCORP


(Exact
      name of registrant as specified in its charter)


Indiana
            35-1811284(State
                or other jurisdiction
            (I.R.S.
                Employerof
                incorporation or organization)
            Identification
                Number)212
                West 7th Street,
                Auburn, Indiana
            46706(Address
                of principal executive offices)
            (Zip
                Code)





Registrant’s
      telephone number,
      including area code:(260) 925-2500


Securities
      registered pursuant to Section 12(b) of the Act: None





Securities
      registered pursuant to Section 12(g) of the Act





Common
      Stock, par value
      $1.00 per share


(Title
      of
      Class)


_________________


Indicate
      by check mark if the
      registrant is a well-known seasoned issuer, as defined in rule 405 of the
      Securities Act.


Yes___
      No X.





Indicate
      by check mark if the
      registrant is not required to file reports pursuant to Section 13 or Section
      15(d) of the Act.


Yes No X.





Indicate
      by check mark whether the
      registrant (1) has filed all reports required to be filed by Section 13 or
      15(d)
      of the Securities Exchange Act of 1934 during the preceding 12 months (or for
      such shorter period that the registrant was required to file such reports),
      and
      (2) has been subject to such filing requirements for the past 90
      days.  YesX
      No .





Indicate
      by check mark if disclosure
      of delinquent filers pursuant to Item 405 of regulation S-K is not contained
      herein, and will not be contained, to the best of registrant’s knowledge, in
      definitive proxy information statements incorporated by reference in Part III
      of
      this Form 10-K or any amendment to this Form 10-K.  X





Indicate
      by check mark whether the
      registrant is a large accelerated filer, an accelerated filer, or a
      non-accelerated filer. See definition of “accelerated filer and large
      accelerated filer” in Rule 12b-2 of the Exchange Act.  (Check
      one):




Large
        accelerated filer o        Accelerated
        filer o        Non-accelerated
        filer x
  Indicate
      by check mark whether the
      registrant is a shell company (as defined in Rule 12b-2 of the Exchange
      Act).


Yes
      ___No
X





The
                aggregate market value of the voting stock held by non-affiliates
                of the
                Registrant computed by reference to the average bid and asked price
                of
                such stock as of March 31, 2007 was approximately $58,478,750.





As
      of December 14, 2007, there were
      issued and outstanding 3,104,990 shares of the Registrant’s common
      stock.








FORWARD
      LOOKING
      STATEMENTS





Peoples
      Bancorp (the “Company”) may from
      time to time make written or oral “forward-looking statements,” including
      statements contained in the Company’s filings with the Securities and Exchange
      Commission (including this annual report on Form 10-K and the exhibits thereto),
      in its reports to stockholders and in other communications by the Company,
      which
      are made in good faith by the Company pursuant to the “safe harbor” provisions
      of the Private Securities Litigation Reform Act of 1995.





These
      forward-looking statements involve
      risks and uncertainties, such as statements of the Company’s plans, objectives,
      expectations, estimates and intentions that are subject to change based on
      various important factors (some of which are beyond the Company’s control). The
      following factors, among others, could cause the Company’s financial performance
      and other actual results to differ materially from the plans, objectives,
      expectations, estimates and intentions expressed in such forward-looking
      statements: the strength of the United States economy in general and the
      strength of the local economies in which the Company conducts operations; the
      effects of, and changes in, trade, monetary and fiscal policies and laws,
      including interest rate policies of the Board of Governors of the Federal
      Reserve System, inflation, interest rates, market and monetary fluctuations;
      changes in real estate values and the real estate market; loss of deposits
      and
      loan demand to other financial institutions; the timely development of and
      acceptance of new products and services of the Company and the perceived overall
      value of these products and services by users, including the features, pricing
      and quality compared to competitors’ products and services; the willingness of
      users to substitute competitors’ products and services for the Company’s
      products and services; the success of the Company in gaining regulatory approval
      of its products and services, when required; the impact of changes in financial
      services laws and regulations (including laws concerning taxes, banking,
      securities and insurance); technological changes; acquisitions; changes in
      consumer spending and saving habits; increases in compensation and employee
      expenses; unanticipated results in pending legal proceedings; other factors
      described in Item 1A. Risk Factors; and the success of the Company in managing
      the risks resulting from these factors.





The
      Company cautions that the listed
      factors are not exclusive. The Company does not undertake to update any
      forward-looking statement, whether written or oral, that may be made from time
      to time by or on behalf of the Company.





PART
      I





Item
      1.  Business





General





The
      Company is anIndiana corporationorganized in October 1990 to become the
      thrift holding company for Peoples Federal Savings Bank ofDeKalbCounty(“Peoples
      Federal”). The Company is the
      sole shareholder of Peoples Federal.





Peoples
      Federal was founded in 1925 and
      chartered by the Federal Home Loan Bank Board (“FHLBB”), now the Office of
      Thrift Supervision (“OTS”), in 1937. Since that time, it has been a member of
      the Federal Home Loan Bank System (“FHLB System”) and the Federal Home Loan Bank
      ofIndianapolis(“FHLB
      of Indianapolis”). Its savings
      accounts are insured up to applicable limits by the Deposit Insurance Fund
      (“DIF”), as administered by the Federal Deposit Insurance Corporation (the
“FDIC”).





OnFebruary
      29, 2000a merger was completed
      with Three Rivers
      Financial Corp. and its subsidiary First Savings Bank (“First Savings”) ofThree Rivers,Michigan.
      The Company became the sole
      shareholder of First Savings.





During
      fiscal 2007 the Board of
      Directors directed the management team to review the present structure of the
      Company and to look at all avenues to improve cost controls. As a result of
      these efforts, onOctober
      1, 2007 theCompany merged
      First Savings into Peoples Federal. This merger is expected to reduce regulatory
      expenses and other costs resulting from a separate Board of Directors and
      duplicate positions at First Savings that were eliminated in the
      merger.


-2-


Accordingly,
      Peoples Federal now conducts business from its main office in Auburn, Indiana
      and its eight original full-service offices located in Avilla, Columbia City,
      Garrett, Kendallville, LaGrange, Topeka and Waterloo, Indiana. It also conducts
      business from the former main office of First Savings in Three Rivers, Michigan,
      and its five full-service offices in Three Rivers, Union and Schoolcraft,
      Michigan, and Howe and Middlebury, Indiana, offices formerly operating under
      the
      name of First Savings. Peoples Federal offers a full range of retail deposit
      services and lending services to northeastern Indiana and southern
      Michigan.





The
      Company has no other business
      activity other than being the holding company for Peoples Federal (“Peoples
      Federal” or the “Bank”) and is subject to regulation by the OTS. The Company’s
      securities are registered with the Securities and Exchange Commission (“SEC”)
      pursuant to the Securities Exchange Act of 1934, as amended (the “Exchange
      Act”). As such, the Company is subject to the information, proxy solicitation,
      insider trading, and other restrictions and requirements of the Exchange
      Act.





In
      February, 2006, the Board authorized
      a three-year stock repurchase program permitting the Company to purchase up
      to
      300,000 shares of the Company’s common stock. The purchases may be made in the
      open market or in privately negotiated transactions. As ofSeptember 30, 2007,
      the Company had repurchased 237,669
      shares under this plan.





On
      a yearly basis, the Company updates
      its long-term strategic plan. This plan includes, among other things, the
      Company’s commitment to maintaining a strong capital base and continuing to
      improve the Company’s return on assets through asset growth and controlling
      operating expenses. Continued careful monitoring of the Bank’s interest rate
      risk is also cited as an important goal. As a result, the Company expects to
      emphasize continued origination of short-term consumer and installment loans,
      prime plus equity loans, adjustable rate mortgage loans, and fixed-rate real
      estate loans with original terms of 15 years or less. Longer-term real estate
      loans that are originated will normally be sold into the secondary
      market.





The
      Bank offers a wide range of consumer
      and commercial financial services. These services include: consumer demand
      deposit accounts; NOW accounts; regular and term savings accounts and savings
      certificates; residential and commercial real estate loans; and secured and
      unsecured consumer loans. During 1999, Peoples Federal added agricultural and
      commercial lending officers to its staff. Since these types of loans pose a
      higher credit risk than traditional mortgage lending, they typically offer
      higher yields and are for shorter terms. It is expected that these loans will
      assist Peoples Federal in managing its interest rate risk, and increase its
      overall profitability. The Bank provides these services through a branch network
      comprised of fifteen full-service banking offices. It also provides credit
      card
      services, as well as enhancements to loan and deposit products designed to
      provide customers with added conveniences. The Company has historically
      concentrated its business activities in northeasternIndiana andsouthernMichigan.
      The Company’s current strategy is to
      maintain its branch office network as well as remain alert to new
      opportunities.





Over
      the years, the Company has
      broadened its product line and enhanced its operations in order to accommodate
      its growth and to meet the vigorous competition from various financial
      institutions and other companies or firms that engage in similar
      activities.





The
      Thrift Industry





Thrift
      institutions are financial
      intermediaries which historically have accepted savings deposits from the
      general public and, to a lesser extent, borrowed funds from outside sources
      and
      invested those deposits and funds primarily in loans secured by first mortgage
      liens on residential and other types of real estate. Such institutions may
      also
      invest their funds in various types of short and long-term securities. The
      deposits of thrift institutions are insured by the DIF as administered by the
      FDIC, and these institutions are subject to extensive regulations. These
      regulations govern, among other things, the lending and other investment powers
      of thrift institutions, including the terms of mortgage instruments these
      institutions are permitted to utilize, the types of deposits they are permitted
      to accept, and reserve requirements.


-3-


The
      operations of thrift institutions, including those of the Bank, are
      significantly affected by general economic conditions and by related monetary
      and fiscal policies of the federal government and regulations and policies
      of
      financial institution regulatory authorities, including the Board of Governors
      of the Federal Reserve System and the OTS. Lending activities are influenced
      by
      a number of factors including the demand for housing, conditions in the
      construction industry, and availability of funds. Sources of funds for lending
      activities include savings deposits, loan principal payments, proceeds from
      sales of loans, and borrowings from the Federal Home Loan Banks and other
      sources. Savings flows at thrift institutions such as the Bank are influenced
      by
      a number of factors including interest rates on competing investments and levels
      of personal income.





Earnings





The
      Bank’s earnings depend primarily on
      the difference between income from interest-earning assets such as loans and
      investments, and interest paid on interest-bearing liabilities such as deposits
      and borrowings. The Bank typically engages in long-term mortgage lending at
      fixed rates of interest, generally for periods of up to 30 years, while
      accepting deposits for considerably shorter periods.





Generally,
      rapidly rising interest rates
      cause the cost of interest-bearing liabilities to increase more rapidly than
      yields on interest-earning assets, thereby adversely affecting the earnings
      of
      many thrift institutions. While the industry has received expanded lending
      and
      borrowing powers in recent years permitting different types of investments
      and
      mortgage loans, including those with floating or adjustable rates and those
      with
      shorter terms, earnings and operations are still highly influenced by levels
      of
      interest rates and financial market conditions and by substantial investments
      in
      long-term mortgage loans.





Competition





The
      Bank experiences strong competition
      both in making real estate loans and in attracting savings deposits. The Bank
      competes for real estate loans with commercial banks, mortgage banking
      companies, insurance companies, and other institutional lenders. The most direct
      competition for savings comes from other thrift institutions, mutual savings
      banks, commercial banks and credit unions. During periods of generally high
      interest rates, additional significant competition for savings accounts comes
      from corporate and government securities as well as money market mutual funds.
      The principal methods generally used by the Bank to attract deposit accounts
      include: competitive interest rates, advertising, providing a variety of
      financial services, convenient office locations, flexible hours for the public,
      and promotions for opening or adding to deposit accounts.





Net
      Interest Income





Net
      interest income increases during
      periods when the spread is widened between the Bank’s weighted average rate at
      which new loans are originated and the weighted average cost of interest-bearing
      liabilities. The Bank’s ability to originate loans is affected by market factors
      such as interest rates, competition, consumer preferences, the supply of and
      demand for housing, and the availability of funds.





The
      Bank has supplemented its interest
      income through purchases of investments when appropriate. This activity usually
      generates positive interest rate spreads on large principal balances with
      minimal administrative expense.





Interest
      Rate and Volume of Interest-Related Assets and Liabilities





Both
      changes in interest rates and
      changes in the composition of the Bank’s interest-earning assets and
      interest-bearing liabilities can have a significant effect on net interest
      income.





For
      information regarding the total
      dollar amount of interest income from interest-earning assets, the average
      yields, the amount of interest expense from interest-bearing liabilities and
      the
      average rate, net interest income, interest rate spread, and the net yield
      on
      interest-earning assets, refer to Item 7. Management’s Discussion and Analysis
      of Financial Condition and Results of Operation - Net Interest
      Income.


-4-


For
      information regarding the combined weighted average effective interest rate
      earned by the Bank on its loan portfolios and investments, the combined weighted
      average effective cost of the Bank’s deposits and borrowings, the interest rate
      spread of the Bank, and the net yield on combined monthly weighted average
      interest-earning assets of the Bank on its loan portfolios and investments
      for
      the fiscal years ending September 30, 2007, 2006, and 2005 refer to Item 7.
      Management’s Discussion and Analysis of Financial Condition and Results of
      Operation - General.





For
      information concerning the extent to
      which changes in interest rates and changes in volume of interest-related assets
      and liabilities have affected the Bank’s interest income and expense during the
      fiscal years endingSeptember 30, 2007,
      2006, and 2005 refer to Item 7.
      Management’s Discussion and Analysis of Financial Condition and Results of
      Operation - Net Interest Income.





Market
      Area





Peoples
      Federal’s historical market area
      in northeasternIndiana
      spansthe counties of
      DeKalb, Whitley, Noble, and LaGrange. This market area has a population of
      approximately 160,000 and has a diversified industrial economic base with an
      emphasis on the production sector that includes major manufacturers of
      international scope and agriculture. Moreover, the distribution sector,
      primarily in the wholesale and retail trades, constitutes a substantial portion
      of the area’s economy, both in terms of product mix, sales receipts, and
      employment. The most rapid growth has occurred in the service sector with
      respect to packaging, warehousing, and distribution
      services.





The
      historical market area of First
      Savings, which is now additional market area for Peoples Federal as a result
      of
      the merger, is in southernMichigan andthe towns of Howe and Middlebury in
      northeasternIndiana.
      The Bank servesSt. Joseph,
      southernKalamazoo,
      and Cass counties inMichigan andLaGrange and easternElkhart countiesinIndiana.
      This market area is contiguous to the
      Peoples Federal historical market area. This aggregate market area has a
      population estimate of 590,000 and consists of a diversified economic base
      that
      includes manufacturing, wholesale and retail trades, small farming, and service
      industries. This portion of the general area serviced by the Bank would be
      classified as rural.





Lending
      Activities





General





The
      Bank has attempted to emphasize
      investments in adjustable-rate residential mortgages and consumer loans in
      its
      market areas. In order to lessen the risk from interest rate fluctuations,
      the
      Bank emphasizes the origination of interest rate sensitive loan products, such
      as one-year adjustable-rate mortgage loans, and prime-plus loans. However,
      during the recent low interest rate market, customers preferred fixed-rate
      products. The Bank reacted to this trend by offering a new mortgage product
      of a
      seven-year fixed-rate loan, which converts to a one-year adjustable product
      at
      the end of the seventh year. In this way, the Bank offered a fixed-rate product
      to satisfy the customer demand, but was not locked into low interest rates
      for a
      long period of time. For regulatory reporting purposes, these loans are shown
      as
      fixed-rate product until the period remaining to the next repricing is under
      five years. Seven-year/one-year loans originated during the initial
      implementation of this product are now shown in this Form 10-K as
      adjustable-rate product. More recent originations of these types of loans are
      shown as fixed rate mortgages. The Bank generally sells any loans it originates
      that have fixed-rate terms that exceed 7 years on the secondary
      market.





Residential
                Mortgage
                Loans





A
      substantial portion of the Bank’s
      lending activity involves the origination of loans secured by residential real
      estate, consisting of single-family dwelling units. The Bank also lends on
      the
      security of mid-size multifamily dwelling units. The residential mortgage loans
      included in the Bank’s portfolio are primarily conventional fixed-rate loans
      with a maturity of up to 30 years.


-5-


The
      Bank
      also offers adjustable-rate mortgage loans. Currently, these loans generally
      have interest rates that adjust (up or down) every year. Generally, these loans
      provide for a maximum adjustment of 6% over the life of the loans with a maximum
      adjustment of 2% during any given year. Adjustments are based upon an index
      established at the time the commitments are issued by the Bank. The index used
      for most loans is tied to the applicable United States Treasury security index.
      While adjustable-rate mortgage loans assist the Bank in maintaining a positive
      spread during periods of high interest rates, it is not expected that
      adjustments in interest rates on adjustable-rate mortgages will match precisely
      changes in the Bank’s cost of funds. The majority of the adjustable rate
      mortgages originated by the Bank have limitations on the amount (generally
      6%)
      and frequency of interest rate changes.





During
      the fiscal year endedSeptember 30, 2007
      theBank originated
      $37,920,286 of residential loans of which $13,034,686 were five- to 30-year
      fixed-rate mortgages and $24,885,600 were adjustable-rate loans. The rates
      offered on the Bank’s adjustable-rate residential mortgage loans are generally
      competitive with the rates offered by other thrift institutions in the Bank’s
      market areas and are based upon the Bank’s cost of funds and the rate of return
      the Bank can receive on comparable investments. Fixed-rate loans are originated
      generally under terms and conditions and using documentation which would permit
      their sale in the secondary market and at rates which are generally competitive
      with rates offered by other financial institutions in the Bank’s market
      areas.





Set
      forth below are the amounts and
      percentages of fixed-rate and adjustable-rate loans (which include consumer
      loans) in the Bank’s portfolios atSeptember 30, 2007,
      2006, and 2005.





September
                30,2007
            
            2006
            
            2005(Dollars
                in Thousands)Adjustable
            
            Fixed
            
            Adjustable
            
            Fixed
            
            Adjustable
            
            Fixed$196,695
            
            $153,624
            
            $185,683
            
            $187,878
            
            $248,534
            
            $113,15956.2%
            
            43.8%
            
            49.7%
            
            50.3%
            
            68.7%
            
            31.3%





The
      terms of the residential loans
      originated by the Bank range from one to 30 years. Experience during recent
      years reveals that as a result of prepayments in connection with refinancings
      and sales of the underlying properties, residential loans generally remain
      outstanding for periods substantially shorter than maturity of the loan
      contracts. However, with the recent increases in refinancings, many consumers
      now have low rate loans. With interest rates rising, these consumers may not
      be
      as willing to prepay these low rate loans, and the loans may remain outstanding
      for a much longer period. AtSeptember 30, 2007,
      the average contractual maturity of
      the Bank’s portfolios of fixed-rate loans was 7 years and 10 months, and 20
      years and 4 months with respect to its portfolio of adjustable-rate
      loans.





Substantially
      all of the Bank’s
      residential mortgages include so-called “due on sale” clauses, which are
      provisions giving the Bank the right to declare a loan immediately due and
      payable in the event that, among other things, the borrower sells or otherwise
      disposes of the real property subject to the mortgage, and the loan is not
      repaid.





Generally,
      the Bank will not lend more
      than 80% of the appraised value of a residential property which is owner
      occupied unless the borrower obtains private mortgage insurance reducing the
      uninsured portion of the loan to 72% of the appraised value. If private mortgage
      insurance is obtained, the Bank’s policy is to lend up to 90% of the appraised
      value of the property securing the loan. The Bank applies the same standards
      to
      residential loans purchased in the secondary market.





Commercial
                Real Estate
                Loans





The
      Bank also originates commercial real
      estate loans. FromSeptember 30, 2006,
      toSeptember 30, 2007,
      commercial real estate loans decreased
      from $30,027,000 to $23,362,000, with the percentage of commercial real estate
      loans to total loans decreasing from 8.0% to 6.6%. These loans consisted of
      construction and permanent loans secured by mortgages on mid-size commercial
      real estate and farms. Of these loans, approximately $11.1 million are secured
      by agricultural real estate. The terms of commercial real estate loans vary
      from
      loan to loan but are usually five-year adjustable-rate loans with terms of
      20 to
      25 years. The loan-to-value ratio of commercial real estate loans is generally
      75% or less.


-6-





Generally,
      commercial real estate loans
      involve greater risk to the Bank than do residential loans but usually provide
      for a higher rate of interest and increased fee income than do residential
      loans. Commercial real estate loans typically involve large loan balances to
      single borrowers or groups of related borrowers. In addition, the payment
      experience on loans secured by income producing properties is typically
      dependent on the successful operation of the related project and thus may be
      subject to a great extent to adverse conditions in the real estate market or
      in
      the economy generally.





Construction
                Loans





The
      Bank offers residential construction
      loans both to owner-occupants and to persons building residential property.
      Construction loans are usually offered with fixed rates of interest during
      construction. Generally, construction loans have terms ranging from six to
      12
      months at fixed rates over the construction period. Practically all residential
      construction loans are written so as to become permanent loans at the end of
      the
      construction period.





Construction
      loans involve greater
      underwriting and default risks to the Bank than do loans secured by mortgages
      on
      existing properties. Loan funds are advanced upon the security of the project
      under construction, which is more difficult to value prior to the completion
      of
      construction. Moreover, because of the uncertainties inherent in estimating
      construction costs, it is relatively difficult to evaluate accurately the total
      loan funds required to complete a project and the related loan-to-value ratios.
      Should a default occur which results in foreclosure, the Bank could be
      negatively impacted in that it would have to take control of the project and
      attempt either to arrange for completion of construction or dispose of the
      unfinished project.





The
      Bank’s underwriting criteria are
      designed to evaluate and minimize the risks of each construction loan. The
      Bank
      carefully considers a wide variety of factors before originating a construction
      loan, including the availability of permanent financing or a takeout commitment
      to the borrower (which may be provided by the Bank at market rates); the
      reputation of the borrower and the contractor; independent valuations and
      reviews of cost estimates; pre-construction sale information; and cash flow
      projections of the borrower. Inspections of construction sites are made by
      the
      Bank on a timely basis to verify progress made to date as a further
      reinforcement of its conservative lending policy. To reduce the risks inherent
      in construction lending, the Bank limits the number of properties that can
      be
      constructed on a “speculative” or unsold basis by a developer at any one time
      and generally requires the borrower or its principals to personally guarantee
      repayment of the loan.





Consumer
                and Other
                Loans





Federal
      laws and regulations permit a
      federally-chartered savings institution to make secured and unsecured consumer
      loans including home equity loans (loans secured by the equity in the borrower’s
      residence, but not necessarily for the purpose of improvement), home improvement
      loans (loans secured by a residential second mortgage), loans secured by deposit
      accounts, and credit card loans (unsecured). The Bank offers all of these types
      of loans and is currently emphasizing home equity loans to take advantage of
      the
      adjustable interest rate feature of this type of loan versus the mortgage
      product. These loans also carry a higher rate of interest than conventional
      mortgages, thereby increasing the profit potential while reducing the interest
      rate risk.





-7-


Loan
                Portfolio Cash
                Flows





The
      following table sets forth the
      estimated maturity of the Bank’s loan portfolios by type of loan atSeptember 30, 2007.
      The estimated maturity reflects
      contractual terms atSeptember 30, 2007.
      Contractual principal repayments of
      loans do not necessarily reflect the actual term of the Bank’s loan portfolios.
      The average life of mortgage loans is substantially less than their contractual
      terms because of loan prepayments and because of enforcement of “due on sale”
clauses. The average life of mortgage loans tends to increase, however, when
      current mortgage loan rates substantially exceed rates on existing mortgage
      loans.





Due
                in One Year or Less
            
            
            One
                Year Through Five Years
            
            
            Due
                After Five Years
            
            
            Total(In
                thousands)Type
                of Loan:Construction
                loans:Residential
                real estate
            
            $
            1,902
            
            
            $
            -
            
            
            $
            -
            
            
            $
            1,902Commercial
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -Real
                estate loans:Mortgage-residential
            
            
            1,385
            
            
            
            10,201
            
            
            
            299,310
            
            
            
            310,896Commercial
            
            
            3,836
            
            
            
            1,096
            
            
            
            18,430
            
            
            
            23,362Installment
                loans:Consumer
            
            
            1,679
            
            
            
            5,572
            
            
            
            514
            
            
            
            7,765Commercial
            
            
            5,973
            
            
            
            2,047
            
            
            
            579
            
            
            
            8,599Total
            
            $
            14,775
            
            
            $
            18,916
            
            
            $
            318,833
            
            
            $
            352,524








The
      following table sets forth the total
      amount of loans due after one year fromSeptember 30, 2007,
      which have a fixed rate or an
      adjustable rate.





Loans
                DueOctober
                1, 2008 and thereafter(Dollars
                in Thousands)Fixed
            
            Adjustable
            
            Total
                at September 30, 2007$86,684
            
            $251,065
            
            $337,749





-8-





Loan
                Portfolio
                Composition





The
      following table sets forth the
      composition of the Bank’s loan portfolios by type of loan at the dates
      indicated. The table includes a reconciliation of total net loans receivable,
      after consideration of undisbursed portion of loans, deferred loan fees and
      discounts, and allowance for losses on loans.





At
                September 30,2007
            
            
            2006
            
            
            2005
            
            
            2004
            
            
            2003TYPE
                OF LOAN
            
            AMOUNT
            
            
            %
            
            
            AMOUNT
            
            
            %
            
            
            AMOUNT
            
            
            %
            
            
            AMOUNT
            
            
            %
            
            
            AMOUNT
            
            
            %Residential:
            
            (dollars
                in thousands)1-4
                family units
            
            $
            286,022
            
            
            
            81.1
            %
            
            $
            303,089
            
            
            
            80.4
            %
            
            $
            290,833
            
            
            
            80.4
            %
            
            $
            290,002
            
            
            
            79.2
            %
            
            $
            303,062
            
            
            
            83.2
            %Over
                4 family units
            
            
            2,128
            
            
            
            0.6
            %
            
            
            1,031
            
            
            
            0.3
            %
            
            
            2,105
            
            
            
            0.6
            %
            
            
            2,401
            
            
            
            0.7
            %
            
            
            2,593
            
            
            
            0.7
            %Commercial
                real estate
            
            
            23,362
            
            
            
            6.6
            %
            
            
            30,027
            
            
            
            8.0
            %
            
            
            19,752
            
            
            
            5.4
            %
            
            
            22,447
            
            
            
            6.1
            %
            
            
            14,750
            
            
            
            4.1
            %Land
                acquisition anddevelopment
            
            
            3,683
            
            
            
            1.0
            %
            
            
            3,824
            
            
            
            1.0
            %
            
            
            2,442
            
            
            
            0.7
            %
            
            
            1,683
            
            
            
            0.5
            %
            
            
            1,480
            
            
            
            0.4
            %Consumer
                and other loans
            
            
            36,781
            
            
            
            10.5
            %
            
            
            38,303
            
            
            
            10.1
            %
            
            
            45,822
            
            
            
            12.7
            %
            
            
            48,785
            
            
            
            13.3
            %
            
            
            41,748
            
            
            
            11.5
            %Loans
                on deposits
            
            
            548
            
            
            
            0.2
            %
            
            
            793
            
            
            
            0.2
            %
            
            
            739
            
            
            
            0.2
            %
            
            
            675
            
            
            
            0.2
            %
            
            
            521
            
            
            
            0.1
            %352,524
            
            
            
            100.0
            %
            
            
            377,067
            
            
            
            100.0
            %
            
            
            361,693
            
            
            
            100.0
            %
            
            
            365,993
            
            
            
            100.0
            %
            
            
            364,154
            
            
            
            100.0
            %Less:Undisbursed
                portionof
                loans
            
            
            1,574
            
            
            
            
            
            
            
            2,734
            
            
            
            
            
            
            
            3,361
            
            
            
            
            
            
            
            2,440
            
            
            
            
            
            
            
            3,467Deferred
                loan fees anddiscounts
            
            
            886
            
            
            
            
            
            
            
            1,070
            
            
            
            
            
            
            
            1,216
            
            
            
            
            
            
            
            1,434
            
            
            
            
            
            
            
            1,6232,460
            
            
            
            
            
            
            
            3,804
            
            
            
            
            
            
            
            4,577
            
            
            
            
            
            
            
            3,874
            
            
            
            
            
            
            
            5,090Total
                loans receivable
            
            
            350,064
            
            
            
            
            
            
            
            373,263
            
            
            
            
            
            
            
            357,116
            
            
            
            
            
            
            
            362,119
            
            
            
            
            
            
            
            359,064Allowance
                for losseson
                loans
            
            
            1,834
            
            
            
            
            
            
            
            1,898
            
            
            
            
            
            
            
            1,967
            
            
            
            
            
            
            
            1,958
            
            
            
            
            
            
            
            2,111Net
                loans
            
            $
            348,230
            
            
            
            
            
            
            $
            371,365
            
            
            
            
            
            
            $
            355,149
            
            
            
            
            
            
            $
            360,161
            
            
            
            
            
            
            $
            356,953





Origination,
                Purchase
                and Sale of Loans and Loan
                Concentrations





The
      Bank originates residential loans in
      conformity with standard underwriting criteria to assure maximum eligibility
      for
      possible resale in the secondary market. Although the Bank has authority to
      lend
      anywhere in theUnited
      States, it has confined its
      loan origination activities primarily in the Bank’s service
      areas.





Loan
      originations are developed from a
      number of sources, primarily from referrals from real estate brokers, builders,
      and existing and walk-in customers.





The
      Bank’s mortgage loan approval
      process is intended to assess the borrower’s ability to repay the loan, the
      viability of the loan, and the adequacy of the value of the property that will
      secure the loan. The loan committees of the Bank can approve residential and
      commercial loans ranging up to $500,000. The Bank’s Board of Directors must
      approve loans exceeding $500,000. The Bank utilizes independent qualified
      appraisers approved by the Board of Directors to appraise the properties
      securing loans and requires title insurance or title opinions so as to insure
      that the Bank has a valid lien on the mortgaged real estate. The Bank requires
      borrowers to maintain fire and casualty insurance on its secured
      properties.


-9-


The
      procedure
      for approval of construction loans is the same as for residential mortgage
      loans, except that the appraiser evaluates the building plans, construction
      specifications, and estimates of construction costs. The Bank also evaluates
      the
      feasibility of the proposed construction project and the experience and track
      record of the developer. In addition, all construction loans generally require
      a
      commitment from a third-party lender or from the Bank for a permanent long-term
      loan to replace the construction loan upon completion of
      construction.





Consumer
      loans are underwritten on the
      basis of the borrower’s credit history and an analysis of the borrower’s income
      and expenses, ability to repay the loan, and the value of the collateral, if
      any. A consumer loan officer must approve consumer loans. Consumer loan
      originations currently are being generated primarily through
      advertising.





Currently,
      it is the Bank’s policy to
      originate both fixed-rate and adjustable-rate loans, provided all such loans
      are
      eligible for sale in the secondary market. The Bank is currently active in
      the
      secondary market and sells the majority of its fixed rate loan
      products.





The
      following table shows mortgage and
      other loan origination, purchase, and repayment activity for the Bank during
      the
      periods indicated:





Years
                Ended September 302007
            
            
            2006
            
            
            2005(Dollars
                in thousands)Mortgage
                loans originated for the purpose of:Construction
            
            $
            2,168
            
            
            $
            12,224
            
            
            $
            7,974Purchase/refinance
            
            
            41,823
            
            
            
            64,557
            
            
            
            64,454Consumer
                and other loans originated
            
            
            17,265
            
            
            
            28,595
            
            
            
            16,920Total
                loans originated
            
            
            61,256
            
            
            
            105,376
            
            
            
            89,348Loan
                credits:Loans
                sold
            
            
            6,122
            
            
            
            4,474
            
            
            
            5,604Principal
                repayments and other adjustments
            
            
            77,575
            
            
            
            84,231
            
            
            
            88,320Other:Provision
                for losses on loans
            
            
            77
            
            
            
            56
            
            
            
            67Amortization
                of loan fees
            
            
            (352
            )
            
            
            (381
            )
            
            
            (487
            )Loan
                foreclosures, net
            
            
            1,011
            
            
            
            780
            
            
            
            856736
            
            
            
            455
            
            
            
            436Total
                credits, net
            
            
            78,311
            
            
            
            84,686
            
            
            
            88,756Net
                increases (decreases) in mortgage and other loans receivable,
                net
            
            $
            (23,177
            )
            
            $
            16,216
            
            
            $
            (5,012
            )





Interest
                Rates, Points
                and Fees





The
      Bank realizes interest, point, and
      fee income from their lending activities. The Bank also realizes income from
      commitment fees for making commitments to originate loans, from prepayment
      and
      late charges, loan fees, application fees, and fees for other miscellaneous
      services.





The
      Bank accounts for loan origination
      fees in accordance with the Statement of Financial Accounting Standards on
      Accounting for Nonrefundable Fees and Costs Associated with Originating or
      Acquiring Loans (“SFAS No. 91”) issued by the Financial Accounting Standards
      Board (the “FASB”). SFAS No. 91 prohibits the immediate recognition of loan
      origination fees as revenues and requires that such income (net of certain
      direct loan origination costs) for each loan be amortized, generally by the
      interest method, over the estimated life of the loan as an adjustment of
      yield.





The
      Bank also realizes income from gains
      on sales of loans, and servicing fees for loans sold with servicing
      retained.


-10-


Nonperforming
      Assets





Loans
      are reviewed on a regular basis
      and are generally placed on nonaccrual status when the loans become 90 days
      or
      more past due, or when, in the judgment of management, the probability of
      collection is deemed to be insufficient to warrant further accrual. When a
      loan
      is placed on a nonaccrual status, previously accrued but unpaid interest is
      deducted from interest income. When the Bank is unable to resolve a delinquency
      satisfactorily within 45 days after the loan is past due, it will undertake
      foreclosure or other proceedings, as necessary, to minimize any potential
      loss.





Real
      estate acquired by the Bank as a
      result of foreclosure or by deed in lieu of foreclosure is classified as “real
      estate owned” until it is sold. When property is so acquired, it is recorded at
      the lower of loan balance or fair market value at the date of acquisition.
      Periodically, real estate owned is reviewed to ensure that net realizable value
      is not less than carrying value, and any allowance resulting therefrom is
      charged to operations as a provision for loss on real estate owned. All costs
      incurred in maintaining the property from the date of acquisition are
      expensed.





The
      following table reflects the amount
      of loans in delinquent status atSeptember 30, 2007.





Loans
                Delinquent For30-59
                Days
            
            
            60-89
                Days
            
            
            90
                Days and OverPercent
            
            
            
            
            
            
            
            
            Percent
            
            
            
            
            
            
            
            
            Percentof
                Loan
            
            
            
            
            
            
            
            
            of
                Loan
            
            
            
            
            
            
            
            
            of
                LoanNumber
            
            
            Amount
            
            
            Category
            
            
            Number
            
            
            Amount
            
            
            Category
            
            
            Number
            
            
            Amount
            
            
            CategoryReal
                estate:
            
            (Dollars
                in thousands)One
                to four family
            
            
            19
            
            
            $
            1,266
            
            
            
            0.44
            %
            
            
            8
            
            
            $
            349
            
            
            
            0.12
            %
            
            
            14
            
            
            $
            796
            
            
            
            0.28
            %Non-residential
            
            
            -
            
            
            
            -
            
            
            
            0.00
            %
            
            
            -
            
            
            
            -
            
            
            
            0.00
            %
            
            
            1
            
            
            
            78
            
            
            
            0.34
            %Consumer
            
            
            18
            
            
            
            571
            
            
            
            1.55
            %
            
            
            1
            
            
            
            3
            
            
            
            0.01
            %
            
            
            6
            
            
            
            129
            
            
            
            0.35
            %Total
            
            
            37
            
            
            $
            1,837
            
            
            
            0.52
            %
            
            
            9
            
            
            $
            352
            
            
            
            0.10
            %
            
            
            21
            
            
            $
            1,003
            
            
            
            0.28
            %





The
      following table sets forth the
      Bank’s nonperforming assets at the dates indicated.





At
                September 30,2007
            
            
            2006
            
            
            2005
            
            
            2004
            
            
            2003(Dollars
                in thousands)Nonaccrual
                loans
            
            $
            1,003
            
            
            $
            565
            
            
            $
            1,042
            
            
            $
            493
            
            
            $
            1,127Loans
                past due 90 days andstill
                accruing
            
            
            -
            
            
            
            -
            
            
            
            126
            
            
            
            26
            
            
            
            901,003
            
            
            
            565
            
            
            
            1,168
            
            
            
            519
            
            
            
            1,217Real
                estate owned, netof
                allowance
            
            
            986
            
            
            
            709
            
            
            
            1,061
            
            
            
            940
            
            
            
            854Total
                nonperformingassets
            
            $
            1,989
            
            
            $
            1,274
            
            
            $
            2,229
            
            
            $
            1,459
            
            
            $
            2,071





Consumer
      loans are placed on nonaccrual
      generally when the loan exceeds 90 days delinquent or if, in the opinion of
      management, the possibility of collecting the loan becomes questionable.
      Mortgage loans are placed on nonaccrual generally when the loan exceeds 90
      days
      delinquent; however, if the loan is below a 25% loan-to-value ratio, management
      may at their option decide to accrue interest on the loan, since collection
      of
      the loan appears highly likely.


-11-


The
      increase in nonaccrual loans since September 30, 2006 is primarily from the
      1 to
      4 family portion of the loan portfolio, and management believes the amount
      of
      nonaccrual loans has been appropriately considered in determining the adequacy
      of the allowance for loan and real estate owned (“REO”) losses at September 30,
      2007. There have been no significant changes in potential problem loans since
      September 30, 2006. Net charge-offs for the years ended September 30, 2007
      and 2006 were $142,000 and $124,000, respectively.





Interest
      income that would have been
      recognized for the year endedSeptember 30, 2007,
      if nonaccrual loans had been current
      in accordance with their original terms, approximated $61,000. Interest income
      that would have been recognized on such loans for the year endedSeptember 30, 2006,
      approximated $33,000. AtSeptember 30, 2007 theBank had $501,000 of loans that were
      deemed impaired in accordance with Statement of Financial Accounting Standards
      No. 114. Refer to Note 5 of the Notes to Consolidated Financial Statements
      in
      Item 8. Financial Statements and Supplementary Data.





Federal
      regulations require savings
      associations to review their assets on a regular basis and to classify them
      as:
      special mention; substandard; doubtful and loss. Loans classified as special
      mention are loans which currently do not expose the Bank to an unusual risk
      of
      loss, but based on information available require the attention of management.
      This classification usually includes loans secured by unusual collateral, loans
      with documentary items that are being addressed by counsel, and relatively
      large
      loans where the borrower has had a history of delinquent payments and the
      collateral has a cash flow shortfall, however, the borrower has continued to
      service the debt.





Loans
      classified as substandard or
      doubtful generally represent balances where the borrower has made several late
      payments and is unable to bring the loan current. Substandard loans generally
      represent situations where the borrower is attempting to resolve the delinquency
      in the normal course of business (i.e., sale of the property or infusion of
      additional capital). Substandard loans are reserved at 20% of the loan balance.
      Loans classified as doubtful represent situations where the borrower has been
      unsuccessful in attempts to resolve the delinquency in the normal course of
      business. Doubtful loans involve a greater degree of uncertainty regarding
      estimate of loss, and the company reserves 50% of the loan
      balance.





Loans
      classified as loss represent
      situations where the loan is severely delinquent. These loans typically involve
      extensive bankruptcy proceedings or other unusual circumstances where the debtor
      contests foreclosure.





Loans
      classified as special mention,
      substandard or doubtful do not necessarily require specific reserves. Individual
      loan balances may be classified in one or more categories based on management’s
      analysis and estimate of the risk underlying each individual
      situation.





In
      accordance with the federal
      regulations, the Bank’s management continually reviews the mix and delinquency
      status of its loan portfolio and classifies those loans it deems
      appropriate.





As
      ofSeptember 30, 2007,
      loan balances were classified by the
      Bank as follows:





At
                September 30, 2007(In
                Thousands)Loss
            
            $
            -Doubtful
            
            
            -Substandard
            
            
            4,081Special
                Mention
            
            
            294Total
                Classified Assets
            
            $
            4,375





-12-


Allowance
      for Losses on Loans





The
      allowances for loan losses represent
      amounts available to absorb inherent losses in the loan portfolios. The
      allowance is based on management’s continuing review of the portfolios,
      historical charge-offs, current economic conditions, and such other factors,
      which in management’s judgment deserve recognition in estimating possible
      losses. In addition, various regulatory agencies, as an integral part of their
      examination process, periodically review the allowance for loan losses. Such
      agencies may require additions to the allowance based on their judgment about
      the information available to them at the time of their examination. Provisions
      for losses are charged to earnings to bring the allowance to levels considered
      necessary by management. Losses are charged to the allowance when considered
      probable. As ofSeptember
      30, 2007 allowancefor
      losses on loans was $1,834,000. Overall, the general composition of the loan
      portfolio has remained similar to the prior year with no significant shift
      of
      risk between components of the loan portfolio that would impact the calculation
      of the allowance for loan losses. The Bank’s management believes that the
      allowance is adequate to absorb known and inherent losses in the portfolios.
      No
      assurance can be given, however, that economic conditions which may adversely
      affect the Bank’s markets or other circumstances will not result in additions to
      the allowance for loan and real estate owned losses.





The
      following table presents an
      allocation of the Bank’s allowance for loan losses at the dates
      indicatedand
      the percentage of loans in each
      category to total loans.





September
                30,2007
            
            
            2006
            
            
            2005
            
            
            2004
            
            
            2003Amount
            
            
            %
            
            
            Amount
            
            
            %
            
            
            Amount
            
            
            %
            
            
            Amount
            
            
            %
            
            
            Amount
            
            
            %Balance
                at end of period applicable to:
            
            (Dollars
                in thousands)Residential
                Mortgage Loans
            
            $
            1,229
            
            
            
            81.7
            %
            
            $
            1,212
            
            
            
            80.7
            %
            
            $
            1,380
            
            
            
            87.8
            %
            
            $
            1,588
            
            
            
            87.8
            %
            
            $
            1,634
            
            
            
            82.1
            %Commercial/
                Commercial RealEstate
                Loans
            
            
            423
            
            
            
            7.7
            %
            
            
            368
            
            
            
            9.0
            %
            
            
            276
            
            
            
            6.1
            %
            
            
            231
            
            
            
            8.8
            %
            
            
            166
            
            
            
            5.8
            %Consumer
                Loans
            
            
            182
            
            
            
            10.6
            %
            
            
            318
            
            
            
            10.4
            %
            
            
            311
            
            
            
            6.1
            %
            
            
            140
            
            
            
            3.4
            %
            
            
            311
            
            
            
            12.1
            %Total
            
            $
            1,834
            
            
            
            100.0
            %
            
            $
            1,898
            
            
            
            100.0
            %
            
            $
            1,967
            
            
            
            100.0
            %
            
            $
            1,959
            
            
            
            100.0
            %
            
            $
            2,111
            
            
            
            100.0
            %





The
      following table is a summary of
      activity in the Bank’s allowance for loan losses for the periods
      indicated.





Summary
                of Loan Loss Experience
            
            Years
                ended September 30,2007
            
            
            2006
            
            
            2005
            
            
            2004
            
            
            2003Balance
                of loan loss allowance at
            
            (Dollars
                in Thousands)beginning
                of year
            
            $
            1,898
            
            
            $
            1,967
            
            
            $
            1,959
            
            
            $
            2,111
            
            
            $
            2,117Charge-offsResidential
            
            
            76
            
            
            
            86
            
            
            
            7
            
            
            
            4
            
            
            
            25Commercial
                real estate
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            144
            
            
            
            -Commercial
            
            
            21
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            395Consumer
            
            
            52
            
            
            
            48
            
            
            
            87
            
            
            
            93
            
            
            
            138Total
                Charge-offs
            
            
            149
            
            
            
            134
            
            
            
            94
            
            
            
            241
            
            
            
            558RecoveriesResidential
            
            
            4
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -Consumer
            
            
            4
            
            
            
            9
            
            
            
            35
            
            
            
            49
            
            
            
            15Total
                Recoveries
            
            
            8
            
            
            
            9
            
            
            
            35
            
            
            
            49
            
            
            
            15Net
                Charge-offs (Recoveries)
            
            
            141
            
            
            
            125
            
            
            
            59
            
            
            
            192
            
            
            
            543Provision
                for loan losses
            
            
            77
            
            
            
            56
            
            
            
            67
            
            
            
            40
            
            
            
            537Balance
                of loan loss allowance atend
                of year
            
            $
            1,834
            
            
            $
            1,898
            
            
            $
            1,967
            
            
            $
            1,959
            
            
            $
            2,111Ratio
                of net charge-offs to averageloans
                outstanding
            
            
            0.04
            %
            
            
            0.01
            %
            
            
            0.02
            %
            
            
            0.05
            %
            
            
            0.14
            %





-13-


Investment
      Activities





Federal
      thrift institutions, such as the
      Bank, have authority to invest in various types of liquid assets, including
      United States Treasury obligations and securities of various federal agencies,
      certificates of deposit at insured banks, bankers’ acceptances and federal
      funds. As a member of the FHLB System, the Bank must maintain minimum levels
      of
      liquid assets specified by the OTS, which vary from time to time. Subject to
      various regulatory restrictions, federal thrift institutions may also invest
      a
      portion of their assets in certain commercial paper, corporate debt securities
      and mutual funds whose assets conform to the investments that a federal thrift
      institution is authorized to make directly.





The
      carrying values of the Bank’s
      investment securities, including its liquid assets, as of the dates indicated
      are presented in the following table.





At
                September 30,2007
            
            
            2006
            
            
            2005(Dollars
                in thousands)Interest-bearing
                deposits and certificates of deposit (1)
            
            $
            9,145
            
            
            $
            9,394
            
            
            $
            3,467U.S.
                government and federal agency securitiesAvailable
                for sale
            
            
            71,826
            
            
            
            75,538
            
            
            
            76,041Mortgage-backed
                securitiesHeld
                to Maturity
            
            
            423
            
            
            
            568
            
            
            
            751Available
                for sale
            
            
            4,355
            
            
            
            5,618
            
            
            
            7,604Stock
                in FHLB of Indianapolis
            
            
            4,404
            
            
            
            4,568
            
            
            
            4,888OtherAvailable
                for sale (2)
            
            
            10,419
            
            
            
            12,485
            
            
            
            14,035Total
                investments
            
            $
            100,572
            
            
            $
            108,171
            
            
            $
            106,786




(1)
            In
                Interest-bearing accounts at FHLB of Indianapolis of $6,334 and $243
                of
                bank deposits, insured certificates of deposit of $2,568 at September
                30,
                2007; In Interest-bearing accounts at FHLB of Indianapolis of $4,346,
                insured certificates of deposit of $5,048 at September 30, 2006;
                Insured
                certificates of deposit at September 30, 2005.


(2)
            In
                State and Municipal obligations at September 30, 2007 and 2006; Van
                Kampen
                Prime Income Fund of $2,464, Van Kampen Senior Income Trust of $1,397,
                State and Municipal obligations of $10,174 at September 30, 2005.







The
      following table sets forth
      information regarding the maturity distribution of investment securities atSeptember 30,
      2007, and the weighted
      average rate on those securities.





At
                September 30, 2007Available
                for Sale
            
            
            Held
                to MaturityWeighted
            
            
            Approximate
            
            
            
            
            
            Weighted
            
            
            ApproximateAmortized
            
            
            Average
            
            
            Fair
            
            
            Amortized
            
            
            Average
            
            
            FairMaturity
                Distribution at September 30:
            
            Cost
            
            
            Coupon
            
            
            Value
            
            
            Cost
            
            
            Coupon
            
            
            Value(Dollars
                in thousands)Due
                in one year or less
            
            $
            17,111
            
            
            
            3.58
            %
            
            $
            17,026
            
            
            $
            -
            
            
            
            
            
            $
            -Due
                after one through five years
            
            
            46,531
            
            
            
            4.13
            %
            
            
            46,298
            
            
            
            -
            
            
            
            
            
            
            -Due
                after five through ten years
            
            
            17,744
            
            
            
            4.71
            %
            
            
            17,675
            
            
            
            -
            
            
            
            
            
            
            -Due
                after ten years
            
            
            1,278
            
            
            
            4.04
            %
            
            
            1,245
            
            
            
            -
            
            
            
            
            
            
            -82,664
            
            
            
            
            
            
            
            82,244
            
            
            
            -
            
            
            
            
            
            
            -Mortgage-backed
                securities
            
            
            4,438
            
            
            
            4.31
            %
            
            
            4,356
            
            
            
            423
            
            
            
            5.44
            %
            
            
            425Marketable
                equity securities
            
            
            -
            
            
            
            
            
            
            
            -
            
            
            
            -
            
            
            
            
            
            
            
            -Total
            
            $
            87,102
            
            
            
            
            
            
            $
            86,600
            
            
            $
            423
            
            
            
            
            
            
            $
            425





-14-


Sources
      of Funds





General





Deposits
      have traditionally been the
      primary source of funds of the Bank for use in lending and investment
      activities. In addition to deposits, the Bank derives funds from loan
      prepayments and income on interest-earning assets. While income on
      interest-earning assets is a relatively stable source of funds, deposit inflows
      and outflows can vary widely and are influenced by prevailing interest rates,
      money market conditions, and levels of competition.





Deposits





Deposits
      are attracted principally from
      within the Bank’s primary market areas through the offering of a variety of
      deposit instruments, including passbook and statement accounts and certificates
      of deposit ranging in terms from three months to five years. Deposit account
      terms vary, principally on the basis of the minimum balance required, the time
      periods the funds must remain on deposit and the interest rate. The Bank also
      offers individual retirement accounts (“IRA’s”).





The
      Bank’s policies are designed
      primarily to attract deposits from local residents rather than to solicit
      deposits from areas outside its primary markets. Interest rates paid, maturity
      terms, service fees and withdrawal penalties are established by the Bank on
      a
      periodic basis. Determination of rates and terms are predicated upon funds
      acquisition and liquidity requirements, rates paid by competitors, growth goals
      and federal regulations.





A
      major determinant of the Bank’s
      average cost of funds is the distribution of the Bank’s accounts by interest
      rate paid. An important indicator of the Bank’s stability of lendable funds is
      the distribution of the Bank’s accounts by maturity.





Average
      deposits and rates by category
      for the previous three years ended December 31 are as
      follows:





Years
                Ended September 302007
            
            
            2006
            
            
            2005Amount
            
            
            Rate
            
            
            Amount
            
            
            Rate
            
            
            Amount
            
            
            Rate(Dollars
                in Thousands)Non-interest-bearing
                demand deposits
            
            $
            14,143
            
            
            
            -
            
            
            $
            12,683
            
            
            
            -
            
            
            $
            11,190
            
            
            
            -Interest
                bearing demand deposits
            
            
            85,158
            
            
            
            1.80
            %
            
            
            96,059
            
            
            
            1.45
            %
            
            
            103,399
            
            
            
            0.94
            %Savings
                deposits
            
            
            45,000
            
            
            
            0.72
            
            
            
            49,735
            
            
            
            0.71
            
            
            
            55,905
            
            
            
            0.61Time
                deposits
            
            
            218,388
            
            
            
            4.38
            
            
            
            209,568
            
            
            
            3.74
            
            
            
            201,766
            
            
            
            3.07Totals
            
            $
            362,689
            
            
            
            3.15
            %
            
            $
            368,045
            
            
            
            2.60
            %
            
            $
            372,260
            
            
            
            2.02
            %





The
      following table lists maturities of
      certificates of deposits where the balance of the certificate exceeds $100,000
      for the periods indicated. None of these certificates was a brokered
      deposit.





At
                September 30,2007(Dollars
                in Thousands)3
                months or less
            
            $
            18,652over
                3-6 months
            
            
            9,285over
                6-12 months
            
            
            7,750over
                12 months
            
            
            7,732Total
            
            $
            43,419





For
      information on the amounts of
      certificate accounts atSeptember 30, 2007,
      maturing during the next five years,
      see Note 7 of the Notes to Consolidated Financial Statements in Item 8.
      Financial Statements and Supplementary Data.


-15-


Borrowings





As
      a member of the FHLB System and the
      FHLB of Indianapolis, the Bank is eligible to arrange borrowings or advances
      for
      various purposes and on various terms. As ofSeptember 30, 2007,
      2006 and 2005 the Bank had outstanding
      advances from the FHLB of Indianapolis of $53,480,000, $59,155,000, and
      $59,250,000, respectively. For the maturity breakdown of these long-term
      instruments, see Note 9 of the Notes to Consolidated Financial Statements in
      Item 8. Financial Statements and Supplementary Data.





Reverse
      repurchase agreements, another
      source of borrowing for Peoples Federal, are retail obligations of Peoples
      Federal with a maturity of 90 days or less, and are generally secured with
      specific investment securities owned by Peoples Federal.





The
      following tables set forth certain
      information as to the Bank’s short-term borrowings consisting of reverse
      repurchase agreements for the periods and at the dates indicated. Average
      balances and average interest rates are based on month-end
      balances.





Years
                Ended September 30,2007
            
            
            2006
            
            
            2005(Dollars
                in thousands)Average
                balance of short-term borrowings
            
            $
            631
            
            
            $
            767
            
            
            $
            2,138Highest
                month-end balance of total short-term borrowings
            
            
            1,092
            
            
            
            1,524
            
            
            
            3,771Weighted
                average interest rate of total short-term borrowings
            
            
            2.58
            %
            
            
            2.20
            %
            
            
            1.55
            %At
                September 30,2007
            
            
            2006
            
            
            2005(Dollars
                in thousands)Reverse
                Repurchase agreements
            
            $
            1,001
            
            
            $
            518
            
            
            $
            642Bank
                overdraft
            
            
            -
            
            
            
            -
            
            
            
            239Total
                short-term borrowings
            
            $
            1,001
            
            
            $
            518
            
            
            $
            881Weighted
                average interest rate
            
            
            2.56
            %
            
            
            2.00
            %
            
            
            1.38
            %





Trust
      Department





In
      October 1984, the FHLB of
      Indianapolis granted full trust powers to Peoples Federal, one of the first
      savings institutions inIndianato
      be granted such powers. As ofSeptember 30,
      2007, Peoples Federal’s
      trust department assets totaled approximately $81,785,000 including
      self-directed Individual Retirement Accounts (“IRA’s”), and it was offering a
      variety of trust services including estate planning. As of that date, the trust
      department was administering approximately 625 trust accounts, including
      estates, guardianships, revocable and irrevocable trusts, testamentary trusts,
      and self-directed IRA’s. The trust department also offers and administers
      self-directed IRA’s and Simplified Employee Pension IRA’s for small businesses.
      The trust department provides a needed service to the communities served by
      Peoples Federal, as well as generating fee income which is largely unaffected
      by
      interest rate fluctuations.





Non-Bank
      Subsidiary





Peoples
      Financial Services, Inc.
      (“PFSI”) was organized in 1977 under the laws of the State ofIndiana.
      It is wholly owned by Peoples Federal
      and conducts a general insurance business within the State ofIndiana underthe name of Peoples Insurance Agency.
      During fiscal years endedSeptember 30, 2007 and2006, PFSI recorded total income of
      $55,400 and $58,335, respectively, with net income for such periods amounting
      to
      $8,167 and $4,625, respectively.


-16-


PFDC
      Investments, Inc. (“PFDCI”) was organized in March of 2006 under the laws of the
      State of Nevada. It is wholly owned by Peoples Federal and its assets consist
      solely of certain investment securities and cash. At September 30, 2007 PFDCI
      had $53.5 million of assets. Net income for the period was $1.4
      million.





Alpha
      Financial, Inc. (“Alpha
      Financial”) was organized under the laws of the state ofMichiganin
      1975 as a wholly owned subsidiary of
      First Savings. First Savings’ investment in Alpha Financial, Inc. was $251,800
      atSeptember 30,
      2007. The assets of Alpha
      Financial consist of cash and seven percent of the stock of MBT Title Services,
      which reinsures credit life insurance policies written on the lives of borrowers
      of various financial institutions. Alpha Financial is now a wholly owned
      subsidiary of Peoples Federal as a result of the October 2007 merger of First
      Savings into Peoples Federal.





Employees





As
      ofSeptember 30, 2007,
      the Bank employed 130 persons on a
      full-time basis and 30 persons on a part-time basis. The Bank’s employees are
      not represented by any collective bargaining group, and management considers
      its
      relations with its employees to be excellent. The holding company has no
      employees.





Regulation
      - General





The
      Company, as a savings and loan
      holding company, and the Bank, as a federally chartered savings association
      are
      subject to extensive regulation by the OTS and the FDIC. The lending activities
      and other investments of the Bank must comply with various federal regulatory
      requirements, and the OTS periodically examines the Bank for compliance with
      various regulatory requirements and for safe and sound operations. The FDIC
      also
      has the authority to conduct examinations. The Bank must file reports with
      the
      OTS describing its activities and financial condition and is also subject to
      certain reserve requirements promulgated by the Board of Governors of the
      Federal Reserve System. This supervision and regulation is intended primarily
      for the protection of depositors and the deposit insurance funds and not for
      the
      protection of stockholders of the Company. Certain of these regulatory
      requirements are referred to below or appear elsewhere
      herein.





Regulation
      of the Company





General





The
      Company is a savings and loan
      holding company as defined by the Home Owners’ Loan Act, as amended (the
“HOLA”). As such, the Company is registered with the OTS and is subject to OTS
      regulation, examination, supervision and reporting requirements. As a subsidiary
      of a savings and loan holding company, the Bank is subject to certain
      restrictions in its dealings with the Company and affiliates. The Company also
      is required to file certain reports with, and otherwise comply with, the rules
      and regulations of the SEC under the federal securities
      laws.





Activities
                Restriction





The
      Company is a unitary savings and
      loan holding company. Prior to the enactment of the Gramm-Leach-Bliley Act
      in
      1999, there were no restrictions on the permissible business activities of
      a
      unitary savings and loan holding company. The Gramm-Leach-Bliley Act included
      a
      provision that prohibits any new unitary savings and loan holding company,
      defined as a company that acquires a thrift afterMay 4, 1999,
      from engaging in commercial
      activities. Due to these restrictions, the Company is authorized to engage
      only
      in those activities that are permissible for a financial holding company or
      a
      multiple savings and loan holding company. A financial holding company may
      engage in activities that are financial in nature, incidental to financial
      activities or complementary to a financial activity. A multiple savings and
      loan
      holding company is generally limited to activities permissible for bank holding
      companies under Section 4(c)(8) of the Bank Holding Company Act, subject to
      the
      prior approval of the OTS, and certain activities authorized by OTS
      regulations.


-17-


The
      Home
      Owners’ Loan Act provides that, among other things, a multiple savings and loan
      holding company may not, either directly or acting through a subsidiary that
      is
      not a savings association, conduct any business activity other than
      (i) furnishing or performing management services for a subsidiary savings
      association, (ii) conducting an insurance agency or escrow business, (iii)
      holding, managing, or liquidating assets owned by or acquired from a subsidiary
      savings association, (iv) holding or managing properties used or occupied by
      a
      subsidiary savings association, (v) acting as trustee under deeds of trust,
      (vi)
      those activities in which multiple savings and loan holding companies were
      authorized (by regulation) to directly engage on March 5, 1987, or (vii) those
      activities authorized by the FRB as permissible for bank holding companies,
      unless the Director of the OTS by regulation prohibits or limits such activities
      for savings and loan holding companies. Those activities described in (vii)
      above must also be approved by the Director of the OTS before a multiple savings
      and loan holding company may engage in such activities.





Notwithstanding
      the above rules as to
      permissible business activities of savings and loan holding companies, if the
      savings association subsidiary of such a holding company fails to meet the
      qualified thrift lender test, then such holding company would be deemed to
      be a
      bank holding company subject to all of the provisions of the Bank Holding
      Company Act of 1956 and other statutes applicable to bank holding companies,
      to
      the same extent as if the holding company were a bank holding company and the
      Bank were a bank. See “Qualified Thrift Lender Test.” AtOctober 1, 2007,
      the Bank’s asset composition was in
      excess of that required to qualify as a qualified thrift
      lender.





Restrictions
                on
                Acquisitions





Savings
      and loan holding companies are
      prohibited from acquiring, without prior approval of the OTS, (i) control of
      any
      other savings institution or savings and loan holding company or substantially
      all the assets thereof or (ii) more than 25% of the voting shares of a savings
      institution or holding company thereof which is not a subsidiary. Under certain
      circumstances, a registered savings and loan holding company is permitted to
      acquire, with the approval of the OTS, up to 15% of the voting shares of an
      undercapitalized savings institution pursuant to a “qualified stock issuance”
without that savings institution being deemed controlled by the holding company.
      In order for the shares acquired to constitute a “qualified stock issuance,” the
      shares must consist of previously unissued stock or treasury shares, the shares
      must be acquired for cash, the savings and loan holding company’s other
      subsidiaries must have tangible capital of at least 6.5% of total assets, there
      must not be more than one common director or officer between the savings and
      loan holding company and the issuing savings institution, and transactions
      between the savings institution and the savings and loan holding company and
      any
      of its affiliates must conform to Section 11 of the Home Owners’ Loan Act and
      Sections 23A and 23B of the Federal Reserve Act. Except with the prior approval
      of the OTS, no director or officer of a savings and loan holding company or
      person owning by proxy or otherwise more than 25% of such company’s stock, may
      also acquire control of any savings institution, other than a subsidiary savings
      institution, or of any other savings and loan holding
      company.





Sarbanes-Oxley
                Act of
                2002





OnJuly
      30, 2002, President Bush signed
      into law the
      Sarbanes-Oxley Act of 2002 (the “Sarbanes-Oxley Act”). The Sarbanes-Oxley Act’s
      stated goals include enhancing corporate responsibility, increasing penalties
      for accounting and auditing improprieties at publicly traded companies and
      protecting investors by improving the accuracy and reliability of corporate
      disclosures pursuant to the securities laws. The Sarbanes-Oxley Act generally
      applies to all companies that file or are required to file periodic reports
      with
      the SEC under the Securities Exchange Act of 1934 (the “Exchange
      Act”).





Among
      other things, the Sarbanes-Oxley
      Act creates the Public Company Accounting Oversight Board as an independent
      body
      subject to SEC supervision with responsibility for setting auditing, quality
      control and ethical standards for auditors of public companies. The
      Sarbanes-Oxley Act also requires public companies to make faster and more
      extensive financial disclosures, requires the chief executive officer and chief
      financial officer of public companies to provide signed certifications as to
      the
      accuracy and completeness of financial information filed with the SEC, and
      provides enhanced criminal and civil penalties for violations of the federal
      securities laws.


-18-


The
      Sarbanes-Oxley Act also addresses functions and responsibilities of audit
      committees of public companies. The statute makes the audit committee directly
      responsible for the appointment, compensation and oversight of the work of
      the
      company’s outside auditor, and requires the auditor to report directly to the
      audit committee. The Sarbanes-Oxley Act authorizes each audit committee to
      engage independent counsel and other advisors, and requires a public company
      to
      provide the appropriate funding, as determined by its audit committee, to pay
      the company’s auditors and any advisors that its audit committee retains. The
      Sarbanes-Oxley Act also requires public companies to include an internal control
      report and assessment by management, along with an attestation to this report
      prepared by the company’s registered public accounting firm, in their annual
      reports to stockholders.





The
      Company expects to incur additional
      expense in complying with the provisions of the Sarbanes-Oxley Act and the
      resulting regulations.





Other
                Recent
                Legislative Developments





The
      Securities and Exchange Commission
      in 2006 adopted significant changes to its proxy statement disclosure rules
      relating to executive compensation. Among other things, several tables, more
      detailed narrative disclosures, and a new compensation discussion and analysis
      section are required in proxy statements. These changes have required and will
      require a significant commitment of managerial resources and will result in
      increased costs to us which could adversely affect results of operations, or
      cause fluctuations in results of operations, in the future.





Regulation
      of the Bank





Federal
                Home Loan Bank
                System





The
      Bank is a member of the FHLB System,
      which consists of 12 district Federal Home Loan Banks subject to supervision
      and
      regulation by the Federal Housing Finance Board (“FHFB”). The Federal Home Loan
      Banks provide a central credit facility primarily for member institutions.
      As a
      member of the FHLB of Indianapolis, the Bank is required to acquire and hold
      shares of capital stock in the FHLB of Indianapolis in an amount at least equal
      to 1% of the aggregate unpaid principal of its home mortgage loans, home
      purchase contracts, and similar obligations at the beginning of each year,
      or
      1/20 of its advances (i.e.,
      borrowings) from the FHLB of
      Indianapolis, whichever is greater. The Bank was in compliance with this
      requirement with an investment in FHLB of Indianapolis stock atSeptember 30, 2007,
      of $4,403,900.





The
      FHLB of Indianapolis serves as a
      reserve or central bank for its member institutions within its assigned
      district. It is funded primarily from proceeds derived from the sale of
      consolidated obligations of the FHLB System. It makes advances to members
      secured by certain prescribed collateral in accordance with policies and
      procedures established by the FHFB and the Board of Directors of the FHLB of
      Indianapolis. Long-term advances may only be made for the purpose of providing
      funds for residential housing finance. Members must meet standards of community
      investment or service established by the FHLB of Indianapolis in order to
      maintain continued access to long-term advances. As ofSeptember 30, 2007,
      the Bank had advances totaling
      $53,480,000 outstanding. See Item 1. Business – Sources of Funds –
“Borrowings.”





Qualified
                Thrift
                Lender Test





Savings
      institutions must meet a
      qualified thrift lender (“QTL”) test, which test may be met either by
      maintaining a specified level of assets in qualified thrift investments as
      specified in HOLA or by meeting the definition of a “domestic building and loan
      association” in section 7701(a)(19) of the Internal Revenue Code of 1986, as
      amended (the “Code”). If the Bank maintains an appropriate level of certain
      specified investments (primarily residential mortgages and related investments,
      including certain mortgage-related securities) and otherwise qualifies as a
      QTL
      or a domestic building and loan association (“DBLA”), it will continue to enjoy
      full borrowing privileges from the FHLB. The required percentage of investments
      under HOLA is 65% of assets while the Code requires investments of 60% of
      assets. An association must be in compliance with the QTL test or definition
      of
      domestic building and loan association on a monthly basis in nine out of every
      12 months. Associations that fail to meet the QTL test will generally be
      prohibited from engaging in any activity not permitted for both a national
      bank
      and a savings association. As ofSeptember 30, 2007,
      the Bank was in compliance with its
      QTL requirements and met the definition of a domestic building and loan
      association.


-19-


Branching





Subject
      to certain limitations, the HOLA
      and the OTS regulations currently permit federally chartered savings
      institutions such as the Bank to establish branches in any state of theUnited States.
      Federal savings associations with
      branches in more than one state must satisfy either the QTL or the DBLA test
      on
      a state-by-state basis. The authority for a federal savings institution to
      establish an interstate branch network would facilitate a geographic
      diversification of the institution’s activities. This authority under the HOLA
      and the OTS regulations preempts any state law purporting to regulate branching
      by federal savings institutions.





Regulatory
                Capital
                Requirements





Under
      OTS capital regulations, savings
      institutions must maintain “tangible” capital equal to 1.5% of adjusted total
      assets, “core” capital equal to 4% of adjusted total assets and “total” capital
      (a combination of core and “supplementary” capital) equal to 8% of risk-weighted
      assets. In addition, OTS regulations impose certain restrictions on savings
      associations that have a total risk-based capital ratio that is less than 8.0%,
      a ratio of Tier 1 capital to risk-weighted assets of less than 4.0% or a ratio
      of Tier 1 capital to adjusted total assets of less than 4.0% (or 3.0% if the
      institution is rated Composite 1 under the OTS examination rating
      system).





In
      addition to generally applicable
      capital standards for savings institutions, the Director of the OTS is
      authorized to establish the minimum level of capital for a savings institution
      at such amount or at such ratio of capital-to-assets as the Director determines
      to be necessary or appropriate for such institution in light of the particular
      circumstances of the institution. The Director of the OTS may treat the failure
      of any savings institution to maintain capital at or above such level as an
      unsafe or unsound practice and may issue a directive requiring any savings
      institution which fails to maintain capital at or above the minimum level
      required by the Director to submit and adhere to a plan for increasing capital.
      Such a directive may be enforced in the same manner as an order issued by the
      OTS.





AtSeptember
      30, 2007, the Bank exceeded all
      regulatory
      minimum capital requirements. See Note 16 to the Notes to Consolidated Financial
      Statements in Item 8. Financial Statements and Supplementary Data for the
      Company’s actual and required capital amounts and ratios.





Insurance
                Deposit
                Accounts





The
      FDIC administers an insurance fund
      for depository financial institutions called the Deposit Insurance Fund (“DIF”).
      As the federal insurer of deposits of savings institutions, the FDIC determines
      whether to grant insurance to newly chartered savings institutions, has
      authority to prohibit unsafe or unsound activities and has enforcement powers
      over savings institutions (usually in conjunction with the OTS or on its own
      if
      the OTS does not undertake enforcement action).





Deposit
      accounts in the Bank are insured
      by the DIF within prescribed statutory limits which generally provide a maximum
      of $100,000 coverage for each insured account. This coverage amount is subject
      to adjustment for inflation beginning in 2010 and every succeeding five years.
      As a condition to such insurance, the FDIC is authorized to issue regulations
      and, in conjunction with the OTS, conduct examinations and generally supervise
      the operations of its insured members.





The
      FDIC’s deposit insurance premiums
      are assessed through a risk based system under which all insured depository
      institutions are placed into one of nine categories and assessed insurance
      premiums based upon their level of capital and supervisory evaluation. Under
      the
      system, institutions classified as well capitalized (i.e. a core capital ratio
      of at least 5%, a ratio of Tier 1 or core capital to risk weighted assets (“Tier
      1 risk based capital”) of at least 6% and a total risk-based capital ratio of at
      least 10%) pay the lowest premium while institutions that are less than
      adequately capitalized (i.e. core or Tier 1 risk based capital ratio of less
      than 4% or a total risk-based capital ratio of less than 8%) and considered
      of
      substantial supervisory concern pay the highest premium. Risk classification
      of
      all insured institutions is made by the FDIC
      semi-annually.


-20-


In
      addition to the assessment for deposit insurance, savings institutions are
      required to pay on bonds issued in the late 1980s by the Financing Corporation
      to recapitalize a predecessor to the DIF. By law, payments on Financing
      Corporation obligations have been shared by the members of the insurance funds
      since January 1, 2000. The Bank’s annual deposit insurance premium for the year
      ended September 30, 2007, including the Financing Corporation payments, was
      approximately $45,000 based upon its current risk classification and the
      assessment schedule for insured institutions. These premiums are subject to
      change in future periods.





The
      FDIC is authorized to increase
      assessment rates, on a semiannual basis, if it determines that the reserve
      ratio
      of the DIF will be less than the designated reserve ratio of 1.25% of DIF
      insured deposits. In setting these increased assessments, the FDIC must seek
      to
      restore the reserve ratio to that designated reserve level, or such higher
      reserve ratio as established by the FDIC. The FDIC may also impose special
      assessments on DIF members to repay amounts borrowed from the United States
      Treasury or for any other reason deemed necessary by the
      FDIC.





Federal
                Reserve
                System





Pursuant
      to regulations of the Federal
      Reserve Board, a savings institution must maintain average daily reserves
      against its transaction accounts (primarily checking and NOW accounts) and
      non-personal money market accounts. This percentage is subject to adjustment
      by
      the Federal Reserve Board. Because required reserves must be maintained in
      the
      form of vault cash or in a non-interest bearing account at a Federal Reserve
      Bank, the effect of the reserve requirement is to reduce the amount of the
      institution’s interest-earning assets. As ofSeptember 30, 2007,
      the Bank met its reserve
      requirements.





Dividend
                and Other
                Capital Distribution
                Limitations





The
      OTS imposes various restrictions or
      requirements on the ability of savings institutions to make capital
      distributions, including cash dividends. A savings institution that is a
      subsidiary of a savings and loan holding company, such as the Bank, must file
      an
      application or a notice with the OTS at least 30 days before making a capital
      distribution. Savings institutions are not required to file an application
      for
      permission to make a capital distribution and need only file a notice if the
      following conditions are met: (1) they are eligible for expedited treatment
      under OTS regulations, (2) they would remain adequately capitalized after the
      distribution, (3) the annual amount of capital distribution does not exceed
      net
      income for that year to date added to retained net income for the two preceding
      years, and (4) the capital distribution would not violate any agreements between
      the OTS and the savings institution or any OTS regulations. Any other situation
      would require an application to the OTS.





In
      addition, the OTS could prohibit a
      proposed capital distribution by any institution, which would otherwise be
      permitted by the regulation, if the OTS determines that the distribution would
      constitute an unsafe or unsound practice. A federal savings institution is
      prohibited from making a capital distribution if, after making the distribution,
      the savings institution would be unable to meet any one of its minimum
      regulatory capital requirements. Savings institutions cannot distribute
      regulatory capital that is needed for its liquidation
      account.





Affiliate
                Restrictions





Transactions
      between a savings
      association and its “affiliates” are subject to quantitative and qualitative
      restrictions under Sections 23A and 23B of the Federal Reserve Act. Affiliates
      of a savings association include, among other entities, the savings
      association’s holding company and companies that are under common control with
      the savings association.


-21-


In
      general, Sections 23A and 23B and OTS regulations issued in connection therewith
      limit the extent to which a savings association or its subsidiaries may engage
      in certain “covered transactions” with affiliates to an amount equal to 10% of
      the association’s capital and surplus, in the case of covered transactions with
      any one affiliate, and to an amount equal to 20% of such capital and surplus,
      in
      the case of covered transactions with all affiliates. In addition, a savings
      association and its subsidiaries may engage in covered transactions and certain
      other transactions only on terms and under circumstances that are substantially
      the same, or at least as favorable to the savings association or its subsidiary,
      as those prevailing at the time for comparable transactions with nonaffiliated
      companies. A “covered transaction” is defined to include a loan or extension of
      credit to an affiliate; a purchase of investment securities issued by an
      affiliate; a purchase of assets from an affiliate, with certain exceptions;
      the
      acceptance of securities issued by an affiliate as collateral for a loan or
      extension of credit to any party; or the issuance of a guarantee, acceptance,
      or
      letter of credit on behalf of an affiliate.





In
      addition, under the OTS regulations,
      a savings association may not make a loan or extension of credit to an affiliate
      unless the affiliate is engaged only in activities permissible for bank holding
      companies; a savings association may not purchase or invest in securities of
      an
      affiliate other than shares of a subsidiary; a savings association and its
      subsidiaries may not purchase a low-quality asset from an affiliate; and covered
      transactions and certain other transactions between a savings association or
      its
      subsidiaries and an affiliate must be on terms and conditions that are
      consistent with safe and sound banking practices. With certain exceptions,
      each
      loan or extension of credit by a savings association to an affiliate must be
      secured by collateral with a market value ranging from 100% to 130% (depending
      on the type of collateral) of the amount of the loan or extension of
      credit.





The
      OTS regulation generally excludes
      all non-bank and non-savings association subsidiaries of savings associations
      from treatment as affiliates, except to the extent that the OTS or the Board
      of
      Governors of the Federal Reserve System (the “Federal Reserve Board”) decides to
      treat such subsidiaries as affiliates. The regulation also requires savings
      associations to make and retain records that reflect affiliate transactions
      in
      reasonable detail, and provides that certain classes of savings associations
      may
      be required to give the OTS prior notice of affiliate
      transactions.





Standards
                for Safety
                and Soundness





Under
      applicable regulatory
      requirements, the Bank is required to prescribe standards, by regulation or
      guideline, relating to internal controls, information systems and internal
      audit
      systems, loan documentation, credit underwriting, interest rate risk exposure,
      asset growth, asset quality, operational and managerial standards as the
      agencies deem appropriate. The OTS and the federal bank regulatory agencies
      have
      adopted a set of guidelines prescribing safety and soundness standards pursuant
      to the statute. The safety and soundness guidelines establish general standards
      relating to internal controls and information systems, internal audit systems,
      loan documentation, credit underwriting, interest rate risk exposure, asset
      growth, and compensation, asset quality and earnings standards, and fees and
      benefits. In general, the guidelines require, among other things, appropriate
      systems and practices to identify and manage the risks associated with each
      aspect of an institution’s operations. The guidelines also prohibit excessive
      compensation as an unsafe and unsound practice and describe compensation as
      excessive when the amounts paid are unreasonable or disproportionate to the
      services performed by an executive officer, employee, director or principal
      stockholder.





With
      respect to asset quality and
      earnings standards, a savings institution would be required to maintain systems,
      commensurate with its size and the nature and scope of its operations, to
      identify problem assets and prevent deterioration in those assets as well as
      to
      evaluate and monitor earnings and ensure that earnings are sufficient to
      maintain adequate capital and reserves.





Prompt
                Corrective
                Action





The
      prompt corrective action regulation
      of the OTS requires certain mandatory actions and authorizes certain other
      discretionary actions to be taken by the OTS against a savings bank that falls
      within certain undercapitalized capital categories specified in the
      regulation.


-22-


The
      regulation establishes five categories of capital classification: “well
      capitalized,” “adequately capitalized,” “undercapitalized,” “significantly
      undercapitalized,” and “critically undercapitalized.” Under the regulation, the
      risk-based capital, leverage capital, and tangible capital ratios are used
      to
      determine an institution’s capital classification. At September 30, 2007, the
      Bank met the capital requirements of a “well capitalized” institution under
      applicable OTS regulations.





In
      general, the prompt corrective action
      regulation prohibits an insured depository institution from declaring any
      dividends, making any other capital distribution, or paying a management fee
      to
      a controlling person if, following the distribution or payment, the institution
      would be within any of the three undercapitalized categories. In addition,
      adequately capitalized institutions may accept Brokered Deposits only with
      a
      waiver from the FDIC and are subject to restrictions on the interest rates
      that
      can be paid on such deposits. Undercapitalized institutions may not accept,
      renew, or roll-over Brokered Deposits.





If
      the OTS determines that an
      institution is in an unsafe or unsound condition, or if the institution is
      deemed to be engaging in an unsafe and unsound practice, the OTS may, if the
      institution is well capitalized, reclassify it as adequately capitalized; if
      the
      institution is adequately capitalized but not well capitalized, require it
      to
      comply with restrictions applicable to undercapitalized institutions; and,
      if
      the institution is undercapitalized, require it to comply with certain
      restrictions applicable to significantly undercapitalized
      institutions.





Real
                Estate Lending
                Standards





Under
      joint regulations of the federal
      banking agencies, including the OTS, savings institutions must adopt and
      maintain written policies that establish appropriate limits and standards for
      extensions of credit that are secured by liens or interests in real estate
      or
      are made for the purpose of financing permanent improvements to real estate.
      These policies must establish loan portfolio diversification standards, prudent
      underwriting standards, including loan-to-value limits that are clear and
      measurable, loan administration procedures and documentation, approval and
      reporting requirements. An institution’s real estate lending policy must reflect
      consideration of the Interagency Guidelines for Real Estate Lending Policies
      (the “Interagency Guidelines”) that have been adopted by the federal banking
      agencies. The Interagency Guidelines, among other things, call upon depository
      institutions to establish internal loan-to-value limits specified in the
      Interagency Guidelines for the various types of real estate loans. The
      Interagency Guidelines state that it may be appropriate in individual cases
      to
      originate or purchase loans with loan-to-value ratios in excess of the
      supervisory loan-to-value limits not exceeding those specified, but require
      that
      the aggregate amount of loans with loan-to-value ratios in excess of certain
      specified levels may not exceed the amount of the savings association’s total
      capital. (Amounts in excess of core capital must be deducted on a
      dollar-for-dollar basis from this capital.)





Federal
                Consumer
                Credit and Non-Discrimination
                Legislation





The
      Bank’s mortgage lending activities
      are subject to the provisions of various federal and state statutes, including,
      among others, the Truth in Lending Act, the Equal Credit Opportunity Act, the
      Real Estate Settlement Procedures Act, the Fair Housing Act and the regulations
      promulgated thereunder. These statutes and regulations, among other things,
      prohibit discrimination on the basis of race, gender or other designated
      characteristics, prohibit unfair and deceptive trade practices, require the
      disclosure of certain basic information to mortgage borrowers concerning credit
      terms and settlement costs, and otherwise regulate terms and conditions of
      credit and the procedures by which credit is offered and administered. Each
      of
      the foregoing statutes provides for various administrative, civil and, in
      limited circumstances, criminal enforcement procedures, and violations thereof
      may also lead to class actions seeking actual and/or punitive
      damages.





Community
                Reinvestment
                Act and Fair Lending
                Developments





The
      Bank is subject to certain fair
      lending requirements and reporting obligations involving home mortgage lending
      operations and Community Reinvestment Act (“CRA”) activities. The CRA generally
      requires the federal banking agencies to evaluate the record of a financial
      institution in meeting the credit needs of its local communities, including
      low-
      and moderate-income neighborhoods. A savings association may be subject to
      substantial penalties and corrective measures for a violation of certain fair
      lending laws. The federal banking agencies may take into account compliance
      with
      such laws and CRA obligations when regulating and supervising other
      activities.


-23-


A
      savings
      association’s compliance with its CRA obligations is based on a
      performance-based evaluation system that bases CRA ratings on an institution’s
      lending service and investment performance. When a holding company applies
      for
      approval to acquire another financial institution or financial institution
      holding company, the OTS will review the assessment of each subsidiary savings
      association of the applicant; and such records of CRA Examinations may be the
      basis for denying the application. As of the latest CRA Examinations, the Bank
      received a rating of “satisfactory” in complying with the CRA
      obligations.





USA
                PATRIOT Act of
                2001





OnOctober
      26, 2001, President Bush signed
      the USA PATRIOT
      Act of 2001 (the “PATRIOT Act”). The PATRIOT Act, among other things, is
      intended to strengthen the ability ofU.S.law
      enforcement to combat terrorism on a
      variety of fronts. The PATRIOT Act contains sweeping anti-money laundering
      and
      financial transparency laws and requires financial institutions to implement
      additional policies and procedures with respect to, or additional measures
      designed to address, any or all the following matters, among others: money
      laundering, suspicious activities and currency transaction reporting, and
      currency crimes. Many of the provisions in the PATRIOT Act were to have expiredDecember 31,
      2005, but the U.S. Congress
      authorized renewals that extended the provisions untilMarch 10, 2006.
      In early March 2006, the U.S. Congress
      approved the USA PATRIOT Improvement and Reauthorization Act of 2005 (the
“Reauthorization Act”) and the USA PATRIOT Act Additional Reauthorizing
      Amendments Act of 2006 (the “PATRIOT Act Amendments”), and they were signed into
      law by President Bush onMarch 9, 2006.
      The Reauthorization Act makes
      permanent all but two of the provisions that had been set to expire and provides
      that the remaining two provisions, which relate to surveillance and the
      production of business records under the Foreign Intelligence Surveillance
      Act,
      will expire in four years. The PATRIOT Act Amendments include provisions
      allowing recipients of certain subpoenas to obtain judicial review of
      nondisclosure orders and clarifying the use of certain subpoenas to obtain
      information from libraries. We do not anticipate that these changes will
      materially affect our operations.





Federal
      and State Taxation





Federal
      Taxation





Savings
      institutions that meet certain
      definitional tests relating to the composition of assets and other conditions
      prescribed by the Internal Revenue Code of 1986, as amended, are permitted
      to
      establish reserves for bad debts and to make annual additions which may, within
      specified formula limits, be taken as a deduction in computing taxable income
      for federal income tax purposes. The amount of the bad debt reserve deduction
      is
      computed under the experience method.





In
      addition to the regular income tax,
      corporations, including savings institutions, generally are subject to a minimum
      tax. An alternative minimum tax is imposed at a minimum tax rate of 20% on
      alternative minimum taxable income, which is the sum of a corporation’s regular
      taxable income (with certain adjustments) and tax preference items, less any
      available exemption. The alternative minimum tax is imposed to the extent it
      exceeds the corporation’s regular income tax and net operating losses can offset
      no more than 90% of alternative minimum taxable income.





A
      portion of our reserves for losses on
      loans which are presented on the statement of financial condition of retained
      earnings, may not, without adverse tax consequences, be utilized for the payment
      of cash dividends or other distributions to a shareholder, including
      distributions on redemption, dissolution or liquidation, or for any other
      purpose except to absorb bad debt losses. As ofSeptember 30, 2007,
      the portion of our reserves subject to
      this treatment for tax purposes totaled approximately $8,102,000. We file
      consolidated federal income tax returns with our subsidiaries on a fiscal year
      basis using the accrual method of accounting. We have not been audited by the
      IRS during the last five fiscal years.


-24-


Indiana
      Taxation





The
      State ofIndiana imposesan 8.5% franchise tax on corporations
      transacting the business of a financial institution inIndiana.
      Included in the definition of
      corporations transacting the business of a financial institution inIndiana areholding companies of thrift
      institutions, as well as thrift institutions. Net income for franchise tax
      purposes will constitute federal taxable income before net operating loss
      deductions and special deductions, adjusted for certain items, includingIndiana incometaxes and bad debts. Other applicableIndiana taxesinclude sales, use and property
      taxes.





Michigan
      Taxation





The
      State ofMichigan hastax filing requirements that require
      the Company to file separate tax returns based upon its activity inMichigan.
      TheMichigan taxableincome base is determined by beginning
      with federal taxable income with several adjustments to determineMichigan taxableincome. This income is then multiplied
      by the effectiveMichigan
      taxrate.Michigan
      allowscertain credits to be
      used to offset
      theMichigan
      liability.





-25-


Item
      1A.  Risk
      Factors





In
      analyzing whether to make or to
      continue an investment in the Company, investors should consider, among other
      factors, the following factors that could materially adversely affect the
      Company’s operating results and financial condition. These risks and
      uncertainties are not necessarily the only ones the Company may
      face.





Changes
      in interest rates could have an adverse impact on our results of operations
      and
      financial condition.





The
      earnings and financial condition of
      the Company are dependent to a large degree upon net interest income, which
      is
      the difference between interest earned from loans and investments and interest
      paid on deposits and borrowings. The narrowing of the spread between interest
      earned on loans and investments and interest paid on deposits and borrowings
      could adversely affect our earnings and financial condition.





Interest
      rates are highly sensitive to
      many factors including:





·
            The
                rate of inflation;


·
            Economic
                conditions;


·
            Federal
                monetary policies;


·
            Stability
                of domestic and foreign markets.





Changes
      in market interest rates will
      also affect the level of prepayments on loans as well as the payments received
      on mortgage backed securities, requiring the reinvestment at lower rates than
      the loans or securities were paying.





The
      Bank originates a significant amount
      of residential mortgage loans for sale and for our portfolio. The origination
      of
      residential mortgage loans is highly dependent on the local real estate market
      and the level of interest rates. Increasing interest rates tend to reduce the
      origination of loans for sale and consequently fee income, which we report
      gain
      on sale of loans. Conversely, decreasing interest rates have the effect of
      causing clients to refinance mortgage loans faster than anticipated. This causes
      the value of mortgage servicing rights on the loans sold to be lower than
      originally anticipated. If this happens, the Company may be required to write
      down the value of our mortgage servicing rights faster than anticipated, which
      will increase expense and lower earnings.





The
      Company’s exposure to credit risk due to the nature of the Company’s loan
      business makes it vulnerable to an adverse effect on its financial
      condition.





The
      Company’s
      earnings and financial condition may be adversely affected if the Company fails
      to adequately manage credit risk. The Company’s primary business is the
      origination and underwriting of loans. This business requires the Company to
      take “credit risk” which is the risk of losing principal and interest income
      because borrowers fail to repay their loans. The ability of borrowers to repay
      their loans and the value of collateral securing such loans may be affected
      by a
      number of factors including:





·
            A
                slowdown in the local economy where the Company’s markets are located or
                the national economy;


·
            A
                downturn in the business sectors in which the Company’s loan customers
                operate;


·
            A
                rapid increase in interest rates.





An
      inability to access the Company’s sources of liquidity when needed could
      adversely affect its financial condition and results of operation.





Liquidity
      is the ability to meet cash
      flow needs on a timely basis at a reasonable cost. The liquidity of the Company
      is used to make loans and to repay deposit liabilities as they become due or
      are
      demanded by customers. Liquidity policies and limits are established by the
      Board of Directors with limits monitored by the Asset/Liability
      committee.


-26-


The
      Company’s sources of liquidity include both local deposits and wholesale funding
      sources. Wholesale funding sources include Federal Home Loan Bank advances,
      Federal Funds purchased, securities sold under repurchase agreements, and
      brokered or other out-of-market certificate of deposit purchases. Also the
      Company maintains a portfolio of securities that can be used as a secondary
      source of liquidity. Other sources of liquidity that may be available if
      necessary include the sale or securitization of loans, the issuance of
      additional collateralized borrowings beyond those currently utilized with the
      Federal Home Loan Bank, the issuance of debt securities and the issuance of
      preferred or common securities in public or private transactions.





The
      inability of the Company to access
      the above listed sources of liquidity when needed could cause the Bank to be
      unable to meet customer needs, which could adversely impact its financial
      condition, results of operations, cash flow, or regulatory capital
      levels.





The
      geographic concentration of our loan portfolio and lending activities makes
      us
      vulnerable to a downturn in the local economy.





The
      Company operates its banking units
      within the geographic area comprised of northeastIndiana andsouthernMichigan.
      Weaknesses in this geographic market
      area could be caused by such factors as an increase in the unemployment rate,
      a
      decrease in real estate values, or significant increases in interest rates.
      Any
      such weakness could have a negative impact on our earnings and financial
      condition because:





·
            Demand
                for our products and services may go down;


·
            Borrowers
                may be unable to make payments on their loans;


·
            The
                value of collateral securing loans may decline;


·
            The
                overall quality of the loan portfolio may decline;


·
            Local
                market-area deposits may decline, impacting the Company’s cost of funding
                and its liquidity.





Strong
      competition may limit growth and profitability.





Competition
      in the Company’s market area
      may reduce the Company’s ability to originate loans and attract and retain
      deposits. The Company faces competition both in originating loans and attracting
      deposits. Competition is intense in the financial services industry. The Company
      competes in its market area by offering superior service and competitive rates
      and products. The type of institutions the Company competes with include large
      regional commercial banks, smaller community banks, savings institutions,
      mortgage banking firms, credit unions, finance companies, brokerage firms,
      insurance agencies and mutual funds. As a result of their size and ability
      to
      achieve economies of scale, certain of the Company’s competitors can offer a
      broader range of products and services than the Company can offer. To stay
      competitive in its market area, the Company may need to adjust the interest
      rates on its products to match rates of its competition, which will have a
      negative impact on net interest margin. The Company’s continued profitability
      depends on its ability to continue to effectively compete in its market
      areas.





Our
      earnings could be adversely impacted by incidences of fraud and compliance
      failures that are not always within our direct control.





The
      Company processes transactions on a
      daily basis and is exposed to numerous types of risks resulting from inadequate
      or failed internal processes, people and systems. These risks include but are
      not limited to the risk of fraud by persons inside or outside the Company,
      the
      execution of unauthorized transactions by employees, errors relating to
      transaction processing and systems, and breaches of the internal control system
      and compliance requirements. The risk of loss also includes the potential legal
      actions that could arise as a result of operational deficiencies or as a result
      of noncompliance with applicable regulatory standards.





The
      Company has established and
      maintains a system of internal controls that provide management with information
      on a timely basis and allows for the monitoring of compliance with operational
      standards. While not foolproof, these systems have been designed to manage
      operational risks at an appropriate, cost effective level. Procedures exist
      that
      are designed to ensure that policies relating to conduct, ethics, and business
      practices are followed. Periodically, losses from operational risks may occur,
      including the effects of operational errors. Such losses are included in
      non-interest expense as incurred. While management continually monitors the
      system of internal control, as well as data processing systems and
      corporate-wide processes and procedures, there can be no assurance that future
      losses will not occur.


-27-





The
      Company’s operations are also
      dependent on the existing infrastructure, including equipment and facilities.
      Extended disruption of vital infrastructure as a result of fire, power loss,
      natural disaster, telecommunications failures, computer hacking or viruses,
      terrorist activity or the domestic response to such activity, or other events
      outside of the control of management could have a material adverse impact on
      the
      financial services industry as a whole and on the Company’s business, results of
      operations, cash flows and financial condition in particular. The Company has
      a
      business recovery plan but there are no assurances that such plan will work
      as
      intended or that it will prevent significant interruptions to
      operations.





Changes
      in laws, government regulation, and monetary policy may have a material effect
      on our results of operations.





The
      Company’s business may be adversely
      affected by changes in the regulatory environment or by changes in government
      policies as a whole. The earnings of financial institutions such as the Company
      and the Bank are affected by the policies of the regulatory authorities,
      including the Federal Reserve Board, which regulates the money supply, and
      the
      Office of Thrift Supervision, which regulates unitary thrift holding companies
      such as the Company and savings banks such as Peoples
      Federal.





Among
      the methods employed by the
      Federal Reserve Board are open market operations in U.S. Government securities,
      changes in the discount rate on member bank borrowings, and changes in the
      reserve requirement against member bank deposits. These tools are utilized
      by
      the Federal Reserve in varying combinations to influence overall growth and
      distribution of bank loans, investments and deposits and they have a significant
      impact on interest rates charged on loans and paid on deposits. The influence
      of
      the monetary policies of the Federal Reserve Board is expected to have a
      continuing effect on the operating results of commercial and savings
      banks.





Policies,
      administration guidelines, and
      regulatory practices of the Office of Thrift Supervision and other banking
      regulators have a significant impact on the operations of the Bank and the
      Company. It is possible that certain of those regulations will negatively impact
      the Company’s operating results or financial condition.





An
      inadequate allowance for loan losses would reduce our earnings.





The
      Company has established an allowance
      for loan losses which management believes to be adequate to offset probable
      losses on the Company’s existing loans. However, there is no precise method of
      estimating loan losses. There can be no assurance that any future declines
      in
      real estate market conditions, general economic conditions or changes in
      regulatory policies will not require the Company to increase its allowance
      for
      loan losses.





The
      Company’s ability to pay dividends is subject to the ability of Peoples Federal
      to make capital distributions to the Company.





While
      the Board of Directors expects to
      continue its policy of regular quarterly dividend payments, this dividend policy
      will be reviewed periodically in light of future earnings, regulatory
      restrictions and other considerations. No assurance can be given, therefore,
      that cash dividends on common stock will be paid in the
      future.





There
      is a limited market for the Company’s common stock.





Although
      the Company’s common stock is
      listed on the Nasdaq Global Market System, there has been only limited trading
      in the common stock. There can be no assurance that a regular and active market
      for the common stock will develop in the foreseeable future. See Item 5. Market
      for the Registrant’s Common Equity, Related Stockholder Matters and Issuer
      Purchases of Equity Securities. Investors in the shares of common stock must,
      therefore, be prepared to assume the risk of their investment for an indefinite
      period of time.


-28-


“Anti-Takeover”
      and “Anti-Greenmail” provisions may restrict the ability for the Company to be
      acquired, which may adversely affect the price of the Company’s common
      stock.





The
      Articles of Incorporation of the
      Company presently contain certain provisions which may be deemed to be
“anti-takeover” and “anti-greenmail” in nature in that such provisions may
      deter, discourage or make more difficult the assumption of control of the
      Company by another corporation or person through a tender offer, merger, proxy
      contest or similar transaction or series of transactions. The overall effects
      of
      the “anti-takeover” and “anti-greenmail” provisions may be to discourage, make
      more costly or more difficult, or prevent a future takeover offer, prevent
      shareholders from receiving a premium for their securities in a takeover offer,
      and enhance the possibility that a future bidder for control of the Company
      will
      be required to act through arms-length negotiation with the Company’s Board of
      Directors. Copies of the Articles of Incorporation of the Company are on file
      with the Securities and Exchange Commission and the Indiana Secretary of
      State.





The
      Company’s common stock is not an insured deposit.





Investments
      in the shares of the
      Company’s common stock are not deposits insured against loss by the FDIC or any
      other entity.





Item
      1B.  Unresolved Staff Comments





Not
      applicable.





Item
      2.  Properties





Peoples
      Federal owns fifteen
      full-service banking offices located inIndiana andMichigan.
      The following table provides certain
      information with respect to these full-service offices:








Full
                  ServiceOffices
            
            DateOpened
            
            Net
                  BookValue (1)(Dollars
                in thousands)Auburn,
                IN-Main Office
            
            1973
            
            $       310Avilla,
                IN
            
            1980
            
            76Columbia
                City, IN-Downtown
            
            1971
            
            73Columbia
                City, IN-North
            
            1998
            
            450Garrett,
                IN
            
            1972
            
            113Howe,
                IN
            
            1998
            
            301Kendallville,
                IN
            
            1941
            
            335LaGrange,
                IN
            
            1972
            
            198Middlebury,
                IN
            
            1998
            
            572Schoolcraft,
                MI
            
            1971
            
            43Three
                Rivers, MI-Main Office
            
            1981
            
            327Three
                Rivers, MI-Branch
            
            1988
            
            507Topeka,
                IN
            
            2002
            
            441Union,
                MI
            
            1988
            
            222Waterloo,
                IN
            
            2000
            
            785$    4,753




(1)
            Of
                real estate at September 30, 2007.





The
      total net book value of Peoples
      Federal’s premises and equipment atSeptember 30, 2007,
      was $5.6 million.
      This total represents the combined information for Peoples Federal and First
      Savings, now operating as a single bank as a result of the October 2007
      merger.


-29-





Item
      3.  Legal
      Proceedings





There
      are no material pending legal
      proceedings to which the Company, the Bank or any subsidiary is a party or
      to
      which any of their property is subject.








Item
      4.  Submission of Matters to a Vote of Security
      Holders





No
      matters were submitted to a vote of
      securities holders during the fourth quarter of 2007.








PART
      II





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





The
      Company’s common stock trades on the
      NASDAQ Global Market under the symbol “PFDC.” As ofDecember 14, 2007,
      the Company had 1,011 shareholders of
      record.





The
      table below shows the reported high
      and low sales prices of the common stock and cash dividends declared per share
      of common stock during the periods indicated in 2007 and
      2006.





Years
                EndingSeptember
                30, 2007
            
            
            September
                30, 2006High
            
            
            Low
            
            
            Dividend
            
            
            High
            
            
            Low
            
            
            DividendQuarter
                ended:December
                31
            
            $
            20.78
            
            
            $
            17.91
            
            
            $
            0.19
            
            
            $
            21.62
            
            
            $
            19.40
            
            
            $
            0.19March
                31
            
            
            20.30
            
            
            
            18.49
            
            
            
            0.19
            
            
            
            22.25
            
            
            
            19.71
            
            
            
            0.19June
                30
            
            
            20.10
            
            
            
            18.25
            
            
            
            0.19
            
            
            
            21.97
            
            
            
            19.58
            
            
            
            0.19September
                30
            
            
            19.25
            
            
            
            15.45
            
            
            
            0.19
            
            
            
            21.00
            
            
            
            15.60
            
            
            
            0.19





The
      OTS imposes various restrictions or
      requirements on the ability of associations to make capital distributions.
      Capital distributions include, without limitation, payments of cash dividends,
      repurchases and certain other acquisitions by an association of its shares
      and
      payments to stockholders of another association in an acquisition of such other
      association.





An
      application must be submitted and
      approval from the OTS must be obtained by a subsidiary of a savings and loan
      holding company (i) if the proposed distribution would cause total distributions
      for the calendar year to exceed net income for that year to date plus the
      savings association’s retained net income for the preceding two years; (ii) if
      the savings association will not be at least adequately capitalized following
      the capital distribution; or (iii) if the proposed distribution would violate
      a
      prohibition contained in any applicable statute, regulation or agreement between
      the savings association and the OTS (or the FDIC), or a condition imposed on
      the
      savings association in an OTS-approved application or notice. If a savings
      association subsidiary of a holding company is not required to file an
      application, it must file a notice of the proposed capital distribution with
      the
      OTS. Peoples Federal paid $2.2 million and $2.8 million in dividends during
      the
      years endingSeptember 30,
      2007 and2006,
      respectively.





For
      information relating to the
      Company’s common stock that is authorized for issuance under equity compensation
      plans, see Item 12. Security Ownership of Certain Beneficial Owners and
      Management and Related Stockholder Matters.





-30-


The
      line graph below compares the yearly
      percentage change in cumulative total shareholder return on Peoples Bancorp
      common stock and the cumulative total return of the NASDAQ Composite Index
      and
      the SNL Midwest Thrift Index. An investment of $100 onSeptember 30, 2002,
      and the reinvestment of all dividends
      are assumed.



















Period
                EndingIndex
            
            09/30/02
            
            
            09/30/03
            
            
            09/30/04
            
            
            09/30/05
            
            
            09/30/06
            
            
            09/30/07Peoples
                Bancorp
            
            
            100.00
            
            
            
            131.93
            
            
            
            131.71
            
            
            
            120.79
            
            
            
            126.24
            
            
            
            108.79NASDAQ
                Composite
            
            
            100.00
            
            
            
            152.46
            
            
            
            161.84
            
            
            
            183.58
            
            
            
            192.69
            
            
            
            230.49SNL
                Midwest Thrift Index
            
            
            100.00
            
            
            
            142.25
            
            
            
            161.05
            
            
            
            167.83
            
            
            
            183.70
            
            
            
            182.97





-31-


The
      Company completed the following
      common stock repurchases during the 2007 fourth quarter:





Issuer
                Purchases of Equity SecuritiesPeriod
            
            Total
                Number of Shares Purchased
            
            
            Average
                Price Paid Per Share
            
            
            Total
                Number of Shares Purchased as Part of Publicly Announced
                Plan
            
            
            Maximum
                Number of Shares That May Yet be Purchased Under the Plan
                (a)July
                1, 2007 to July 31, 2007
            
            
            416
            
            
            $
            18.26
            
            
            
            416
            
            
            
            101,170August
                1, 2007 to August 31, 2007
            
            
            31,280
            
            
            $
            18.62
            
            
            
            31,280
            
            
            
            69,890September
                1, 2007 to September 30, 2007
            
            
            7,559
            
            
            $
            18.63
            
            
            
            7,559
            
            
            
            62,33139,255
            
            
            $
            18.62
            
            
            
            39,255
            
            
            
            62,331





(a)  In
      February 2006, the Board authorized a three-year stock repurchase program.
      Purchases of up to 300,000 shares of the Company’s common stock may be made in
      open market or in privately negotiated transactions. As of September 30, 2007,
      the Company had repurchased 237,669 shares and 62,331 shares may yet be
      purchased under the plan. This plan expires in February 2009.











-32-


Item
      6.  Selected
      Financial Data





Selected
      Consolidated Financial Data of the Company





September
                302007
            
            
            2006
            
            
            2005
            
            
            2004
            
            
            2003Balance
                Sheet Data:Total
                assets
            
            $
            469,193,037
            
            
            $
            501,353,713
            
            
            $
            488,617,542
            
            
            $
            491,445,300
            
            
            $
            502,920,006Loans
                receivable including loans held for sale, net
            
            
            348,485,297
            
            
            
            371,662,679
            
            
            
            355,854,443
            
            
            
            360,454,908
            
            
            
            356,953,361Investments
                and other interest earning assets
            
            
            100,572,388
            
            
            
            108,170,325
            
            
            
            106,786,121
            
            
            
            109,254,698
            
            
            
            122,104,691Deposits
            
            
            349,291,182
            
            
            
            375,848,729
            
            
            
            360,243,356
            
            
            
            370,824,854
            
            
            
            380,115,884Borrowed
                funds
            
            
            54,480,511
            
            
            
            59,672,791
            
            
            
            60,131,225
            
            
            
            53,421,460
            
            
            
            56,749,653Stockholder’s
                equity
            
            
            62,032,964
            
            
            
            62,775,216
            
            
            
            65,184,382
            
            
            
            64,991,560
            
            
            
            63,924,854For
                Year Ended September 302007
            
            
            2006
            
            
            2005
            
            
            2004
            
            
            2003Operating
                Data:Interest
                income
            
            $
            28,659,990
            
            
            $
            28,310,432
            
            
            $
            26,949,339
            
            
            $
            26,866,634
            
            
            $
            29,748,296Interest
                expense
            
            
            14,559,298
            
            
            
            12,927,583
            
            
            
            10,463,071
            
            
            
            10,335,942
            
            
            
            12,147,419Net
                interest income
            
            $
            14,100,692
            
            
            $
            15,382,849
            
            
            $
            16,486,268
            
            
            $
            16,530,692
            
            
            $
            17,600,877Provision
                for losses on loans
            
            
            76,972
            
            
            
            56,065
            
            
            
            67,144
            
            
            
            40,374
            
            
            
            537,181Net
                interest income after provision for losses on loans
            
            $
            14,023,720
            
            
            $
            15,326,784
            
            
            $
            16,419,124
            
            
            $
            16,490,318
            
            
            $
            17,063,696Non-Interest
                income
            
            
            2,104,783
            
            
            
            2,285,030
            
            
            
            2,033,744
            
            
            
            1,646,944
            
            
            
            2,713,522Non-Interest
                expenses
            
            
            12,099,627
            
            
            
            12,822,056
            
            
            
            12,134,978
            
            
            
            11,411,108
            
            
            
            11,032,427Income
                before income taxes
            
            
            4,028,876
            
            
            
            4,789,758
            
            
            
            6,317,890
            
            
            
            6,726,154
            
            
            
            8,744,791Income
                tax expense
            
            
            1,227,460
            
            
            
            1,537,352
            
            
            
            2,188,283
            
            
            
            1,991,957
            
            
            
            2,995,486Net
                income
            
            $
            2,801,416
            
            
            $
            3,252,406
            
            
            $
            4,129,607
            
            
            $
            4,734,197
            
            
            $
            5,749,305Basic
                income per common share
            
            $
            0.89
            
            
            $
            0.99
            
            
            $
            1.23
            
            
            $
            1.40
            
            
            $
            1.67Diluted
                income per common share
            
            $
            0.89
            
            
            $
            0.98
            
            
            $
            1.22
            
            
            $
            1.39
            
            
            $
            1.66Dividends
                per common share
            
            $
            0.76
            
            
            $
            0.76
            
            
            $
            0.73
            
            
            $
            0.69
            
            
            $
            0.65Other
                Data:Average
                yield on all interest-earning assets
            
            
            6.13
            %
            
            
            5.96
            %
            
            
            5.74
            %
            
            
            5.68
            %
            
            
            6.21
            %Average
                cost of all interest-bearing liabilities
            
            
            3.58
            %
            
            
            3.09
            %
            
            
            2.51
            %
            
            
            2.45
            %
            
            
            2.76
            %Interest
                rate spread
            
            
            2.55
            %
            
            
            2.87
            %
            
            
            3.23
            %
            
            
            3.23
            %
            
            
            3.45
            %Number
                of full service banking offices
            
            
            15
            
            
            
            15
            
            
            
            15
            
            
            
            15
            
            
            
            15Return
                on assets (net income divided by average total assets)
            
            
            0.57
            %
            
            
            0.65
            %
            
            
            0.84
            %
            
            
            0.95
            %
            
            
            1.14
            %Return
                on equity (net income divided by average total equity)
            
            
            4.44
            %
            
            
            5.06
            %
            
            
            6.31
            %
            
            
            7.41
            %
            
            
            9.19
            %Dividend
                payout ratio (dividends per common share divided by net income per
                common
                share)
            
            
            85.39
            %
            
            
            76.77
            %
            
            
            59.35
            %
            
            
            49.29
            %
            
            
            38.92
            %Equity
                to assets ratio (average total equity divided by average total
                assets)
            
            
            12.93
            %
            
            
            12.90
            %
            
            
            13.25
            %
            
            
            12.87
            %
            
            
            12.39
            %





-33-


Item
      7.  Management’s Discussion and Analysis of Financial Condition and
      Results of Operation





Forward
      Looking Statements




This
      Annual Report contains statements that constitute forward-looking statements
      within the meaning of the Private Securities Litigation Reform Act of 1995.
      These statements appear in a number of places in this report and include
      statements regarding the intent, belief, outlook, estimate or expectations
      of
      Peoples Bancorp (the “Company”), its directors or its officers primarily with
      respect to future events and the future financial performance of the Company.
      Readers of this report are cautioned that any such forward looking statements
      are not guarantees of future events or performance and involve risks and
      uncertainties, and that actual results may differ materially from those in
      the
      forward looking statements as a result of various factors. The accompanying
      information contained in this report identifies important factors that could
      cause such differences. These factors include changes in interest rates, loss
      of
      deposits and loan demand to other financial institutions, substantial changes
      in
      financial markets, changes in real estate values and the real estate market,
      regulatory changes, increases in compensation and employee expenses, or
      unanticipated results in pending legal proceedings.




Overview




Peoples
      Bancorp had net income of $2.80 million for the year ended September 30, 2007
      compared to $3.25 million and $4.13 million for the years ended September 30,
      2006 and 2005 respectively. On a diluted per share basis, Peoples Bancorp earned
      $0.89 per share in 2007, $0.98 per share in 2006, and $1.22 per share in 2005.
      The decrease in earnings was due to funding costs growing at a faster pace
      than
      asset yields.




Net
      interest income was $14.10 million for the year ended September 30, 2007
      compared to $15.38 million and $16.49 million for the years ended September
      30,
      2006 and 2005 respectively. The net interest margin was 3.00%, 3.24% and 3.51%
      for the years ended September 30, 2007, 2006 and 2005 respectively. The decrease
      in margin each year has been due to declining interest rate spread. This decline
      was due to funding costs growing at a faster pace than asset
      yields.




Non-interest
      income was impacted by decreased gains on the sale of real estate owned and
      decreased fees and service charges for the year ended September 30, 2007
      compared to the year ended September 30, 2006, offset by increases in net
      realized gains on available-for-sale securities. Fiscal 2006 non-interest income
      benefited from a $188,000 nontaxable gain on donated real estate.




Non-interest
      expenses decreased in fiscal 2007 due to overall initiatives to reduce spending,
      but also because 2006 expenses were higher than normal as a result of a donation
      by First Savings Bank in that year of appreciated real estate with a value
      of
      $200,000, a robbery loss of $84,000 during fiscal 2006, and $101,000 of expenses
      due to a benefits continuation agreement with the former President and CEO
      of
      First Savings Bank upon his retirement. Operating expenses, as a percentage
      of
      the Company’s total assets, were 2.58%, 2.56% and 2.48% for the fiscal year
      ended September 30, 2007, 2006 and 2005, respectively. The Company continuously
      seeks to reduce operating expenses. In this regard, the budget committee of
      the
      Board of Directors monitors the Company’s current operating budget on at least a
      quarterly basis to ascertain that expense levels remain within projected ranges
      and to establish competitive, as opposed to aggressive, rates for the Company’s
      various deposit accounts. The Company’s efforts to contain operating expense
      also include underwriting policies that attempt to reduce potential losses
      and
      conservative expansion of personnel. Management also believes that the merger
      of
      the two Banks effective October 1, 2007, will have a positive impact on
      operating expenses.




On
      October 1, 2007, the Company merged its two banking subsidiaries (the “Banks”)
      into one bank. The merger of First Savings Bank into Peoples Federal Savings
      Bank of DeKalb County will help the Company in its continued efforts to decrease
      costs. The decreases in the Company’s net interest margin have shown signs of
      slowing, and even improving slightly. The Company will continue to closely
      monitor costs, and look for ways of increasing non-interest income. Customer
      service will continue to play a vital role in positioning the Company for
      success in the future.




Critical
      Accounting Policies




Peoples
      Bancorp has established various accounting policies which govern the application
      of accounting principles generally accepted in the United States in the
      preparation of its financial statements. The significant accounting policies
      of
      Peoples Bancorp are described in the footnotes to the consolidated financial
      statements for fiscal year 2007. Certain of these policies are important to
      the
      portrayal of the Company’s financial condition and results of operations, since
      they require management to make difficult, complex or subjective judgments,
      some
      of which may relate to matters that are significant and inherently uncertain.
      Management believes that its critical accounting policies include determining
      the allowance for loan losses (“ALL”) and accounting for goodwill.




-34-


Allowance
      For Loan Losses




The
      ALL
      is a significant estimate that can and does change based on management’s
      assumptions about specific borrowers and applicable economic and environmental
      conditions, among other factors. Management reviews the adequacy of the ALL
      on a
      quarterly basis. This review is based on specific identified risks or
      anticipated losses in individual loans, a percentage factor based on the
      classification of certain loans, and management’s analysis of overall economic
      conditions such as employment, bankruptcy trends, property value changes and
      changes in delinquency levels.




Credits
      are evaluated individually based on degree of delinquency and/or identified
      risk
      ratings of special mention or worse. Credits with delinquency levels of less
      than 60 days and risk ratings of satisfactory/monitor or better, are reviewed
      in
      the aggregate. Percentage factors applied to individual credits are based on
      risk rating, the type of credit and estimated potential losses in the event
      liquidation becomes necessary. Percentage factors applied to loans reviewed
      in
      the aggregate are based solely on the type of credit. Anticipated losses on
      loans transferred to real estate owned are recognized immediately upon recording
      the asset.




The
      ALL
      also includes a component based on management’s assumptions of changes in risk
      in non-quantifiable areas such as market conditions, property values, employment
      conditions and perceived changes in overall portfolio quality due to changes
      in
      concentration, underwriting changes and both national and regional
      trends.




External
      factors such as increases in unemployment, regional softness in property values
      and increasing national numbers in bankruptcy and internal factors such as
      the
      continuing increase in the commercial loan portfolio, and increasing unsecured
      delinquencies and charge offs may result in larger losses in current economic
      conditions. Charge-offs have remained stable over the last five years at
      $100-$200 thousand, with the exception of 2003 when a large charge-off was
      taken
      on a commercial loan caused by fraud on the part of the borrower. Management
      believes its process for identifying specific risks in the portfolio is adequate
      and appropriate. However, as in the case of the commercial loan charge-off,
      fraud on the part of borrowers cannot always be uncovered by the Banks. Changes
      in loan concentration, delinquency and portfolio are addressed through the
      variation in percentages used in calculating the ALL for various types of credit
      as well as individual review of “high risk” credits and large
      loans.




Accounting
      for Goodwill




Goodwill
      is no longer amortized by the Company but instead is tested annually for
      impairment. The impairment testing involves estimating the fair value of the
      Company and comparing it to the carrying amount. If the fair value is less
      than
      the carrying value, then the implied fair value of goodwill shall be determined
      and any related impairment loss will be recognized.




General




The
      Company is an Indiana corporation organized in October 1990 to become the
      savings and loan holding company for Peoples Federal Savings Bank of DeKalb
      County (“Peoples”). Effective February 29, 2000, the Company acquired by merger
      Three Rivers Financial Corp. and its wholly owned subsidiary, First Savings
      Bank
      (“First Savings”). Until October 1, 2007, the Company was the sole shareholder
      of Peoples and First Savings (collectively “Banks”). As mentioned earlier, on
      October 1, 2007 First Savings was merged into Peoples and will operate as one
      bank going forward. Peoples, following the merger, conducts business from its
      main office in Auburnand its 14 full service
      offices located in Avilla, Columbia City, Garrett, Kendallville, LaGrange,
      Topeka, Waterloo, Howe and Middlebury, Indiana and Three Rivers, Schoolcraft
      and
      Union, Michigan. The Company’s primary business activity is being the holding
      company for Peoples. Peoples offers a full range of retail deposit services
      and
      lending services.




The
      Company’s earnings are primarily dependent upon the earnings of the Banks.
      Historically, the principal business of savings banks, including Peoples and
      First Savings, has consisted of attracting deposits from the general public
      and
      making loans secured by residential real estate. The Banks’ net earnings are
      contingent on the difference or spread between the interest earned on their
      loans and investments and the interest paid on their consumer deposits and
      borrowings. Prevailing economic conditions, government policies, regulations,
      interest rates, and local competition also significantly affect the
      Banks.




Interest
      income is a function of the balance of loans and investments outstanding during
      a given period and the yield earned on such loans and investments. Interest
      expense is a function of the amounts of deposits and borrowings outstanding
      during the same period and the rates paid on such deposits and borrowings.
      The
      Banks’ earnings are also affected by gains and losses on sales of loans and
      investments, provisions for loan losses, service charges, income from subsidiary
      activities, operating expenses and income taxes.




The
      Company has supplemented its interest income through purchases of investment
      securities when appropriate. Such investments include U. S. Government
      securities, including those issued and guaranteed by the Federal Home Loan
      Mortgage Corporation (“FHLMC”), the Federal National Mortgage Association
      (“FNMA”), and the Government National Mortgage Association (“GNMA”), and state
      and local obligations. This activity (a) generates positive interest rate
      spreads on large principal balances with minimal administrative expense; (b)
      lowers the credit risk of the Banks’ loan portfolios as a result of the
      guarantees of full payment of principal and interest by FHLMC, FNMA, and GNMA;
      (c) enables the Banks to use securities as collateral for financings in the
      capital markets; and (d) increases the liquidity of the Banks.




-35-


On
      a
      yearly basis, the Company updates its long-term strategic plan. This plan
      includes, among other things, the Company’s commitment to maintaining a strong
      capital base and continuing to improve the organization’s return on assets
      through asset growth and controlling operating expenses. Continued careful
      monitoring of interest rate risk is also cited as an important goal. As a
      result, continued origination of short-term consumer and installment loans,
      prime plus equity loans, adjustable rate mortgage loans, and fixed-rate real
      estate loans with original terms of 15 years or less is emphasized.




Results
      of Operations, Fiscal Year Ended September 30, 2007 Compared to Fiscal Year
      Ended September 30, 2006




The
      Company’s net income for the fiscal year ended September 30, 2007 was $2.80
      million compared to $3.25 million for the fiscal year ended September 30, 2006.
      On a diluted basis, Peoples Bancorp earned $0.89 per share in fiscal 2007,
      compared to $0.98 per share in fiscal 2006.




The
      Company’s net interest income decreased $1.3 million to $14.1 million for the
      fiscal year ended September 30, 2007. Interest earned on investments and other
      interest-earning assets and interest paid on deposits all increased during
      the
      year. Interest income on loans increased due to increases in rates on
      outstanding loans. The average balance of deposits did not decrease as much
      as
      the ending balance. However, the decreases in balances were offset by rate
      increases on deposits. The interest rates paid on deposits rose faster than
      interest earned on loans, causing interest expense to rise more than interest
      income. Interest on long-term debt decreased to $3.1 million from $3.3 million.
      The average balance outstanding of FHLB advances decreased by $4.2 million,
      causing a decrease in interest expense.




Provision
      for loan losses increased $21,000 to $77,000 reflecting adjustments due to
      management’s continuing review of its loan portfolio. Management’s review of its
      loan portfolio is based on historical information, concentrations, delinquency
      trends, experience of lending personnel, review of specific loans, and general
      economic conditions.




Non-interest
      income decreased $180,000 to $2.1 million due primarily to a $107,000 decrease
      in ATM/debit card, check printing and other loan and deposit fees. Other income
      in fiscal 2006 also benefited from $188,000 of nonrecurring non-taxable gain
      on
      the donation of appreciated real estate. Gains on the sale of certain marketable
      equity securities increased $123,000 in 2007 compared to 2006 and gains on
      sale
      of loans increased $58,000 in fiscal 2007.




Total
      non-interest expense decreased $722,000 to $12.1 million for the year ended
      September 30, 2007. Salaries and benefits decreased $95,000 to $7.0 million
      due
      to employees not receiving bonuses in 2007. During 2007 several of the employee
      benefit plans were changed or restructured. On July 1, 2007 the Company changed
      the provider of health insurance benefits to employees and started to pay a
      higher portion of the costs. This resulted in an increase of $36,000 in health
      insurance costs. On August 1, 2007 the Company froze the benefits provided
      by
      its defined benefit multi-employer pension plan. That was largely responsible
      for a decrease of $117,000 in the cost of that plan for the year. At the same
      time the decision was made to offer a profit sharing component under the
      Company’s 401(k) plan. The profit sharing component, along with the traditional
      match made by the Company, resulted in an increase of $28,000 in employee
      benefit expense. Net occupancy and equipment expense decreased $118,000 due
      primarily to decreased depreciation expense as an increasing number of the
      Company’s fixed assets were fully depreciated. Other expenses also decreased in
      comparison with fiscal 2006 because of the following non-recurring expenses
      in
      2006. There was a contribution of appreciated real estate resulting in a
      charitable contribution expense of $200,000; $101,000 of expenses due to a
      benefits continuation agreement with the former President and CEO of First
      Savings Bank upon his retirement on March 30, 2006, and a charge of $84,000
      resulting from a robbery loss.





The
      effective tax rate for the Company for the years ended September 30, 2007 and
      2006 was 30.5% and 32.1%, respectively. Effective tax rates can be affected
      by
      the mix of taxable versus tax-exempt interest income, the level of
      non-deductible expenses for the year, and the timing of the deductibility of
      certain items. Please see Note 11 to the Company’s Consolidated Financial
      Statements for a breakdown of these differences.




Results
      of Operations, Fiscal Year Ended September 30, 2006 Compared to Fiscal Year
      Ended September 30, 2005




The
      Company’s net income for the fiscal year ended September 30, 2006 was $3.25
      million compared to $4.13 million for the fiscal year ended September 30, 2005.
      On a diluted basis, Peoples Bancorp earned $0.98 per share in fiscal 2006
      compared to $1.22 per share in fiscal 2005.




The
      Company’s net interest income decreased $1.1 million to $15.3 million for the
      fiscal year ended September 30, 2006. Interest earned on investments and other
      interest-earning assets and interest paid on deposits both increased during
      the
      year. Interest income on loans increased due to increases in both rates and
      volumes of outstanding loans. Total deposits increased and the mix of deposits
      changed with an increase in higher cost certificates of deposit balances. The
      interest rates paid on deposits rose faster than interest earned on loans,
      causing interest expense to rise more than interest income. Interest on
      long-term debt increased to $3.3 million from $2.9 million. The average balance
      of outstanding FHLB advances increased by $7.8 million, causing an increase
      in
      interest expense.




-36-


Provision
      for loan losses decreased $11,000 to $56,000 reflecting adjustments due to
      management’s continuing review of its loan portfolio. Management’s review of its
      loan portfolio is based on historical information, concentrations, delinquency
      trends, experience of lending personnel, review of specific loans, and general
      economic conditions.




Non-interest
      income increased $251,000 to $2.3 million due primarily to the increase of
      $328,000 in trust, ATM/debit card, check printing and other loan and deposit
      fees. There was also a non-taxable gain on the donation of appreciated real
      estate of $188,000 included in fiscal 2006’s other income. Net realized gains
      (losses) on the sale of available for sale securities in fiscal 2007 declined
      by
      $128,000 due to a loss in fiscal 2006 of $117,496 compared to a gain of $10,469
      in fiscal 2005.




Total
      non-interest expense increased $687,000 to $12.8 million for the year ended
      September 30, 2006. Salaries and benefits increased $162,000 to $7.1 million
      due
      primarily to a large increase in the expense related to the Banks’ defined
      benefit multi-employer pension plan. The cost of this plan is partially
      dependent on the stock market’s average performance and average interest rates
      for the last five years. Because of the poor performance in these indexes,
      the
      Company had to recognize additional expense related to this plan. Occupancy
      and
      equipment expense decreased $170,000 due primarily to decreased property taxes
      on real estate and buildings of the Banks, and lower depreciation expense.
      Other
      expenses increased in fiscal 2006 due to the following matters: an accrual
      of
      $101,000 due to a retirement benefits agreement with the former President and
      CEO of First Savings Bank who retired on March 30, 2006, a robbery loss of
      $84,000 and a deduction for donated property in the amount of $200,000.
      Accounting and supervisory expenses increased $26,000 and $11,000
      respectively.




The
      effective tax rate for the Company for the years ended September 30, 2006 and
      2005 was 32.1% and 34.6%, respectively. Effective tax rates can be affected
      by
      the mix of taxable versus tax-exempt interest income, the level of
      non-deductible expenses for the year, and the timing of the deductibility of
      certain items. Please see Note 11 to the Company’s Consolidated Financial
      Statements for a breakdown of these differences.




Comparison
      of Financial Condition, Fiscal Year Ended September 30, 2007 Compared to Fiscal
      Year Ended September 30, 2006




Total
      assets decreased $32.2 million to $469.2 million at September 30, 2007 compared
      to 2006. The decrease was due primarily to a reduction in the size of the loan
      portfolio which decreased $23.2 million to $348.5 million, including loans
      held
      for sale. The decrease in loans was in the real estate and the commercial real
      estate portfolios, and was attributable to increased activity in selling loans
      into the secondary market, and a decline in originations and payment
      amortization. There was also a decrease in investment securities of $7.2 million
      to $87.0 million. The decrease resulted from the use of the proceeds of matured
      securities to pay down borrowings and to partially offset decreased deposit
      balances.




Total
      liabilities decreased $31.4 million to $407.2 million. Deposits decreased $26.6
      million to $349.3 million. The decrease was due to a reduction in checking
      and
      savings accounts of $11.3 million and a decrease in certificates of deposit
      of
      $15.3 million. Federal Home Loan Bank advances decreased $5.7 million to $53.5
      million. Those decreases were partially offset by increases of $483,000 in
      short-term borrowings and $331,000 in other liabilities.




Stockholders’
      equity decreased $742,000 to $62.0 million. This decrease was due to a
      combination of net income of $2.8 million reduced by dividends paid to
      shareholders of $2.4 million and stock repurchases of $2.1 million. Those
      decreases in stockholders’ equity were partially offset by the decrease in the
      accumulated unrealized loss on available for sale securities to $323,000, a
      decrease of $829,000 since last year. The loss is caused by a decrease in market
      value of the Company’s fixed rate investments due to changes in market interest
      rates since the time of purchase. These losses are not expected to become
      realized losses, since the Company has the ability, and intent, to hold the
      securities to recovery, at which time, full value is expected to be received.
      Nonetheless, management may elect to sell some of these securities before
      maturity based on market conditions. Stockholders’ equity increased $104,000 as
      a result of the exercise of stock options.




Impact
      of Inflation and Changing Prices




The
      consolidated financial statements and related data presented herein have been
      prepared in accordance with generally accepted accounting principles which
      require the measurement of financial condition and operating results in terms
      of
      historical dollars or fair value without considering changes in the relative
      purchasing power of money over time due to inflation.




Virtually
      all of the assets and liabilities of a financial institution are monetary in
      nature. As a result, interest rates have a more significant impact on a
      financial institution’s performance than the effects of general levels of
      inflation. Interest rates do not necessarily move in the same direction or
      with
      the same magnitude as the prices of goods and services, since such prices are
      affected by inflation. In a volatile interest rate environment, liquidity and
      the maturity structure of the Banks’ assets and liabilities are critical to the
      maintenance of acceptable performance levels.




-37-






Average
      Balances and Interest Rates and Yields




The
      following table sets forth the weighted-average yields earned on the Company’s
      assets and the weighted-average rate paid on deposits andborrowings.




Years
                Ended September 30(Dollars
                in Thousands)2007
            
            
            2006
            
            
            2005Average
            
            
            
            
            
            Yield
            
            
            Average
            
            
            
            
            
            Yield
            
            
            Average
            
            
            
            
            
            YieldBalance
            
            
            Interest
            
            
            Rate
            
            
            Balance
            
            
            Interest
            
            
            Rate
            
            
            Balance
            
            
            Interest
            
            
            RateInterest-earning
                assets:Loans
                receivable (1)
            
            $
            362,306
            
            
            $
            24,076
            
            
            
            6.65
            %
            
            $
            366,944
            
            
            $
            23,910
            
            
            
            6.52
            %
            
            $
            357,340
            
            
            $
            22,958
            
            
            
            6.42
            %Investment
                Securities (2)
            
            
            91,520
            
            
            
            3,796
            
            
            
            4.15
            %
            
            
            95,430
            
            
            
            3,794
            
            
            
            3.98
            %
            
            
            98,576
            
            
            
            3,508
            
            
            
            3.56
            %Interest
                Bearing Deposits
            
            
            11,358
            
            
            
            574
            
            
            
            5.05
            %
            
            
            7,535
            
            
            
            385
            
            
            
            5.11
            %
            
            
            9,012
            
            
            
            276
            
            
            
            3.06
            %FHLB
                stock
            
            
            4,433
            
            
            
            214
            
            
            
            4.83
            %
            
            
            4,818
            
            
            
            221
            
            
            
            4.59
            %
            
            
            4,838
            
            
            
            207
            
            
            
            4.28
            %Total
                interest-earning assets
            
            
            467,756
            
            
            
            28,660
            
            
            
            6.10
            %
            
            
            474,727
            
            
            
            28,310
            
            
            
            5.96
            %
            
            
            467,802
            
            
            
            26,949
            
            
            
            5.76
            %Non-interest-earning
                assets
            
            
            19,683
            
            
            
            
            
            
            
            
            
            
            
            23,402
            
            
            
            
            
            
            
            
            
            
            
            26,158Total
                assets
            
            $
            487,439
            
            
            
            
            
            
            
            
            
            
            $
            498,129
            
            
            
            
            
            
            
            
            
            
            $
            493,960Deposits
                and Interest-bearing liabilities:Interest
                bearing deposits
            
            $
            348,546
            
            
            $
            11,416
            
            
            
            3.28
            %
            
            $
            355,363
            
            
            $
            9,585
            
            
            
            2.70
            %
            
            $
            361,068
            
            
            $
            7,505
            
            
            
            2.08
            %FHLB
                advances
            
            
            58,030
            
            
            
            3,127
            
            
            
            5.39
            %
            
            
            62,211
            
            
            
            3,325
            
            
            
            5.34
            %
            
            
            54,378
            
            
            
            2,925
            
            
            
            5.38
            %Other
                Borrowings
            
            
            631
            
            
            
            16
            
            
            
            2.54
            %
            
            
            767
            
            
            
            17
            
            
            
            2.22
            %
            
            
            1,370
            
            
            
            33
            
            
            
            2.41
            %Total
                interest-bearing liabilities
            
            
            407,207
            
            
            
            14,559
            
            
            
            3.58
            %
            
            
            418,341
            
            
            
            12,927
            
            
            
            3.09
            %
            
            
            416,816
            
            
            
            10,463
            
            
            
            2.51
            %Non-interest
                bearing deposits
            
            
            14,144
            
            
            
            -
            
            
            
            
            
            
            
            12,683
            
            
            
            -
            
            
            
            
            
            
            
            11,192
            
            
            
            -Total
                including non-interest-bearing demand deposits
            
            
            421,351
            
            
            
            14,559
            
            
            
            3.46
            %
            
            
            431,024
            
            
            
            12,927
            
            
            
            3.00
            %
            
            
            428,008
            
            
            
            10,463
            
            
            
            2.44
            %Other
                non-interest-bearing liabilities
            
            
            3,048
            
            
            
            
            
            
            
            
            
            
            
            2,824
            
            
            
            
            
            
            
            
            
            
            
            506Total
                liabilities
            
            
            424,399
            
            
            
            
            
            
            
            
            
            
            
            433,848
            
            
            
            
            
            
            
            
            
            
            
            428,514Stockholders’
                equity
            
            
            63,040
            
            
            
            
            
            
            
            
            
            
            
            64,281
            
            
            
            
            
            
            
            
            
            
            
            65,446Total
                liabilities and stockholders’ equity
            
            $
            487,439
            
            
            
            
            
            
            
            
            
            
            $
            498,129
            
            
            
            
            
            
            
            
            
            
            $
            493,960Net
                interest income; interest rate spread
            
            
            
            
            
            $
            14,101
            
            
            
            2.52
            %
            
            
            
            
            
            $
            15,383
            
            
            
            2.87
            %
            
            
            
            
            
            $
            16,486
            
            
            
            3.23
            %Net
                interest margin (3)
            
            
            
            
            
            
            
            
            
            
            3.00
            %
            
            
            
            
            
            
            
            
            
            
            3.24
            %
            
            
            
            
            
            
            
            
            
            
            3.51
            %Average
                interest-earning assets  to average interest bearing
                liabilities
            
            
            
            
            
            
            
            
            
            
            115
            %
            
            
            
            
            
            
            
            
            
            
            113
            %
            
            
            
            
            
            
            
            
            
            
            112
            %(1) Average
                balances include nonaccrual balances.(2) Yield
                on investment securities is computed based on amortized
                cost.(3) Net
                interest margin is net interest income divided by average interest-earning
                assets.







-38-




Interest
      Rate Spread




The
      following table sets forth the weighted-average yield on interest-earning assets
      and the weighted-average rate on interest-bearing liabilities for the years
      ending September 30, 2007, 2006, and 2005.




2007
            
            
            2006
            
            
            2005Weighted
                average interest rate on:Loans
            
            
            6.65
            %
            
            
            6.52
            %
            
            
            6.42
            %Securities
            
            
            4.15
            
            
            
            3.98
            
            
            
            3.56Interest
                bearing deposits
            
            
            5.05
            
            
            
            5.11
            
            
            
            3.06FHLB
                stock
            
            
            4.83
            
            
            
            4.59
            
            
            
            4.28Combined
            
            
            6.10
            
            
            
            5.96
            
            
            
            5.76Weighted
                average cost of:Interest
                bearing deposits
            
            
            3.28
            
            
            
            2.70
            
            
            
            2.08FHLB
                advances
            
            
            5.39
            
            
            
            5.34
            
            
            
            5.38Other
                borrowings
            
            
            2.54
            
            
            
            2.22
            
            
            
            2.41Combined
            
            
            3.58
            
            
            
            3.09
            
            
            
            2.51Interest
                rate spread
            
            
            2.52
            
            
            
            2.87
            
            
            
            3.23Net
                yield on weighted averageinterest-earning
                assets
            
            
            3.00
            
            
            
            3.24
            
            
            
            3.51





Rate/Volume
      Analysis




In
      addition to changes in interest rates, changes in volume can have a significant
      effect on net interest income. The following table describes the extent to
      which
      changes in interest rates and changes in volume of interest related assets
      and
      liabilities have affected the Banks’ interest income and expense for the periods
      indicated. For the purposes of this table, changes attributable to both rate
      and
      volume, which cannot be separated, have been allocated proportionately to the
      change due to volume and the change due to rate. Tax-exempt income was
      calculatedusing
      actual rates and not adjusted for the tax effects.




Years
                ended September 30,2007
                vs 2006
            
            
            2006
                vs 2005Increase
            
            
            
            
            
            Increase(Decrease)
            
            
            Total
            
            
            (Decrease)
            
            
            TotalDue
                to
            
            
            Increase
            
            
            Due
                to
            
            
            IncreaseVolume
            
            
            Rate
            
            
            (Decrease)
            
            
            Volume
            
            
            Rate
            
            
            (Decrease)Interest
                income from:Loans
            
            $
            (302
            )
            
            $
            468
            
            
            $
            166
            
            
            $
            617
            
            
            $
            335
            
            
            $
            952Investment
                securities
            
            
            (155
            )
            
            
            157
            
            
            
            2
            
            
            $
            (112
            )
            
            
            398
            
            
            
            286Interest
                bearing deposits
            
            
            195
            
            
            
            (6
            )
            
            
            189
            
            
            $
            (45
            )
            
            
            154
            
            
            
            109FHLB
                Stock
            
            
            (18
            )
            
            
            11
            
            
            
            (7
            )
            
            $
            (1
            )
            
            
            15
            
            
            
            14Total
                interest income
            
            
            (280
            )
            
            
            630
            
            
            
            350
            
            
            
            459
            
            
            
            902
            
            
            
            1,361Interest
                expense from:Interest
                bearing deposits
            
            
            (184
            )
            
            
            2,015
            
            
            
            1,831
            
            
            
            (119
            )
            
            
            2,199
            
            
            
            2,080FHLB
                Advances
            
            
            (223
            )
            
            
            25
            
            
            
            (198
            )
            
            
            421
            
            
            
            (21
            )
            
            
            400Other
                borrowings
            
            
            (3
            )
            
            
            2
            
            
            
            (1
            )
            
            
            (15
            )
            
            
            (1
            )
            
            
            (16
            )Total
                interest expense
            
            
            (410
            )
            
            
            2,042
            
            
            
            1,632
            
            
            
            287
            
            
            
            2,177
            
            
            
            2,464Net
                interest income (expense)
            
            $
            130
            
            
            $
            (1,412
            )
            
            $
            (1,282
            )
            
            $
            172
            
            
            $
            (1,275
            )
            
            $
            (1,103
            )









-39-


Asset
      and Liability Management




A
      significant portion of the Company’s revenues and net income is derived from net
      interest income and, accordingly, the Company strives to manage its
      interest-earning assets and interest-bearing liabilities to generate an
      appropriate contribution from net interest income. Asset and liability
      management seeks to control the volatility of the Company’s performance due to
      changes in interest rates. The Company attempts to achieve an appropriate
      relationship between rate sensitive assets and rate sensitive liabilities.
      Peoples Bancorp does not presently use off balance sheet derivatives to enhance
      its risk management.




Historically,
      all of the Banks’ real estate loans were made at fixed rates. More recently, the
      Banks have adopted an asset and liability management plan that calls for the
      origination of residential mortgage loans and other loans with adjustable
      interest rates, the origination of 15-year or less residential mortgage loans
      with fixed rates, and the maintenance of investments with short to medium terms.
      In addition, the Banks sell loans on the secondary market through the Federal
      Home Loan Bank of Indianapolis and Freddie Mac. This results in fee income
      on
      the initial sale, as well as lowering interest rate risk since the long-term
      asset is no longer held in the Banks’ portfolios. In order to offset these
      decreased earnings, management is emphasizing cost control wherever possible,
      and will continue to look for sources of fee income that are unaffected by
      interest rates.




The
      OTS
      uses a net market value methodology to measure the interest rate risk exposure
      of savings associations. Under this OTS regulation, an institution’s “normal”
level of interest rate risk in the event of an assumed change in interest rates
      is a decrease in the institution’s Net Portfolio Value (“NPV”) in an amount not
      exceeding 2% of the present value of its assets. Thrift institutions, like
      Peoples, with over $300 million in assets or less than a 12% risk-based capital
      ratio are required to file OTS Schedule CMR. Data from Schedule CMR is used
      by
      the OTS to calculate changes in NPV (and the related “normal” level of interest
      rate risk) based upon certain interest rate changes (discussed below).
      Institutions that do not meet either of the foregoing requirements are not
      required to file OTS Schedule CMR, but may do so voluntarily. First Savings
      has
      filed voluntarily in the past.




Presented
      below, as of September 30, 2007 and 2006, is an analysis performed by the OTS
      of
      Peoples’ interest rate risk as measured by changes in NPV for instantaneous and
      sustained parallel shifts in the yield curve, in 100 basis point increments,
      up
      300 basis points and down 200 basis points. At September 30, 2007 and 2006,
      2%
      of the present value of Peoples’ assets was approximately $7.6 million and $8.0
      million. The interest rate risk of a 200 basis point increase in market rates
      (which was greater than the interest rate risk of a 200 basis point decrease)
      was $10.8 million at September 30, 2007 and $9.9 million at September 30,
      2006.




Peoples
                Federal Savings Bank of DeKalb County
              Interest
                Rate Risk As of September 30, 2007
              (dollars
                in thousands)
            
            Peoples
                Federal Savings Bank of DeKalb County
              Interest
                Rate Risk As of September 30, 2006
              (dollars
                in thousands)Market
                Value
            
            NPV
                as % of Portfolio Value of Assets
            
            
            
            Market
                Value
            
            NPV
                as % of Portfolio Value of AssetsChanges
              in
                Rates
            
            $
                Amount
            
            $
                Change
            
            %
                Change
            
            NPV
                Ratio
            
            Change
            
            Changes
              in
                Rates
            
            $
                Amount
            
            $
                Change
            
            %
                Change
            
            NPV
                Ratio
            
            Change+300
                bp
            
            36,601
            
            (16,631)
            
            -31%
            
            10.19%
            
            -381
                bp
            
            +300
                bp
            
            33,179
            
            (16,706)
            
            -33%
            
            8.80%
            
            -368
                bp+200
                bp
            
            42,427
            
            (10,804)
            
            -20%
            
            11.58%
            
            -242
                bp
            
            +200
                bp
            
            39,943
            
            (9,942)
            
            -20%
            
            10.35%
            
            -213
                bp+100
                bp
            
            48,118
            
            (5,114)
            
            -10%
            
            12.88%
            
            -112
                bp
            
            +100
                bp
            
            45,655
            
            (4,231)
            
            -8%
            
            11.60%
            
            -88
                bp0
                bp
            
            52,232
            
            -
            
            -
            
            14.00%
            
            
            
            0 bp
            
            49,885
            
            -
            
            -
            
            12.48%-100
                bp
            
            55,911
            
            2,679
            
            5%
            
            14.54%
            
            +54
                bp
            
            -100
                bp
            
            55,486
            
            5,601
            
            11%
            
            13.62%
            
            +114
                bp-200
                bp
            
            56,762
            
            3,530
            
            7%
            
            14.67%
            
            +67
                bp
            
            -200
                bp
            
            58,646
            
            8,761
            
            18%
            
            14.00%
            
            +173
                bp





-40-


The
      following, as of September 30, 2007 and 2006, is the same analysis performed
      by
      the OTS of First Savings’ interest rate risk. At September 30, 2007 and 2006, 2%
      of the present value of First Savings’ assets were approximately $2.0 million
      and $2.2 million. The interest rate risk of a 200 basis point increase in market
      rates (which was greater than the interest rate risk of a 200 basis point
      decrease) was $1.1 million and $1.4 million at September 30, 2007, and 2006.
      At
      September 30, 2007 and 2006, 2% of the present value of First Savings assets
      exceeded the 200 basis point decrease.




First  Savings
                Bank
              Interest
                Rate Risk As of September 30, 2007
              (dollars
                in thousands)
            
            First
                Savings Bank
              Interest
                Rate Risk As of September 30, 2006
              (dollars
                in thousands)Market
                Value
            
            NPV
                as % of Portfolio Value of Assets
            
            
            
            Market
                Value
            
            NPV
                as % of Portfolio Value of AssetsChanges
                in Rates
            
            $
                Amount
            
            $
                Change
            
            %
                Change
            
            NPV
                Ratio
            
            Change
            
            Changes
                in Rates
            
            $
                Amount
            
            $
                Change
            
            %
                Change
            
            NPV
                Ratio
            
            Change+300
                bp
            
            15,075
            
            (1,924)
            
            -11%
            
            15.66%
            
            -132
                bp
            
            +300
                bp
            
            12,917
            
            (2,471)
            
            -16%
            
            12.53%
            
            -177
                bp+200
                bp
            
            15,859
            
            (1,139)
            
            -7%
            
            16.25%
            
            -73
                bp
            
            +200
                bp
            
            13,958
            
            (1,430)
            
            -9%
            
            13.33%
            
            -97 bp+100
                bp
            
            16,589
            
            (410)
            
            -2%
            
            16.76%
            
            -22
                bp
            
            +100
                bp
            
            14,788
            
            (601)
            
            -4%
            
            13.93%
            
            -38 bp0
                bp
            
            16,999
            
            -
            
            -
            
            16.98%
            
            
            
            0 bp
            
            15,388
            
            -
            
            -
            
            14.30%-100
                bp
            
            17,122
            
            123
            
            1%
            
            16.95%
            
            -3 bp
            
            -100
                bp
            
            15,800
            
            412
            
            3%
            
            14.50%
            
            +20
                bp-200
                bp
            
            17,147
            
            149
            
            1%
            
            16.82%
            
            -16
                bp
            
            -200
                bp
            
            16,142
            
            753
            
            5%
            
            14.63%
            
            +33
                bp







In
      evaluating the Banks’ exposure to interest rate risk, certain shortcomings,
      inherent in the method of analysis presented in the foregoing tables must be
      considered. For example, although certain assets and liabilities may have
      similar maturities or periods to repricing, they may react in different degrees
      to changes in market interest rates. Also, the interest rates on certain types
      of assets and liabilities may fluctuate in advance of changes in market interest
      rates, while interest rates on other types may lag behind changes in market
      rates. Further, in the event of a change in interest rates, prepayments and
      early withdrawal levels could deviate significantly from those assumed in
      calculating the table. Finally, the ability of many borrowers to service their
      debt may decrease in the event of an interest rate increase. As a result, the
      actual effect of changing interest rates may differ from that presented in
      the
      foregoing tables.




Loans,
      Non-performing Assets and Summary of Loan Loss Experience




The
      following table presents the composition of the loan portfolio of both Banks,
      excluding loans held for sale, at September 30, 2007 and September 30, 2006
      (in
      thousands):




September
                30, 2007
            
            
            September
                30, 2006TYPE
                OF LOAN
            
            Amount
            
            
            Percent
                of Total
            
            
            Amount
            
            
            Percent
                of TotalResidential:
            
            (Dollars
                in thousands)1-4
                family units
            
            $
            286,022
            
            
            
            81.1
            %
            
            $
            303,089
            
            
            
            80.4
            %Over
                4 family units
            
            
            2,128
            
            
            
            0.6
            %
            
            
            1,030
            
            
            
            0.3
            %Home
                Equity Lines of Credit
            
            
            20,965
            
            
            
            5.9
            %
            
            
            22,724
            
            
            
            6.0
            %Commercial
                real estate
            
            
            23,362
            
            
            
            6.6
            %
            
            
            30,027
            
            
            
            8.0
            %Land
                acquisition and development
            
            
            3,683
            
            
            
            1.0
            %
            
            
            3,824
            
            
            
            1.0
            %Consumer
                and other loans
            
            
            15,816
            
            
            
            4.5
            %
            
            
            15,580
            
            
            
            4.1
            %Loans
                on deposits
            
            
            548
            
            
            
            0.2
            %
            
            
            793
            
            
            
            0.2
            %352,524
            
            
            
            100.0
            %
            
            
            377,067
            
            
            
            100.0
            %Less:Undisbursed
                portion of loans
            
            
            1,574
            
            
            
            
            
            
            
            2,734Deferred
                loan fees and discounts
            
            
            886
            
            
            
            
            
            
            
            1,0702,460
            
            
            
            
            
            
            
            3,804Total
                loans receivable
            
            
            350,064
            
            
            
            
            
            
            
            373,263Allowance
                for losses on loans
            
            
            1,834
            
            
            
            
            
            
            
            1,898Net
                loans
            
            $
            348,230
            
            
            
            
            
            
            $
            371,365





-41-


Non-performing
      assets of the Banks at September 30, 2007 and 2006 are as follows (in
      thousands):




September
                30, 2007
            
            
            September
                30, 2006Non-accruing
                loans
            
            $
            1,003
            
            
            $
            565Real
                estate owned (REO)
            
            
            986
            
            
            
            709Restructured
                loans
            
            
            1,133
            
            
            
            1,226$
            3,122
            
            
            $
            2,500







It
      is the
      Company’s policy to stop accruing interest on all loans over 90 days past due.
      At September 30, 2007, loans past due more than 90 days had increased $438,000
      compared to September 30, 2006.




It
      is the
      Company’s policy to carry REO at net realizable value. After repossession,
      appraised value is reduced for estimated repair and selling costs, and the
      net
      amount is the carrying value of the property. Any changes in estimated
      realizable value after the initial repossession, are charged to a specific
      loss
      reserve account for REO. There have been no significant changes in potential
      problem loans since September 30, 2006. Net charge-offs for the years ended
      September 30, 2007 and 2006 were $142,000 and $124,000,
      respectively.




The
      allowances for loan and real estate owned losses represent amounts available
      to
      absorb losses inherent in the portfolio. Such allowances are based on
      management’s continuing review of the portfolios, historical charge-offs,
      current economic conditions, and such other factors, which in management’s
      judgment deserve recognition in estimating losses. In addition, various
      regulatory agencies, as an integral part of their examination process,
      periodically review the allowance for loan losses. Such agencies may require
      additions to the allowances based on their judgment about the information
      available to them at the time of their examination. Provisions for losses are
      charged to earnings to bring the allowances to levels considered necessary
      by
      management. Losses are charged to the allowances when considered probable or,
      in
      the case of REO, at the time of repossession. Overall, the general composition
      of the loan portfolio has remained similar to the prior year with no significant
      shift of risk between components of the loan portfolio that would impact the
      calculation of the allowance for loan losses. Net charge-offs for the last
      five
      years have remained consistently at $50-$200 thousand, with the exception of
      2003. The charge-off figure for 2003 was higher than normal due to a large
      commercial loan that was charged off. This charge-off had not been identified
      during the normal loan review process as a potential loss due to fraud on the
      part of the borrower. Management believes that the allowances are adequate
      to
      absorb known and inherent losses in the portfolios. No assurance can be given,
      however, that economic conditions which may adversely affect the Company’s
      markets or other circumstances, such as the aforementioned fraud, will not
      result in future losses in the portfolios.




Liquidity
      and Capital Resources




The
      primary internal sources of funds for operations are principal and interest
      payments on loans and new deposits. In addition, if greater liquidity is
      required, the Banks can borrow from the FHLB.Under existing resolutions
      of the
      Company’s Board of Directors, First Savings may borrow an additional $16.5
      million, and Peoples may borrow an additional $19.0 million. If borrowing in
      excess of these amounts is ever needed, the Board of Directors of the Company
      could increase the available credit amounts significantly, limited only by
      the
      size of the Banks’ loan portfolios. First Savings and Peoples operate under a
      blanket collateral agreement with FHLB, whereby their single family loans act
      as
      collateral for the borrowings. Peoples Federal also has the ability to pledge
      specific government agency securities to secure their borrowings at the FHLB.In the opinion of management, the Banks’ liquid assets are adequate to
      meet outstanding loan commitments and other obligations.




Management
      knows of no existing or potential obligations which would materially impact
      the
      Banks’ liquidity levels.




During
      the year ended September 30, 2007 cash and cash equivalents increased $1.6
      million, interest-bearing time deposits decreased $2,480,000, investment
      securities decreased $7.2 million, and net loans decreased $23.1 million.
      Deposits decreased $26.6 million, and Federal Home Loan Bank advances decreased
      $5.7 million. In fiscal 2007, there was $4.0 million in net cash provided by
      operating activities.




During
      the year ended September 30, 2006 cash and cash equivalents increased $867,000,
      investment securities decreased $4.2 million, and net loans increased $16.2
      million. Deposits increased $15.6 million and Federal Home Loan Bank advances
      decreased $95,000. In fiscal 2006, there was $4.3 million in net cash provided
      by operating activities.




Off-Balance
      Sheet Arrangements




The
      Company does not have any off-balance sheet arrangements that have or are
      reasonably likely to have a current or future effect on the Company’s financial
      condition, changes in financial condition, revenues or expenses, results of
      operations, liquidity, capital expenditures or capital resources that are
      material to investors.




-42-


Contractual
      Obligations




In
      the
      ordinary course of operations, the Company enters into certain contractual
      obligations. The following table summarizes the Company’s significant fixed and
      determinable contractual obligations, by payment date, at September 30,
      2007.









Contractual
                Obligations Due by PeriodOne
            
            
            ThreeWithin
            
            
            Year
                to
            
            
            Years
                to
            
            
            AfterOne
                Year
            
            
            Three
                Years
            
            
            Five
                Years
            
            
            Five
                Years
            
            
            Total(Dollars
                in thousands)Borrowings
            
            $
            17,031
            
            
            $
            21,200
            
            
            $
            13,250
            
            
            $
            3,000
            
            
            $
            54,481Service
                Contract(1)
            
            
            585
            
            
            
            576
            
            
            
            576
            
            
            
            168
            
            
            
            1,905Dividends
                Payable
            
            
            590
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            590$
            18,206
            
            
            $
            21,776
            
            
            $
            13,826
            
            
            $
            3,168
            
            
            $
            56,976




(1)
            The
                service contract is with Open Solutions Inc. to provide Peoples Bancorp
                with service bureau support for processing of deposit and loan accounts.
                The contract fees are based on the number of accounts processed and
                additional reporting services provided from time to time. The amount
                shown
                is an estimate of cost based on current account support and reporting
                fee
                structures. The current contract expires March 1, 2008. A new contract
                has
                been signed to be effective March 1, 2008 and will expire April 30,
                2013.
                During the new contract the processing of accounts will be done “in house”
                by Peoples Bancorp on software licensed by Open Solutions Inc.







Item
      7A.  Quantitative and Qualitative Disclosures About Market
      Risk





Information
      required by this item is set
      forth under the caption “Asset and Liability Management” included in Item 7.
      Management’s Discussion and Analysis of Financial Condition and Results of
      Operation.





Item
      8.  Financial
      Statements and Supplementary Data





Information
      required by this item is set
      forth in the Reports of Independent Registered Public Accounting Firms,
      Consolidated Statements of Financial Condition, Consolidated Statements of
      Income, Consolidated Statements of Stockholder’s Equity, Consolidated Statements
      of Cash Flows and Notes to Consolidated Financial Statements which
      follow.





Peoples
      Bancorp




September
      30, 2007, 2006 and 2005




ContentsReport
                of Independent Registered Public Accounting Firm
            44Consolidated
                Financial StatementsBalance
                Sheets
            45Statements
                of Income
            46Statements
                of Stockholders’ Equity
            47Statements
                of Cash Flows
            48Notes
                to Financial Statements
            49


-43-


Report
      of Independent Registered Public Accounting Firm








Audit
      Committee, Board of Directors and


Stockholders


Peoples
      Bancorp


Auburn,
      Indiana








We
      have
      audited the accompanying consolidated balance sheets of Peoples Bancorp as
      of
      September 30, 2007 and 2006, and the related consolidated statements of
      income, changes in stockholders’ equity and cash flows for each of the three
      years in the period ended September 30, 2007. These financial statements
      are the responsibility of the Company’s management. Our responsibility is to
      express an opinion on these financial statements based on our
      audits.




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




In
      our
      opinion, the consolidated financial statements referred to above present fairly,
      in all material respects, the financial position of Peoples Bancorp as of
      September 30, 2007 and 2006, and the results of its operations and its cash
      flows for each of the three years in the period ended September 30, 2007,
      in conformity with accounting principles generally accepted in the United States
      of America.












Indianapolis,
      Indiana


December
      7, 2007




-44-


Peoples
      Bancorp


Consolidated
      Balance Sheets


September
      30, 2007 and 2006







Assets




2007
            
            
            2006Cash
                and cash equivalents
            
            $
            12,311,371
            
            
            $
            10,756,693Interest-bearing
                time deposits
            
            
            2,567,908
            
            
            
            5,047,883Investment
                securitiesAvailable
                for sale
            
            
            86,599,820
            
            
            
            93,640,940Held
                to maturity (fair value of $424,745 and $570,957)
            
            
            423,173
            
            
            
            567,690Total
                investment securities
            
            
            87,022,993
            
            
            
            94,208,630Mortgage
                loans held for sale
            
            
            255,500
            
            
            
            297,400Loans,
                net of allowance for loan losses of $1,833,682 and
                $1,898,257
            
            
            348,229,797
            
            
            
            371,365,279Premises
                and equipment
            
            
            5,555,341
            
            
            
            5,703,922Federal
                Home Loan Bank of Indianapolis stock, at cost
            
            
            4,403,900
            
            
            
            4,567,600Core
                deposit intangible
            
            
            57,436
            
            
            
            195,282Goodwill
            
            
            2,330,198
            
            
            
            2,330,198Other
                assets
            
            
            6,458,593
            
            
            
            6,880,826Total
                assets
            
            $
            469,193,037
            
            
            $
            501,353,713LiabilitiesNOW
                and savings deposits
            
            $
            135,474,910
            
            
            $
            146,762,078Certificates
                of deposit
            
            
            213,816,272
            
            
            
            229,086,651Total
                deposits
            
            
            349,291,182
            
            
            
            375,848,729Short-term
                borrowings
            
            
            1,000,511
            
            
            
            517,791Federal
                Home Loan Bank advances
            
            
            53,480,000
            
            
            
            59,155,000Other
                liabilities
            
            
            3,388,380
            
            
            
            3,056,977Total
                liabilities
            
            
            407,160,073
            
            
            
            438,578,497Commitments
                and ContingenciesStockholders’EquityPreferred
                stock, $1 par valueAuthorized
                and unissued - 5,000,000 sharesCommon
                stock, $1 par valueAuthorized
                - 7,000,000 sharesIssued
                and outstanding - 3,106,134 and 3,206,969 shares
            
            
            3,106,134
            
            
            
            3,206,969Additional
                paid-in capital
            
            
            679,457
            
            
            
            2,567,131Retained
                earnings
            
            
            58,570,157
            
            
            
            58,152,876Accumulated
                other comprehensive loss
            
            
            (322,784
            )
            
            
            (1,151,760
            )Total
                stockholders’ equity
            
            
            62,032,964
            
            
            
            62,775,216Total
                liabilities and stockholders’ equity
            
            $
            469,193,037
            
            
            $
            501,353,713





See
      Notes to Consolidated Financial Statements


-45-


Peoples
      Bancorp


Consolidated
      Statements of Income


Years
      Ended September 30, 2007, 2006 and 2005







2007
            
            
            2006
            
            
            2005Interest
                IncomeLoans
            
            $
            24,076,195
            
            
            $
            23,910,031
            
            
            $
            22,958,234Investment
                securities
            
            
            3,795,752
            
            
            
            3,639,173
            
            
            
            3,508,062Other
                interest and dividend income
            
            
            788,043
            
            
            
            761,228
            
            
            
            483,04328,659,990
            
            
            
            28,310,432
            
            
            
            26,949,339Interest
                ExpenseDepositsNOW
                and savings deposits
            
            
            1,854,558
            
            
            
            1,750,321
            
            
            
            1,308,231Certificates
                of deposit
            
            
            9,561,365
            
            
            
            7,834,951
            
            
            
            6,196,792Short-term
                borrowings
            
            
            16,262
            
            
            
            16,871
            
            
            
            33,034Federal
                Home Loan Bank advances
            
            
            3,127,113
            
            
            
            3,325,440
            
            
            
            2,925,01414,559,298
            
            
            
            12,927,583
            
            
            
            10,463,071Net
                Interest Income
            
            
            14,100,692
            
            
            
            15,382,849
            
            
            
            16,486,268Provision
                for loan losses
            
            
            76,972
            
            
            
            56,065
            
            
            
            67,144Net
                Interest Income After Provision for Loan Losses
            
            
            14,023,720
            
            
            
            15,326,784
            
            
            
            16,419,124Non-interest
                IncomeFiduciary
                activities
            
            
            357,221
            
            
            
            357,279
            
            
            
            345,546Fees
                and service charges
            
            
            1,320,528
            
            
            
            1,428,023
            
            
            
            1,112,128Net
                realized gains (losses) on available-for-sale securities
            
            
            5,104
            
            
            
            (117,496
            )
            
            
            10,469Gain
                on sale of loans
            
            
            161,554
            
            
            
            103,216
            
            
            
            136,768Other
                income
            
            
            260,376
            
            
            
            514,008
            
            
            
            428,833Total
                other income
            
            
            2,104,783
            
            
            
            2,285,030
            
            
            
            2,033,744Non-interest
                ExpensesSalaries
                and employee benefits
            
            
            6,991,906
            
            
            
            7,086,684
            
            
            
            6,924,306Net
                occupancy expense
            
            
            944,335
            
            
            
            923,640
            
            
            
            1,037,285Equipment
                expense
            
            
            557,283
            
            
            
            696,315
            
            
            
            752,456Data
                processing expense
            
            
            1,140,519
            
            
            
            1,092,603
            
            
            
            1,052,271Deposit
                insurance expense
            
            
            44,553
            
            
            
            46,985
            
            
            
            52,068Other
                expenses
            
            
            2,421,031
            
            
            
            2,975,829
            
            
            
            2,316,592Total
                other expenses
            
            
            12,099,627
            
            
            
            12,822,056
            
            
            
            12,134,978Income
                Before Income Tax
            
            
            4,028,876
            
            
            
            4,789,758
            
            
            
            6,317,890Income
                tax expense
            
            
            1,227,460
            
            
            
            1,537,352
            
            
            
            2,188,283Net
                Income
            
            $
            2,801,416
            
            
            $
            3,252,406
            
            
            $
            4,129,607Basic
                Earnings Per Share
            
            $
            .89
            
            
            $
            .99
            
            
            $
            1.23Diluted
                Earnings Per Share
            
            $
            .89
            
            
            $
            .98
            
            
            $
            1.22Weighted-Average
                Shares Outstanding - Basic
            
            
            3,161,939
            
            
            
            3,293,223
            
            
            
            3,357,018Weighted-Average
                Shares Outstanding - Diluted
            
            
            3,164,080
            
            
            
            3,304,826
            
            
            
            3,380,358





See
      Notes to Consolidated Financial Statements


-46-


Peoples
      Bancorp


Consolidated
      Statements of Stockholders’ Equity


Years
      Ended September 30, 2007, 2006 and 2005




AccumulatedOtherAdditional
            
            
            
            
            
            
            
            
            ComprehensiveCommon
                Stock
            
            
            Paid-in
            
            
            Comprehensive
            
            
            Retained
            
            
            IncomeOutstanding
            
            
            Amount
            
            
            Capital
            
            
            Income
            
            
            Earnings
            
            
            (Loss)
            
            
            TotalBalances
                October 1, 2004
            
            
            3,367,803
            
            
            
            3,367,803
            
            
            
            6,002,637
            
            
            
            
            
            
            55,711,953
            
            
            
            (90,833
            )
            
            
            64,991,560Comprehensive
                incomeNet
                income
            
            
            
            
            
            
            
            
            
            
            
            
            
            $
            4,129,607
            
            
            
            4,129,607
            
            
            
            
            
            
            
            4,129,607Other
                comprehensive income, net of taxUnrealized
                losses on securities, net of reclassification adjustment
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            (910,775
            )
            
            
            
            
            
            
            (910,775
            )
            
            
            (910,775
            )Comprehensive
                income
            
            
            
            
            
            
            
            
            
            
            
            
            
            $
            3,218,832Cash
                dividends ($.73 per share)
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            (2,441,240
            )
            
            
            
            
            
            
            (2,441,240
            )Stock
                options exercised
            
            
            3,119
            
            
            
            3,119
            
            
            
            31,658
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            34,777Repurchase
                of common stock
            
            
            (30,498
            )
            
            
            (30,498
            )
            
            
            (589,049
            )
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            (619,547
            )Balances
                September 30, 2005
            
            
            3,340,424
            
            
            
            3,340,424
            
            
            
            5,445,246
            
            
            
            
            
            
            
            57,400,320
            
            
            
            (1,001,608
            )
            
            
            65,184,382Comprehensive
                incomeNet
                income
            
            
            
            
            
            
            
            
            
            
            
            
            
            $
            3,252,406
            
            
            
            3,252,406
            
            
            
            
            
            
            
            3,252,406Other
                comprehensive income, net of taxUnrealized
                losses on securities, net of reclassification adjustment
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            (150,152
            )
            
            
            
            
            
            
            (150,152
            )
            
            
            (150,152
            )Comprehensive
                income
            
            
            
            
            
            
            
            
            
            
            
            
            
            $
            3,102,254Cash
                dividends ($.76 per share)
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            (2,499,850
            )
            
            
            
            
            
            
            (2,499,850
            )Stock
                options exercised
            
            
            37,961
            
            
            
            37,961
            
            
            
            399,524
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            437,485Tax
                benefit on stock options exercised
            
            
            
            
            
            
            
            
            
            
            90,851
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            90,851Repurchase
                of common stock
            
            
            (171,416
            )
            
            
            (171,416
            )
            
            
            (3,368,490
            )
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            (3,539,906
            )Balances
                September 30, 2006
            
            
            3,206,969
            
            
            
            3,206,969
            
            
            
            2,567,131
            
            
            
            
            
            
            
            58,152,876
            
            
            
            (1,151,760
            )
            
            
            62,775,216Comprehensive
                incomeNet
                income
            
            
            
            
            
            
            
            
            
            
            
            
            
            $
            2,801,416
            
            
            
            2,801,416
            
            
            
            
            
            
            
            2,801,416Other
                comprehensive income, net of taxUnrealized
                gains on securities, net of reclassification adjustment
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            828,976
            
            
            
            
            
            
            
            828,976
            
            
            
            828,976Comprehensive
                income
            
            
            
            
            
            
            
            
            
            
            
            
            
            $
            3,630,392Cash
                dividends ($.76 per share)
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            (2,384,135
            )
            
            
            
            
            
            
            (2,384,135
            )Stock
                options exercised
            
            
            7,722
            
            
            
            7,722
            
            
            
            96,519
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            104,241Repurchase
                of common stock
            
            
            (108,557
            )
            
            
            (108,557
            )
            
            
            (1,984,193
            )
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            (2,092,750
            )Balances
                September 30, 2007
            
            
            3,106,134
            
            
            $
            3,106,134
            
            
            $
            679,457
            
            
            
            
            
            
            $
            58,570,157
            
            
            $
            (322,784
            )
            
            $
            62,032,964














See
      Notes to Consolidated Financial Statements





-47-


Peoples
      Bancorp


Consolidated
      Statements of Cash Flows


Years
      Ended September 30, 2007, 2006 and 2005






2007
            
            
            2006
            
            
            2005Operating
                ActivitiesNet
                income
            
            $
            2,801,416
            
            
            $
            3,252,406
            
            
            $
            4,129,607Items
                not requiring (providing) cashProvision
                for loan losses
            
            
            76,972
            
            
            
            56,065
            
            
            
            67,144Depreciation
                and amortization
            
            
            637,111
            
            
            
            740,230
            
            
            
            793,230Investment
                securities amortization, net
            
            
            (33,393
            )
            
            
            122,181
            
            
            
            622,427Loans
                originated for sale
            
            
            (8,320,051
            )
            
            
            (3,249,505
            )
            
            
            (5,930,155
            )Proceeds
                from sale of loans held for sale
            
            
            8,451,506
            
            
            
            3,713,031
            
            
            
            5,603,824Loss
                from sale of property, plant and equipment
            
            
            4,708
            
            
            
            —
            
            
            
            —Gain
                on sale of loans
            
            
            (161,554
            )
            
            
            (103,216
            )
            
            
            (136,768
            )Amortization
                of deferred loan fees
            
            
            (353,785
            )
            
            
            (387,793
            )
            
            
            (487,399
            )Net
                realized (gains) losses on available-for-sale securities
            
            
            (5,104
            )
            
            
            117,496
            
            
            
            (10,469
            )Deferred
                income tax
            
            
            (199,101
            )
            
            
            142,219
            
            
            
            194,678Change
                inInterest
                receivable
            
            
            (30,684
            )
            
            
            (454,294
            )
            
            
            (78,923
            )Interest
                payable
            
            
            715,042
            
            
            
            377,057
            
            
            
            58,269Other
                adjustments
            
            
            431,674
            
            
            
            (29,451
            )
            
            
            6,573Net
                cash provided by operating activities
            
            
            4,014,757
            
            
            
            4,296,426
            
            
            
            4,832,038Investing
                ActivitiesNet
                change in interest-bearing deposits
            
            
            2,479,975
            
            
            
            (1,580,852
            )
            
            
            (395,985
            )Purchases
                of securities available for sale
            
            
            (14,020,286
            )
            
            
            (5,618,752
            )
            
            
            (21,120,709
            )Proceeds
                from maturities and paydowns of securities held to
                maturity
            
            
            154,789
            
            
            
            192,855
            
            
            
            381,018Proceeds
                from maturities and paydowns of securities available for
                sale
            
            
            17,824,291
            
            
            
            5,403,895
            
            
            
            14,248,897Proceeds
                from sale of securities available for sale
            
            
            4,501,896
            
            
            
            3,624,656
            
            
            
            3,255,101Proceeds
                from the sale of FHLB stock
            
            
            163,700
            
            
            
            320,600Net
                change in loans
            
            
            22,143,467
            
            
            
            (17,109,248
            )
            
            
            4,635,983Purchases
                of premises and equipment
            
            
            (493,238
            )
            
            
            (82,045
            )
            
            
            (806,809
            )Proceeds
                from sale of foreclosed real estate
            
            
            934,373
            
            
            
            1,770,967
            
            
            
            806,320Net
                cash provided by (used in) investing activities
            
            
            33,688,967
            
            
            
            (13,077,924
            )
            
            
            1,003,816Financing
                ActivitiesNet
                change inNOW
                and savings deposits
            
            
            (11,287,168
            )
            
            
            (10,781,808
            )
            
            
            (9,248,957
            )Certificates
                of deposit
            
            
            (15,270,379
            )
            
            
            26,387,181
            
            
            
            (1,332,541
            )Short-term
                borrowings
            
            
            482,720
            
            
            
            (363,434
            )
            
            
            (2,440,235
            )Proceeds
                from Federal Home Loan Bank advances
            
            
            78,785,000
            
            
            
            46,880,000
            
            
            
            22,150,000Repayment
                of Federal Home Loan Bank advances
            
            
            (84,460,000
            )
            
            
            (46,975,000
            )
            
            
            (13,000,000
            )Cash
                dividends
            
            
            (2,410,710
            )
            
            
            (2,486,835
            )
            
            
            (2,414,514
            )Excess
                tax benefit on stock options exercised
            
            
            —
            
            
            
            90,851
            
            
            
            —Stock
                options exercised
            
            
            104,241
            
            
            
            437,485
            
            
            
            34,777Repurchase
                of common stock
            
            
            (2,092,750
            )
            
            
            (3,539,906
            )
            
            
            (619,547
            )Net
                cash provided by (used in) financing activities
            
            
            (36,149,046
            )
            
            
            9,648,534
            
            
            
            (6,871,017
            )Net
                Change in Cash and Cash Equivalents
            
            
            1,554,678
            
            
            
            867,036
            
            
            
            (1,035,163
            )Cash
                and Cash Equivalents, Beginning of Year
            
            
            10,756,693
            
            
            
            9,889,657
            
            
            
            10,924,820Cash
                and Cash Equivalents, End of Year
            
            $
            12,311,371
            
            
            $
            10,756,693
            
            
            $
            9,889,657Additional
                Cash Flows InformationInterest
                paid
            
            $
            13,844,257
            
            
            $
            12,550,526
            
            
            $
            10,404,802Income
                tax paid
            
            
            991,230
            
            
            
            1,575,426
            
            
            
            2,062,383





See
      Notes to Consolidated Financial Statements


-48-


Peoples
      Bancorp


Notes
      to Consolidated Financial Statements


September
      30, 2007, 2006 and 2005









Note
                1:
            Nature
                of Operations and Summary of Significant Accounting Policies




The
      accounting and reporting policies of Peoples Bancorp (Company), its wholly-owned
      subsidiaries, Peoples Federal Savings Bank of DeKalb County (Peoples), First
      Savings Bank (First Savings) (collectively, the Banks), Peoples’ wholly owned
      subsidiaries, Peoples Financial Services, Inc. (Peoples Financial), PFDC
      Investments, Inc. and First Savings’ wholly owned subsidiary, Alpha Financial,
      Inc. (Alpha) conform to accounting principles generally accepted in the United
      States of America and reporting practices followed by the thrift industry.
      The
      more significant of the policies are described below.




The
      preparation of financial statements in conformity with accounting principles
      generally accepted in the United States of America requires management to make
      estimates and assumptions that affect the reported amounts of assets and
      liabilities and disclosure of contingent assets and liabilities at the date
      of
      the financial statements and the reported amounts of revenues and expenses
      during the reporting period. Actual results could differ from those
      estimates.




The
      Company is a thrift holding company whose principal activity is the ownership
      and management of the Banks. The Banks operate under federal thrift charters
      and
      provide full banking services, including trust services. As federally-chartered
      thrifts, the Banks are subject to the regulation of the Office of Thrift
      Supervision (OTS) and the Federal Deposit Insurance Corporation.




The
      Company generates commercial, mortgage and consumer loans and receives deposits
      from customers located primarily in north central and north eastern Indiana
      and
      south central Michigan. The Company’s loans are generally secured by specific
      items of collateral including real property and consumer assets.




Consolidation
      - The
      consolidated financial statements include the accounts of the Company, the
      Banks, Alpha, PFDC Investments, Inc. and Peoples Financial after elimination
      of
      all material intercompany transactions.




Cash
      Equivalents - Cash and
      cash equivalents include amounts due from banks and overnight investments with
      the Federal Home Loan Bank (FHLB). Net cash flows are reported for customer
      loan
      and deposit transactions, interest-bearing deposits in other financial
      institutions, and repurchase agreements.




Investment
      Securities - Debt
      securities are classified as held to maturity when the Company has the positive
      intent and ability to hold the securities to maturity. Securities held to
      maturity are carried at amortized cost. Debt securities not classified as held
      to maturity are classified as available for sale. Securities available for
      sale
      are carried at fair value with unrealized gains and losses reported separately,
      net of tax, in accumulated other comprehensive income. The Company holds no
      securities for trading.




Amortization
      of premiums and accretion of discounts are recorded as interest income from
      securities. Realized gains and losses are recorded as net security gains
      (losses). Gains and losses on sales of securities are determined on the
      specific-identification method.




-49-


Peoples
      Bancorp


Notes
      to Consolidated Financial Statements


September
      30, 2007, 2006 and 2005






Mortgage
      loans held for sale
      are carried at the lower of cost or fair value, determined using an aggregate
      basis. Write-downs to fair value are recognized as a charge to earnings at
      the
      time the decline in value occurs. Forward commitments to sell mortgage loans
      are
      acquired to reduce market risk on mortgage loans in the process of origination
      and mortgage loans held for sale. Gains and losses resulting from sales of
      mortgage loans are recognized when the respective loans are sold to investors.
      Gains and losses are determined by the difference between the selling price
      and
      the carrying amount of the loans sold, net of discounts collected or paid and
      considering a normal servicing rate.




Loans
      that management has the
      intent and ability to hold for the foreseeable future or until maturity or
      payoff are reported at the principal amount outstanding, net of deferred loan
      fees and costs and the allowance for loan losses. Interest income is accrued
      on
      the principal balances of loans. Generally, loans are placed on non-accrual
      status at ninety days past due. The accrual of interest on impaired loans is
      discontinued when, in management’s opinion, the borrower may be unable to meet
      payments as they become due. When interest accrual is discontinued, all unpaid
      accrued interest is reversed when considered uncollectible. Interest income
      is
      subsequently recognized only to the extent cash payments are received. Certain
      loan fees and direct costs are being deferred and amortized as an adjustment
      of
      yield on the loans.




Allowance
      for loan losses is
      maintained at a level believed by management to absorb probable incurred losses
      in the loan portfolio and is based on the size and current risk characteristics
      of the loan portfolio, an assessment of individual problem loans, actual loss
      experience, current economic events in specific industries and geographical
      areas, and other pertinent factors including general economic conditions.
      Determination of the allowance is inherently subjective as it requires
      significant estimates, including the amounts and timing of future cash flows
      on
      impaired loans, estimated losses on pools of homogeneous loans based on
      historical loss experience and consideration of economic trends, all of which
      may be susceptible to significant change. Allocations of the allowance may
      be
      made for specific loans, however, the entire allowance is available for any
      loan
      that, in management’s judgment, should be charged off. A loan is impaired when
      full payment under the loan terms is not expected.




Loan
      losses are charged off against the allowance when, in management’s estimation,
      it is unlikely that the loan will be collected, while recoveries of amounts
      previously charged off are credited to the allowance. A provision for loan
      losses is charged to operations based on management’s periodic evaluation of the
      factors previously mentioned, as well as other pertinent factors in order to
      maintain the allowance for loan losses at the level deemed adequate by
      management. The determination of whether a loan is considered past due or
      delinquent is based on the contractual payment terms. Management believes that,
      as of September 30, 2007, the allowance for loan losses is adequate based
      on information currently available. A worsening or protracted economic decline
      in the area within which the Company operates would increase the likelihood
      of
      additional losses due to credit and market risks and could create the need
      for
      additional loss provisions.




-50-


Peoples
      Bancorp


Notes
      to Consolidated Financial Statements


September
      30, 2007, 2006 and 2005







Premises
      and equipment are
      stated at cost less accumulated depreciation. Buildings and related components
      are depreciated using either a straight-line or accelerated method with useful
      lives ranging from 5 to 39 years. Furniture, fixtures and equipment are
      depreciated using a straight-line or accelerated method with useful lives
      ranging from 3 to 10 years. Land is carried at cost. Maintenance and repairs
      are
      expensed as incurred while major additions and improvements are capitalized.
      Gains and losses on dispositions are included in current
      operations.




Federal
      Home Loan Bank stock
      is a required investment for institutions that are members of the Federal Home
      Loan Bank system. The required investment in the common stock is based on a
      predetermined formula.




Foreclosed
      assets are carried
      at the lower of cost or fair value less estimated selling costs. When foreclosed
      assets are acquired, any required adjustment is charged to the allowance for
      loan losses. All subsequent activity is included in current
      operations.




Goodwillis
      annually tested
      for impairment. If the implied fair value of goodwill is lower than its carrying
      amount, a goodwill impairment is indicated and goodwill is written down to
      its
      implied fair value. Subsequent increases in goodwill value are not recognized
      in
      the financial statements.




Core
      deposit intangible is
      being amortized over eight years using an accelerated method switching to
      straight-line amortization when it exceeds the accelerated method, and is
      periodically evaluated as to the recoverability of its carrying
      value.




Investments
      in limited
      partnerships are included in other assets. The Company utilizes the
      equity method of accounting for these investments. At September 30, 2007
      and 2006, these investments totaled $221,000 and $265,000,
      respectively.




Pension
      plan costs are based
      on actuarial computations and charged to current operations. The funding policy
      is to pay at least the minimum amounts required by ERISA. The Company froze
      the
      Company’s defined benefit plan effective August 1, 2007.









-51-


Peoples
      Bancorp


Notes
      to Consolidated Financial Statements


September
      30, 2007, 2006 and 2005







Stock
      Options - At September
      30, 2007, the Company has a stock-based employee compensation plan, which is
      described more fully in Note 17. The Company adopted SFAS 123R, Share-Based Payment, (SFAS
      123R) in 2006. All stock options were previously vested and no stock options
      or
      restricted shares were granted in 2006; therefore, there was no impact from
      adopting SFAS 123R. Prior to adopting SFAS 123R, the Company accounted for
      stock
      option grants in accordance with APB Opinion No. 25, Accounting for Stock Issued
      to
      Employees, and related interpretations, and, accordingly, recognized no
      compensation expense for the stock option grants as all options granted under
      the plan had an exercise price equal to or greater than the market value of
      the
      underlying common stock at the date of grant. The following table illustrates
      the effect on net income and earnings per share if the Company had applied
      the
      fair value provisions of FASB Statement No. 123, Accounting for Stock-Based
      Compensation, to stock-based employee compensation.




2005Net
                income, as reported
            
            $
            4,129,607Less:  Total
                stock-based employee compensation cost determined under the fair
                value
                based method, net of income taxes
            
            
            —Pro
                forma net income
            
            $
            4,129,607Earnings
                per shareBasic
                - as reported
            
            $
            1.23Basic
                - pro forma
            
            
            1.23Diluted
                - as reported
            
            
            1.22Diluted
                - pro forma
            
            
            1.22







Income
      tax in the consolidated
      statements of income includes deferred income tax provisions or benefits for
      all
      significant temporary differences in recognizing income and expenses for
      financial reporting and income tax purposes. The Company files consolidated
      income tax returns with its subsidiaries.




Earnings
      per share have been
      computed based upon the weighted-average common shares outstanding during each
      year.









Note
                2:
            Recent
                Accounting Pronouncements




In
      September 2006, the Financial Accounting Standards Board (FASB) issued Statement
      No. 157, Fair Value
      Measurements. This Statement defines fair value, establishes a framework
      for measuring fair value and expands disclosures about fair value measurements.
      This Statement establishes a fair value hierarchy about the assumptions used
      to
      measure fair value and clarifies assumptions about risk and the effect of a
      restriction on the sale or use of an asset. The standard is effective for fiscal
      years beginning after November 15, 2007. The Company does not expect that the
      adoption of SFAS No. 157 will have a material impact on financial condition
      or
      results of operations.




-52-


Peoples
      Bancorp


Notes
      to Consolidated Financial Statements


September
      30, 2007, 2006 and 2005







In
      September 2006, the FASB Emerging Issues Task Force (EITF) finalized Issue
      No.
      06-5, Accounting for Purchases
      of Life Insurance - Determining the Amount That Could Be Realized in Accordance
      with FASB Technical Bulletin No. 85-4 (Accounting for Purchases of Life
      Insurance). This issue requires that a policyholder consider contractual
      terms of a life insurance policy in determining the amount that could be
      realized under the insurance contract. It also requires that if the contract
      provides for a greater surrender value if all individual policies in a group
      are
      surrendered at the same time, that the surrender value be determined based
      on
      the assumption that policies will be surrendered on an individual basis. Lastly,
      the issue discusses whether the cash surrender value should be discounted when
      the policyholder is contractually limited in its ability to surrender a policy.
      This issue is effective for fiscal years beginning after December 15, 2006.
      The
      Company does not expect that the adoption of EITF No. 06-5 will have a material
      impact on financial condition or results of operations.




On
      February 15, 2007, the FASB issued its Statement No. 159, The Fair Value Option for
      Financial
      Assets and Financial Liabilities-Including an Amendment of FASB Statement No.
      115. FAS 159 permits entities to elect to report most financial assets
      and liabilities at their fair value with changes in fair value included in
      net
      income. The fair value option may be applied on an instrument-by-instrument
      or
      instrument class-by-class basis. The option is not available for deposits
      withdrawable on demand, pension plan assets and obligations, leases, instruments
      classified as stockholders’ equity, investments in consolidated subsidiaries and
      variable interest entities and certain insurance policies. The new standard
      is
      effective at the beginning of the Company’s fiscal year beginning October 1,
      2008, and early application may be elected in certain circumstances. The Company
      expects to first apply the new standard at the beginning of its 2009 fiscal
      year. The Company is currently evaluating and has not yet determined the impact
      the new standard is expected to have on its financial position and results
      of
      operations.




In
      June
      2006, FASB issued Interpretation No. 48, Accounting for Uncertainty
      in Income
      Taxes, an interpretation of SFAS No. 109, Accounting for Income Taxes
      (Interpretation No. 48). Interpretation No. 48 clarifies the accounting
      for uncertainty in income taxes in financial statements and prescribes a
      recognition threshold and measurement attribute for financial statement
      recognition and measurement of a tax position taken or expected to be taken.
      It
      also provides guidance on derecognizing, classification, interest and penalties,
      accounting in interim periods, disclosure and transition. Interpretation No.
      48
      will be effective for the Company beginning October 1, 2007. We have evaluated
      the requirements of Interpretation No. 48 and determined that it will not have
      a
      material effect on our financial condition or results of
      operations.




Note
                3:
            Concentration
                of Funds and Restriction on Cash and Cash Equivalents




As
      of
      September 30, 2007 and 2006, respectively, there were no balances with other
      financial institutions in excess of the balance insured by the Federal Deposit
      Insurance Corporation. Additionally, the Company had $5,699,000 and $3,507,000
      on deposit with the Federal Home Loan Bank of Indianapolis, and $126,000 and
      $107,000 on deposit with the Federal Reserve Bank of Chicago as of September
      30,
      2007 and 2006, respectively.




The
      Banks
      are required to maintain reserve funds in cash and/or on deposit with the
      Federal Reserve Bank. The reserve funds required at September 30, 2007
      totaled $1,621,000.




-53-


Peoples
      Bancorp


Notes
      to Consolidated Financial Statements


September
      30, 2007, 2006 and 2005









Note
                4:
            Investment
                Securities




2007Amortized
              Cost
            
            
            Gross
              Unrealized
              Gains
            
            
            Gross
              Unrealized
              Losses
            
            
            Fair
              ValueAvailable
                for saleFederal
                agencies
            
            $
            72,103,912
            
            
            $
            175,834
            
            
            $
            454,100
            
            
            $
            71,825,646State
                and municipal obligations
            
            
            10,560,571
            
            
            
            14,710
            
            
            
            156,570
            
            
            
            10,418,711Mortgage-backed
                securities
            
            
            4,437,411
            
            
            
            14,879
            
            
            
            96,827
            
            
            
            4,355,463Total
                available for sale
            
            
            87,101,894
            
            
            
            205,423
            
            
            
            707,497
            
            
            
            86,599,820Held
                to maturityMortgage-backed
                securities
            
            
            423,173
            
            
            
            9,906
            
            
            
            8,334
            
            
            
            424,745Total
                investment securities
            
            $
            87,525,067
            
            
            $
            215,329
            
            
            $
            715,831
            
            
            $
            87,024,565





2006Amortized
              Cost
            
            
            Gross
              Unrealized
              Gains
            
            
            Gross
              Unrealized
              Losses
            
            
            Fair
              ValueAvailable
                for saleFederal
                agencies
            
            $
            77,027,143
            
            
            $
            18,882
            
            
            $
            1,507,765
            
            
            $
            75,538,260State
                and municipal obligations
            
            
            12,605,770
            
            
            
            21,309
            
            
            
            141,927
            
            
            
            12,485,152Mortgage-backed
                securities
            
            
            5,752,602
            
            
            
            18,579
            
            
            
            153,653
            
            
            
            5,617,528Total
                available for sale
            
            
            95,385,515
            
            
            
            58,770
            
            
            
            1,803,345
            
            
            
            93,640,940Held
                to maturityMortgage-backed
                securities
            
            
            567,690
            
            
            
            14,435
            
            
            
            11,168
            
            
            
            570,957Total
                investment securities
            
            $
            95,953,205
            
            
            $
            73,205
            
            
            $
            1,814,513
            
            
            $
            94,211,897







The
      amortized cost and fair value of securities held to maturity and available
      for
      sale at September 30, 2007, by contractual maturity, are shown below.
      Expected maturities will differ from contractual maturities because issuers
      may
      have the right to call or prepay obligations with or without call or prepayment
      penalties.




2007Available
                for Sale
            
            
            Held
                to MaturityMaturity
                Distributions at September 30
            
            Amortized
              Cost
            
            
            Fair
              Value
            
            
            Amortized
              Cost
            
            
            Fair
              ValueWithin
                one year
            
            $
            17,111,044
            
            
            $
            17,026,601
            
            
            $
            —
            
            
            $
            —One
                to five years
            
            
            46,531,399
            
            
            
            46,297,724
            
            
            
            —
            
            
            
            —Five
                to ten years
            
            
            17,744,087
            
            
            
            17,675,372
            
            
            
            —
            
            
            
            —After
                ten years
            
            
            1,277,953
            
            
            
            1,244,660
            
            
            
            —
            
            
            
            —82,664,483
            
            
            
            82,244,357
            
            
            
            —
            
            
            
            —Mortgage-backed
                securities
            
            
            4,437,411
            
            
            
            4,355,463
            
            
            
            423,173
            
            
            
            424,745$
            87,101,894
            
            
            $
            86,599,820
            
            
            $
            423,173
            
            
            $
            424,745


-54-


Peoples
      Bancorp


Notes
      to Consolidated Financial Statements


September
      30, 2007, 2006 and 2005







Securities
      with a carrying value of $1,050,000 and $2,071,000 were pledged at
      September 30, 2007 and 2006 to secure repurchase agreements and certain
      deposits. Securities with a carrying value of $4,350,000 and $4,034,000 were
      pledged at September 30, 2007 and 2006 to secure certain
      deposits.




Proceeds
      from sales of securities available for sale during 2007, 2006 and 2005 were
      $4,502,000, $3,625,000 and $3,255,000, respectively. Gross gains of $20,000,
      $0
      and $14,000 were realized on those sales during 2007, 2006 and 2005,
      respectively. Gross losses of $15,000, $117,000 and $4,000 were realized on
      those sales during 2007, 2006 and 2005, respectively.




The
      income tax expense (benefit) on the security gains/losses for the years ended
      September 30, 2007, 2006 and 2005 were $2,000, $(40,000) and $4,000,
      respectively.




Certain
      investments in debt securities are reported in the financial statements at
      an
      amount less than their historical cost. Total fair value of these investments
      at
      September 30, 2007 and 2006, was $63,076,000 and $86,744,000, which is
      approximately 72% and 92% of the Company’s available-for-sale and
      held-to-maturity investment portfolio. These declines primarily resulted from
      increases in market interest rates after the purchase.




Based
      on
      evaluation of available evidence, including recent changes in market interest
      rates, credit rating information and information obtained from regulatory
      filings, management believes the declines in fair value for these securities
      are
      temporary.




Should
      the impairment of any of these securities become other than temporary, the
      cost
      basis of the investment will be reduced and the resulting loss recognized in
      net
      income in the period the other –than-temporary impairment is
      identified.




The
      following table shows our investments’ gross unrealized losses and fair value,
      aggregated by investment category and length of time that individual securities
      have been in a continuous unrealized loss position at September 30,
      2007:




Less
                than 12 Months
            
            
            12
                Months or More
            
            
            TotalDescription
                of
              Securities
            
            Fair
              Value
            
            
            Unrealized
              Losses
            
            
            Fair
              Value
            
            
            Unrealized
              Losses
            
            
            Fair
              Value
            
            
            Unrealized
              LossesFederal
                agencies
            
            $
            —
            
            
            $
            —
            
            
            $
            50,204,415
            
            
            $
            454,100
            
            
            $
            50,204,415
            
            
            $
            454,100State
                and municipal obligations
            
            
            1,987,331
            
            
            
            40,618
            
            
            
            7,159,366
            
            
            
            115,952
            
            
            
            9,146,697
            
            
            
            156,570Mortgage-backed
                securities
            
            
            8,680
            
            
            
            20
            
            
            
            3,716,549
            
            
            
            105,141
            
            
            
            3,725,229
            
            
            
            105,161Total
                temporarily impaired securities
            
            $
            1,996,011
            
            
            $
            40,638
            
            
            $
            61,080,330
            
            
            $
            675,193
            
            
            $
            63,076,341
            
            
            $
            715,831







-55-


Peoples
      Bancorp


Notes
      to Consolidated Financial Statements


September
      30, 2007, 2006 and 2005







The
      following table shows our investments’ gross unrealized losses and fair value,
      aggregated by investment category and length of time that individual securities
      have been in a continuous unrealized loss position at September 30,
      2006:




Less
                than 12 Months
            
            
            12
                Months or More
            
            
            TotalDescription
                of
              Securities
            
            Fair
              Value
            
            
            Unrealized
              Losses
            
            
            Fair
              Value
            
            
            Unrealized
              Losses
            
            
            Fair
              Value
            
            
            Unrealized
              LossesFederal
                agencies
            
            $
            482,656
            
            
            $
            2,904
            
            
            $
            72,607,703
            
            
            $
            1,504,861
            
            
            $
            73,090,359
            
            
            $
            1,507,765State
                and municipal obligations
            
            
            1,638,760
            
            
            
            4,270
            
            
            
            6,998,013
            
            
            
            137,657
            
            
            
            8,636,773
            
            
            
            141,927Mortgage-backed
                securities
            
            
            270,964
            
            
            
            7,709
            
            
            
            4,745,713
            
            
            
            157,112
            
            
            
            5,016,677
            
            
            
            164,821Total
                temporarily impaired securities
            
            $
            2,392,380
            
            
            $
            14,883
            
            
            $
            84,351,429
            
            
            $
            1,799,630
            
            
            $
            86,743,809
            
            
            $
            1,814,513







Note
                5:
            Loans
                and Allowance




2007
            
            
            2006Commercial
                and commercial mortgage loans
            
            $
            31,444,707
            
            
            $
            35,789,425Real
                estate loans
            
            
            307,292,018
            
            
            
            323,271,296Construction
                loans
            
            
            3,295,699
            
            
            
            6,576,950Individuals’
                loans for household and other personal expenditures
            
            
            10,491,307
            
            
            
            11,429,850352,523,731
            
            
            
            377,067,521Less:Undisbursed
                portion of loans
            
            
            1,574,144
            
            
            
            2,733,596Deferred
                loan fees and discounts
            
            
            886,108
            
            
            
            1,070,389Allowance
                for loan losses
            
            
            1,833,682
            
            
            
            1,898,2574,293,934
            
            
            
            5,702,242Total
                loans
            
            $
            348,229,797
            
            
            $
            371,365,279







2007
            
            
            2006
            
            
            2005Allowance
                for loan lossesBalances,
                October 1
            
            $
            1,898,257
            
            
            $
            1,966,623
            
            
            $
            1,958,569Provision
                for losses
            
            
            76,972
            
            
            
            56,065
            
            
            
            67,144Recoveries
                on loans
            
            
            7,513
            
            
            
            9,697
            
            
            
            35,253Loans
                charged off
            
            
            (149,060
            )
            
            
            (134,128
            )
            
            
            (94,343
            )Balances,
                September 30
            
            $
            1,833,682
            
            
            $
            1,898,257
            
            
            $
            1,966,623







-56-


Peoples
      Bancorp


Notes
      to Consolidated Financial Statements


September
      30, 2007, 2006 and 2005









Impaired
      loans were as follows:




2007
            
            
            2006Year-end
                loans with no allocated allowance for loan losses
            
            $
            —
            
            
            $
            —Year-end
                loans with allocated allowance for loan losses
            
            
            500,868
            
            
            
            —$
            500,868
            
            
            $
            —Amount
                of the allowance for loan losses allocated
            
            $
            40,000
            
            
            $
            —







2007
            
            
            2006Average
                balance of impaired loans during the year
            
            $
            262,505
            
            
            $
            —Interest
                income recognized during impairment
            
            
            —
            
            
            
            —Cash-basis
                interest income recognized
            
            
            1,372
            
            
            
            —







The
      Company considers its investment in one-to-four family residential loans and
      consumer loans to be homogeneous and therefore excluded from separate
      identification for evaluation of impairment.




At
      September 30, 2007 and 2006, non-accruing loans were $1,003,000 and $565,000,
      respectively. There are no loans delinquent 90 days or more and still accruing
      as of September 30, 2007 and 2006, respectively.









Note
                6:
            Premises
                and Equipment




2007
            
            
            2006Land
            
            $
            1,344,098
            
            
            $
            1,351,271Buildings
            
            
            9,154,093
            
            
            
            9,077,631Equipment
            
            
            6,286,248
            
            
            
            5,895,046Total
                cost
            
            
            16,784,439
            
            
            
            16,323,948Accumulated
                depreciation
            
            
            (11,229,098
            )
            
            
            (10,620,026
            )Net
            
            $
            5,555,341
            
            
            $
            5,703,922







Depreciation
      and amortization expense for 2007, 2006 and 2005 was $637,000, $740,000 and
      $793,000, respectively.




-57-


Peoples
      Bancorp


Notes
      to Consolidated Financial Statements


September
      30, 2007, 2006 and 2005









Note
                7:
            Deposits




2007
            
            
            2006Noninterest-bearing
                demand deposits
            
            $
            15,654,934
            
            
            $
            14,609,453Interest-bearing
                demand deposits
            
            
            75,501,731
            
            
            
            85,601,091Savings
                deposits
            
            
            44,318,245
            
            
            
            46,551,534Certificates
                and other time deposits of $100,000 or more
            
            
            43,419,375
            
            
            
            45,583,234Other
                certificates and time deposits
            
            
            170,396,897
            
            
            
            183,503,417$
            349,291,182
            
            
            $
            375,848,729







Certificates
      and other time deposits maturing in years ending
      September 30:




2008
            
            $
            170,395,0042009
            
            
            24,952,0282010
            
            
            9,597,8352011
            
            
            3,939,1222012
            
            
            4,932,283$
            213,816,272







Note
                8:
            Short-Term
                Borrowings




2007
            
            
            2006Securities
                sold under agreements to repurchase
            
            $
            1,000,511
            
            
            $
            517,791







At
      September 30, 2007 and 2006, the securities sold under agreements to
      repurchase obligations were secured by investment securities and such collateral
      is held by a safekeeping agent. The maximum amount of outstanding agreements
      at
      any month-end during 2007 and 2006 totaled $1,092,000 and $1,524,000 and the
      average of such agreements for the years ended September 30, 2007 and 2006
      totaled $631,000 and $767,000, respectively.









-58-


Peoples
      Bancorp


Notes
      to Consolidated Financial Statements


September
      30, 2007, 2006 and 2005









Note
                9:
            Federal
                Home Loan Bank Advances




Federal
      Home Loan Bank advances at September 30, 2007 and 2006 totaled $53,480,000
      and $59,155,000 and were at various rates ranging from 3.55% to 7.21% maturing
      at various dates through January 2015. The Federal Home Loan Bank advances
      are
      secured by first mortgage loans totaling $270,595,000. Advances are subject
      to
      restrictions or penalties in the event of prepayment.




Maturities
                in years ending September 30
            
            Amount
            
            
            Weighted-
              Average
                Rate2008
            
            
            16,030,000
            
            
            
            5.14
            %2009
            
            
            9,500,000
            
            
            
            4.98
            %2010
            
            
            11,700,000
            
            
            
            6.10
            %2011
            
            
            5,250,000
            
            
            
            5.00
            %2012
            
            
            8,000,000
            
            
            
            5.01
            %Thereafter
            
            
            3,000,000
            
            
            
            4.73
            %$
            53,480,000







Amounts
      advanced totaling $13,500,000 are subject to an option for the FHLB to convert
      the entire advance to a periodic adjustable rate five years after the date
      of
      the advance. The adjustable rate would be for the remaining term at the
      predetermined rate of three-month LIBOR or three-month LIBOR plus .0002 (.02
      basis points), varying by advance. If the FHLB exercises its option to convert
      the advance to an adjustable rate, the advance will be pre-payable at the Banks’
option, at par without a penalty fee.




At
      September 30, 2007 and 2006, the Banks had a $1,000,000 overdraft line of credit
      agreement with the Federal Home Loan Bank. The Banks had not borrowed against
      this line of credit at September 30, 2007 or 2006. The line of credit expires
      July 11, 2008.









Note
                10:
            Loan
                Servicing




Mortgage
      loans serviced for others are not included in the accompanying consolidated
      balance sheets. The unpaid principal balance of mortgage loans serviced for
      others was $51,067,000 and $48,404,000 at September 30, 2007 and 2006,
      respectively.




-59-


Peoples
      Bancorp


Notes
      to Consolidated Financial Statements


September
      30, 2007, 2006 and 2005









The
      aggregate fair value of capitalized mortgage servicing rights included in other
      assets at September 30, 2007 and 2006 is based on comparable market values
      and a valuation model that calculates the present value of future cash flows.
      For purposes of measuring impairment, risk characteristics, including product
      type, investor type and interest rates, were used to stratify the originated
      mortgage servicing rights.




2007
            
            
            2006Mortgage
                servicing rightsBalance,
                beginning of year
            
            $
            191,751
            
            
            $
            259,643Servicing
                rights capitalized
            
            
            71,999
            
            
            
            47,938Amortization
                of servicing rights
            
            
            (97,263
            )
            
            
            (115,830
            )Balance,
                end of year
            
            $
            166,487
            
            
            $
            191,751







Note
                11:
            Core
                Deposit Intangible




The
      carrying basis and accumulated amortization of recognized core deposit
      intangibles at September 30, 2007 and 2006, were:




2007
            
            
            2006Gross
                carrying amount
            
            $
            1,154,000
            
            
            $
            1,154,000Accumulated
                amortization
            
            
            (1,096,564
            )
            
            
            (958,718
            )$
            57,436
            
            
            $
            195,282







Amortization
      expense for the years ended September 30, 2007, 2006 and 2005 was approximately
      $138,000, $138,000 and $138,000, respectively. Estimated amortization expense
      for the next fiscal year is:




2008
            $         
                57,436







-60-


Peoples
      Bancorp


Notes
      to Consolidated Financial Statements


September
      30, 2007, 2006 and 2005







Note
                12:
            Income
                Tax




2007
            
            
            2006
            
            
            2005Income
                tax expenseCurrently
                payableFederal
            
            $
            1,298,666
            
            
            $
            1,203,310
            
            
            $
            1,630,093State
            
            
            127,895
            
            
            
            191,823
            
            
            
            363,512DeferredFederal
            
            
            (167,006
            )
            
            
            115,447
            
            
            
            180,557State
            
            
            (32,095
            )
            
            
            26,772
            
            
            
            14,121Total
                income tax
                expense
            
            $
            1,227,460
            
            
            $
            1,537,352
            
            
            $
            2,188,283Reconciliation
                of federal statutory to actual tax expenseFederal
                statutory income tax at 34%
            
            $
            1,369,818
            
            
            $
            1,628,521
            
            
            $
            2,148,084Tax
                exempt interest
            
            
            (110,700
            )
            
            
            (96,322
            )
            
            
            (83,136
            )Nondeductible
                expenses
            
            
            1,349
            
            
            
            4,319
            
            
            
            4,121Effect
                of state income taxes
            
            
            63,228
            
            
            
            144,273
            
            
            
            249,238Effect
                of low income housing credits
            
            
            (98,569
            )
            
            
            (133,531
            )
            
            
            (134,621
            )Other
            
            
            2,334
            
            
            
            (9,908
            )
            
            
            4,597Actual
                tax
                expense
            
            $
            1,227,460
            
            
            $
            1,537,352
            
            
            $
            2,188,283




A
      cumulative net deferred tax asset is included in other assets. The components
      of
      the asset are as follows:




2007
            
            
            2006AssetsAllowance
                for loan losses
            
            $
            753,515
            
            
            $
            761,814Loan
                fees
            
            
            226,336
            
            
            
            289,621Net
                unrealized losses on securities available for sale
            
            
            178,346
            
            
            
            612,825Capital
                loss carry-forward
            
            
            225,579
            
            
            
            —Other
            
            
            190,135
            
            
            
            209,809Total
                assets
            
            
            1,573,911
            
            
            
            1,874,069LiabilitiesDepreciation
            
            
            82,166
            
            
            
            94,835State
                income tax
            
            
            39,003
            
            
            
            28,247FHLB
                of Indianapolis stock dividend
            
            
            247,293
            
            
            
            255,222Prepaid
                expenses
            
            
            76,622
            
            
            
            64,461Other
            
            
            297,936
            
            
            
            365,035Total
                liabilities
            
            
            743,020
            
            
            
            807,800$
            830,891
            
            
            $
            1,066,269


-61-


Peoples
      Bancorp


Notes
      to Consolidated Financial Statements


September
      30, 2007, 2006 and 2005









Management
      believes no valuation allowance is necessary at September 30, 2007 and
      2006.




Retained
      earnings at September 30, 2007 include approximately $8,102,000 for which no
      deferred income tax liability has been recognized. This amount represents an
      allocation of income to bad debt deductions as of June 30, 1988 for tax
      purposes only. Reduction of amounts so allocated for purposes other than tax
      bad
      debt losses or adjustments arising from carryback of net operating losses would
      create income for tax purposes only, which income would be subject to the then
      current corporate income tax rate. The unrecorded deferred income tax liability
      on the above amount was approximately $2,755,000 at September 30,
      2007.




At
      September 30, 2007, the Company had a capital loss carry-forward of $564,840.
      The capital loss carry-forward will expire if not used by September 30,
      2011.









Note
                13:
            Other
                Comprehensive Income




2007Before-Tax
              Amount
            
            
            Tax
              Expense
              (Benefit)
            
            
            Net-of-Tax
              AmountUnrealized
                losses on securitiesUnrealized
                holding gains arising during the year
            
            $
            1,242,789
            
            
            $
            (411,005
            )
            
            $
            831,784Less:
                reclassification adjustment for gains realized in net
                income
            
            
            5,104
            
            
            
            (2,296
            )
            
            
            2,808Net
                unrealized gains
            
            $
            1,237,685
            
            
            $
            (408,709
            )
            
            $
            828,976







2006Before-Tax
              Amount
            
            
            Tax
              Expense
              (Benefit)
            
            
            Net-of-Tax
              AmountUnrealized
                losses on securitiesUnrealized
                holding losses arising during the year
            
            $
            (344,998
            )
            
            $
            (117,299
            )
            
            $
            (227,699
            )Less:
                reclassification adjustment for losses realized in net
                income
            
            
            (117,496
            )
            
            
            (39,949
            )
            
            
            (77,547
            )Net
                unrealized losses
            
            $
            (227,502
            )
            
            $
            (77,350
            )
            
            $
            (150,152
            )







-62-


Peoples
      Bancorp


Notes
      to Consolidated Financial Statements


September
      30, 2007, 2006 and 2005









2005Before-Tax
              Amount
            
            
            Tax
              Expense
              (Benefit)
            
            
            Net-of-Tax
              AmountUnrealized
                losses on securitiesUnrealized
                holding losses arising during the year
            
            $
            (1,476,365
            )
            
            $
            (571,912
            )
            
            $
            (904,453
            )Less:
                reclassification adjustment for gains realized in net
                income
            
            
            10,469
            
            
            
            4,147
            
            
            
            6,322Net
                unrealized losses
            
            $
            (1,486,834
            )
            
            $
            (576,059
            )
            
            $
            (910,775
            )







Note
                14:
            Commitments
                and Contingent Liabilities




In
      the
      normal course of business there are outstanding commitments and contingent
      liabilities, such as commitments to extend credit, which are not included in
      the
      accompanying consolidated financial statements. The Company’s exposure to credit
      loss in the event of nonperformance by the other party to the financial
      instruments for commitments to extend credit is represented by the contractual
      or notional amount of those instruments. The Company uses the same credit
      policies in making such commitments as it does for instruments that are included
      in the consolidated balance sheets.




Financial
      instruments whose contract
      amount represents credit risk at September 30, 2007 and 2006 consisted of
      commitments to extend credit totaling $40,816,000 and
      $42,918,000.




Commitments
      to extend credit are agreements to lend to a customer as long as there is no
      violation of any condition established in the contract. Commitments generally
      have fixed expiration dates or other termination clauses and may require payment
      of a fee. Since many of the commitments are expected to expire without being
      drawn upon, the total commitment amounts do not necessarily represent future
      cash requirements. The Company evaluates each customer’s credit worthiness on a
      case-by-case basis. The amount of collateral obtained, if deemed necessary
      by
      the Company upon extension of credit, is based on management’s credit
      evaluation. Collateral held varies, but may include residential real estate,
      income-producing commercial properties, or other assets of the
      borrower.




The
      Company has employment agreements with two officers which include provisions
      for
      payment to them of three and two years’ salary, respectively, in the event of
      their termination in connection with any change in ownership or control of
      the
      Company, other than by agreement. The agreements have terms of three and two
      years, respectively, which may be extended annually for successive periods
      of
      one year.




The
      Company and subsidiaries are also subject to possible claims and lawsuits which
      arise primarily in the ordinary course of business. It is the opinion of
      management that the disposition or ultimate determination of such possible
      claims or lawsuits will not have a material adverse effect on the consolidated
      financial position, results of operations and cash flows of the
      Company.




-63-


Peoples
      Bancorp


Notes
      to Consolidated Financial Statements


September
      30, 2007, 2006 and 2005









Note
                15:
            Dividends
                and Capital Restrictions




Without
      prior approval, current regulations allow Peoples and First Savings to pay
      dividends to the Company not exceeding net profits (as defined) for the current
      calendar year to date plus those for the previous two years. At
      September 30, 2007, such limitations totaled $1,881,000. The Banks normally
      restrict dividends to a lesser amount because of the need to maintain an
      adequate capital structure.









Note
                16:
            Regulatory
                Capital




The
      Banks
      are subject to various regulatory capital requirements administered by the
      federal banking agencies and are assigned to a capital category. The assigned
      capital category is largely determined by ratios that are calculated according
      to the regulations. The ratios are intended to measure capital relative to
      assets and credit risk associated with those assets and off-balance sheet
      exposures of the entity. The capital category assigned to an entity can also
      be
      affected by qualitative judgments made by regulatory agencies about the risk
      inherent in the entity’s activities that are not part of the calculated
      ratios.




There
      are
      five capital categories defined in the regulations, ranging from well
      capitalized to critically undercapitalized. Classification of a bank in any
      of
      the undercapitalized categories can result in actions by regulators that could
      have a material effect on a bank’s operations. At September 30, 2007, the
      Banks were categorized as well capitalized and met all subject capital adequacy
      requirements. There are no conditions or events since September 30, 2007
      that management believes have changed the Banks’ classification.




Peoples’
      actual and required capital amounts and ratios are as follows:




2007Actual
            
            
            Required
                for Adequate Capital 1
            
            
            To
                Be WellCapitalized1Amount
            
            
            Ratio
            
            
            Amount
            
            
            Ratio
            
            
            Amount
            
            
            RatioTotal
                risk-based capital 1
                (to risk-weighted assets)
            
            $
            44,474,000
            
            
            
            24.2
            %
            
            $
            14,672,000
            
            
            
            8.0
            %
            
            $
            18,340,000
            
            
            
            10.0
            %Tier
                1 risk-based capital 1(to risk-weighted assets)
            
            
            43,171,000
            
            
            
            23.5
            %
            
            
            7,336,000
            
            
            
            4.0
            %
            
            
            11,004,000
            
            
            
            6.0
            %Core
                capital 1
                (to adjusted total assets)
            
            
            43,171,000
            
            
            
            11.7
            %
            
            
            14,803,000
            
            
            
            4.0
            %
            
            
            18,504,000
            
            
            
            5.0
            %Core
                capital 1
                (to adjusted tangible assets)
            
            
            43,171,000
            
            
            
            11.7
            %
            
            
            7,401,000
            
            
            
            2.0
            %
            
            NA
            
            
            NATangible
                capital 1
                (to adjusted total assets)
            
            
            43,171,000
            
            
            
            11.7
            %
            
            
            5,551,000
            
            
            
            1.5
            %
            
            NA
            
            
            NA







-64-


Peoples
      Bancorp


Notes
      to Consolidated Financial Statements


September
      30, 2007, 2006 and 2005




2006Actual
            
            
            Required
                for Adequate Capital 1
            
            
            To
                Be WellCapitalized1Amount
            
            
            Ratio
            
            
            Amount
            
            
            Ratio
            
            
            Amount
            
            
            RatioTotal
                risk-based capital 1
                (to risk-weighted assets)
            
            $
            44,267,000
            
            
            
            21.8
            %
            
            $
            16,246,000
            
            
            
            8.0
            %
            
            $
            20,308,000
            
            
            
            10.0
            %Tier
                1 risk-based capital 1(to risk-weighted assets)
            
            
            42,890,000
            
            
            
            21.1
            %
            
            
            8,123,000
            
            
            
            4.0
            %
            
            
            12,185,000
            
            
            
            6.0
            %Core
                capital 1
                (to adjusted total assets)
            
            
            42,890,000
            
            
            
            10.9
            %
            
            
            15,756,000
            
            
            
            4.0
            %
            
            
            19,695,000
            
            
            
            5.0
            %Core
                capital 1
                (to adjusted tangible assets)
            
            
            42,890,000
            
            
            
            10.9
            %
            
            
            7,878,000
            
            
            
            2.0
            %
            
            NA
            
            
            NATangible
                capital 1
                (to adjusted total assets)
            
            
            42,890000
            
            
            
            10.9
            %
            
            
            5,908,000
            
            
            
            1.5
            %
            
            NA
            
            
            NA







First
      Savings’ actual and required capital amounts and ratios are as
      follows:




2007Actual
            
            
            Required
                for Adequate Capital 1
            
            
            To
                Be WellCapitalized1Amount
            
            
            Ratio
            
            
            Amount
            
            
            Ratio
            
            
            Amount
            
            
            RatioTotal
                risk-based capital 1
                (to risk-weighted assets)
            
            $
            14,806,000
            
            
            
            29.3
            %
            
            $
            4,037,000
            
            
            
            8.0
            %
            
            $
            5,047,000
            
            
            
            10.0
            %Tier
                1 risk-based capital 1(to risk-weighted assets)
            
            
            14,291,000
            
            
            
            28.3
            %
            
            
            2,019,000
            
            
            
            4.0
            %
            
            
            3,028,000
            
            
            
            6.0
            %Core
                capital 1
                (to adjusted total assets)
            
            
            14,291,000
            
            
            
            14.7
            %
            
            
            3,879,000
            
            
            
            4.0
            %
            
            
            4,848,000
            
            
            
            5.0
            %Core
                capital 1
                (to adjusted tangible assets)
            
            
            14,291,000
            
            
            
            14.7
            %
            
            
            1,939,000
            
            
            
            2.0
            %
            
            NA
            
            
            NATangible
                capital 1
                (to adjusted total assets)
            
            
            14,291,000
            
            
            
            14.7
            %
            
            
            1,454,000
            
            
            
            1.5
            %
            
            NA
            
            
            NA




2006Actual
            
            
            Required
                for Adequate Capital 1
            
            
            To
                Be WellCapitalized1Amount
            
            
            Ratio
            
            
            Amount
            
            
            Ratio
            
            
            Amount
            
            
            RatioTotal
                risk-based capital 1
                (to risk-weighted assets)
            
            $
            14,275,000
            
            
            
            24.1
            %
            
            $
            4,738,000
            
            
            
            8.0
            %
            
            $
            5,922,000
            
            
            
            10.0
            %Tier
                1 risk-based capital 1(to risk-weighted assets)
            
            
            13,770,000
            
            
            
            23.3
            %
            
            
            2,369,000
            
            
            
            4.0
            %
            
            
            3,553,000
            
            
            
            6.0
            %Core
                capital 1
                (to adjusted total assets)
            
            
            13,770,000
            
            
            
            13.0
            %
            
            
            4,238,000
            
            
            
            4.0
            %
            
            
            5,298,000
            
            
            
            5.0
            %Core
                capital 1
                (to adjusted tangible assets)
            
            
            13,770,000
            
            
            
            13.0
            %
            
            
            2,119,000
            
            
            
            2.0
            %
            
            NA
            
            
            NATangible
                capital 1
                (to adjusted total assets)
            
            
            13,770,000
            
            
            
            13.0
            %
            
            
            1,589,000
            
            
            
            1.5
            %
            
            NA
            
            
            NA




1As
                defined by Regulatory Agencies




-65-


Peoples
      Bancorp


Notes
      to Consolidated Financial Statements


September
      30, 2007, 2006 and 2005









Note
                17:
            Employee
                Benefit Plans




The
      Banks
      are participants in a pension fund known as the Financial Institutions
      Retirement Fund (FIRF). This plan is a multi-employer plan; separate actuarial
      valuations are not made with respect to each participating employer. This plan
      provides pension benefits for substantially all of the Company’s employees.
      Pension expense was approximately $1,181,000, $1,298,000 and $1,081,000 for
      2007, 2006 and 2005. The benefits of this plan were frozen on August 1,
      2007.




A
      profit-sharing plan is maintained for the benefit of substantially all of the
      Company’s employees and allows for both employee and Company contributions. The
      Company contribution consists of a matching contribution of 50 percent of
      employee contributions, up to 6 percent of eligible employee compensation.
      The
      Company may also contribute an additional discretionary amount to each employee,
      regardless of participation in the matching program. The Company’s contribution
      to the plan, for the matching program was approximately $109,000, $109,000
      and
      $108,000 for 2007, 2006 and 2005. The Company’s contribution for the
      discretionary program was $28,000 for 2007.







Note
                18:
            Stock
                Option Plan




Under
      the
      Company’s incentive stock option plan approved in 1998, which is accounted for
      in accordance with SFAS No. 123R, the Company grants selected executives and
      other key employees stock option awards which vest and become fully exercisable
      at the end of five years of continued employment. During 1999, the Company
      authorized the grant of options for up to 200,000 shares of the Company’s common
      stock. The exercise price of each option, which has a ten-year life, was equal
      to or greater than the market price of the Company’s stock on the date of grant;
      therefore, no compensation expense was recognized. The Company has not granted
      any options during the three year period ended September 30, 2007. The pro
      forma
      effect on net income is disclosed in Note 1.




The
      following is a summary of the status of the Company’s stock option plan and
      changes in that plan as of and for the years ended September 30, 2007, 2006
      and 2005.




2007Options
            
            Shares
            
            
            Weighted-
              Average
              Exercise
              Price
            
            
            Weighted-
              Average
              Remaining
              Contractual
                Term
            
            
            Aggregate
              Intrinsic
              ValueOutstanding,
                beginning of year
            
            
            38,741
            
            
            $
            18.16Exercised
            
            
            (7,722
            )
            
            
            13.50Forfeited
                or expired
            
            
            (9,376
            )
            
            
            19.36Outstanding,
                end of year
            
            
            21,643
            
            
            $
            19.30
            
            
            
            1.0
            
            
            $
            19,976Exercisable,
                end of year
            
            
            21,643
            
            
            $
            19.30
            
            
            
            1.0
            
            
            $
            19,976


-66-


Peoples
      Bancorp


Notes
      to Consolidated Financial Statements


September
      30, 2007, 2006 and 2005









2006Options
            
            Shares
            
            
            Weighted-Average
              Exercise
              Price
            
            
            Weighted-
              Average
              Remaining
              Contractual
                Term
            
            
            Aggregate
              Intrinsic
              ValueOutstanding,
                beginning of year
            
            
            84,924
            
            
            $
            14.48Exercised
            
            
            (37,961
            )
            
            
            11.52Forfeited
                or expired
            
            
            (8,222
            )
            
            
            11.16Outstanding,
                end of year
            
            
            38,741
            
            
            $
            18.16
            
            
            
            2.0
            
            
            $
            106,671Exercisable,
                end of year
            
            
            38,741
            
            
            $
            18.16
            
            
            
            2.0
            
            
            $
            106,671







The
      total
      intrinsic value of options exercised during the years ended September 30, 2007
      and 2006, was $44,000 and $341,000, respectively.




As
      of
      September 30, 2007 and 2006, there was no unrecognized compensation cost related
      to nonvested share-based compensation arrangements granted under the
      Plan.









Note
                19:
            Earnings
                Per Share




For
      the
      year ended September 30, 2007, options to purchase 16,000 shares of common
      stock
      at an exercise price of $21.50 per share were outstanding, but were not included
      in the computation of diluted earnings per share because the options were
      anti-dilutive. Earnings per share (EPS) were computed as follows:




2007Income
            
            
            Weighted-
              Average
              Shares
            
            
            Per-Share
                AmountBasic
                Earnings Per ShareNet
                income available to common stockholders
            
            $
            2,801,416
            
            
            
            3,161,939
            
            
            $
            .89Effect
                of Dilutive SecuritiesStock
                options
            
            
            —
            
            
            
            2,141Diluted
                Earnings Per ShareIncome
                available to common stockholders and assumed conversions
            
            $
            2,801,416
            
            
            
            3,164,080
            
            
            $
            .89







-67-


Peoples
      Bancorp


Notes
      to Consolidated Financial Statements


September
      30, 2007, 2006 and 2005







2006Income
            
            
            Weighted-
              Average
              Shares
            
            
            Per-Share
                AmountBasic
                Earnings Per ShareNet
                income available to common stockholders
            
            $
            3,252,406
            
            
            
            3,293,223
            
            
            $
            .99Effect
                of Dilutive SecuritiesStock
                options
            
            
            —
            
            
            
            11,603Diluted
                Earnings Per ShareIncome
                available to common stockholders and assumed conversions
            
            $
            3,252,406
            
            
            
            3,304,826
            
            
            $
            .98







2005Income
            
            
            Weighted-
              Average
              Shares
            
            
            Per-Share
                AmountBasic
                Earnings Per ShareNet
                income available to common stockholders
            
            $
            4,129,607
            
            
            
            3,357,018
            
            
            $
            1.23Effect
                of Dilutive SecuritiesStock
                options
            
            
            —
            
            
            
            23,340Diluted
                Earnings Per ShareIncome
                available to common stockholders and assumed conversions
            
            $
            4,129,607
            
            
            
            3,380,358
            
            
            $
            1.22







Note
                20:
            Fair
                Values of Financial Instruments




The
      following methods and assumptions were used to estimate the fair value of each
      class of financial instrument:




Cash
      and Cash Equivalents -
      The fair value of cash and cash equivalents approximates carrying
      value.




Interest-Bearing
      Time Deposits
      - The fair values of interest-bearing time deposits are determined on a
      discounted cash flow basis.




Securities
      and Mortgage-Backed
      Securities - Fair values are based on quoted market prices.




Loans
      and Loans Held for Sale
      - For both short-term loans and variable-rate loans that reprice frequently
      and
      with no significant change in credit risk, fair values are based on carrying
      values. The fair value for other loans is estimated using discounted cash flow
      analyses using interest rates currently being offered for loans with similar
      terms to borrowers of similar credit quality.




-68-


Peoples
      Bancorp


Notes
      to Consolidated Financial Statements


September
      30, 2007, 2006 and 2005









Interest
      Receivable/Payable -
      The fair values of interest receivable/payable approximate carrying
      values.




FHLB
      Stock - Fair value of
      FHLB stock is based on the price at which it may be resold to the
      FHLB.




Deposits
      - The fair values of
      noninterest-bearing, interest-bearing demand and savings accounts are equal
      to
      the amount payable on demand at the balance sheet date. The carrying amounts
      for
      variable rate, fixed-term certificates of deposit approximate their fair values
      at the balance sheet date. Fair values for fixed-rate certificates of deposit
      are estimated using a discounted cash flow calculation that applies interest
      rates currently being offered on certificates to a schedule of aggregated
      expected monthly maturities on such time deposits.




Short-Term
      Borrowings - The
      fair value of short-term borrowings approximates carrying value.




Federal
      Home Loan Bank
      Advances - The fair value of these borrowings is estimated using a
      discounted cash flow calculation, based on current rates for similar
      advances.




The
      estimated fair values of the Company’s financial instruments are as
      follows:




2007
            
            
            2006Carrying
              Amount
            
            
            Fair
              Value
            
            
            Carrying
              Amount
            
            
            Fair
              ValueAssetsCash
                and cash equivalents
            
            $
            12,311,371
            
            
            $
            12,311,371
            
            
            $
            10,756,693
            
            
            $
            10,756,693Interest-bearing
                time deposits
            
            
            2,567,908
            
            
            
            2,574,000
            
            
            
            5,047,883
            
            
            
            5,047,883Investment
                securities available for sale
            
            
            86,599,820
            
            
            
            86,599,820
            
            
            
            93,640,940
            
            
            
            93,640,940Investment
                securities held to maturity
            
            
            423,173
            
            
            
            424,745
            
            
            
            567,690
            
            
            
            570,957Loans,
                including loans held for sale
            
            
            348,485,297
            
            
            
            346,543,000
            
            
            
            371,662,679
            
            
            
            363,592,486Stock
                in FHLB
            
            
            4,403,900
            
            
            
            4,403,900
            
            
            
            4,567,600
            
            
            
            4,567,600Interest
                receivable
            
            
            2,951,833
            
            
            
            2,951,833
            
            
            
            2,921,149
            
            
            
            2,921,149LiabilitiesDeposits
            
            
            349,291,182
            
            
            
            349,237,000
            
            
            
            375,848,729
            
            
            
            374,839,000Short-term
                borrowings
            
            
            1,000,511
            
            
            
            1,000,511
            
            
            
            517,791
            
            
            
            517,791Federal
                Home Loan Bank advances
            
            
            53,480,000
            
            
            
            54,054,000
            
            
            
            59,155,000
            
            
            
            59,103,000Interest
                payable
            
            
            1,889,998
            
            
            
            1,889,998
            
            
            
            652,042
            
            
            
            652,042







-69-


Peoples
      Bancorp


Notes
      to Consolidated Financial Statements


September
      30, 2007, 2006 and 2005







Note
                21:
            Quarterly
                Results of Operations (Unaudited)




Quarter
              Ending
            
            Interest
              Income
            
            
            Interest
              Expense
            
            
            Net
                Interest
              Income
            
            
            Provision
              For
              Loan
                Losses
            
            
            Net
              Income
            
            
            Average
              Shares
              Outstanding
            
            
            Basic
              Earnings
              Per
              ShareDec
                06
            
            $
            7,367,655
            
            
            $
            3,696,425
            
            
            $
            3,671,230
            
            
            $
            3,695
            
            
            $
            800,436
            
            
            
            3,202,179
            
            
            $
            .25Mar
                07
            
            
            7,192,184
            
            
            
            3,686,547
            
            
            
            3,505,637
            
            
            
            27,620
            
            
            
            513,290
            
            
            
            3,172,048
            
            
            
            .16Jun
                07
            
            
            7,113,100
            
            
            
            3,618,559
            
            
            
            3,494,541
            
            
            
            5,116
            
            
            
            717,464
            
            
            
            3,145,389
            
            
            
            .23Sep
                07
            
            
            6,987,051
            
            
            
            3,557,767
            
            
            
            3,429,284
            
            
            
            40,541
            
            
            
            770,226
            
            
            
            3,128,246
            
            
            
            .25$
            28,659,990
            
            
            $
            14,559,298
            
            
            $
            14,100,692
            
            
            $
            76,972
            
            
            $
            2,801,416Dec
                05
            
            $
            6,923,629
            
            
            $
            2,919,429
            
            
            $
            4,004,200
            
            
            $
            43,803
            
            
            $
            992,210
            
            
            
            3,340,263
            
            
            $
            .30Mar
                06
            
            
            6,947,258
            
            
            
            3,074,043
            
            
            
            3,873,215
            
            
            
            2,950
            
            
            
            711,450
            
            
            
            3,321,754
            
            
            
            .21Jun
                06
            
            
            7,089,881
            
            
            
            3,308,441
            
            
            
            3,781,440
            
            
            
            (1,796
            )
            
            
            854,647
            
            
            
            3,273,643
            
            
            
            .26Sep
                06
            
            
            7,349,664
            
            
            
            3,625,670
            
            
            
            3,723,994
            
            
            
            11,108
            
            
            
            694,099
            
            
            
            3,237,506
            
            
            
            .21$
            28,310,432
            
            
            $
            12,927,583
            
            
            $
            15,382,849
            
            
            $
            56,065
            
            
            $
            3,252,406







Note
                22:
            Condensed
                Financial Information (Parent Company Only)




Presented
      below is condensed financial information as to financial position, results
      of
      operations and cash flows of the Company.




Condensed
                Balance Sheets2007
            
            
            2006AssetsCash
            
            $
            2,986,285
            
            
            $
            4,769,914Investment
                in subsidiaries
            
            
            59,553,403
            
            
            
            58,050,638Securities
                available for sale
            
            
            69,340
            
            
            
            66,640Other
                assets
            
            
            14,801
            
            
            
            504,797Total
                assets
            
            $
            62,623,829
            
            
            $
            63,391,989LiabilitiesDividends
                payable on common stock
            
            $
            590,165
            
            
            $
            616,740Other
            
            
            700
            
            
            
            33Total
                liabilities
            
            
            590,865
            
            
            
            616,773Stockholders’
                EquityCommon
                stock
            
            
            3,106,134
            
            
            
            3,206,969Additional
                paid-in capital
            
            
            679,457
            
            
            
            2,567,131Retained
                earnings
            
            
            58,570,157
            
            
            
            58,152,876Accumulated
                other comprehensive loss
            
            
            (322,784
            )
            
            
            (1,151,760
            )62,032,964
            
            
            
            62,775,216Total
                liabilities and stockholders’ equity
            
            $
            62,623,829
            
            
            $
            63,391,989


-70-


Peoples
      Bancorp


Notes
      to Consolidated Financial Statements


September
      30, 2007, 2006 and 2005









Condensed
                Statements
                of
                Income2007
            
            
            2006
            
            
            2005IncomeDividends
                from subsidiaries
            
            $
            2,225,000
            
            
            $
            3,300,000
            
            
            $
            1,900,000Interest
                on investments
            
            
            6,774
            
            
            
            164,461
            
            
            
            197,249Net
                gains (losses) on available-for-sale securities
            
            
            —
            
            
            
            (127,308
            )
            
            
            11,1142,231,774
            
            
            
            3,337,153
            
            
            
            2,108,363Expenses
            
            
            (163,665
            )
            
            
            (164,450
            )
            
            
            (187,627
            )Income
                before equity in undistributed income of subsidiaries and income
                tax
                expense
            
            
            2,068,109
            
            
            
            3,172,703
            
            
            
            1,920,736Equity
                in undistributed income of subsidiaries
            
            
            673,307
            
            
            
            105,832
            
            
            
            2,212,954Income
                before income tax
            
            
            2,741,416
            
            
            
            3,278,535
            
            
            
            4,133,690Income
                tax expense (benefit)
            
            
            (60,000
            )
            
            
            26,129
            
            
            
            4,083Net
                income
            
            $
            2,801,416
            
            
            $
            3,252,406
            
            
            $
            4,129,607







Condensed
                Statements of Cash Flows2007
            
            
            2006
            
            
            2005Net
                cash provided by operating activities
            
            $
            2,615,590
            
            
            $
            3,188,170
            
            
            $
            1,904,064Cash
                flows from investing activitiesProceeds
                from sales of securities available for sale
            
            
            —
            
            
            
            3,869,189
            
            
            
            227,129Proceeds
                from maturities and calls of securities available for sale
            
            
            —
            
            
            
            150,000
            
            
            
            —Net
                cash provided by investing activities
            
            
            —
            
            
            
            4,019,189
            
            
            
            227,129Cash
                flows from financing activitiesStock
                repurchased
            
            
            (2,092,750
            )
            
            
            (3,539,906
            )
            
            
            (619,547
            )Stock
                options exercised
            
            
            104,241
            
            
            
            437,485
            
            
            
            34,777Excess
                tax benefit of stock options exercised
            
            
            
            
            
            
            90,851
            
            
            
            —Cash
                dividends
            
            
            (2,410,710
            )
            
            
            (2,486,835
            )
            
            
            (2,414,514
            )Net
                cash used in financing activities
            
            
            (4,399,219
            )
            
            
            (5,498,405
            )
            
            
            (2,999,284
            )Net
                change in cash
            
            
            (1,783,629
            )
            
            
            1,708,954
            
            
            
            (868,091
            )Cash
                at beginning of year
            
            
            4,769,914
            
            
            
            3,060,960
            
            
            
            3,929,051Cash
                at end of year
            
            $
            2,986,285
            
            
            $
            4,769,914
            
            
            $
            3,060,960


-71-


Peoples
      Bancorp


Notes
      to Consolidated Financial Statements


September
      30, 2007, 2006 and 2005









Note
                23:
            Subsequent
                Events




On
      June
      26, 2007, the Company announced that an application is being filed to combine
      its two banking subsidiaries, Peoples and First Savings into one bank.
      Regulatory approval has been received and the merger of First Savings into
      Peoples took place as of October 1, 2007.










-72-





Item
      9.  Changes
      In and Disagreements With Accountants on Accounting and Financial
      Disclosure





None.





Item
      9A.  Controls
      and Procedures





Evaluation
      of Disclosure Controls and Procedures





Disclosure
      controls are procedures
      designed to ensure that information required to be disclosed in the Company’s
      reports filed under the Exchange Act, such as this report, is recorded,
      processed, summarized, and reported within the time periods specified in the
      SEC’s rules and forms. Disclosure controls are also designed to ensure that such
      information is accumulated and communicated to management, including the Chief
      Executive Officer and Chief Financial Officer, as appropriate to allow timely
      decisions regarding required disclosure. In designing and evaluating the
      disclosure controls and procedures, management recognized that any controls
      and
      procedures, no matter how well designed and operated, can provide only
      reasonable, not absolute, assurance of achieving the desired control objectives,
      as ours are designed to do, and management necessarily was required to apply
      its
      judgment in evaluating the cost-benefit relationship of possible controls and
      procedures.





As
      of September 30, 2007, an evaluation
      was carried out under the supervision and with the participation of the
      Company’s management, including the Chief Executive Officer and Chief Financial
      Officer, of the effectiveness of the design and operation of its disclosure
      controls and procedures (as defined in Rule 13a-15(e) or 15a-15(e) under the
      Securities Exchange Act of 1934). Based upon that evaluation, the Chief
      Executive Officer and Chief Financial Officer concluded that the Company’s
      disclosure controls and procedures are effective in ensuring that information
      required to be disclosed by the Company in reports that it files or submits
      under the Exchange Act is recorded, processed, summarized and reported within
      the time periods specified in the Securities and Exchange Commission’s rules and
      are designed to ensure that information required to be disclosed in those
      reports is accumulated and communicated to management as appropriate to allow
      timely decisions regarding required disclosure.





Changes
      in Internal Controls over Financial Reporting





There
      were no changes in the Company’s
      internal control over financial reporting that occurred during the quarter
      ended
      September 30, 2007 that have materially affected, or are reasonably likely
      to
      materially affect, the Company’s internal control over financial
      reporting.







Item
      9B.  Other
      Information





There
      is no information that was
      required to be disclosed on a Form 8-K during the fourth quarter that was not
      reported.


-73-


PART
      III





Item
      10.  Directors, Executive Officers and Corporate
      Governance





Directors





The
      following table lists the directors
      of the Company:





Name(Age)
            Position
            Director
                  Since
            Present
                  Term ExpiresErica
                D. Dekko (38)
            Director
            2001
            2009Maurice
                F. Winkler, III (51)
            Director
                and President of Peoples Bancorp and Peoples Federal
            1993
            2009Bruce
                S. Holwerda (50)
            Director
            1998
            2010Stephen
                R. Olson (64)
            Director
            2000
            2010John
                C. Thrapp (73)
            Director
            1990
            2010G.
                Richard Gatton (65)
            Chairman
                of the Board
            2000
            2011Douglas
                D. Marsh (66)
            Director
            1990
            2011





Mr.
      Gattonserved as President,
      Chief
      Executive Officer of Three Rivers Financial Corporation, and in December 1990
      became a director of First Savings Bank, a subsidiary of the Company that merged
      into Peoples Federal onOctober 1, 2007.
      Upon the merger of Three Rivers
      Financial Corporation into the Company, Mr. Gatton became a director of the
      Company and retained his position as President and Chief Executive Officer
      of
      First Savings. OnMarch 1,
      2006, he retired as
      President and Chief Executive Officer of First Savings, and as a director of
      First Savings. Mr. Gatton was elected Chairman of the Board of the Company,
      and
      Chairman of the Board and director of the Company and of Peoples Financial
      Services, Inc. (“Peoples Financial”), a wholly-owned subsidiary of Peoples
      Federal, onFebruary 1,
      2007. Prior to joining
      First Savings Bank, Mr. Gatton served as President of the Bank of Three Oaks,Michigan andPresident and CEO of First National
      Bank ofWabash,Indiana.
      Mr. Gatton has been involved in the
      banking industry since 1966. He is the father of Jeffrey H. Gatton, former
      President of First Savings Bank and now Senior Vice President and Chief
      Operating Officer of Peoples.





Ms.
      Dekkohas served as a director
      of
      Peoples Federal since January of 2000 and was elected as a director of the
      Company January 2001. Ms. Dekko completed her Executive MBA from Notre Dame
      in
      2000. She is a Financial Adviser for Dekko Investment Services. Ms. Dekko also
      serves as a director of Peoples Financial.





Mr.
      Holwerdawas elected a director
      of
      Peoples Federal and the Company in 1998. Mr. Holwerda was co-owner of Ambassador
      Steel Corporation,Auburn,Indiana,
      and served as Vice President and Chief
      Operating Officer, positions he held from 1990 to 2003. In 2003, he sold his
      co-ownership and is serving as consultant to Ambassador Steel.In addition to his consulting
      services,
      Mr. Holwerda has other real estate investments and is an owner of four
      companies. Mr. Holwerda also serves as a director of Peoples
      Financial.





Mr.
      Marshhas served as a director
      of
      Peoples Federal since 1982 and a director of the Company since 1990. He
      currently serves as Principal Broker of Castle One Realty inAuburn,Indiana,
      and Chairman of the Board of Applied
      Innovations Inc. inChicago,Illinois.
      From 1991 to 1996, Mr. Marsh served as
      Vice President of Sales for Superior Chaircraft, a division of JSJ Corporation,
      Grand Haven,Michigan.
      From 1976 to 1991, Mr. Marsh served as
      President and Chief Executive Officer of Garrett Industries of Hudson, Indiana.
      Mr. Marsh also serves as a director of Peoples Financial.





Mr.
      Olsonstarted
      withMortonBuildings,
      a construction company located inThree Rivers,Michigan
      in1970, serving as manager
      until 2003 andcurrently serves as a
      training director and sales consultant.Mr. Olson was appointed
      to the Board of
      Directors of First Savings Bank in 1984 and served as Chairman since
      1993.Mr.
      Olson became a director of the
      Company upon the merger of Three Rivers Financial Corporation into the Company
      onFebruary1,
      2000 anda director of PeoplesFederalonOctober
      1, 2007.He
      is also on the Board of Directors
      of Camp Wakeshma, a non-profit
      summer youthcamp.


-74-


Mr.
      Thrappserved as a director
      and
      officer of First Federal Savings and Loan Association of Kendallville, which
      merged with Peoples Federal in August 1990. He became a director of Peoples
      Federal and the Company in September 1990. Since 1962, Mr. Thrapp has been
      an
      attorney with the firm of Thrapp & Thrapp inKendallville,Indiana.





Mr.
      Winklerwas appointed to the
      Board
      of Directors of Peoples Federal and the Company in June 1993. Mr. Winkler joined
      Peoples Federal in 1979. From 1981 to 1985, he served as Peoples Federal’s
      Controller and in December 1985 became Vice President-Operations. Mr. Winkler
      assumed the duties of President and Chief Executive Officer of the Company,
      Peoples Federal, and Peoples Financial effectiveOctober 1, 1996.
      Mr. Winkler also serves as a director
      of Peoples Financial.





Executive
      Officers





The
      following table lists the executive
      officers of the Company.





Name
            
            Age
            
            PositionG.
                Richard Gatton
            
            65
            
            Chairman
                of the BoardMaurice
                F. Winkler, III
            
            51
            
            President
                and Chief Executive OfficerCheryl
                L. Taylor
            
            57
            
            SecretarySteven
                H. Caryer
            
            44
            
            Vice
                President and Chief Financial OfficerJeffrey
                H. Gatton
            
            44
            
            Sr.
                Vice President and Chief Operating OfficerJeffrey
                L. Grate
            
            44
            
            Vice
                President of Retail Lending





Ms.
      Taylor
      joinedPeoples Federal in
      April 1986. She has served in various capacities for Peoples Federal and was
      promoted to insurance agent for Peoples Financial in November 1991. In August
      of
      2000, Ms. Taylor was promoted to Corporate Secretary for the Company and in
      October 2000 was promoted to Vice President and Secretary of Peoples
      Financial.





Mr.
      Caryer
      becameVice President and
      Chief Financial Officer of the Company and Peoples Federal in September, 2006.
      Previously, Mr. Caryer was employed for nine years by First Defiance Financial
      Corp. as Senior Vice President and Controller. Prior to that, he was with
      Hicksville Building Loan and Savings in a similar capacity.





Mr.
      Jeffrey Gattonhad over eleven years
      banking experience when he joined First Savings in October 1997 as Vice
      President and Manager of the Indiana Division. He was promoted to Executive
      Vice
      President and Chief Operations Officer in late 2000. In March 2006, Mr. Gatton
      was promoted to President of First Savings. Upon the merger of Peoples Federal
      and First Savings onOctober 1, 2007,
      Mr. Gatton was appointed Senior Vice
      President and Chief Operating Officer of Peoples Federal. Mr. Gatton is the
      son
      of G. Richard Gatton, the Chairman of the Board of the Company and Peoples
      Federal.





Mr.
      Gratejoined Peoples Federal
      in
      July1988 asaloan officer and acollection
      officer.In
      July1997,
      he was promoted to Vice President ofRetailLending.
      He came to Peoples with over two years
      of banking experience.





Section
      16(a) Beneficial Ownership Reporting Compliance





Section
      16(a) of the Securities Exchange
      Act of 1934 requires the Company’s directors and executive officers, and persons
      who own more than 10% of a registered class of the Company’s equity securities,
      to file with the Securities and Exchange Commission (“SEC”) initial reports of
      ownership and reports of changes in ownership of equity securities of the
      Company. Officers, directors and greater than 10% shareholders are required
      by
      SEC regulation to furnish the Company with copies of all Section 16(a) forms
      they file.





To
      the Company’s knowledge, based solely
      on a review of the copies of such reports furnished to the Company and written
      representations that no other reports were required, during the fiscal year
      ended September 30, 2007, all Section 16(a) filing requirements applicable
      to
      the Company’s officers and directors were complied with and there were no late
      filings.


-75-


Code
      of Ethics





The
      Company has adopted an ethics policy
      that applies to financial managers of the Company and its subsidiaries,
      including its principal executive officer, principal financial officer,
      principal accounting officer or controller, and persons performing similar
      functions. A copy of the Code of Ethical Conduct for Financial Managers is
      attached as Exhibit 14 to this annual report. In addition, the Company will
      provide a copy without charge, upon a written request delivered to the attention
      of Maurice F. Winkler, III, President, Peoples Bancorp, at212 West Seventh Street,Auburn,Indiana46706-1723
      orby fax to (260) 925-1733.
      The Company
      intends to satisfy the disclosure requirement under Item 5.05 of Form 8-K
      regarding an amendment to a provision of its Code of Ethical Conduct for
      Financial Managers by posting such information on the Company’s website at
      www.Peoplesbancorp.us.





Audit
      Committee





The
      Company’s Board of Directors has a
      standing Audit Committee. The members of the Audit Committee are: Erica D.
      Dekko
      (Chairperson), Bruce S. Holwerda, Douglas D. Marsh, and Stephen R. Olson. All
      members of the Audit Committee are independent as required by the listing
      standards of the NASDAQ Stock Exchange. The Company’s Board of Directors has
      determined that Ms. Dekko’s credentials and her expertise in finance qualify her
      as a “financial expert” as defined in Item 407(d)(5)(ii) of Regulation S-K
      promulgated under the Securities Act of 1933. Ms. Dekko is independent as
      defined in the applicable listing standards of the NASDAQ Stock
      Exchange.





Item
      11.  Executive Compensation





Compensation
      Discussion And Analysis




Overview
      of Compensation Program




Peoples
      Federal compensates the
      executive officers of the Company. During the fiscal year endedSeptember 30, 2007,
      the Company did not pay any cash
      compensation to any of the executive officers.





The
      following table lists the Company’sfour namedexecutive officers (the “Named
      Executive Officers”) who are included in the Summary Compensation Table and
      other tables set forth below (with the exception of the Director Compensation
      Table). Thesefour
      officersare referred to as
      the “Named Executive Officers”.





Executive
                Officers
            
            Bank
                Title
            
            Company
                TitleMaurice
                F. Winkler, III
            
            President
                and Chief Executive Officer
            
            President
                and Chief Executive OfficerSteven
                H. Caryer
            
            Vice
                President and Chief Financial Officer
            
            Chief
                Financial OfficerJeffrey
                H. Gatton
            
            Sr.
                Vice President and Chief Operating Officer
            
            N/AJeffrey
                L. Grate
            
            Vice
                President of  Retail Lending
            
            N/A





The
      Budget/Compensation Committee of the
      Company’s Board of Directors determines, subject to the approval of the Board of
      Directors, the compensation for the Named Executive Officers. The Committee
      reviews payroll costs, establishes policies and objectives relating to
      compensation, and approves the salaries of all employees, including executive
      officers. All recommendations by the Committee relating to salaries of the
      Company’s executive officers are approved by the full Board of Directors of the
      Company. The Committee uses similar procedures in establishing the Chief
      Executive Officer’s annual compensation, including a review of the Chief
      Executive Officer’s annual performance in achieving organizational goals and
      strategic initiatives as well as using America’s Community Bankers Compensation
      and Benefit Survey for 2007 comparing financial institutions similar in asset
      size and located in Indiana.


-76-


The
      Chief Executive Officer recommends
      annual compensation adjustments to the Committee for all executive officers
      other than himself. In developing these recommendations, the Chief Executive
      Officer considers the performance of the individual executive officers over
      the
      past year, including achievement of specific goals and objectives, as well
      as
      their contribution to the strategic advancement of the organization. In
      addition, he reviews salary surveys and considers his personal knowledge of
      industry trends in making his recommendation. The Committee then reviews these
      recommendations, along with the executive officer annual review forms, if
      appropriate and, after discussion, either accepts the recommendation or
      recommends changes. Occasionally, the Chief Financial Officer makes mid-year
      recommendations to the Committee for either salary adjustments or other forms
      of
      compensation, such as options or restricted stock awards. These mid-year
      adjustments are infrequent and could result, for example, from a change in
      responsibility or title, the recognition of a mile-stone achievement or an
      adjustment to establish parity with a newly hired individual where warranted.
      In
      fiscal 2007, the Chief Financial Officer did not recommend to the Committee
      any
      modifications to the annual merit recommendations with respect to executive
      officers. However, the full Board of Directors of the Company recommended a
      mid-year adjustment for Jeffrey H. Gatton, Peoples Federal’s Sr. Vice President
      and Chief Operating Officer. The Board reviewed Mr. Gatton’s performance as
      President at First Savings and compared his salary to peers, and determined
      he
      deserved an increase in base salary from $85,000 to $102,500, which became
      effectiveApril 1,
      2007.





The
      Committee has access to and reviews
      compensation data for comparable financial institutions in theMidwest indetermining and approving the salaries
      of executive officers. To determine 2007 compensation, the Committee reviewed
      a
      salary survey compiled by America’s Community Bankers Compensation and Benefit
      Survey for 2007, and used the Consumer Price Index. The Consumer Price Index
      is
      used to evaluate inflation rates so the employees will not lose purchasing
      power. Seniority and performance are also taken into consideration, as well
      as
      amounts of compensation paid by peers of the Company.





The
      Committee has the authority under
      the Committee’s Charter to retain outside consultants or advisors to assist the
      Committee. No outside consultants were retained in 2007.





Impact
      of Performance on Compensation




Each
      Executive’s performance is reviewed
      annually along with the financial performance of the Company and the extent
      to
      which its strategic objectives have been achieved. Generally, individual
      performance drives base salary adjustments as well as some option awards. The
      executives’ financial performance is rewarded through the bonus program
      described below under “Annual Cash Bonuses.” In addition, outstanding individual
      performance or substantial advancement of strategic organizational goals may
      also result in the award of either options or restricted shares. Also, a change
      in job responsibility may trigger a compensation review outside the annual
      process.





Objectives
      of Compensation Program




We
      have the following objectives with
      respect to our executive compensation programs:





(1)
            provide
                compensation opportunities comparable to those offered by other similarly
                situated financial institutions in order to be able to attract and
                retain
                talented executives who are critical to the Company’s long-term success;




(2)
            reward
                executive officers based upon their ability to achieve short-term
                and
                long-term strategic goals and objectives and enhance shareholder
                value;
                and




(3)
            align
                the interests of the executive officers with the long-term interests
                of
                shareholders by granting stock options which will become more valuable
                to
                the executives as the value of the Company’s shares increase.




-77-


2007 
      Executive Compensation Components




The
      Company’s executive compensation
      system contains the following components:





·
            base
                salary;




·
            annual
                bonuses;




·
            stock
                options; and




·
            post-employment
                compensation as prescribed in employment contracts for Mr. Maurice
                F.
                Winkler, Mr. Steven H. Caryer, and Mr. Jeffrey H. Gatton.




Current
      compensation, designed to
      compensate employees for their current responsibilities and performance,
      includes monthly salary payments and annual performance-based bonus payments.
      The annual bonuses are tied to the Company’s performance in the areas of growth,
      profit, quality, and productivity as they ultimately relate to earnings per
      share and return on equity for the current fiscal year. In years in which the
      performance goals of the Company are met or exceeded, executive compensation
      tends to be higher than in years in which performance is below
      expectations.





An
      additional component of our executive
      compensation system is generally more long term in nature and includes awards
      of
      stock options pursuant to our two stock option plans described below. See “Stock
      Option Information.” Options granted under these plans, which are
      non-transferable, have little or no initial value to the employee. The intent
      of
      this form of compensation is two-fold. First, the potential appreciation in
      the
      inherent value of the options that results from increases in the stock price
      of
      the Company aligns recipients’ interests with those of our shareholders. Second,
      the vesting schedules applied to each option grant, which is typically five-year
      pro-rata, reduces the potential motivation for short-sighted behavior that
      might
      sacrifice long-term value for short-term results, and also serves as an
      incentive for our key talent pool to remain with the Company for meaningful
      periods of time.





The
      Company also provides various
      organization-wide benefit programs such as health insurance, life insurance,
      long-term disability insurance, a flexible benefits plan, a defined benefit
      plan, and a 401(K) Plan.





Base
      Salary.Base
      salary levels of the Company’s executive officers are intended to be comparable
      to those offered by similar financial institutions in theMidwest andare based on asset size and ownership
      structure. The Committee has access to and reviews compensation data for
      comparable financial institutions in theMidwest indetermining and approving the salaries
      of executive officers. To determine 2007 base salary compensation, the Committee
      reviewed a salary survey compiled by America’s Community Bankers Compensation
      and Benefit Survey for 2007, and used the Consumer Price Index. The Consumer
      Price Index is used to evaluate inflation rates so the employees will not lose
      purchasing power. Seniority and performance are also taken into consideration,
      as well as amounts of compensation paid by peers of the
      Company.





In
      determining base salaries, the
      Committee also takes into account individual experience and performance and
      contributions the employee makes to the achievement of the Company’s goals.
      Those contributions vary in type and scope, depending on the requirements of
      the
      job, the skills, experience and knowledge an employee brings to a particular
      position, and the quality of work performed. These qualities are considered
      when
      evaluating the value of the employee to the organization and determining the
      appropriate level of compensation in exchange for those
      qualifications.





The
      base salary of each of our Named
      Executive Officers for fiscal 2007 is included in the Summary Compensation
      Table
      below.





Annual
      Cash
      Bonuses.Each
      year, the Board of Directors determines the percentage of an employee’s base
      salary the employee will be eligible to receive as a cash bonus if the threshold
      requirements established for that year are met. No bonuses were paid this year
      as the profitability of Peoples Federal did not justify bonuses being
      awarded.


-78-


Stock
      Options.The
      Company’s option plans are intended to align executive and other key employees
      and shareholder long-term interests by creating a strong and direct link between
      executive pay and shareholder return, and enabling executives to acquire a
      significant ownership position in the Company’s common stock. Stock options are
      granted with exercise prices equal to the prevailing market price of the
      Company’s common stock and will only have value to the recipient if the stock
      price increases thereafter. The Company’s Budget/Compensation Committee
      determines the number of option grants to make to executive officers based
      on
      the practices of comparable financial institutions as well as the executive’s
      level of responsibility and contributions to the Company. For a description
      of
      the Company’s option plans, see “Stock Option Information--The 1998 Stock Option
      and Incentive Plan” and “--The Three Rivers Financial Corporation Stock Option
      and Incentive Plan.”





Potential
      Payments
      Upon Termination or Change in Control.Maurice F. Winkler, III,
      Steven H.
      Caryer, and Jeffrey H. Gatton have entered into employment agreements with
      the
      Company and Peoples Federal. These agreements provide for compensation following
      their termination of employment. The employment and special termination
      agreements to which Mr. Winkler, Mr. Caryer, and Mr. Gatton are parties are
      described below in more detail under “Employment
      Agreements”.





Section
      162(m) of the Internal Revenue
      Code, in specified circumstances, limits to $1 million the deductibility of
      compensation, including stock-based compensation, paid to top executives by
      public companies. None of the compensation paid to the Named Executive Officers
      for fiscal 2007 exceeded the threshold for deductibility under Section
      162(m).





The
      Budget/Compensation Committee
      believes that linking executive compensation to corporate performance results
      in
      a better alignment of compensation with corporate goals and the interests of
      the
      Company’s shareholders. As performance goals are met or exceeded, most probably
      resulting in increased value to shareholders, executives are rewarded
      commensurately. The Committee believes that compensation levels during fiscal
      2007 for executives and for the Chief Executive Officer adequately reflect
      the
      Company’s compensation goals and policies.





-79-


Summary
      Compensation Table For Fiscal 2007





The
      following table presents information
      for compensation awarded to, earned by, or paid to the Named Executive Officers
      for 2007.





Name
                  and Principal
                Position
            Fiscal
                Year
            Salary
                ($)(1)
            Bonus
                  (2)
            Option
                Awards
                ($)(3)
            Change
                  in Pension Value and Nonqualified Deferred Compensation Earnings
                  ($)(4)
            All
                  Other Compensation
                ($)(5)
            Total
                ($)Maurice
                F. Winkler, III
              President
                and Chief Executive Officer
            2007
            $170,719
            $6,382
            -0-
            $42,000
            $
                7,578
            $226,679Steven
                H. Caryer
              Vice
                President and Chief Financial Officer
            2007
            $
                98,000
            $10,000
            -0-
            N/A
            $
                4,190
            $112,190Jeffrey
                H. Gatton
              Sr.
                Vice President and Chief Operating Officer
            2007
            $103,656
            $
                3,800
            $33,534
            $7,000
            $12,568
            $160,558Jeffrey
                L. Grate
              Vice
                President of Lending Operations
            2007
            $
                90,105
            $
                3,867
            -0-
            $11,000
            $
                1,903
            $106,875


____________________


(1)
            Includes
                amounts earned but deferred, including amounts deferred under the
                Company’s 401(k) Plan. Mr. Winkler received $26,580 in director's fees
                which are included in this column. Mr. Jeffrey Gatton received $8,580
                in
                director’s fees while serving on First Savings’ Board which are included
                in this column. As a result of the merger of First Savings into Peoples
                Federal as of October 1, 2007, Mr. Gatton no longer serves as a director
                of First Savings. Mr. Caryer and Mr. Grate do not receive director's
                fees.
                Mr. Winkler received an additional $827 due to a change in the timing
                of
                pay dates, starting October 1, 2006.


(2)
            Bonus
                was awarded in fiscal 2006 and paid in fiscal 2007.(3)
            The
                amounts reflect the dollar amount the Company recognized, before
                forfeitures, for financial statement reporting purposes for the fiscal
                year ended September 30, 2007, in accordance with FAS 123(R) and
                thus may
                include amounts from awards granted in and prior to 2007. The expense
                recognized in the financial statements is determined by the vested
                pro-rata portion of the fair value of the stock or option award on
                the
                date of award. The assumptions used in calculating these amounts
                are
                included in Note 19 to the Financial Statements for the fiscal year
                ended
                September 30, 2007, included in this Annual Report on Form 10-K and
                in
                Note 18 to the Financial Statements included in the Company’s Annual
                Report on Form 10-K for the fiscal year ended September 30, 1999,
                filed on
                December 29, 1999.




(4)
            This
                column includes the increase in actuarial value of the Named Executive
                Officer’s interest in the Peoples Federal defined benefit plan, which was
                frozen on August 1, 2007. The accrual benefit shown is the increase
                in
                actuarial value between October 1, 2006 and September 30, 2007. All
                executive officers participated in the defined benefit plan until
                it was
                frozen on August 1, 2007, with the exception of Mr. Caryer.


(5)
            Includes
                the Company’s matching contributions and allocations under its 401(k) Plan
                and the value of insurance premiums in excess of IRS limits. The
                Named
                Executive Officers received certain perquisites during fiscal 2007,
                but
                the incremental cost of providing those perquisites did not exceed
                the
                $10,000 disclosure threshold. Includes the personal benefit to the
                Named
                Executive Officers of split-dollar insurance purchased by Peoples
                Federal
                and First Savings.





-80-





Stock
      Option Information







The
      1998 Stock Option and Incentive Plan




On
      November 10, 1998, the Company’s
      Board of Directors adopted the Peoples Bancorp 1998 Stock Option and Incentive
      Plan (“1998 Plan”) that permits the grant of incentive and nonqualified options
      to purchase shares of the Company’s common stock, as well as stock appreciation
      rights. Our shareholders approved the 1998 Plan onJanuary 13, 1999.
      The Budget/Compensation Committee
      administers the 1998 Plan.





Under
      the 1998 Plan, the maximum number
      of shares of common stock that may be issued pursuant to awards granted under
      the 1998 Plan is 200,000 (subject to adjustment to prevent dilution). The 1998
      Plan continues in effect untilNovember 10, 2008,
      unless earlier terminated. Pursuant to
      the 1998 Plan, directors and key employees of the Company (or any affiliate
      as
      defined in the 1998 Plan) may be granted options at an exercise price not less
      than 100% of the fair market value of the Company’s common stock on the date of
      the grant. During fiscal 2007, no options were granted under the 1998 Plan.
      As
      ofNovember 30,
      2007, options to purchase
      16,000 shares were outstanding under the 1998 Plan at an average price of $21.50
      per share, and 170,000 shares were reserved for future awards under the 1998
      Plan. No stock appreciation rights have been awarded under the 1998 Plan. Stock
      options become exercisable in full upon a change in control of the Company.
      For
      this purpose, a change in control means the execution of an agreement that
      will
      result in the sale of all or a material portion of the assets of the Company,
      a
      merger or recapitalization of the Company in which the Company is not the
      surviving entity, the acquisition of control of the Company as defined in 12
      CFR
§ 574.3, or the acquisition of 25% or more of the Company’s outstanding shares
      by any person, entity or group.





The
      Three Rivers Financial Corporation Stock Option and Incentive Plan




In
      April 1996, Three Rivers Financial
      Corporation’s Board of Directors adopted, and the shareholders approved, the
      Three Rivers Financial Corporation Stock Option and Incentive Plan (the “Three
      Rivers Plan”). The Three Rivers Plan is administered by the Budget/Compensation
      Committee. The purpose of the Three Rivers Plan was to provide additional
      incentive to directors and key employees by facilitating their purchase of
      stock
      through incentive and non-qualified stock options, as well as stock appreciation
      rights. No further awards may be made under this plan. During the fiscal year
      endedSeptember 30,
      2007, no options were
      granted under the Three Rivers Plan and options for 1,722 shares were exercised.
      As ofSeptember 30,
      2007, there were options
      for 5,643 shares outstanding under the Three Rivers Plan, at an average price
      per share of $13.05.





Option
      Exercises for 2007




The
      following table presents information
      on the exercise by Named Executive Officers of stock options during fiscal
      2007.
      No stock options were granted to the Named Executive Officers during the fiscal
      year endedSeptember 30,
      2007.





Option
                  AwardsName
            Number
                  of Shares Acquired on Exercise (#)
            Value
                  Realized on Exercise ($)(1)Maurice
                F. Winkler, III
            —
            —Steven
                H. Caryer
            —
            —Jeffrey
                H. Gatton
            7,128
            $40,725Jeffrey
                L. Grate
            —
            —





(1)
            Amounts
                reflecting value realized upon exercise of options are based on the
                difference between the closing price for a share on the date of exercise
                and the exercise price for a share. The Company repurchased 5,728
                of these
                shares from Mr. Gatton at $19.51 per share for an aggregate price
                of
                $111,753.


-81-


Outstanding
      Equity Awards at September 30, 2007





The
      following table presents information
      on unexercised stock options held by the Named Executive Officers that are
      outstanding as ofSeptember
      30, 2007:





Option
                  AwardsName
            Number
                  of Securities Underlying Unexercised Options (#)
                  Exercisable
            Option
                  Exercise Price ($)
            Option
                  Expiration DateMaurice
                F. Winkler, III
            —
            —
            —Steven
                H. Caryer
            —
            —
            —Jeffrey
                H. Gatton
            —
            —
            —Jeffrey
                L. Grate
            1,500
            $21.50
            09-15-2008








Other
      Compensation Of Executives




Defined
      Benefit Pension Plan at September 30, 2007




The
      following table provides information
      on each plan that provides for payments or other benefits in connection with
      a
      Named Executive Officer’s retirement, excluding tax-qualified and non-qualified
      defined contribution plans.





Number
                of Years
            Present
                Value of
            Payments
                DuringCredited
                Service
            Accumulated
            Last
                Fiscal YearName
            Plan
                Name
            (#)(2)
            Benefit
                ($)(3)
            ($)Maurice
                F. Winkler, III
            Pentegra
                Group Pension
                Plan (1)
            27
            $328,000
            $0Steven
                H. Caryer
            Pentegra
                Group Pension
                Plan (1)
            0
            N/A
            N/AJeffrey
                H. Gatton
            Pentegra
                Group Pension
                Plan(1)
            8.833
            $
                33,000
            $0Jeffrey
                L. Grate
            Pentegra
                Group Pension
                Plan (1)
            18.250
            $
                75,000
            $0


___________________


(1)
            The
                Plan is a non-contributory, multi-employer comprehensive Pension
                Plan. The
                Plan was frozen as to new participants and for additional years of
                service
                for existing participants on August 1, 2007.


(2)
            The
                number of years of credited service is computed as of September 30,
                2007, the same pension plan measurement date used for financial statement
                reporting purposes in the Company’s Annual Report to Shareholders.


(3)
            This
                information is as of September 30, 2007, the same pension plan measurement
                date used for financial statement reporting purposes in the Company’s
                Annual Report to Shareholders, assumes that the Named Executive Officer
                retires at age 65, the normal retirement age specified in the Plan,
                and is
                based on compensation paid to the Named Executive Officers until
                the Plan
                was frozen. The interest rate assumptions used are the same ones
                used in
                making disclosures about this plan in the Company’s 2007 Annual Report to
                Shareholders.





Peoples
      Federal maintains an IRS
      qualified defined benefit pension plan (the “Retirement Plan”) for all eligible
      employees (the “Participants”). In order to be eligible to participate, an
      employee must attain age 21 and complete 12 months of employment. The Retirement
      Plan is funded solely by Peoples Federal’s contributions and generally provides
      for vested benefits to Participants with 100% vesting after five years of
      credited service. All full-time employees who were Participants in the
      Retirement Plan onAugust
      1, 2007, participate in the
      Plan, which was frozen as of that date. Further eligibility and benefit accruals
      ceased as ofAugust 1,
      2007, under this Retirement
      Plan. Total Retirement Plan expenses for the fiscal year endedSeptember 30, 2007,
      were
      $1,297,617.


-82-


A
      Participant’s benefit at normal
      retirement age (65) is dependent upon his total years of credited service and
      his average annual earnings for the five consecutive years of highest earnings
      during credited service. However, the benefit so determined is subject to
      proportionate reduction for credited service of fewer than 30 years at normal
      retirement age, and is also subject to actuarial reduction for commencement
      of
      benefit payments prior to normal retirement age. The Retirement Plan also
      provides a death benefit payment in the event of death prior to
      retirement.





The
      Retirement Plan provides for monthly
      or lump sum retirement benefits equal to 2% of the employee’s highest 5-year
      average earnings multiplied by their years of credited service. Earnings include
      base annual salary as of each January 1st,
      exclusive of overtime, bonuses, fees,
      and other special payments subject to an annual IRS limit of $225,000 on
      earnings for 2007. Early retirement, disability, termination of employment
      and
      death benefits are also payable under the Retirement Plan, depending upon the
      participant’s age and years of service. Benefits are payable under the plan at
      or after age 45. We recorded expenses totaling $1,297,617 for the Retirement
      Plan during the fiscal year endedSeptember 30, 2007.
      Benefits are currently subject to a
      maximum of $180,000 under the Internal Revenue Code. The years of service
      credited under the Retirement Plan as ofSeptember 30, 2007,
      were 27 years for Mr. Winkler, 0 years
      for Mr. Caryer, 8.833 years for Mr. Jeffrey Gatton, and 18.250 years for Mr.
      Grate.





401(k)
      Plan




OnNovember
      15, 1988, the Board of Directors
      of Peoples
      Federal adopted an Employee Stock Ownership Plan (the “ESOP”), which was
      approved by the shareholders onJanuary 11, 1989.
      In August 1995, First Savings’ Board
      of Directors adopted an ESOP for the benefit of its
      employees.





OnMay
      1, 1999, the Peoples Federal
      ESOP was amended
      to convert it into a 401(k) Plan and during fiscal 2002, the First Savings’ ESOP
      was also amended to convert it into a 401(k) Plan.





The
      401(k) Plan provides for employee
      contributions between 1% and 15% of salary on a pre-tax basis with matching
      employer contributions equal to 50% of a participant’s contribution up to 6% of
      salary. The vesting schedule is the same as the vesting schedule under the
      ESOP.
      All shares originally contributed to the ESOP were allocated to participants’
accounts under the 401(k) Plan. Withdrawals under the 401(k) Plan are permitted
      on the attainment of age 59 or for hardship. Participants are allowed to choose
      from a variety of investment vehicles to invest their 401(k) accounts and in
      the
      absence of a choice by a participant are invested in a money market fund
      accounts.





The
      ESOP maintained an account for each
      participant in the ESOP. The ESOP accounts were transferred into each
      participant’s 401(k) Plan account. With respect to shares of common stock
      allocated to a participant’s accounts, each participant is entitled to direct
      the Trustee as to the manner of voting such shares. If the participant fails
      to
      so direct the Trustee, such un-voted shares will be voted by the Trustee only
      upon instructions from the Committee.





OnMay
      22, 2007, the Company’s Board of Directors
      approved a discretionary 401(k) contribution, based on fiscal year-end salary,
      to be paid to all full-time employees byDecember 31, 2007.
      In addition, the Board voted to invest
      in $7,000,000 of Bank Owned Life Insurance (BOLI) to help fund the health
      insurance plan for full-time employees who elect to
      participate.





Peoples
      Federal has an existing BOLI
      plan with a current cash value of $685,000 to help fund the salary continuation
      benefit for G. Richard Gatton, former President of First
      Savings.





As
      ofSeptember 30, 2007,
      the 401(k) Plan held 87,540 shares of
      common stock, 100% of which has been allocated to participant accounts. The
      Company contributed $105,237 for the benefit of the participants under the
      401(k) Plan during the fiscal year endedSeptember 30, 2007and
      assumed expenses of $4,754 for
      401(k) Plan administration.


-83-


Bonus
      Plan




Peoples
      Federal has a bonus plan for all
      employees. The plan does not apply to employees of subsidiaries or affiliates
      of
      Peoples Federal. Under the plan, bonus money is made available to the extent
      of
      the net profits of Peoples Federal up to 10% of an employee’s base annual salary
      as defined in the plan. The determination of the amount of a bonus to be paid
      under the plan is made by the Board of Directors in its sole discretion, after
      consideration and recommendation by the Budget/Compensation Committee, based
      on
      profitability of Peoples Federal.





During
      the fiscal year endedSeptember 30,
      2007, bonuses under the
      plans aggregating $212,738 were paid to employees of Peoples Federal and First
      Savings.





Employment
      Agreements




Mr.
      Maurice F. Winkler, III, a Director
      and Chief Executive Officer of the Company and the President and Chief Executive
      Officer of Peoples, has entered into a three-year employment agreement with
      the
      Company and Peoples. The agreement provides for the full-time employment of
      Mr.
      Winkler as President and Chief Executive Officer of Peoples and may be amended
      and extended for additional twelve-month periods upon the mutual agreement
      of
      the parties. The original effective date of the agreement wasMay 18, 2000,
      and the agreement was most recently
      extended onDecember 18,
      2007, when the parties
      executed an amended and restated agreement. The agreement, as amended and
      restated, provides for a base salary of $143,312 per year. Pursuant to the
      agreement, the base salary amount is reviewed at least once every twelve months
      and increases are to be substantially consistent with the increases to the
      base
      salaries of other executives of Peoples Federal, provided the base salary amount
      shall be increased by a percentage no less than the annual increase in the
      cost
      of living index for the Fort Wayne, Indiana metropolitan
      area.





Mr.
      Steven H. Caryer, the Vice President
      and Chief Financial Officer of the Company and Peoples Federal, has entered
      into
      a three-year employment agreement with the Company and Peoples Federal. The
      agreement provides for the full-time employment of Mr. Caryer as the Vice
      President and Chief Financial Officer of Peoples Federal and may be amended
      and
      extended for additional twelve-month periods upon the mutual agreement of the
      parties. The original effective date of the agreement wasSeptember 26, 2006,
      and the agreement was most recently
      extended onDecember 18,
      2007, when the parties
      executed an amended and restated agreement. The agreement, as amended and
      restated, provides for a base salary of $100,940 per year. Pursuant to the
      agreement, the base salary amount is reviewed at least once every twelve months
      and increases are to be substantially consistent with the increases to the
      base
      salaries of other executives of Peoples Federal, provided the base salary amount
      shall be increased by a percentage no less than the annual increase in the
      cost
      of living index for the Fort Wayne, Indiana metropolitan
      area.





Mr.
      Jeffrey H. Gatton, Senior Vice
      President and Chief Operating Officer of Peoples Federal, has entered into
      a
      three-year employment agreement with the Company and Peoples Federal. The
      agreement provides for the full-time employment of Mr. Jeffrey Gatton as Senior
      Vice President and Chief Operating Officer of Peoples Federal and may be amended
      and extended for additional twelve-month periods upon the mutual agreement
      of
      the parties. The original effective date of the agreement isDecember 18, 2007,
      when the parties executed the
      agreement. The agreement provides for a base salary of $102,500 per year.
      Pursuant to the agreement, the base salary amount is reviewed at least once
      every twelve months and increases are to be substantially consistent with the
      increases to the base salaries of other executive of Peoples, provided the
      base
      salary amount shall be increased by a percentage no less than the annual
      increase in the cost of living index for the Fort Wayne, Indiana metropolitan
      area.





The
      employment agreements for Messrs.
      Winkler, Caryer, and Jeffrey H. Gatton (the “Executives”) contain similar
      provisions regarding terminations of employment, including in the event of
      a
      Change of Control of the Company (defined below). Each agreement provides that
      the executive may terminate his employment upon 60 days notice upon the
      occurrence of one of the events specified in the agreement. The Company may
      terminate the employment of the executive upon the occurrence of certain
      specified events or at any time for cause (as defined in the agreement). If
      the
      Company terminates an executive’s employment other than for cause or if the
      Executive terminates his employment upon the occurrence of the events specified
      in the agreement, the agreement provides for the executive to receive an amount
      equal to his base salary for each year remaining under the term of the agreement
      plus bonuses in an amount equal to the last bonus received multiplied by the
      number of years remaining under the term of the agreement, as well as the value
      of any medical and retirement benefits provided under the agreement for each
      year or portion thereof remaining in the term of the agreement, but such amounts
      are subject to deferment for


-84-


minimum
      capital maintenance purposes. In
      the event the executive’s employment is terminated by Peoples Federal or the
      executive for any reason other than for cause within 12 months following a
      Change of Control (as defined in the agreements), the agreements provide for
      Mr.
      Winkler,Mr.
      Caryer, and Mr. Jeffrey
      Gattonto
      receive an amount equal to 2.99 times
      his base salary, plus the amount of any bonus compensation earnings during
      the
      2.99 years immediately preceding the Change of Control, plus certain other
      benefits. The agreements also provide that any unvested options held by an
      executive will vest if his employment is terminated as a result of a Change
      of
      Control. As of the date hereof, the cash compensation that would be received
      upon the Executive’s termination in connection with a change in control would be
      approximately $443,068 for Mr. Winkler, $311,811 for Mr. Caryer, and $316,475
      for Mr. Jeffrey Gatton.





For
      purposes of the employment
      agreements of Messrs. Winkler, Caryer, and Gatton, a “Change of Control” occurs
      if:





•
            a
                person or group acquires ownership of stock representing more than
                50% of
                the Company’s or Peoples Federal’s total fair value or total voting power
                of the stock of the Company or Peoples Federal and stock of the Company
                or
                Peoples Federal remains outstanding after the transaction;




•
            a
                person or group acquires ownership of stock representing 30% or more
                of
                the total voting power of the stock of the Company or Peoples Federal;




•
            during
                a twelve-month period, a majority of the directors of the Company
                is
                replaced by directors whose appointment or election is not endorsed
                by a
                majority of the members of the Company’s Board in office before the date
                of the appointment or election, unless another corporation is a majority
                shareholder of the Company; or




•
            a
                person or group, other than
                shareholders of Peoples Federal or an entity controlled by shareholders
                of
                Peoples Federal acquires more than 40% of the total gross fair market
                value of Peoples Federal’s assets, unless the person orgroup owns
                50% or more of the total value or voting power of Peoples Federal’s stock.




Under
      the employment agreements, the
      executives are eligible to receive such benefits as are made available to other
      senior executives of Peoples Federal.





Retirement
      Benefits Agreement of Richard Gatton.




OnOctober
      26, 2006, First Savings entered
      into a
      Retirement Benefits Agreement with G. Richard Gatton. Mr. Gatton, age 63,
      resigned from his position as President and Chief Executive Officer of First
      Savings effective March 30, 2006, but he continues to serve as a member of
      Peoples Federal’s and the Company’s Boards of Directors.





On
      February 29, 2000, First Savings,
      Peoples Federal and Mr. Gatton entered into an Employment Agreement in which
      First Savings agreed to pay Mr. Gatton the additional retirement benefits he
      would have received if he had continued his employment with First Savings until
      age 65, to the extent that such benefits were not covered by First Savings’
retirement plan or a Salary Continuation Agreement that First Savings and Mr.
      Gatton had entered into on September 18, 1996. Pursuant to the Retirement
      Benefits Agreement, consistent with this obligation, onJanuary 5, 2007,
      Mr. Gatton was paid by First Savings
      an additional retirement benefit of $55,722 in a lump sum. Mr. Gatton is also
      entitled to annual payments of $15,000 per year payable monthly over a 15-year
      period. Those benefits commenced onNovember 1, 2007,
      and continue for a period of 15 years.
      The Retirement Benefits Agreement also provides for Mr. Gatton’s receipt of
      health and medical benefits until the later of age 65, or the commencement
      date
      of his Medicare benefits. Peoples Federal is to pay 75% of the cost of such
      health and medical benefits.





If
      the payments provided for in the
      employment agreements and, in the case of Mr. Gatton in his Salary Continuation
      Agreement, together with any other payments to be made to the Named Executive
      Officers, are deemed to be payments in violation of the “golden parachute” rules
      of the Internal Revenue Code of 1986, as amended, such payments will be reduced
      to the highest amount permissible before the executive officer becomes subject
      to excess parachute payment excise tax or the Company or Peoples Federal lose
      all or part of their compensation deduction forsuch
      payments.


-85-





Director
      Compensation




Directors
      of the Company received fees
      of $6,000 for fiscal 2007 for serving as directors of the Company. Directors
      of
      Peoples Federal currently receive $12,000 per year and directors of First
      Savings received $8,580 per year during the last fiscal year. For the fiscal
      year endedSeptember 30,
      2007, directors’ fees for
      the directors of the Company, Peoples, and First Savings totaled $158,900.
      In
      addition, directors emeritus of Peoples Federal are paid for each meeting at
      a
      monthly fee equal to the fee they received at the time of retirement from the
      Board. For the fiscal year endedSeptember 30, 2007,
      director emeritus fees totaled
      $41,600.





Directors
      are also eligible to receive
      awards under the 1998 Plan, until it terminates onNovember 10, 2008.
      During the fiscal year endedSeptember 30,
      2007, no options were
      granted to directors.





Director
      Compensation for 2007




The
      following table provides information
      concerning the compensation paid to or earned by the members of the Company’s
      Board of Directors other than Maurice F. Winkler, III.





Name
                  (1)
            
            Fees
                  Earned or Paid in Cash ($)
            
            
            Option
                  Awards ($)(2)
            
            
            Change
                  in Pension Value and Nonqualified Deferred Compensation Earnings
                  (3)
            
            
            All
                  Other Compensation ($)
            
            
            Total
                  ($)Erica
                D. Dekko
            
            $
            18,000
            
            
            
            N/A
            
            
            
            
            
            
            
            
            $
            18,000G.
                Richard Gatton
            
            $
            14,000
            
            
            
            N/A
            
            
            $
            55,722
            
            
            $
            7,513
            
            
            $
            77,235Bruce
                S. Holwerda
            
            $
            18,000
            
            
            
            N/A
            
            
            
            
            
            
            
            
            
            
            $
            18,000Douglas
                D. Marsh
            
            $
            18,000
            
            
            
            N/A
            
            
            
            
            
            
            
            
            
            
            $
            18,000Stephen
                R. Olson
            
            $
            14,580
            (4)
            
            
            N/A
            
            
            
            
            
            
            
            
            
            
            $
            14,580John
                C. Thrapp
            
            $
            18,000
            
            
            
            N/A
            
            
            
            
            
            
            
            
            
            
            $
            18,000





(1)
            Information
                on Mr. Winkler, who is a Named Executive Officer, is included in
                the
                Summary Compensation Table.


(2)
            The
                amounts reflect the dollar amount the Company recognized, before
                forfeitures, for financial statement reporting purposes for the fiscal
                year ended September 30, 2007, in accordance with FAS 123(R) and
                this may
                include amounts from awards granted in and prior to October 1, 2006.
                The
                assumptions used in calculating the amounts are included in Note
                1 to the
                Company’s financial statements for the fiscal year ended September 30,
                2007, included in this Annual Report on Form 10-K.


(3)
            This
                column includes the increase in actuarial value of the directors’ interest
                in the Retirement Plan between September 30, 2006 and September 30,
                2007.
                There were no above market earnings on deferred compensation to which
                Mr.
                Olson was entitled under the First Savings Deferred Fee Agreement
                in the
                fiscal year ended September 30, 2007. Under Mr. Gatton’s Retirement
                Benefits Agreement with First Savings, signed on October 26, 2006,
                he was
                entitled to a lump sum benefit of $55,722, payable on January 5,
                2007.


(4)
            Mr.
                Olson defers his board fees under the First Savings Deferred Fee
                Agreement
                (defined below) during fiscal 2007. On September 30, 2007, deferrals
                were
                no longer permitted as a result of the merger of First Savings into
                Peoples Federal, but Mr. Olson’s account continues to accrue interest and
                will be paid out as provided in the Deferred Fee Agreement.





AtSeptember
      30, 2007, director Stephen R.
      Olson had
      outstanding a fully vested nonqualified stock option for 1,188 shares at an
      option price of $13.05 per share which expires onOctober 28, 2008.





Deferred
      Fee Agreement




During
      fiscal 2007, First Savings
      maintained a Deferred Director Fee Agreement (the “Deferred Fee Agreement”) that
      permits its directors to defer payment ofsome orall of their directors fees. Deferred
      directors fees are distributed either in a lump-sum payment or in monthly
      installments over a period specified by the director. If a director has deferred
      a minimum of $6,850 in fees for each year of service on the Boardor
      if a director dies while in active
      service following a change in control of Peoples Federal, upon his death his
      beneficiary will receive a death benefit of $31,642 per year for 15 years.
      A
“change in control” is defined to mean a merger or consolidation in which
      Peoples Federal does not survive, a sale of all or substantially all of the
      assets of Peoples Federal or the acquisition of 25% or more of the voting stock
      of Peoples Federal. The Deferred Fee Agreement also permits hardship withdrawals
      of amounts credited to a director’s account. Interest accrues on the amounts
      deferred and unpaid at the rate payable on 10-year highly-rated corporate bonds.
      At present, Stephen R. Olson is the only director whoparticipates
      in the Deferred Fee
      Agreement. OnSeptember 30,
      2007, deferrals were no
      longer permitted as a result of the merger of First Savings into Peoples
      Federal, but Mr. Olson’s account continues to accrue interest and will be paid
      out as provided in the Deferred Fee Agreement.


-86-




Compensation
      Committee Interlocks and Insider Participation





No
      person who served as a member of the
      Budget/Compensation Committee during the 2007 fiscal year has ever been an
      officer or employee of the Company or any of its subsidiaries, except for John
      Thrapp, who had served as Assistant Trust Officer of Peoples Federal without
      compensation from 1990 to 2003. During the 2007 fiscal year, no executive
      officers of the Company or Peoples Federal served as a director or member of
      the
      compensation committee of another entity, one of whose directors or executive
      officers served as a director or member of the Budget/Compensation Committee
      of
      the Company or Peoples Federal.





Report
      of the Budget/Compensation Committee





The
      Budget/Compensation Committee has
      reviewed and discussed with management the Compensation Discussion and Analysis
      included above. Based on that review and discussion, the Budget/Compensation
      Committee has recommended to the Company’s Board of Directors that the
      Compensation Discussion and Analysis be included in this Annual Report on Form
      10-K for the fiscal year ended September 30, 2007.





This
      Report is respectfully submitted by
      the Budget/Compensation Committee of the Company’s Board of
      Directors.





Douglas
      D. Marsh, Chairman


Erica
      D.
      Dekko


Bruce
      S.
      Holwerda


Stephen
      R. Olson


John
      C.
      Thrapp





Item
      12.  Security
      Ownership of Certain Beneficial Owners and Management and Related Stockholder
      Matters





Equity
      Compensation Plans





The
      following table provides information
      as ofSeptember 30, 2007
      withrespect to the shares
      of Peoples Bancorp common stock that may be issued under the Company’s existing
      equity compensation plans.





Equity
      Compensation Plan Information





Plan
                Category
            
            Number
                of Securities to be Issued Upon Exercise of Outstanding Options,
                Warrants
                and Rights
            
            Weighted
                Average Exercise Price of Outstanding Options, Warrants and
                Rights
            
            Number
                of Securities Remaining Available for Future Issuance Under Equity
                Compensation Plans (Excluding Securities Reflected in Column
                (a))(a)
            
            (b)
            
            (c)Equity
                compensation plans approved by security holders
            
            21,643
            
            $19.30
            
            72,653Equity
                compensation plans not approved by security holders
            
            -
            
            N/A
            
            -Total
            
            21,643
            
            $19.30
            
            72,653





-87-


Securities
      Ownership of Certain Beneficial Owners and Management





The
      following table sets forth as of
      December 14, 2007, information regarding beneficial share ownership of the
      Company’s common stock by: (i) each of the directors of the Company, including
      each nominee for election; (ii) each executive officer of the Company named
      in
      the Summary Compensation Table appearing under “Summary Compensation Table for
      Fiscal 2007” above; and (iii) the directors and executive officers of the
      Company as a group.


Name
                (Age)
            Position
            
            Director
              Since
            
            
            Present
              Term
              Expires
            
            
            Shares
                of
              Common
                Stock
              Beneficially
                Owned
            
            
            Shares
                of
              Percent
              of
                Class(1)DIRECTORS
                CONTINUINGIN
                OFFICE:Erica
                D. Dekko
                (38)
            Director
            
            2001
            
            
            2009
            
            
            
            15,100
            (2)
            
            
            *Maurice
                F. Winkler, III
                (51)
            Director
                and President of Peoples
                Bancorp and Peoples Federal
            
            1993
            
            
            2009
            
            
            
            45,568
            (3)
            
            
            1.47
            %Bruce
                S. Holwerda
                (59)
            Director
            
            1998
            
            
            2010
            
            
            
            1,523
            (4)
            
            
            *Stephen
                R. Olson
                (64)
            Director
            
            2000
            
            
            2010
            
            
            
            14,551
            (5)
            
            
            *NOMINEE
                FOR TWOYEAR
                TERM:John
                C. Thrapp
                (73)
            Director
            
            1990
            
            
            2010
            
            
            
            11,165
            (6)
            
            
            *NOMINEE
                FOR THREE YEAR
                TERM:G.
                Richard Gatton
                (65)
            Chairman
                of the
                Board
            
            2000
            
            
            2011
            
            
            
            27,985
            (7)
            
            
            *Douglas
                D. Marsh
                (66)
            Director
            
            1990
            
            
            2011
            
            
            
            10,000
            (8)
            
            
            *NAMED
                EXECUTIVE OFFICERS WHO ARE
                NOT DIRECTORS OR NOMINEES:Steven
                H. Caryer (44)
            Vice
                President and Chief Financial
                Officer
            
            
            N/A
            
            
            
            N/A
            
            
            
            -0-
            
            
            
            -Jeffery
                H. Gatton (44)
            Sr.
                Vice President and Chief
                Operating Officer
            
            
            N/A
            
            
            
            N/A
            
            
            
            6,789
            (9)
            
            
            *Jeffrey
                L. Grate (44)
            Vice
                President
              of
                Lending
                Operations
            
            
            N/A
            
            
            
            N/A
            
            
            
            6,753
            (10)
            
            
            *All
                executive officers and
                directors of the Company as a group (11 persons)
            
            
            
            140,133
            
            
            
            4.51
            %


______________


*
      Under
      1.0%





(1)
            Computed
                based upon a total of 3,104,990 issued and outstanding shares of
                common
                stock as ofDecember 14,
                2007.


(2)
            All
                of the shares owned by Ms. Dekko are owned directly with sole voting
                and
                investment power.


(3)
            Of
                the shares owned by Mr. Winkler, 37,848 are held by Mr. Winkler with
                sole
                voting and investment power and 7,720 shares are held by Mr. Winkler’s
                wife with sole voting and investment power. Mr. Winkler disclaims
                beneficial ownership of shares held by his wife.


(4)
            All
                of the shares owned by Mr. Holwerda are owned directly with sole
                voting
                and investment power.


(5)
            Includes
                1,188 shares of common stock subject to options exercisable within
                60 days
                of the voting record date. Also includes, 11,198 shares owned by
                Mr. Olson
                with sole voting and investment power, 1,809 shares of common stock
                owned
                by the spouse of Mr. Olson for which Mr. Olson has no voting or
                dispositive power and of which Mr. Olson disclaims beneficial ownership.
                Mr. Olson was in a partnership that was dissolved on 2/26/2007 andshared voting
                and
                investment powers of 594 shares. He retained 356 of these shares
                with sole
                voting and investment powers.


-88-


(6)
            Of
                the shares owned by Mr. Thrapp, 6,500 shares are held by Mr. Thrapp
                with
                voting and investment power shared with his spouse, 3,689 shares
                are held
                by Mr. Thrapp with sole voting and dispositive power, and 976 shares
                are
                held by Mr. Thrapp’s wife with sole voting and investment power. Mr.
                Thrapp disclaims beneficial ownership of shares held by his wife.


(7)
            Includes
                11,674 shares of common stock for which Mr. Gatton shares voting
                or
                dispositive power with his spouse, and 16,311 shares for which he
                has sole
                voting and dispositive power.(8)
            Of
              the shares owned by Mr. Marsh, 1,000 shares are held by Mr. Marsh with
              sole voting and investment power, and 9,000 shares are held in the
              Judith
              A. Marsh Credit Shelter Trust with Mr. Marsh as beneficiary. The Trust
              holds sole voting and investment power.(9)
            All
              of the shares owned by Mr. Gatton are owned directly with sole voting
              and
              investment power.(10)
            Includes
              1,500 shares of common stock subject to options exercisable within
              60 days
              of the voting record date. Of the remaining 5,253 shares owned by Mr.
              Grate, 3,166 shares are held by Mr. Grate with sole voting and investment
              power, and he shares voting and investment power with his wife for
              2,087
              shares. Mr. Grate disclaims beneficial interest in the holdings of
              his
              wife.











There
      are no persons known to the
      Company who own beneficially more than 5% of the Company’s common stock as ofDecember 18,
      2007.





Item
      13.  Certain
      Relationships and Related Transactions, and Director
      Independence





Transactions
      with Certain Related Persons





Peoples
      Federal has followed the policy
      of offering loans to the Company’s and Peoples Federal’s directors, officers,
      and employees for the financing of their principal residences. These loans
      are
      made in the ordinary course of business on substantially the same terms and
      collateral, including interest rates, as those of comparable transactions
      prevailing at the time and do not involve more than the normal risk of
      collectability or present other unfavorable features. Peoples Federal grants
      consumer loans to directors, officers, and employees at rates and terms
      applicable to its other customers. All loans to executive officers and directors
      are subject to Office of Thrift Supervision regulations restricting loans and
      other transactions with affiliated persons of Peoples
      Federal.





The
      Company has 11 executive officers
      and directors, and the aggregate total of loans outstanding to these individuals
      as ofSeptember 30,
      2007, was
      $576,932.





During
      the fiscal year endedSeptember 30,
      2007, the Company
      repurchased 5,728 shares from Mr. Jeffrey Gatton, Peoples Federal’s Sr. Vice
      President and Chief Operating Officer, acquired upon the exercise of his stock
      options for an aggregate price of $111,753, or $19.51 per
      share.





Director
      Independence





The
      Board of Directors has determined
      the following directors, constituting a majority of the members of the Board,
      are independent as defined in the applicable listing standards of the NASDAQ
      Stock Exchange: Erica D. Dekko, Bruce S. Holwerda, Douglas D. Marsh, Stephen
      R.
      Olson, and John C. Thrapp.





The
      Board of Directors has standing
      Budget/Compensation, Audit, and Nominating and Governance Committees, each
      of
      which is comprised of directors who meet the standards for independence set
      forth in the Listing Standards of the NASDAQ Stock Exchange. The Board of
      Directors of the Company considers the independence of each of the directors
      under the Listing Standards of the NASDAQ Stock Exchange which for purposes
      of
      determining the independence of Audit Committee members also incorporate the
      standards of the Securities and Exchange Commission included in Reg. §
240.10A-3(b)(1). Among other things, the Board considers current or previous
      employment relationships as well as material transactions or relationships
      with
      and between the Company and its subsidiaries and the directors, members of
      their
      immediate family, or entities in which the directors have a significant
      interest. The purpose of this review is to determine whether any relationships
      or transactions exist or have occurred that are inconsistent with a
      determination that the director is independent. Regularly scheduled Executive
      Sessions of the independent directors are held concurrently with Audit Committee
      meetings.


-89-


Item
      14.  Principal Accounting Fees and Services





Audit
      Services.  The
      firm of BKDLLP(BKD)
      served as our Independent Public
      Accountants for each of our last two fiscal years endedSeptember 30, 2007and
      2006. The aggregate fees billed by
      BKD for the audit of our financial statements included in our Annual Report
      on
      Form 10-K and for the review of our financial statements included in our
      quarterly reports on Form 10-Q for our fiscal years ended September 30, 2007
      and
      2006, were $87,500 and $83,500, respectively.





Audit-Related
      Fees.  Audit
      related fees billed in fiscal 2007 totaled $10,700 and consisted of fees related
      to the audit of the Company’s employee benefit plans.





Tax
      Fees.  The aggregate fees billed
      in each of fiscal 2007 and 2006 for professional services rendered by BKD for
      tax compliance, tax advice or tax planning were $19,000 and $17,075,
      respectively.





All
      Other
      Fees.  There were
      no fees billed in fiscal 2007 or 2006 for professional services rendered by
      BKD
      except as disclosed above.





Pre-Approval
      Policies and Procedures.  The Audit Committee has
      established pre-approval policies and procedures, pursuant to which the Audit
      Committee approved all of the foregoing audit services provided by BKD in 2007.
      Consistent with the Audit Committee’s responsibility for engaging the Company’s
      independent accountants, all audit and permitted non-audit services require
      pre-approval by the Audit Committee. The full Audit Committee approves proposed
      services and fee estimates for these services. The Audit Committee chairperson
      or its designee has been designated by the Audit Committee to approve any
      services arising during the year that were not pre-approved by the Audit
      Committee. Services approved by the Audit Committee chairperson are communicated
      to the full Audit Committee at its next regular meeting and the Audit Committee
      reviews services and fees for the fiscal year at each such meeting. Pursuant
      to
      these procedures, the Audit Committee approved the foregoing services provided
      by BKD.


-90-




PART
      IV







Item
      15.  Exhibits, Financial Statement Schedules





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





1.           
      Financial
      Statements





10-K
                PageNumberReport
                of Independent Registered Public Accounting Firm (BKD LLP)
            
            44Consolidated
                Balance Sheets as of September 30, 2007 and 2006
            
            45Consolidated
                Statements of Income for the Years Ended September 30, 2007, 2006
                and
                2005
            
            46Consolidated
                Statements of Stockholders’ Equity for the Years Ended September 30, 2007,
                2006 and 2005
            
            47Consolidated
                Statements of Cash Flows for the Years Ended September 30, 2007,
                2006 and
                2005
            
            48Notes
                to Consolidated Financial Statements
            
            49





2.          
      Financial Statement
      Schedules





All
      schedules are omitted because they
      are either not applicable or the required information is shown in the
      Consolidated Financial Statements and related Notes contained in Item 8.
      Financial Statements and Supplementary Data.





3.          
      Exhibits





The
      exhibits listed in the Exhibit Index
      are filed with or incorporated herein by reference.





(b)        The
      exhibits filed herewith or incorporated by reference herein are set forth on
      the
      Exhibit Index.





(c)       
      All schedules are omitted because they are either not applicable or the required
      information is shown in the Consolidated Financial Statements and related Notes
      contained in Item 8. Financial Statements and Supplementary Data.





The
      Securities and Exchange Commission maintains a Web site that contains reports,
      proxy and information statements and other information regarding registrants
      that file electronically with the Commission including the Company. That address
      is http://www.sec.gov.


-91-


SIGNATURES





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





PEOPLES
                BANCORP/s/
                G. R. GattonDecember
                20, 2007
            G.
                Richard GattonChairman
                of the Board, and Director





Pursuant
      to the requirements of the
      Securities Exchange Act of 1934, this report has been signed below by the
      following persons on behalf of the registrant and in the capacities and on
      the
      dates indicated.





/s/
                G. R. GattonDecember
                20, 2007
            G.
                Richard Gatton,Chairman
                of the Board, and Director/s/
                M. F. Winkler IIIDecember
                20, 2007
            Maurice
                F. Winkler, III,President,
                Chief Executive Officer and Director/s/
                Steven H. CaryerDecember
                20, 2007
            Steven
                H. CaryerVice
                President, Chief Financial Officer/s/
                Bruce S. HolwerdaDecember
                20, 2007
            Bruce
                S. Holwerda, DirectorDecember
                __, 2007
            Erica
                D. Dekko, Director/s/
                Douglas D. MarshDecember
                20, 2007
            Douglas
                D. Marsh, Director/s/
                Stephen R. OlsonDecember
                20, 2007
            Stephen
                R. Olson, Director/s/
                John C. ThrappDecember
                20, 2007
            John
                C. Thrapp, Director


-92-


EXHIBIT
      INDEX








Exhibit
                No.
            
            Description
                of Exhibit3.1
            
            Articles
                of
                Incorporation of Peoples Bancorp areincorporated by reference to
                the same Exhibit in the Registrant’s Registration Statement on Form S-4
                (33-37343) filed with the Securities and Exchange Commission on October
                17, 1990.3.2
            
            Bylaws
                of Peoples Bancorp, as amended and restated on August 23, 2007, are
                incorporated by reference to the same Exhibit in the Registrant’s Current
                Report on Form 8-K filed with the Securities and Exchange Commission
                on
                August 24, 2007.10.1*
            
            1998
                Peoples Bancorp Stock Option and Incentive Plan is incorporated by
                reference to Exhibit 10.1 to the Registrant’s Form 10-K filed with the
                Securities and Exchange Commission on December 22,
                2006.10.2*
            
            Three
                Rivers Financial Corporation Stock Option and Incentive Plan (as
                assumed
                by Peoples Bancorp) is incorporated by reference to the same Exhibit
                in
                the Three Rivers Financial Corporation’s Annual Report on Form 10-KSB
                (Commission File Number 1-13826) for the year ended June 30,
                1996.10.3*
            
            Employment
                Agreement with Maurice F. Winkler, III is incorporated by reference
                to the
                Registrant’s Current Report on Form 8-K filed with the Securities and
                Exchange Commission on December 19, 2007.10.4*
            
            Employment
                Agreement with Steven H. Caryer is incorporated by reference to the
                Registrant’s Current Report on Form 8-K filed with the Securities and
                Exchange Commission on December 19, 2007.10.5*
            
            Employment
                Agreement with Jeffrey H. Gatton is incorporated by reference to
                the
                Registrant’s Current Report on Form 8-K filed with the Securities and
                Exchange Commission on December 19, 2007.10.6*
            
            Retirement
                Benefits Agreement between First Savings Bank, a Federal Savings
                Bank, and
                G. Richard Gatton, dated October 26, 2006, is incorporated by reference
                to
                Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the
                Securities and Exchange Commission on November 1, 2006.14
            
            Code
                of Ethical Conduct for Financial Managers is incorporated by reference
                to
                Exhibit 14 of the Registrant’s Annual Report on Form 10-K filed with the
                Securities and Exchange Commission on December 23,
                2004.21
            
            Subsidiaries
                of the Registrant.23
            
            Consent
                of BKD, LLP.31.1
            
            Rule
                13a-14(a)/15d-14(a) Certification of CEO.31.2
            
            Rule
                13a-14(a)/15d-14(a) Certification of CFO.32.1
            
            Section
                1350 Certification of CEO.32.2
            
            Section
                1350 Certification of CFO.*
            
            Indicates
                management contract or compensatory plan, contract or
                arrangement.






-93-