**SECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

** **

**FORM 10-K**

** **

**(Mark One)**

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

 

**For the fiscal year endedDecember 31, 2006**

** **

**OR**

** **

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

 

Commission File No.: 000-29949

 

**PEOPLES COMMUNITY BANCORP, INC.**

(Exact Name of Registrantas Specified in Its Charter)

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

 

**(513) 870-3530**

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(Registrant’s Telephone Number, Including Area Code)

 

Securities registered under Section 12(b) of theExchange Act:

 

| **Common Stock (par value $.01 per share)** | ** ** | **Nasdaq  Global Market**                    |
|---------------------------------------------|------------|----------------------------------------------|
| (Title of Class)                            |       | (Name of Each  Exchange on Which Registered) |

 

Securities registered under Section 12(g) of theExchange Act:

 

**Not Applicable**

** **

Indicate by check mark if the Registrant is awell-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes* *o*  *No* *x

Indicate by check mark if the Registrant is notrequired to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes o   No x

Indicate by check mark whether the Registrant: (1) hasfiled all reports required to be filed by Section 13 or 15(d) of the ExchangeAct during the preceding 12 months (or for such shorter period that theRegistrant was required to file such reports), and (2) has been subject to suchfiling requirements for the past 90 days. Yes x   Noo

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

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

Large accelerated filer o                                       Acceleratedfiler o                                       Non-acceleratedfiler x

Indicate by check mark whether the registrant is ashell company (as defined in Rule 12b-2 of the Exchange Act). Yes o   No x

As of June 29, 2006, the aggregate value of the4,828,451 shares of Common Stock of the Registrant issued and outstanding onsuch date, which excludes 1,081,402 shares held directly or indirectly by alldirectors and executives officers of the Registrant and the Registrant’sEmployee Stock Ownership Plan (“ESOP”) as a group, was approximately $74.4million.  This figure is based on theclosing sales price of $19.85 per share of the Registrant’s Common Stock onJune 29, 2006.  Although directors andexecutive officers and the ESOP were assumed to be “affiliates” of theRegistrant for purposes of this calculation, the classification is not to beinterpreted as an admission of such status.

Number of shares of Common Stock outstanding as ofMarch 28, 2007: 4,829,699

 

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**TABLE OF CONTENTS**
|            | ** ** | ** **                                                                                                              | ** ** | **Page** | ** ** |
|------------|------------|-------------------------------------------------------------------------------------------------------------------------|------------|----------|------------|
|       |       | PART I                                                                                                             |       |     |       |
|       |       |                                                                                                                    |       |     |       |
| Item 1.    |       | Business                                                                                                                |       |     |       |
|       |       | General                                                                                                                 |       | 3        |       |
|       |       | Peoples  Lending Activities                                                                                             |       | 4        |       |
|       |       | Asset Quality                                                                                                           |       | 11       |       |
|       |       | Investment  Securities                                                                                                  |       | 16       |       |
|       |       | Sources of  Funds                                                                                                       |       | 17       |       |
|       |       | Competition                                                                                                             |       | 21       |       |
|       |       | Regulation                                                                                                              |       | 21       |       |
|       |       | Taxation                                                                                                                |       | 27       |       |
| Item  1A.  |       | Risk  Factors                                                                                                           |       | 29       |       |
| Item 1B.   |       | Unresolved Staff Comments                                                                                               |       | 30       |       |
| Item 2.    |       | Properties                                                                                                              |       | 31       |       |
| Item  3.   |       | Legal  Proceedings                                                                                                      |       | 32       |       |
| Item 4.    |       | Submission of Matters to a Vote of Security Holders                                                                     |       | 32       |       |
|       |       |                                                                                                                    |       |     |       |
|       |       | PART II                                                                                                                 |       |     |       |
|       |       |                                                                                                                    |       |     |       |
| Item 5.    |       | Market for Registrant’s Common Equity, Related  Stockholder Matters and Issuer Purchases of Equity Securities |       | 32       |       |
| Item  6.   |       | Selected  Financial Data                                                                                                |       | 32       |       |
| Item 7.    |       | Management’s Discussion and Analysis of Financial  Condition and Results of Operations                             |       | 32       |       |
| Item 8.    |       | Financial Statements and Supplementary Data                                                                             |       | 32       |       |
| Item 9.    |       | Changes in and Disagreements with Accountants on  Accounting and Financial Disclosure                                   |       | 33       |       |
| Item 9A.   |       | Controls and Procedures                                                                                                 |       | 33       |       |
| Item  9B.  |       | Other  Information                                                                                                      |       | 34       |       |
|       |       |                                                                                                                    |       |     |       |
|       |       | PART III                                                                                                                |       |     |       |
|       |       |                                                                                                                    |       |     |       |
| Item 10.   |       | Directors, Executive Officers and Corporate Governance                                                                  |       | 34       |       |
| Item 11.   |       | Executive Compensation                                                                                                  |       | 34       |       |
| Item 12.   |       | Security Ownership of Certain Beneficial Owners and  Management and Related Stockholder Matters               |       | 34       |       |
| Item 13.   |       | Certain Relationships and Related Transactions, and  Director Independence                                              |       | 35       |       |
| Item 14.   |       | Principal Accountant Fees and Services                                                                                  |       | 35       |       |
|       |       |                                                                                                                    |       |     |       |
|       |       | PART IV                                                                                                                 |       |     |       |
|       |       |                                                                                                                    |       |     |       |
| Item 15.   |       | Exhibits and Financial Statement Schedules                                                                              |       | 35       |       |
|       |       |                                                                                                                    |       |     |       |
| Signatures |       |                                                                                                                    |       | 37       |       |

 

2

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**PART I**

**Item 1.Business**

**General**

Peoples Community Bancorp, Inc. (“Peoples” or the “Company”) wasorganized in December 1999 at the direction of the Board of Directors of ThePeople’s Building, Loan and Savings Company, presently Peoples Community Bank(the “Bank”), for the purpose of holding all of the capital stock of the Bankand in order to facilitate the conversion of the Bank from an Ohio-charteredmutual savings and loan association to a federally-chartered stock savings bank(the “Conversion”).  (Unless the contextotherwise requires, reference to Peoples includes the Bank).  In fiscal year 2005, Peoples changed itscharter to a federal bank holding company, in order to acquire an investmentinterest in a local bank holding company. In fiscal year 2006, Peoples sold itsinvestment interest in the local bank holding company and converted its charterto a registered savings and loan holding company. People’s assets consistprimarily of the outstanding shares of common stock of the Bank, investmentsmade with the portion of the net proceeds from the issuance of Peoples sharesto the public (the “Offering”) retained by Peoples, and Peoples’ loan to theemployee stock ownership plan (the “ESOP”). Peoples has no significant liabilities other than junior subordinateddebentures issued in fiscal 2005 and a $17.5 million line of credit.  The management of Peoples and the Bank aresubstantially identical and Peoples neither owns nor leases any property butinstead uses the premises, equipment and furniture of the Bank. The Bank is afederally-chartered stock savings bank that was originally organized in1889.  The Bank conducts its businessfrom nineteen offices in Hamilton, Warren, and Butler Counties in Ohio andDearborn and Ohio Counties in Indiana. The Bank is primarily engaged in attracting deposits from the generalpublic and using those funds to originate loans and invest in securities.  The Bank’s primary lending emphasis has been,and continues to be, loans secured by first liens on single-family (one- tofour-units) residential properties located in its local market.  However, over the past five fiscal years, the Bank has placed an increasing emphasison multi-family residential loans, nonresidential real estate and land loans,construction loans, commercial loans and consumer loans.  As a result, as a percentage of the totalloan portfolio, single-family residential loans have decreased from 57.8% atSeptember 30, 2001 to 42.3% at December 31, 2006, while multi-familyresidential loans, nonresidential real estate and land loans, constructionloans, commercial loans and consumer loans have increased during the same timeperiod from 8.7% to 15.0%, 15.7% to 17.3%, 15.0% to 28.9%, 2.3% to 3.8% and0.5% to 2.9%, respectively.

The Company was formed in December 1999 inconnection with the mutual to stock conversion of the Bank, and the sale of1,190,000 shares of common stock to depositors and members of thecommunity.  The Bank conducts itsbusiness from nineteen full service offices in Hamilton, Warren and Butlercounties in Southwest Ohio and Dearborn and Ohio Counties in SoutheastIndiana.  The Bank’s business isconducted through an aggressive marketing and selling effort of its lendingproducts and services to the communities in its market area and through thecontinued development of innovative lending programs that give the Bank acompetitive advantage.  The Bank offers awide variety of loan products, including single and multi-family residentialloans, nonresidential real estate and land loans and construction loans.  In addition, the Bank invests insecurities.  The funds for the Bank’slending and investment activities are primarily provided by deposits andborrowings.  At December 31, 2006, theCompany had $1.0 billion in total assets, $755.3 million in deposits, $156.9million in borrowings (excluding subordinated debentures) and $87.6 million ofstockholders’ equity.  The Company’sprincipal executive office is located at 6100 West Chester Road, West Chester,Ohio 45071-1130.  The Company’s telephonenumber is (513) 870-3530.

As a result of acquisitions and internal growth, theCompany has grown from $416.0 million in total assets as of September 30, 2001to $1.0 billion in total assets as of December 31, 2006.  Between the completion of the public offeringin March 2000 and December 31, 2006, the Company has acquired six financialinstitutions with aggregate total assets as of the time of acquisition of$495.6 million.  Also, in September 2003,the Company purchased $32.8 million in loans and assumed $55.6 million indeposits in connection with the acquisition of two branch offices from anotherfinancial institution.  The Company hassupplemented this growth from acquisitions with loan generation securedprimarily by real estate in its market area. Loan originations increased from $241.1

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million in fiscal 2001, $261.6 million in fiscal 2002, $278.6 millionin fiscal 2003, $289.5 million in fiscal 2004 and $337.0 million in fiscal 2005to $341.6 million in fiscal 2006.  Loansreceivable, net increased from $377.7 million at September 30, 2001 to $812.6million at December 31, 2006.  Inaddition, since September 30, 2000, the Company has expanded its franchisethrough the opening of six full service branch offices. These new branchoffices, as well as acquired branch offices, have expanded the Company’s marketpresence and facilitated its loan production growth.  The Company’s loan growth has been funded inpart by deposits.  The Company has placedan emphasis on deposit generation both internally and through whole bank andbranch acquisitions.  Deposits haveincreased from $233.1 million at September 30, 2001 to $755.3 million atDecember 31, 2006.

OnJune 9, 2006, the Company acquired Mercantile Financial Corporation (“Mercantile”)and its wholly-owned subsidiary, Mercantile Savings Bank, which operated onebranch office in Cincinnati, Ohio.  TheBank paid $34.78 in cash and exchanged 43.10 shares of stock for each of theoutstanding common shares of Mercantile, resulting in aggregate mergerconsideration of approximately $9.3 million, including acquisition costs.  This acquisition complements our market area,and increases our market share and scale of operations.

OnDecember 29, 2006, the Company sold its 69,925 shares of Columbia for anaggregate purchase price of $2.9 million. In conjunction with this divesture, the Corporation converted its charter to a registered savingsand loan holding company.

The Bank is subject toexamination and comprehensive regulation by the Office of Thrift Supervision,which is the Bank’s chartering authority and primary federal regulator.  The Bank is also regulated by the FederalDeposit Insurance Corporation (the “FDIC”), administrator of the SavingsAssociation Insurance Fund.  The Bank isa member of the Federal Home Loan Bank (the “FHLB”) of Cincinnati, which is oneof the 12 regional banks comprising the FHLB System.

As previously announced, theBoard of Directors of the Company adopted an amendment to Article VI of theCompany’s Bylaws to change the Company’s fiscal year end from September 30, toDecember 31, effective retroactively to January 1, 2006, in order to increaseoperational efficiency.  As a result, theconsolidated statements of financial condition compares December 31, 2006 toDecember 31, 2005, while the consolidated statements of operations, theconsolidated statements of comprehensive income (loss), and the consolidatedstatements of cash flow reflect, as applicable, the twelve month period endedDecember 31, 2006, the three month period ended December 31, 2005, the twelvemonth period ended September 30, 2005 and the twelve month period endedSeptember 30, 2004.

**PeoplesLending Activities**

**General.**  AtDecember 31, 2006, the net loan portfolio of Peoples totaled $812.6million, representing approximately 79.0% of total assets at that date. Theprincipal lending activity of Peoples is the origination of residential andnonresidential real estate loans. At December 31, 2006, residential loans(including construction loans secured by residential real estate) amounted to$570.3 million, or 63.7% of the gross loan portfolio.  Nonresidential real estate and land loanstotaled $140.9 million, or 15.7% of the gross loan portfolio and nonresidentialconstruction loans amounted to $130.1 million, or 14.5% of the gross loanportfolio as of December 31, 2006. Further, commercial loans amounted to $30.9 million, or 3.5% of thegross loan portfolio at December 31, 2006 and consumer loans amounted to $23.0million, or 2.6% of the gross loan portfolio at such time.  Peoples has placed an increased emphasis onmulti-family residential loans, nonresidential real estate and land loans,construction loans, commercial loans and consumer loans over the last fivefiscal years.  The aggregate amount ofthese loans has increased to $551.9 million, or 61.6% of the gross loanportfolio at December 31, 2006, compared to $260.6 million, or 46.8% ofthe gross loan portfolio at September 30, 2002. Notwithstanding the overall increase during the period between September30, 2002 and December 31, 2006, the Company currently expects to curtail itsacquisition and development lending, one- to four-family residential investmentlending, and unsecured commercial lending due in large part to the softening ofthe local housing market, the increase in the Bank’s nonaccrual loans andcharge-offs, and to realign the portfolio due to loan concentrations.Commercial

4

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loans have decreased from $47.3 million, or 5.6% ofnet loans at December 31, 2005, to $30.9 million, or 3.8% of the net loans atDecember 31, 2006.

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

A savings institution generally may notmake loans to one borrower and related entities in an amount which exceeds 15%of its unimpaired capital and surplus. However, loans in an amount equal to an additional 10% of unimpairedcapital and surplus may be made to a borrower if the loans are fully secured byreadily marketable securities.   AtDecember 31, 2006, Peoples’ regulatory limit on loans-to-one borrower was$15.5 million.  All of Peoples’ fivelargest loans or groups of loans-to-one borrower, amounting to $13.0 million,$12.5 million, $12.5 million, $12.5 million and $12.0 million at December 31,2006 were performing in accordance with their terms at such date.

5

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**LoanPortfolio Composition.**  The following table sets forth thecomposition of Peoples’ loans at the dates indicated.

 
| ** **                              | ** ** | **December 31,**                | ** ** | **September 30,** | ** ** |
|-----------------------------------------|------------|--------------------------------------|------------|------------------------|------------|
| ** **                              | ** ** | **2006**                             | ** ** | **2005**               | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** |
| ** **                              | ** ** | ** **                           | ** ** | **Percent of**    | ** ** | ** ** | ** ** | **Percent of** | ** ** | ** ** | ** ** | **Percent of** | ** ** | ** ** | ** ** | **Percent of** | ** ** | ** ** | ** ** | **Percent of** | ** ** | ** ** | ** ** | **Percent of** | ** ** |
| ** **                              | ** ** | **Amount**                           | ** ** | **Net loans**     | ** ** | **Amount** | ** ** | **Net loans** | ** ** | **Amount** | ** ** | **Net loans** | ** ** | **Amount** | ** ** | **Net loans** | ** ** | **Amount** | ** ** | **Net loans** | ** ** | **Amount** | ** ** | **Net loans** | ** ** |
| ** **                              | ** ** | **(Dollars in Thousands)** | ** ** |
| Mortgage loans:                         |       |                                 |       |                   |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Single-family residential               |       | $                                    | 343,346    |                   | 42.3       | % | $ | 341,233 |   | 40.1 | % | $ | 252,424 |   | 35.8 | % | $ | 226,735 |   | 37.8 | % | $ | 230,775 |   | 41.7 | % | $ | 296,294 |   | 58.8 | % |
| Multi-family residential                |       | 122,221                              |       | 15.0                   |       | 124,984 |   | 14.7 |   | 122,802 |   | 17.4 |   | 106,799 |   | 17.8 |   | 95,459 |   | 17.2 |   | 56,980 |   | 11.3 |   |
| Nonresidential real estate and land     |       | 140,909                              |       | 17.3                   |       | 147,086 |   | 17.3 |   | 132,502 |   | 18.8 |   | 158,907 |   | 26.5 |   | 131,444 |   | 23.7 |   | 88,029 |   | 17.5 |   |
| Construction loans                      |       | 234,830                              |       | 28.9                   |       | 259,249 |   | 30.4 |   | 220,733 |   | 31.3 |   | 124,996 |   | 20.9 |   | 122,598 |   | 22.1 |   | 90,002 |   | 17.9 |   |
| Total mortgage  loans                   |       | 841,306                              |       | 103.5                  |       | 872,552 |   | 102.5 |   | 728,461 |   | 103.3 |   | 617,437 |   | 103.0 |   | 580,276 |   | 104.7 |   | 531,305 |   | 105.5 |   |
|                                    |       |                                 |       |                   |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Commercial loans                        |       | 30,933                               |       | 3.8                    |       | 47,258 |   | 5.6 |   | 43,231 |   | 6.1 |   | 33,238 |   | 5.5 |   | 29,955 |   | 5.4 |   | 21,280 |   | 4.2 |   |
| Consumer loans                          |       | 23,022                               |       | 2.9                    |       | 24,898 |   | 2.9 |   | 22,502 |   | 3.2 |   | 21,781 |   | 3.6 |   | 11,769 |   | 2.1 |   | 4,265 |   | 0.8 |   |
| Total loans  receivable                 |       | 895,261                              |       | 110.2                  |       | 944,708 |   | 111.0 |   | 794,194 |   | 112.6 |   | 672,456 |   | 112.1 |   | 622,000 |   | 112.2 |   | 556,850 |   | 110.5 |   |
| Less:                                   |       |                                 |       |                   |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Undisbursed portion of loans in process |       | (62,042                              | )          | (7.6                   | )          | (77,094 | ) | (9.1 | ) | (72,894 | ) | (10.3 | ) | (59,045 | ) | (9.8 | ) | (55,308 | ) | (10.0 | ) | (43,144 | ) | (8.6 | ) |
| Allowance for loan losses               |       | (18,369                              | )          | (2.3                   | )          | (13,444 | ) | (1.6 | ) | (13,697 | ) | (1.9 | ) | (11,025 | ) | (1.8 | ) | (9,744 | ) | (1.8 | ) | (7,656 | ) | (1.5 | ) |
| Deferred loan fees                      |       | (2,272                               | )          | (0.3                   | )          | (2,900 | ) | (0.3 | ) | (2,889 | ) | (0.4 | ) | (2,920 | ) | (0.5 | ) | (2,597 | ) | (0.4 | ) | (2,038 | ) | (0.4 | ) |
| Loans receivable, net                   |       | $                                    | 812,578    |                   | 100.0      | % | $ | 851,270 |   | 100.0 | % | $ | 704,714 |   | 100.0 | % | $ | 599,466 |   | 100.0 | % | $ | 554,351 |   | 100.0 | % | $ | 504,012 |   | 100.0 | % |

** **

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**Originationof Loans.**  The lending activities of Peoples are subjectto the written underwriting standards and loan origination proceduresestablished by the Board of Directors and management.  Loan originations are obtained through avariety of sources, including referrals from real estate brokers, builders andexisting customers. Written loan applications are taken by loan officers.  Loan processors obtain or procure creditreports, appraisals and other documentation involved with a loan.  Property valuations are performed byindependent outside appraisers approved by the Board of Directors of Peoples.  Over the past twelve months, the Bank hasrevised its underwriting standards to place an increased focus on cash flowanalysis.  This represents a transitionfrom underwriting standards primarily based on collateral value, which are generally used by thrifts, tounderwriting standards more widely used by banks, whereby the borrower’s cashflow capacity to service the loan is the primary focus.

Under the real estatelending policy of Peoples, a title opinion must be obtained for each realestate loan.  Peoples also requires fireand extended coverage casualty insurance, in order to protect the propertiessecuring its real estate loans. Borrowers must also obtain flood insurance policies when the property isin a flood hazard area as designated by the Department of Housing and Urban Development.  Peoples does not require borrowers to advancefunds to an escrow account for the payment of real estate taxes or hazardinsurance premiums.

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

Unsecured loans up to $500,000 requireapproval by three senior executive officers and those greater than $500,000,individually or in the aggregate, must be approved by the Board of Directors orthe executive committee of the Board of Directors.  The executive committee ratifies allapprovals and presents its report on a monthly basis for the Board of Directorsreview and approval.

**Activity inLoans.**  The following table shows the activity inPeoples’ loans during the periods indicated.
| ** **                                   | ** ** | **Year Ended  December 31,** | ** ** | **Three Months  Ended  December 31,** | ** ** | **Year Ended September 30,** | ** ** |
|----------------------------------------------|------------|----------------------------------------|------------|-------------------------------------------------|------------|---------------------------------------------|------------|
| ** **                                   | ** ** | **2006**                               | ** ** | **2005**                                        | ** ** | **2005**                                    | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** |
| ** **                                   | ** ** | **(In Thousands)**                | ** ** |
| Total loans held  at beginning of period     |       | $                                      | 944,708    |                                            | $          | 794,194                                     |       | $ | 672,456 |   | $ | 622,000 |   | $ | 556,850 |   | $ | 419,534 |   |
| Originations of  loans:                      |       |                                   |       |                                            |       |                                        |       |   |   |   |   |   |   |
| Mortgage loans:                              |       |                                   |       |                                            |       |                                        |       |   |   |   |   |   |   |
| Single-family residential                    |       | 90,797                                 |       | 29,831                                          |       | 79,588                                      |       | 89,145 |   | 63,502 |   | 90,592 |   |
| Multi-family residential                     |       | 40,510                                 |       | 12,659                                          |       | 42,248                                      |       | 29,357 |   | 50,686 |   | 28,531 |   |
| Construction                                 |       | 106,240                                |       | 19,295                                          |       | 91,494                                      |       | 75,278 |   | 101,019 |   | 72,167 |   |
| Nonresidential real estate and land          |       | 80,004                                 |       | 32,450                                          |       | 85,658                                      |       | 70,158 |   | 30,170 |   | 39,855 |   |
| Commercial loans                             |       | 18,995                                 |       | 8,899                                           |       | 34,768                                      |       | 23,051 |   | 25,852 |   | 26,656 |   |
| Consumer loans                               |       | 5,093                                  |       | 846                                             |       | 11,058                                      |       | 12,374 |   | 7,344 |   | 3,775 |   |
| Total originations (1)                       |       | 341,639                                |       | 103,980                                         |       | 344,814                                     |       | 289,465 |   | 278,573 |   | 261,576 |   |
|                                         |       |                                   |       |                                            |       |                                        |       |   |   |   |   |   |   |
| Increase due to  Kenwood acquisition         |       | —                                 |       | —                                          |       | —                                      |       | — |   | — |   | 40,326 |   |
| Increase due to  Ameriana branch acquisition |       | —                                 |       | —                                          |       | —                                      |       | — |   | 32,769 |   | — |   |
| Increase due to  American State acquisition  |       | —                                 |       | —                                          |       | 38,358                                      |       | — |   | — |   | — |   |
| Increase due to  Peoples Federal acquisition |       | —                                 |       | 122,643                                         |       | —                                      |       | — |   | — |   | — |   |
| Increase due to  Mercantile acquisition      |       | 38,030                                 |       | —                                          |       | —                                      |       | — |   | — |   | — |   |
| Total increases                              |       | 38,030                                 |       | 122,643                                         |       | 38,358                                      |       | — |   | 311,342 |   | 301,902 |   |
|                                         |       |                                   |       |                                            |       |                                        |       |   |   |   |   |   |   |
| Transfers to  real estate owned              |       | (1,008                                 | )          | —                                          |       | (1,854                                      | )          | (513 | ) | (2,863 | ) | (620 | ) |
| Charge-offs                                  |       | (13,103                                | )          | (2,206                                          | )          | (1,081                                      | )          | (2,360 | ) | (2,122 | ) | (1,547 | ) |
| Other increases (decreases) (2)              |       | (48,481                                | )          | 2,188                                           |       | 5,197                                       |       | (9,641 | ) | 5,879 |   | (9,212 | ) |
| Repayments                                   |       | (366,524                               | )          | (76,091                                         | )          | (263,696                                    | )          | (236,398 | ) | (247,086 | ) | (153,207 | ) |
| Net activity in  loans                       |       | (49,447                                | )          | 150,514                                         |       | 121,738                                     |       | 50,456 |   | 65,150 |   | 137,316 |   |
| Gross loans held at end  of period           |       | $                                      | 895,261    |                                            | $          | 944,708                                     |       | $ | 794,194 |   | $ | 672,456 |   | $ | 622,000 |   | $ | 556,850 |   |

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(1)                      Undisbursedportions of loans in process totaled $62.0 million, $77.1 million, $72.9million, $59.0 million, $55.3 million, and $43.1 million at December 31, 2006and 2005, and September 30, 2005, 2004, 2003, and 2002, respectively.

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(2)                      Includesloan participations sold of $5.1 million, $1.1 million, $5.0 million, $10.2million, and $6.7 million in fiscal 2006, 2005, 2004, 2003, and 2002,respectively.  There were no loanparticipations sold for the three months ended December 31, 2005.  For fiscal 2006 and 2005, includes wholeloans sold of $29.5 million and $6.7 million, respectively, and for the threemonths ended December 31, 2005, includes whole loans sold of $3.5 million. Thereduction in total loans resulting from sales of loans and loan participationsin fiscal 2006, the three months ended December 31, 2005, and fiscal 2005,2004, 2003, and 2002 were offset (increased) by increases (decreases) in undisbursedloans in process, and other net items totaling approximately $(13.9 million0,$5.7 million, $13.0 million, $5.3 million, $16.1 million, and ($2.5 million),respectively.

The significant repayments of $367.5million,  $263.7 million, $236.4 millionand $247.1 million during fiscal 2006, 2005, 2004 and 2003, respectively, wereprimarily due to the repayment of short-term construction loans and landdevelopment loans as well as the refinancing activity related toadjustable-rate single-family residential loans that were set to reprice in thecurrent year.

Charge-offs of $13.1 million during fiscal 2006consisted primarily of $4.1 million in loans secured by single-familyresidential real estate, $2.4 million in loans secured by multi-familyresidential real estate, $1.6 million in construction loans, $1.3 million inloans secured by commercial real estate and land, and $3.7 million incommercial and consumer loans.  Theincrease in charged-off loans was primarily due to real estate investors anddevelopers experiencing financial difficulties and a moderate decline in thelocal economy.  See “Asset Quality.”

Although federal laws and regulationspermit savings institutions to originate and purchase loans secured by realestate located throughout the United States, Peoples generally confines itslending activity to its primary market area of Warren, Butler and HamiltonCounties in Ohio and Dearborn and Ohio Counties in Indiana.  Subject to its loans-to-one borrower limitation,Peoples is permitted to invest without limitation in residential mortgage loansand up to 400% of its capital in loans secured by non-residential or commercialreal estate.  Peoples may also invest insecured and unsecured consumer loans in an amount not exceeding 35% of totalassets.  This 35% limitation may beexceeded for certain types of consumer loans. In addition, Peoples may invest up to 10% of its total assets in securedand unsecured loans for commercial, corporate, business or agriculturalpurposes.  At December 31, 2006,Peoples was within each of the above lending limits.

**One- toFour-Family Residential Real Estate Loans.** Despite the diversification of the loan portfolio over the past fewyears, the primary real estate lending activity of Peoples continues to be theorigination of loans secured by residential real estate.  At December 31, 2006, $343.3 million, or42.3% of the net loan portfolio of Peoples consisted of conventional one- tofour-family residential loans, compared to $341.2 million, or 40.1% at December31, 2005 and  $252.4 million or 35.8% ofthe net loan portfolio at September 30, 2005. The increase of $90.9 million, or 36.0% between September 30, 2005 andDecember 31, 2006, was due to approximately $160.7 million of single-familyresidential loans acquired in conjunction with the purchase of Peoples Federalin December 2005 and Mercantile in June 2006.

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

The residential mortgage loans originatedby Peoples consist of fixed rate and adjustable rate loans.  Presently, the single-family fixed-rateresidential mortgage loans originated by Peoples have terms of up to 30 years.  In addition, Peoples originates adjustable-ratemortgage loans on which the interest rate adjusts every one, three or fiveyears based upon the one-year or three-year rate on T-bills plus a specifiedmargin.  During fiscal 2004, Peoplesintroduced a five year fixed rate balloon product and a five year fixed rateproduct which adjusts on an annual basis thereafter based on the one-year rateon the T-bill.  At December 31, 2006,$159.4 million, or 46.4% of our single-family residential loans were fixed rateand $183.9 million, or 53.6% were adjustable rate.  Although significantly all of Peoples’single-family loans are originated for its portfolio, the single-familyresidential mortgage loans presently being originated by Peoples generallyconform to Fannie Mae and Freddie Mac requirements and may be sold in thesecondary market.

The non-owner occupiedresidential mortgage loans originated by Peoples are primarily to investors andbuilders, and are made on substantially the same terms as owner occupiedresidential real estate loans.  The Companycurrently 

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expects to curtail its one- to four-familyresidential  lending to investors, due inlarge part to the softening of the local housing market, the increase in theBank’s nonaccrual loans and charge-offs, and to realign the portfolio due toloan concentrations.

**Multi-familyResidential Loans.**  Peoples also originates multi-family (overfour units) residential loans.  Peoples’multi-family loans are primarily secured by apartment buildings or apartmentsbeing converted to condominium units. The multi-family residential mortgage loans of Peoples areunderwritten on substantially the same basis as its nonresidential real estateloans, discussed below, although loan-to-value ratios are generally limited to80%.  At December 31, 2006, Peopleshad $122.2 million in multi-family residential mortgage loans, which amountedto 15.0% of Peoples’ net loan portfolio, compared to $125.0 million, or 14.7%of Peoples’ net loan portfolio at December 31, 2005.

**NonresidentialReal Estate and Land Loans.**  Peoples’ nonresidential realestate and land loan portfolio primarily consists of loans secured by land fordevelopment purposes, professional offices, small retail centers, warehousesand building lots located within Peoples’ primary market area.  Nonresidential real estate and land loansamounted to $140.9 million, or 17.3% of the net loan portfolio atDecember 31, 2006.  This compares to$147.1 million, or 17.3% at December 31, 2005.

Nonresidentialreal estate loans originated by Peoples typically have a loan-to-value ratio of75% or less and generally have higher interest rates than single-familyresidential mortgage loans with similar terms and structure. The maximumoriginal term of Peoples’ nonresidential real estate loans is25 years.  Decisions to lend arebased on the economic viability of the property and the creditworthiness of theborrower.  Creditworthiness is determinedby considering the character, experience, management and financial strength ofthe borrower, and the ability of the property to generate adequate funds tocover both operating expenses and debt services.  In evaluating whether to make anonresidential real estate loan, Peoples places primary emphasis on the ratioof net cash flow to debt service on the property and generally requires a ratioof cash flow to debt service of at least 120%, computed after deduction for avacancy factor and property expenses as Peoples deems appropriate.

Theland loans of Peoples generally are secured by single-family residentiallots or undeveloped land being held for residential development.  Lot loans generally have a loan-to-valueratio of 80% or less (on an undeveloped basis) and are typically interest onlyloans with one-year maturities.  Loansoriginated on developed land generally have a loan to value ratio of 75% orless with interest only over either a one or two year term.  Land loans secured by single-familyresidential lots are structured similar to undeveloped land with aloan-to-value ratio of 80% or less.

Nonresidentialreal estate lending is generally considered to involve a higher degree of riskthan one- to four-family residential lending. Such lending typically involveslarge loan balances concentrated in a single borrower or groups of relatedborrowers for rental or business properties. In addition, the paymentexperience on loans secured by income-producing properties is typicallydependent on the success of the operation of the related project and thus istypically affected by adverse conditions in the real estate market and in theeconomy. Peoples generally attempts to mitigate the risks associated with itsnonresidential real estate lending by, among other things, lending primarily inits market area and using reasonable loan-to-value ratios in the underwritingprocess.

Land development and acquisitionloans involve significant additional risks when compared with loans on existingresidential properties. These loans may involve larger loan balances to singleborrowers, and the payment experience may be dependent on the successfuldevelopment of the land and the sale of the lots. These risks can besignificantly impacted by supply and demand conditions as well as localeconomic conditions.  The Bank expects tocurtail new origination of land development and acquisition loans based on thesoftening of the local housing market, the increase in the Bank’s nonaccrualloans and charge-offs, and to realign the portfolio due to loan concentrations.

**ConstructionLoans. **At December 31, 2006, Peoples hadapproximately $234.8 million, or 28.9% of the net loan portfolio, inconstruction loans, compared to $259.2 million, or 30.4% of the total loanportfolio at December 31, 2005.  Of thisamount at December 31, 2006, $104.7 million, or 44.6%, consisted of residentialconstruction loans and $130.1 million, or 55.4%, consisted of nonresidentialconstruction loans.  The constructionloans of Peoples are comprised of loans made to builders on a pre-sold basis,as well as  to builders for homes on anunsold or speculative basis.  Peoples’construction loans to builders are generally made with a term not to exceedtwelve months.  Interest-only paymentsare required during the construction period, which is typically twelvemonths.  Peoples generally limits thenumber of unsold homes under construction to its builders. This number isdependent on the financial strength of the builder, marketability

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of the property and the Bank’s experience with andpresent exposure to the builder.  Inaddition, loans made to borrowers to construct their personal residences areoriginated at one closing as a construction/permanent loan.

Peoples also originates loans for theconstruction of nonresidential real estate such as small office buildings andwarehouses.  These loans are typicallyoriginated as construction/permanent loans with interest only payments duringthe construction period and converting to a permanent loan at the end of theconstruction period.  These loans aregenerally made with a construction term of 12 months.  The loan to value ratio is generally limitedto 75% on these loans on an “as completed” basis.

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

Construction lending isgenerally considered to involve a higher degree of risk of loss than long-termfinancing on improved, owner-occupied real estate because of theuncertainties of construction, including the possibility of costs exceeding theinitial estimates and the need to obtain a tenant or purchaser if the propertywill not be owner-occupied. Peoples generally attempts to mitigate the risks associated withconstruction lending by, among other things, primarily lending in its marketarea, using conservative underwriting guidelines, and monitoring theconstruction process.

**CommercialLoans.** Peoples’ commercial loans consist primarily ofsecured and unsecured lines of credit predominantly to builders and developersfor working capital purposes, and to a lesser extent, loans secured by businessequipment.  At December 31, 2006,commercial loans amounted to $30.9 million, or 3.8% of Peoples’ net loanportfolio, compared to $47.3 million, or 5.6% of the net loan portfolio atDecember 31, 2005.  The Bank expects tocurtail new origination of commercial unsecured loans in recognition of themoderate downturn in the local housing market and the increase in the Bank’snonaccrual loans and charge-offs.

**ConsumerLoans.** Peoples’ consumer and other loans consist ofloans secured by deposit accounts, automobiles and stock.  At December 31, 2006, consumer and otherloans amounted to $23.0 million, or 2.9% of Peoples’ net loan portfolio,compared to $24.9 million, or 2.9% of Peoples’ net loan portfolio as ofDecember 31, 2005.

**LoanOrigination and Other Fees.**  In addition to interest earnedon loans, Peoples receives loan origination fees or “points” for originatingloans.  Loan points are a percentage of theprincipal amount of the mortgage loan and are charged to the borrower inconnection with the origination of the loan. In accordance with Statement of Financial Accounting StandardsNo. 91, loan origination fees and certain related direct loan originationcosts are offset, and the resulting net amount is deferred and amortized asinterest income over the contractual life of the related loans as an adjustmentto the yield of such loans. Peoples had $2.3 million and $2.9 million ofdeferred loan fees at December 31, 2006 and December 31, 2005, respectively.

 

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**ContractualPrincipal Repayments and Interest Rates.**  Thefollowing table sets forth scheduled contractual amortization of Peoples’ loansat December 31, 2006 as well as the dollar amount of such loans which arescheduled to mature after one year which have fixed or adjustable interestrates.  Demand loans, loans having noschedule of repayments and no stated maturity and overdraft loans are reportedas due in one year or less.
| ** **                           | ** ** | **Principal Repayments Contractually Due  in Year(s) Ended December 31,** | ** **  |
|--------------------------------------|------------|--------------------------------------------------------------------------------------------------------------|-------------|
| ** **                           | ** ** | ** **                                                                                                   | ** **  | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | **Total at** | ** ** |
| ** **                           | ** ** | ** **                                                                                                   | ** **  | ** ** | ** ** | ** ** | ** ** | **2010-** | ** ** | **2012-** | ** ** | **2018-** | ** ** | **There-** | ** ** | **December 31,** | ** ** |
| ** **                           | ** ** | **2007**                                                                                                     | ** **  | **2008** | ** ** | **2009** | ** ** | **2011** | ** ** | **2017** | ** ** | **2022** | ** ** | **after** | ** ** | **2006** | ** ** |
| ** **                           | ** ** | **(In Thousands)**                                                                                      | ** **  |
| Mortgage loans:                      |       |                                                                                                         |        |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Single-family  residential           |       | $                                                                                                            | 91,824      |   | $ | 10,506 |   | $ | 10,515 |   | $ | 21,342 |   | $ | 60,104 |   | $ | 45,109 |   | $ | 103,946 |   | $ | 343,346 |   |
| Multi-family  residential            |       | 32,407                                                                                                       |        | 2,380 |   | 2,458 |   | 4,512 |   | 17,236 |   | 14,837 |   | 48,391 |   | 122,221 |   |
| Nonresidential  real estate and land |       | 53,634                                                                                                       |        | 6,234 |   | 5,360 |   | 9,687 |   | 21,636 |   | 20,367 |   | 23,991 |   | 140,909 |   |
| Construction  loans                  |       | 179,137                                                                                                      |        | 23,998 |   | 5,268 |   | 3,400 |   | 5,747 |   | 4,423 |   | 12,857 |   | 234,830 |   |
| Commercial loans                     |       | 28,512                                                                                                       |        | 631 |   | 471 |   | 685 |   | 634 |   | — |   | — |   | 30,933 |   |
| Consumer loans                       |       | 21,989                                                                                                       |        | 508 |   | 268 |   | 227 |   | 30 |   | — |   | — |   | 23,022 |   |
| Total (1)                            | ** ** | **$**                                                                                                        | **407,503** | ** ** | **$** | **44,257** | ** ** | **$** | **24,340** | ** ** | **$** | **39,853** | ** ** | **$** | **105,387** | ** ** | **$** | **84,736** | ** ** | **$** | **189,185** | ** ** | **$** | **895,261** | ** ** |

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(1)                      Of the $487.8 million of loan principalpayments contractually due after December 31, 2007, $169.0 million have fixedrates of interest and $318.8 million have adjustable rates of interest.

Scheduled contractual maturities of loans do not necessarily reflectthe actual expected term of the loan portfolio. The average life of mortgageloans is substantially less than their average contractual terms because ofprepayments. The average life of mortgage loans tends to increase when currentmortgage loan rates are higher than rates on existing mortgage loans and,conversely, decrease when rates on current mortgage loans are lower thanexisting mortgage loan rates (due to refinancing of adjustable-rate andfixed-rate loans at lower rates). Under the latter circumstance, theweighted-average yield on loans decreases as higher yielding loans are repaidor refinanced at lower rates.

**Asset Quality**

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

Loans are placed on non-accrual status when management believes theprobability of collection of interest is insufficient to warrant furtheraccrual. When a loan is placed on non-accrual status, previously accrued butunpaid interest is deducted from interest income. As a matter of policy,Peoples generally discontinues the accrual of interest income when the loanbecomes 90 days past due as to principal or interest, and if collection ofthe interest is questionable.

Real estate acquired by Peoples as a result of foreclosure or bydeed-in-lieu of foreclosure is classified as real estate owned until sold.  Peoples had real estate owned of $333,000 and$188,000 at December 31, 2006 and December 31, 2005, respectively.

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**Delinquent Loans.**  Thefollowing tables set forth information concerning delinquent loans at the datesindicated, in dollar amounts and as a percentage of each category of Peoples’loan portfolio. The amounts presented represent the total outstanding principalbalances of the related loans, rather than the actual payment amounts which arepast due.
| ** **                          | ** ** | **At December 31, 2006  60-89 Days  Delinquent** | ** ** | **At December 31, 2005  60-89 Days  Delinquent** | ** ** | **At September 30, 2005  60-89 Days  Delinquent** | ** ** | **At September 30, 2004  60-89 Days  Delinquent** | ** ** |
|-------------------------------------|------------|----------------------------------------------------------------------|------------|----------------------------------------------------------------------|------------|-----------------------------------------------------------------------|------------|-----------------------------------------------------------------------|------------|
| ** **                          | ** ** | ** **                                                           | ** ** | **Percent**                                                          | ** ** | ** **                                                            | ** ** | **Percent**                                                           | ** ** | ** ** | ** ** | **Percent** | ** ** | ** ** | ** ** | **Percent** | ** ** |
| ** **                          | ** ** | ** **                                                           | ** ** | **Of Loan**                                                     | ** ** | ** **                                                            | ** ** | **Of Loan**                                                      | ** ** | ** ** | ** ** | **Of Loan** | ** ** | ** ** | ** ** | **of Loan** | ** ** |
| ** **                          | ** ** | **Amount**                                                           | ** ** | **Category**                                                         | ** ** | **Amount**                                                            | ** ** | **Category**                                                          | ** ** | **Amount** | ** ** | **Category** | ** ** | **Amount** | ** ** | **Category** | ** ** |
| ** **                          | ** ** | **(Dollars in Thousands)**                                 | ** ** |
| Mortgage loans:                     |       |                                                                 |       |                                                                 |       |                                                                  |       |                                                                  |       |   |   |   |   |   |   |   |   |
| Single-family                       |       | $                                                                    | 3,140      |                                                                 | 0.91       | %                                                                     | $          | 2,832                                                                 |       | .83 | % | $ | 991 |   | 0.39 | % | $ | 821 |   | 0.36 | % |
| Multi-family                        |       | 1,699                                                                |       | 1.39                                                                 | %          | —                                                                |       | —                                                                |       | 332 |   | 0.27 | % | 16 |   | 0.01 | % |
| Nonresidential real estate and land |       | 2,804                                                                |       | 1.99                                                                 | %          | 1,646                                                                 |       | 1.12                                                                  |       | 766 |   | 0.58 | % | — |   | — |   |
| Commercial                          |       | 1,377                                                                |       | 4.45                                                                 | %          | 1,106                                                                 |       | 2.34                                                                  |       | 516 |   | 1.19 | % | — |   | — |   |
| Consumer                            |       | 45                                                                   |       | 0.20                                                                 | %          | 163                                                                   |       | ,65                                                                   |       | 100 |   | 0.44 | % | — |   | — |   |
| Total                               |       | $                                                                    | 9,065      |                                                                 | 1.01       | %                                                                     | $          | 5,747                                                                 |       | .61 | % | $ | 2,705 |   | 0.34 | % | $ | 837 |   | 0.12 | % |

 

**Non-Performing Assets.**  Thefollowing table sets forth information with respect to non-performing assetsidentified by Peoples, including non-accrual loans and other real estate owned.
| ** **                               | ** ** | **At December 31,**        | ** ** | **At September 30,** | ** ** |
|------------------------------------------|------------|--------------------------------------|------------|--------------------------------|------------|
| ** **                               | ** ** | **2006**                             | ** ** | **2005**                       | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** |
| ** **                               | ** ** | **(Dollars in Thousands)** | ** ** |
| Non-accrual  loans:                      |       |                                 |       |                           |       |   |   |   |   |   |   |   |   |
| Single-family residential                |       | $                                    | 7,140      |                           | $          | 5,481 |   | $ | 6,674 |   | $ | 2,090 |   | $ | 1,752 |   | $ | 1,274 |   |
| Multi-family residential                 |       | 4,243                                |       | 928                            |       | 2,325 |   | 2,535 |   | 3,557 |   | 3,217 |   |
| Nonresidential real estate and land      |       | 8,273                                |       | 2,488                          |       | 3,787 |   | 197 |   | — |   | 232 |   |
| Construction loans                       |       | 2,302                                |       | 4,361                          |       | 2,640 |   | 1,039 |   | 1,951 |   | 2,769 |   |
| Commercial loans                         |       | 2,028                                |       | 4,759                          |       | 3,220 |   | 165 |   | — |   | — |   |
| Consumer loans                           |       | 97                                   |       | 742                            |       | 741 |   | 3 |   | 4 |   | — |   |
| Total  non-accrual loans                 |       | $                                    | 24,083     |                           | 18,758     |   | 19,387 |   | 6,029 |   | 7,264 |   | 7,492 |   |
| Loans 90 days  past due and accruing     |       | 1,716                                |       | —                         |       | 1,266 |   | — |   | — |   | — |   |
| Total  non-performing loans              |       | $                                    | 25,799     |                           | 18,758     |   | 20,653 |   | 6,029 |   | 7,264 |   | 7,492 |   |
| Other real  estate owned, net            |       | 333                                  |       | 188                            |       | 207 |   | 301 |   | 1,293 |   | 97 |   |
| Total non-performing assets              |       | $                                    | 26,132     |                           | $          | 18,946 |   | $ | 20,860 |   | $ | 6,330 |   | $ | 8,557 |   | $ | 7,589 |   |
| Non-performing  assets to total assets   |       | 2.54                                 | %          | 1.82                           | %          | 2.07 | % | 0.71 | % | 1.16 | % | 1.30 | % |
| Non-performing loans to  total loans-net |       | 3.17                                 | %          | 2.20                           | %          | 2.96 | % | 1.01 | % | 1.31 | % | 1.49 | % |

 

Nonperforming assets totaled $26.1 million, $18.9million and $20.9 million at December 31, 2006 and 2005, and September 30,2005, respectively.  Nonperforming assetsat December 31, 2006 consisted of $7.1 million of loans secured bysingle-family residential real estate, $4.2 million of loans secured bymulti-family residential real estate, $8.3 million of loans secured bynonresidential real estate and land, $2.3 million in construction loans, $2.1million of commercial and consumer loans, $1.7 million of loans 90 days or morepast due and still accruing, and $333,000 in foreclosed real estate. Of the$25.8 million of nonperforming loans at December 31, 2006, approximately $6.4million were less than 30 days past due. Over the past twelve months, the Bank has revised its methods ofreviewing loans for potential weaknesses, which includes a strong emphasis oncash flow analysis. The Bank’s management believes that this proactive approachhas resulted in earlier detection of loans with potential exposure.  The Bank’s management continues toaggressively pursue the collection and resolution of all delinquent andnonperforming loans.  The increase innonperforming loans was due in large part to the moderate downturn in the local housing market and resultant cashflow issues faced by local property investors.

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At December 31, 2006, non-accrual loans secured byone- to four-family residential real estate consisted of $4.4 million inowner-occupied residences and $2.7 million in non-owner occupied residentialreal estate, each with an average balance of $67,000.  Non-accrual loans secured by multi-familyresidential real estate consisted of $4.2 million with an average balance of$386,000.  Two borrowers represented $3.4million of the multi-family residential non-accrual loans, with the largestborrower owing $2.4 million. Both of these borrowers were current on theseloans as of December 31, 2006.

Nonresidential real estate secured non-accrual loanstotal $8.3 million at December 31, 2006. The average balance of these 22 loans was $376,000.  Approximately $3.4 million of thenonresidential real estate secured non-accrual loans were loan acquisition anddevelopment loans, with the largest borrower owing $2.4 million.  Loans secured by building lots included inthe nonresidential real estate secured non-accrual loans totaled $2.7 millionat December 31, 2006, and were primarily comprised of five borrowers, with thelargest borrower owing $1.1 million. Four nonresidential real estate secured non-accrual loans totaling $2.2million were secured by commercial real estate, with the largest borrower owing$1.6 million.

Non-accrual construction loans totaled $2.3 millionat December 31, 2006, with an average balance of $177,000.  Approximately $2.0 million of theseconstruction loans are secured by one-to four-family residential realestate.  Commercial and consumernon-accrual loans totaled $2.1 million, with $2.0 million of these loans beingunsecured.

If the $24.1 million of non-accruing loans of Peoples had been currentin accordance with their terms during fiscal 2006, the gross income on suchloans would have been approximately $2.3 million.  A total of approximately $963,000 of interestincome was actually recorded by Peoples on such loans in the fiscal year endedDecember 31, 2006.

**Classified Assets.** Federal regulations require that each insured savings institutionclassify its assets on a regular basis. In addition, in connection withexaminations of insured institutions, federal examiners have authority toidentify problem assets and, if appropriate, classify them. There are threeclassifications for problem assets: “substandard,” “doubtful” and “loss.”Substandard assets have one or more defined weaknesses and are characterized bythe distinct possibility that the insured institution will sustain some loss ifthe deficiencies are not corrected. Doubtful assets have the weaknesses ofsubstandard assets with the additional characteristic that the weaknesses makecollection or liquidation in full on the basis of currently existing facts,conditions and values questionable, and there is a higher possibility of loss. Anasset classified loss is considered uncollectible and of such little value thatcontinuance as an asset of the institution is not warranted. Another categorydesignated “special mention” also must be established and maintained for assetswhich do not currently expose an insured institution to a sufficient degree ofrisk to warrant classification as substandard, doubtful or loss.  Assets classified as substandard or doubtfulmay require the institution to establish general allowances for loanlosses.  If an asset or portion thereofis classified loss, the insured institution must either establish specificallowances for loan losses in the amount of 100% of the portion of the assetclassified loss, or charge-off such amount. General loss allowances established to cover possible losses related toassets classified substandard or doubtful may be included in determining aninstitution’s regulatory capital, while specific valuation allowances for loanlosses do not qualify as regulatory capital. Federal examiners may disagree with an insured institution’sclassifications and amounts reserved.

Peoples’ total classified assets atDecember 31, 2006 amounted to $42.1 million, with $40.8 million of assetsclassified as substandard, and $1.3 classified as doubtful.  The largest classified asset atDecember 31, 2006 was a $2.4 million loan secured by nonresidential realestate.  The remaining $39.7 million ofclassified assets at December 31, 2006 consisted of approximately $27.6million of residential real estate loans, $4.1 million of commercial andconsumer loans, $7.7 million of nonresidential real estate and land loans, and$333,000 of foreclosed real estate.

Approximately $31.6 million of loans were categorized as specialmention by the Bank as of December 31, 2006, compared to $10.3 million atDecember 31, 2005.  Although these loansare not deemed classified, these loans have potential weaknesses that deservemanagement’s close attention.  If leftuncorrected, these potential weaknesses may, at some future date, result in thedeterioration of the repayment prospects for the credit or the Bank’s creditposition.  Concerns may lie with cashflow, liquidity, leverage, collateral or industry conditions.  Over the past twelve months, the Bank hasrevised its methods of reviewing loans for potential weaknesses, which includesa strong emphasis on cash flow analysis. The Bank’s management believes thatthis proactive approach has resulted in earlier detection of loans with

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potential exposure.  The Bank’smanagement has also increased its monitoring of these loans and is workingproactively with borrowers to remediate and mitigate risk associated with theseloans.

**Allowance for Loan Losses.**  Theallocation of the allowance for loan losses based on particular types of loanswas as follows:
| ** **                           | ** ** | **December 31,**                | ** ** | **September 30,** | ** ** |
|--------------------------------------|------------|--------------------------------------|------------|------------------------|------------|
| ** **                           | ** ** | **2006**                             | ** ** | **2005**               | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **                           | ** ** | ** **                           | ** ** | **Percent of**    | ** ** | ** ** | ** ** | **Percent of** | ** ** | ** ** | ** ** | **Percent of** | ** ** | ** ** | ** ** | **Percent of** | ** ** |
| ** **                           | ** ** | **Balance**                          | ** ** | **total loans**   | ** ** | **Balance** | ** ** | **total loans** | ** ** | **Balance** | ** ** | **total loans** | ** ** | **Balance** | ** ** | **total loans** | ** ** |
| ** **                           | ** ** | **(Dollars in Thousands)** | ** ** |
| Single-family  residential           |       | $                                    | 4,615      |                   | 25.2       | % | $ | 1,328 |   | 9.88 | % | $ | 2,097 |   | 15.3 | % | $ | 1,100 |   | 33.7 | % |
| Multi-family  residential            |       | 4,084                                |       | 22.2                   |       | 477 |   | 3.55 |   | 517 |   | 3.8 |   | 1,661 |   | 15.9 |   |
| Nonresidential  real estate and land |       | 2,904                                |       | 15.8                   |       | 3,229 |   | 24.02 |   | 3,020 |   | 22.0 |   | 2,461 |   | 23.7 |   |
| Construction  loans                  |       | 2,027                                |       | 11.0                   |       | 1,194 |   | 8.88 |   | 976 |   | 7.1 |   | 2,211 |   | 18.6 |   |
| Commercial loans                     |       | 4,551                                |       | 24.8                   |       | 6,688 |   | 49.75 |   | 6,587 |   | 48.1 |   | 3,122 |   | 4.9 |   |
| Consumer loans                       |       | 188                                  |       | 1.0                    |       | 528 |   | 3.93 |   | 500 |   | 3.7 |   | _470 |   | 3.2 |   |
|                                 |       | $                                    | 18,369     |                   | 100.0      | % | $ | 13,444 |   | 100.0 | % | $ | 13,697 |   | 100.0 | % | $ | 11,025 |   | 100.0 | % |

 

The allowance for loan losses is maintained bymanagement at a level considered sufficient to cover estimated losses inherentin the existing portfolio based on prior loan loss experience, known risks inthe portfolio, adverse situations that may affect the borrower’s ability torepay, the estimated value of any underlying collateral, general economicconditions, and other factors and estimates which are subject to change overtime.

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

Peoples increased its allowance for loan losses infiscal 2006 by recording a $17.5 million provision for losses on loans based onhigher non-performing, classified and criticized assets for the fiscal year2006.  The increase in such loans is primarilydue to delinquent loans in the Bank’s non-owner occupied (investment property)residential loan portfolio and its acquisition, development, and constructionloan portfolio.  The delinquencies inthese portfolios are due primarily to the moderate downturn in the localeconomy and resultant cash flow issues faced by local property investors anddevelopers.  As a result, the Companycurrently expects to curtail its acquisition and development lending, one- tofour-family residential investment lending, and unsecured commerciallending.  While management believes thatit determines the size of the allowance based on the best information availableat the time, the allowance will need to be adjusted as circumstances change andassumptions are updated.  Futureadjustments to the allowance could significantly affect future net earnings.

As previously stated, over the past five years, theBank had increased originations of multi-family residential loans, non-residential real estate and landloans, construction loans, commercial loans and consumer loans.  Correspondingly, the allowance for loanlosses has increased from $7.7 million or 1.4% of total loans at September 30,2002 to $18.4 million or 2.1% of total loans at December 31, 2006.

14

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The following table sets forth the activity in the allowance for loanlosses during the periods indicated.
| ** **                                                               | ** ** | **Year Ended  December 31,** | ** ** | **Three Months  Ended  December 31,** | ** ** | **Year Ended September 30,** | ** ** |
|--------------------------------------------------------------------------|------------|----------------------------------------|------------|-------------------------------------------------|------------|---------------------------------------------|------------|
| ** **                                                               | ** ** | **2006**                               | ** ** | **2005**                                        | ** ** | **2005**                                    | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** |
| ** **                                                               | ** ** | **(Dollars in Thousands)**             | ** ** |
| Allowance at  beginning of period                                        |       | $                                      | 13,444     |                                            | $          | 13,697                                      |       | $ | 11,025 |   | $ | 9,744 |   | $ | 7,656 |   | $ | 3,662 |   |
| Increase due to  Kenwood acquisition                                     |       | —                                 |       | —                                          |       | —                                      |       | — |   | — |   | 276 |   |
| Increase due to  Peoples Federal acquisition                             |       | —                                 |       | 907                                             |       | —                                      |       | — |   | — |   | — |   |
| Increase due to  Mercantile acquisition                                  |       | 302                                    |       | —                                          |       | —                                      |       | — |   | — |   | — |   |
| Provision for  losses on loans                                           |       | 17,450                                 |       | 900                                             |       | 3,600                                       |       | 3,600 |   | 4,198 |   | 5,265 |   |
| Charge-offs:                                                             |       |                                   |       |                                            |       |                                        |       |   |   |   |   |   |   |
| Single-family residential                                                |       | (4,053                                 | )          | (1,519                                          | )          | (103                                        | )          | (609 | ) | (97 | ) | — |   |
| Multi-family residential                                                 |       | (2,369                                 | )          | (360                                            | )          | (940                                        | )          | (1,431 | ) | — |   | — |   |
| Nonresidential real estate and land                                      |       | (1,307                                 | )          | (204                                            | )          | —                                      |       | (151 | ) | (1,097 | ) | — |   |
| Construction                                                             |       | (1,601                                 | )          | —                                          |       | (16                                         | )          | — |   | (62 | ) | — |   |
| Commercial                                                               |       | (1,042                                 | )          | —                                          |       | —                                      |       | (145 | ) | (866 | ) | (1,547 | ) |
| Consumer and other loans                                                 |       | (2,731                                 | )          | (123                                            | )          | (22                                         | )          | (24 | ) | — |   | — |   |
| Total charge-offs                                                        |       | (13,103                                | )          | (2,206                                          | )          | (1,081                                      | )          | (2,360 | ) | (2,122 | ) | (1,547 | ) |
|                                                                     |       |                                   |       |                                            |       |                                        |       |   |   |   |   |   |   |
| Recoveries:                                                              |       |                                   |       |                                            |       |                                        |       |   |   |   |   |   |   |
| Single-family residential                                                |       | 78                                     |       | —                                          |       | 9                                           |       | — |   | 12 |   | — |   |
| Multi-family residential                                                 |       | 9                                      |       | —                                          |       | 140                                         |       | — |   | — |   | — |   |
| Nonresidential real estate and land                                      |       | —                                 |       | —                                          |       | —                                      |       | — |   | — |   | — |   |
| Construction                                                             |       | 1                                      |       | —                                          |       | —                                      |       | — |   | — |   | — |   |
| Commercial                                                               |       | 73                                     |       | 142                                             |       | —                                      |       | 21 |   | — |   | — |   |
| Consumer and other loans                                                 |       | 115                                    |       | 4                                               |       | 4                                           |       | 20 |   | — |   | — |   |
| Total recoveries                                                         |       | 276                                    |       | 146                                             |       | 153                                         |       | 41 |   | 12 |   | — |   |
| Net loans  charged-off to allowance for loan losses                      |       | (12,827                                | )          | (2,060                                          | )          | (928                                        | )          | (2,319 | ) | (2,110 | ) | (1,547 | ) |
| Allowance at end  of period                                              |       | $                                      | 18,369     |                                            | $          | 13,444                                      |       | $ | 13,697 |   | $ | 11,025 |   | $ | 9,744 |   | $ | 7,656 |   |
|                                                                     |       |                                   |       |                                            |       |                                        |       |   |   |   |   |   |   |
| Allowance for  loan losses to total nonperforming loans at end of period |       | 71.20                                  | %          | 71.67                                           | %          | 66.32                                       | %          | 182.87 | % | 134.15 | % | 102.19 | % |
| Allowance for loan  losses to total loans at end of period               |       | 2.05                                   | %          | 1.42                                            | %          | 1.72                                        | %          | 1.64 | % | 1.57 | % | 1.37 | % |

** **

15

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**Investment Securities**

Peoples has authority to invest in various types of securities,including mortgage-backed securities, United States Treasury obligations,securities of various federal agencies and of state and municipal governments,certificates of deposit at federally-insured banks and savingsinstitutions, certain bankers’ acceptances and federal funds.  Each significant purchase of an investmentsecurity is approved by the Board of Directors.

The investment policy of Peoples is designed to maintain adequateliquidity, manage investment assets in conjunction with interest rate risk andmaximize stability through diversification. Excess funds not utilized to meet loan demand are typically invested usingthe guidelines of the investment policy to seek the maximum return with minimalrisk. All investments are approved to be held as “Available for sale” or “Heldto maturity”.  Peoples does not maintainany investments as “Trading”.  Peoplestransacts all investment activity through a select group of securities dealersapproved by the Board of Directors.

The following table sets forth information regarding the carrying valueand fair value of Peoples’ securities at the dates indicated. 
| ** **                    | ** ** | **December 31,**   | ** ** | **September 30,** | ** ** |
|-------------------------------|------------|-------------------------|------------|------------------------|------------|
| ** **                    | ** ** | **2006**                | ** ** | **2005**               | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **                    | ** ** | **Amortized**           | ** ** | **Fair**               | ** ** | **Amortized** | ** ** | **Fair** | ** ** | **Amortized** | ** ** | **Fair** | ** ** | **Amortized** | ** ** | **Fair** | ** ** |
| ** **                    | ** ** | **Cost**                | ** ** | **Value**              | ** ** | **Cost** | ** ** | **Value** | ** ** | **Cost** | ** ** | **Value** | ** ** | **Cost** | ** ** | **Value** | ** ** |
| ** **                    | ** ** | **(In Thousands)** | ** ** |
| Available for  sale:          |       |                    |       |                   |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Mortgage-backed securities    |       | $                       | 52,818     |                   | $          | 52,669 |   | $ | 71,401 |   | $ | 71,024 |   | $ | 199,845 |   | $ | 199,716 |   | $ | 228,568 |   | $ | 228,085 |   |
| Mutual funds                  |       | 1,199                   |       | 1,146                  |       | 1,149 |   | 1,101 |   | 1,136 |   | 1,096 |   | 1,091 |   | 1,069 |   |
| US treasuries and agencies    |       | 1,966                   |       | 1,965                  |       | 1,242 |   | 1,211 |   | 5,549 |   | 5,535 |   | — |   | — |   |
| Municipal Securities          |       | 1,114                   |       | 1,111                  |       | 1,151 |   | 1,146 |   | 1,009 |   | 1,019 |   | — |   | — |   |
| Other equity securities       |       | 7                       |       | 8                      |       | — |   | — |   | — |   | — |   | — |   | — |   |
| Total                         |       | $                       | 57,104     |                   | $          | 56,899 |   | $ | 74,943 |   | $ | 74,482 |   | $ | 207,539 |   | $ | 207,366 |   | $ | 229,659 |   | $ | 229,154 |   |
| Required  investment:         |       |                    |       |                   |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Federal Home Loan Bank  stock |       | $                       | 14,024     |                   | $          | 14,024 |   | $ | 13,122 |   | $ | 13,122 |   | $ | 11,871 |   | $ | 11,871 |   | $ | 10,841 |   | $ | 10,841 |   |

 

The following table sets forth the activity in Peoples’ aggregatesecurities portfolio during the periods indicated.
| ** **                                                                         | ** ** | **Year Ended  December 31,** | ** ** | **Three Months  Ended  December 31,** | ** ** | **Year Ended September 30,** | ** ** |
|------------------------------------------------------------------------------------|------------|----------------------------------------|------------|-------------------------------------------------|------------|---------------------------------------------|------------|
| ** **                                                                         | ** ** | **2006**                               | ** ** | **2005**                                        | ** ** | **2005**                                    | ** ** | **2004** | ** ** |
| ** **                                                                         | ** ** | **(In Thousands)**                | ** ** |
| Securities at  beginning of period                                                 |       | $                                      | 87,604     |                                            | $          | 219,237                                     |       | $ | 239,995 |   | $ | 146,205 |   |
| Purchases (1)                                                                      |       | 721                                    |       | 177                                             |       | 88,667                                      |       | 147,624 |   |
| Sales of  available for sale securities                                            |       | (2,008                                 | )          | (110,272                                        | )          | (41,186                                     | )          | (1,391 | ) |
| Amortization of  premiums and discounts                                            |       | (628                                   | )          | (247                                            | )          | (1,768                                      | )          | (1,493 | ) |
| Repayments,  prepayments and maturities                                            |       | (22,425                                | )          | (22,482                                         | )          | (76,502                                     | )          | (51,489 | ) |
|  Securities acquired through acquisition —  net                          |       | 7,407                                  |       | 1,480                                           |       | 9,699                                       |       | — |   |
| Increase  (decrease) in unrealized gains (losses) on available-for-sale securities |       | 252                                    |       | (289                                            | )          | 332                                         |       | 539 |   |
| Securities at end of  period (2)                                                   |       | $                                      | 70,923     |                                            | $          | 87,604                                      |       | $ | 219,237 |   | $ | 239,995 |   |

----

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

16

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(2)                                  At December 31, 2006 and 2005, and September30, 2005, and 2004, $67.3 million or 94.8%, $85.8 million or 97.9%, $199.6million or 91.1%, and $228.1 million or 95.0%, respectively, of Peoples’securities portfolio consisted of adjustable-rate securities .

The following table sets forth certain informationregarding the maturities of Peoples’ security portfolio at December 31, 2006.
| ** **                  | ** ** | **Contractually Maturing** | ** ** |
|-----------------------------|------------|---------------------------------|------------|
| ** **                  | ** ** | ** **                      | ** ** | **Weighted** | ** ** | ** ** | ** ** | **Weighted** | ** ** | ** ** | ** ** | **Weighted** | ** ** | ** ** | ** ** | **Weighted** | ** ** |
| ** **                  | ** ** | **Under 1**                | ** ** | **Average** | ** ** | **1-5** | ** ** | **Average** | ** ** | **6-10** | ** ** | **Average** | ** ** | **Over 10** | ** ** | **Average** | ** ** |
| ** **                  | ** ** | **Year**                        | ** ** | **Yield** | ** ** | **Years** | ** ** | **Yield** | ** ** | **Years** | ** ** | **Yield** | ** ** | **Years** | ** ** | **Yield** | ** ** |
| ** **                  | ** ** | **(Dollars in Thousands)**      | ** ** |
| Investment  securities      |       | $                               | 22         |   | 5.30 | % | $ | 1,145 |   | 4.79 | % | $ | 708 |   | 4.84 | % | $ | 1,201 |   | 5.32 | % |
| Mortgage-backed  securities |       | —                          |       | — |   | 197 |   | 4.50 |   | 1,042 |   | 4.27 |   | 51,430 |   | 5.17 |   |
|                        |       | $                               | 22         |   | 5.30 | % | $ | 1,342 |   | 4.75 | % | $ | 1,750 |   | 4.50 | % | $ | 52,631 |   | 5.17 | % |

 

Mortgage-backed securities represent a participation interest ina pool of one- to four-family or multi-family mortgages.  The mortgage originators use intermediaries(generally U.S. Government agencies and government-sponsored enterprises)to pool and repackage the participation interests in the form of securities,with investors receiving the principal and interest payments on the mortgages.  Such U.S. Government agencies and government-sponsoredenterprises guarantee the payment of principal and interest to investors.

Mortgage-backed securities are typically issued with statedprincipal amounts, and the securities are backed by pools of mortgages thathave loans with interest rates that are within a range and have varyingmaturities.  The underlying pool ofmortgages, i.e., fixed-rate or adjustable-rate, as well as prepayment risk, arepassed on to the certificate holder.  Thelife of a mortgage-backed pass-through security approximates the life ofthe underlying mortgages.

The mortgage-backed securities of Peoples may consist ofGovernment National Mortgage Association (“Ginnie Mae”), Federal Home LoanMortgage Corporation (“FHLMC”) and Federal National Mortgage Association (“FNMA”)securities.  Ginnie Mae is a governmentagency within the Department of Housing and Urban Development which is intendedto help finance government-assisted housing programs.  Ginnie Mae securities are backed by loansinsured by the Federal Housing Administration, or guaranteed by the VeteransAdministration, and the timely payment of principal and interest on Ginnie Maesecurities are guaranteed by Ginnie Mae and backed by the full faith and creditof the U.S. Government.

Mortgage-backed securities generally yield less than the loanswhich underlie such securities because of their payment guarantees or creditenhancements which offer nominal credit risk. In addition, mortgage-backedsecurities are more liquid than individual mortgage loans and may be used tocollateralize borrowings or other obligations of Peoples.  At December 31, 2006, Peoples hadmortgage-backed securities with a fair value totaling $52.7 million.

**Sources of Funds**

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

17

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

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

Interest rates paid, maturity terms, service fees and withdrawalpenalties are established on a periodic basis. Management determines the ratesand terms based on rates paid by competitors, the need for funds or liquidity,growth goals and federal and state regulations.

The following table sets forth theactivity in Peoples’ deposits during the periods indicated.
| ** **                                         | ** ** | **Year Ended  December 31,** | ** ** | **Three Months  Ended  December 31,** | ** ** | **Year Ended September 30,** | ** ** |
|----------------------------------------------------|------------|----------------------------------------|------------|-------------------------------------------------|------------|---------------------------------------------|------------|
| ** **                                         | ** ** | **2006**                               | ** ** | **2005**                                        | ** ** | **2005**                                    | ** ** | **2004** | ** ** |
| ** **                                         | ** ** | **(In Thousands)**                | ** ** |
| Beginning  balance                                 |       | $                                      | 726,629    |                                            | $          | 612,199                                     |       | $ | 472,436 |   | $ | 455,900 |   |
| Net increase  before interest credited             |       | 28,230                                 |       | 114,358                                         |       | 139,568                                     |       | 5,255 |   |
| Interest  credited                                 |       | 402                                    |       | 72                                              |       | 195                                         |       | 11,281 |   |
| Net increase in  deposits (including acquisitions) |       | 28,632                                 |       | 114,430                                         |       | 139,763                                     |       | 16,536 |   |
| Ending balance                                     |       | $                                      | 755,261    |                                            | $          | 726,629                                     |       | $ | 612,199 |   | $ | 472,436 |   |

 

The following table sets forth by various interest rate categories thecertificates of deposit with Peoples at the dates indicated.
| ** **     | ** ** | **December 31,**   | ** ** | **September 30,** | ** ** |
|----------------|------------|-------------------------|------------|------------------------|------------|
| ** **     | ** ** | **2006**                | ** ** | **2005**               | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **     | ** ** | **(In Thousands)** | ** ** |
| 0.00% to 2.99% |       | $                       | 8,438      |                   | $          | 71,821 |   | $ | 95,437 |   | $ | 124,115 |   |
| 3.00% to 3.99% |       | 78,277                  |       | 137,292                |       | 107,399 |   | 56,156 |   |
| 4.00% to 4.99% |       | 253,708                 |       | 215,232                |       | 140,226 |   | 55,199 |   |
| 5.00% to 6.99% |       | 158,864                 |       | 17,112                 |       | 18,514 |   | 25,194 |   |
| 7.00% to 8.99% |       | 5                       |       | —                 |       | — |   | 137 |   |
| Total          |       | $                       | 499,292    |                   | $          | 441,457 |   | $ | 361,576 |   | $ | 260,801 |   |

 

18

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The following table sets forth the amount and remaining maturities ofPeoples’ certificates of deposit at December 31, 2006. 

|                | ** ** | **Six  Months  And Less** | ** ** | **Over Six  Months  Through  One  Year** | ** ** | **Over One  Year  Through  Two  Years** | ** ** | **Over Two  Years  Through  Three  Years** | ** ** | **Over  Three  Years** | ** ** |
|----------------|------------|--------------------------------|------------|-----------------------------------------------|------------|----------------------------------------------|------------|-------------------------------------------------|------------|------------------------|------------|
| ** **     | ** ** | **(In Thousands)**        | ** ** |
|           |       |                           |       |                                          |       |                                         |       |                                            |       |                   |       |
| 0.00% to 2.99% |       | $                              | 6,724      |                                          | $          | 429                                          |       | $                                               | 1,213      |                   | $          | 35 |   | $ | 37 |   |
| 3.00% to 3.99% |       | 31,042                         |       | 11,443                                        |       | 24,421                                       |       | 11,120                                          |       | 251                    |       |
| 4.00% to 4.99% |       | 148,301                        |       | 25,138                                        |       | 8,160                                        |       | 25,088                                          |       | 47,021                 |       |
| 5.00% to 6.99% |       | 27,757                         |       | 130,122                                       |       | 136                                          |       | 236                                             |       | 613                    |       |
| 7.00% to 8.99% |       | —                         |       | —                                        |       | 5                                            |       | —                                          |       | —                 |       |
| Total          |       | $                              | 213,824    |                                          | $          | 167,132                                      |       | $                                               | 33,935     |                   | $          | 36,479 |   | $ | 47,922 |   |

 

As of December 31, 2006, theaggregate amount of outstanding certificates of deposit at Peoples, in amountsgreater than $100,000, was approximately $131.9 million.  The following table presents the maturity ofthese certificates of deposit at such date.

|                                  | ** ** | **December 31, 2006** | ** ** |
|----------------------------------|------------|---------------------------------|------------|
| ** **                       | ** ** | **(In Thousands)**         | ** ** |
| 3 months or less                 |       | $                               | 37,181     |   |
| Over 3 months through 6  months  |       | 18,568                          |       |
| Over 6 months through  12 months |       | 49,139                          |       |
| Over 12 months                   |       | 27,029                          |       |
|                             |       | $                               | 131,917    |   |

 

The following table sets forth the dollar amount of deposits in varioustypes of deposits offered by Peoples at the dates indicated.
| ** **                      | ** ** | **At December 31,**        | ** ** | **At September 30,** | ** ** |
|---------------------------------|------------|--------------------------------------|------------|--------------------------------|------------|
| ** **                      | ** ** | **2006**                             | ** ** | **2005**                       | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **                      | ** ** | **Amount**                           | ** ** | **Percentage**                 | ** ** | **Amount** | ** ** | **Percentage** | ** ** | **Amount** | ** ** | **Percentage** | ** ** | **Amount** | ** ** | **Percentage** | ** ** |
| ** **                      | ** ** | **(Dollars in Thousands)** | ** ** |
| Non-interest checking  accounts |       | $                                    | 21,967     |                           | 2.91       | % | $ | 24,125 |   | 3.32 | % | $ | 20,150 |   | 3.29 | % | $ | 17,638 |   | 3.74 | % |
| Savings and checking  accounts  |       | 213,139                              |       | 28.22                          |       | 242,593 |   | 33.39 |   | 210,590 |   | 34.40 |   | 164,415 |   | 34.80 |   |
| Certificates of deposit         |       | 499,292                              |       | 66.11                          |       | 441,457 |   | 60.75 |   | 361,576 |   | 59.06 |   | 260,801 |   | 55.20 |   |
| Money market accounts           |       | 20,863                               |       | 2.76                           |       | 18,454 |   | 2.54 |   | 19,883 |   | 3.25 |   | 29,582 |   | 6.26 |   |
| Total                           |       | $                                    | 755,261    |                           | 100.00     | % | $ | 726,629 |   | 100.00 | % | $ | 612,199 |   | 100.00 | % | $ | 472,436 |   | 100.00 | % |

 

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

19

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The average daily deposits for the years endedDecember 31, 2006, September 30, 2005 and September 30, 2004, and the averagerates paid on those deposits are summarized in the following table.
| ** **                  | ** ** | **For Year Ended  December 31, 2006** | ** ** | **For Year Ended  September 30, 2005** | ** ** | **For Year Ended  September 30, 2004** | ** ** |
|-----------------------------|------------|-----------------------------------------------------------|------------|------------------------------------------------------------|------------|------------------------------------------------------------|------------|
| ** **                  | ** ** | **Average  Daily  Balance  (000’s)**                 | ** ** | **Average  Rate  Paid**                                    | ** ** | **Average  Daily  Balance  (000’s)**                  | ** ** | **Average  Rate  Paid** | ** ** | **Average  Daily  Balance  (000’s)** | ** ** | **Average  Rate  Paid** | ** ** |
|                        |       |                                                      |       |                                                       |       |                                                       |       |   |   |   |   |   |   |
| Non-Interest Checking       |       | $                                                         | 23,944     |                                                       | 0.00       | %                                                          | $          | 15,668 |   | 0.00 | % | $ | 9,321 |   | 0.00 | % |
| Savings /Checking  Accounts |       | 230,353                                                   |       | 2.65                                                       |       | 190,901                                                    |       | 2.23 |   | 151,613 |   | 1.84 |   |
| Certificates of  Deposits   |       | 478,148                                                   |       | 4.30                                                       |       | 295,636                                                    |       | 3.61 |   | 273,428 |   | 3.03 |   |
| Money Market Accounts       |       | 20,303                                                    |       | 1.92                                                       |       | 25,019                                                     |       | 1.22 |   | 33,482 |   | 1.22 |   |
|                        |       |                                                      |       |                                                       |       |                                                       |       |   |   |   |   |   |   |
| Total Deposits              |       | $                                                         | 752,748    |                                                       | 3.59       | %                                                          | $          | 527,224 |   | 2.89 | % | $ | 467,844 |   | 2.45 | % |

 

**Borrowings.**  Peoples may obtain advancesfrom the Federal Home Loan Bank of Cincinnati upon the security of the commonstock Peoples owns in that bank and certain of its residential mortgage loansand mortgage-backed securities, provided certain standards related tocreditworthiness have been met. These advances are made pursuant to severalcredit programs, each of which has its own interest rate and range ofmaturities. Federal Home Loan Bank advances are generally available to meetseasonal and other withdrawals of deposit accounts and to permit increasedlending.  As of December 31, 2006,Peoples was permitted to borrow, subject to security pledge agreements, up to$527.4 million from the Federal Home Loan Bank of Cincinnati.  At such date, Peoples had $144.2 million ofFederal Home Loan Bank advances. The Bank has used Federal Home Loan Bankadvances in order to complement deposits as a funding source for loans andinvestments.  Of the $144.2 million ofadvances at December 31, 2006, $6.5 million mature in fiscal 2007.

In addition, Peoples has a line of credit with another financialinstitution for $17.5 million.  As ofDecember 31, 2006, Peoples had an outstanding balance on this line of credit of$12.7 million.  This line of creditmatures in December 2007.

The following table shows certain information regarding the borrowingsof Peoples at or for the dates indicated:
| ** **                                                     | ** ** | **At or for the  Year Ended  December 31,** | ** ** | **At or for the  Three Months  Ended  December 31,** | ** ** | **At or for the Year Ended  September 30,** | ** ** |
|----------------------------------------------------------------|------------|----------------------------------------------------------------------|------------|-------------------------------------------------------------------------------|------------|---------------------------------------------------------------------------|------------|
| ** **                                                     | ** ** | **2006**                                                             | ** ** | **2005**                                                                      | ** ** | **2005**                                                                  | ** ** | **2004** | ** ** |
| ** **                                                     | ** ** | **(Dollars in Thousands)**                                 | ** ** |
| Federal Home Loan Bank  advances:                              |       |                                                                 |       |                                                                          |       |                                                                      |       |   |   |
| Average balance  outstanding                                   |       | $                                                                    | 172,073    |                                                                          | $          | 262,102                                                                   |       | $ | 296,527 |   | $ | 299,224 |   |
| Maximum amount  outstanding at any month-end during the period |       | $                                                                    | 203,148    |                                                                          | $          | 260,564                                                                   |       | $ | 320,474 |   | $ | 327,000 |   |
| Balance  outstanding at end of period                          |       | $                                                                    | 144,185    |                                                                          | $          | 193,132                                                                   |       | $ | 273,569 |   | $ | 324,500 |   |
| Average interest  rate during the period                       |       | 4.10                                                                 | %          | 3.94                                                                          | %          | 3.35                                                                      | %          | 2.56 | % |
| Weighted-average  interest rate at end of period               |       | 3.96                                                                 | %          | 3.89                                                                          | %          | 3.89                                                                      | %          | 2.85 | % |
|                                                           |       |                                                                 |       |                                                                          |       |                                                                      |       |   |   |
| Line of Credit:                                                |       |                                                                 |       |                                                                          |       |                                                                      |       |   |   |
| Average balance  outstanding                                   |       | $                                                                    | 1,357      |                                                                          | $          | —                                                                    |       | $ | — |   | $ | 1,100 |   |
| Maximum amount  outstanding at any month-end during the period |       | $                                                                    | 12,700     |                                                                          | $          | —                                                                    |       | — |   | $ | 1,900 |   |
| Balance  outstanding at end of period                          |       | $                                                                    | 12,700     |                                                                          | $          | —                                                                    |       | — |   | — |   |
| Average interest  rate during the period                       |       | 7.84                                                                 | %          | N/A                                                                           |       | N/A                                                                       |       | 2.97 | % |
| Weighted-average  interest rate at end of period               |       | 7.37                                                                 | %          | N/A                                                                           |       | N/A                                                                       |       | N/A |   |

** **

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**Total Employees**

Peopleshad 217 full-time equivalent employees at December 31, 2006.  None of these employees are represented  by  acollective bargaining agent, and Peoples believes that it enjoys good relationswith its personnel.

**Competition**

Peoples faces significant competition both in attracting deposits andin making loans.  Its most directcompetition for deposits has come historically from commercial banks, creditunions and other savings institutions located in its primary market area,including many large financial institutions which have greater financial andmarketing resources available to them. In addition, it faces significantcompetition for investors’ funds from short-term money market securities,mutual funds and other corporate and government securities.  Peoples does not rely upon any individualgroup or entity for a material portion of its deposits.  The ability of Peoples to attract and retaindeposits depends on its ability to generally provide a rate of return,liquidity and risk comparable to that offered by competing investmentopportunities.

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

**REGULATION**

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

**General**

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

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

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

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**PeoplesCommunity Bancorp**

Peoples is a registered savings and loan holdingcompany within the meaning of Section 10 of the Home Owners’ Loan Act, andis subject to Office of Thrift Supervision examination and supervision as wellas certain reporting requirements.  Federal law generally prohibits asavings and loan holding company, without prior Office of Thrift Supervisionapproval, from acquiring the ownership or control of any other savings institutionor savings and loan holding company, or all, or substantially all, of theassets or more than 5% of the voting shares thereof.  These provisionsalso prohibit, among other things, any director or officer of a savings andloan holding company, or any individual who owns or controls more than 25% ofthe voting shares of such holding company, from acquiring control of anysavings institution not a subsidiary of such savings and loan holding company,unless the acquisition is approved by the Office of Thrift Supervision.

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

·                  furnish or perform management services for asavings association subsidiary of a savings and loan holding company;

·                  hold, manage or liquidate assets owned oracquired from a savings association subsidiary of a savings and loan holdingcompany;

·                  hold or manage properties used or occupied bya savings association subsidiary of a savings and loan holding company;

·                  engage in activities determined by theFederal Reserve to be closely related to banking and a proper incident thereto;and

·                  engage in services and activities previouslydetermined by the Federal Home Loan Bank Board by regulation to be permissiblefor a multiple savings and loan holding company as of March 5, 1987.

The activities financial holding companies may engage in include:

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

·                  insuring, guaranteeing or indemnifyingothers, issuing annuities, and acting as principal, agent or broker forpurposes of the foregoing;

·                  providing financial, investment or economicadvisory services, including advising an investment company;

·                  issuing or selling interests in pooled assetsthat a bank could hold directly;

·                  underwriting, dealing in or making a marketin securities; and

·                  merchant banking activities.

If the Office of Thrift Supervision determines thatthere is reasonable cause to believe that the continuation by a savings andloan holding company of an activity constitutes a serious risk to the financialsafety, soundness or stability of its subsidiary savings institution, theOffice of Thrift Supervision may impose such restrictions as deemed necessaryto address such risk. These restrictions include limiting the following:

·      thepayment of dividends by the savings institution;

·                  transactions between the savings institutionand its affiliates; and

·                  any activities of the savings institutionthat might create a serious risk that the liabilities of the holding companyand its affiliates may be imposed on the savings institution.

Every savings institution subsidiary of a savingsand loan holding company is required to give the Office of Thrift Supervisionat least 30 days’ advance notice of any proposed dividends to be made onits guaranty, permanent or other non-withdrawable stock, or else such dividendwill be invalid.  See “Peoples Community Bank - Capital Distributions.”

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**Restrictions on Transactions WithAffiliates.** Transactions between a savings institution and its “affiliates” are subject toquantitative and qualitative restrictions under Sections 23A and 23B of theFederal Reserve Act and Office of Thrift Supervision regulations. Affiliates ofa savings institution generally include, among other entities, the savingsinstitution’s holding company and companies that are controlled by or undercommon control with the savings institution.  However, most subsidiariesof savings institutions are not considered affiliates for the purposes of theserules.

In general, a savings institution or itssubsidiaries may engage in certain “covered transactions” with affiliates up tocertain limits. In addition, a savings institution and its subsidiaries mayengage in covered transactions and certain other transactions only on terms andunder circumstances that are substantially the same, or at least as favorableto the savings institution or its subsidiary, as those prevailing at the timefor comparable transactions with nonaffiliated companies. A “coveredtransaction” is defined to include a loan or extension of credit to anaffiliate; a purchase of investment securities issued by an affiliate; apurchase of assets from an affiliate, with certain exceptions; the acceptanceof securities issued by an affiliate as collateral for a loan or extension ofcredit to any party; or the issuance of a guarantee, acceptance or letter ofcredit on behalf of an affiliate. In addition, a savings institution may not:

·                  make a loan or extension of credit to anaffiliate unless the affiliate is engaged only in activities permissible forbank holding companies;

·                  purchase or invest in securities of anaffiliate other than shares of a subsidiary;

·                  purchase a low-quality asset from anaffiliate; or

·                  engage in covered transactions and certainother transactions between a savings institution or its subsidiaries and anaffiliate except on terms and conditions that are consistent with safe andsound banking practices.

With certain exceptions, each loan or extension ofcredit by a savings institution to an affiliate must be secured by collateralwith a market value ranging from 100% to 130% (depending on the type ofcollateral) of the amount of the loan or extension of credit.

**FederalSecurities Laws**.  Peoples registered its common stock with theSecurities and Exchange Commission under Section 12(g) of the SecuritiesExchange Act of 1934.  Peoples is subjectto the proxy and tender offer rules, insider trading reporting requirements andrestrictions, and certain other requirements under the Exchange Act.

**Sarbanes-Oxley Act of 2002.**  OnJuly 30, 2002, the President signed into law the Sarbanes-Oxley Act of 2002implementing legislative reforms intended to address corporate and accountingfraud.  In addition to the establishmentof a new accounting oversight board which will enforce auditing, qualitycontrol and independence standards and will be funded by fees from all publiclytraded companies, the bill restricts provision of both auditing and consultingservices by accounting firms.  To ensureauditor independence, any non-audit services being provided to an audit clientwill require preapproval by the company’s audit committee members.  In addition, the audit partners must berotated.  The bill requires chiefexecutive officers and chief financial officers, or their equivalent, tocertify to the accuracy of periodic reports filed with the SEC, subject tocivil and criminal penalties if they knowingly or willfully violate thiscertification requirement.  In addition,under the Act, counsel will be required to report evidence of a materialviolation of the securities laws or a breach of fiduciary duty by a company toits chief executive officer or its chief legal officer, and, if such officerdoes not appropriately respond, to report such evidence to the audit committeeor other similar committee of the board of directors or the board itself.

Longerprison terms and increased penalties will also be applied to corporateexecutives who violate federal securities laws, the period during which certaintypes of suits can be brought against a company or its officers has beenextended, and bonuses issued to top executives prior to restatement of acompany’s financial statements are now subject to disgorgement if suchrestatement was due to corporate misconduct. Executives are also prohibited from insider trading during retirementplan “blackout” periods, and loans to company executives are restricted.  In addition, a provision directs that civilpenalties levied by the SEC as a result of any judicial or administrativeaction under the Act be deposited to a fund for the benefit of harmedinvestors.  The Federal Accounts forInvestor Restitution (“FAIR”) provision also requires the SEC to develop methodsof improving collection rates.  Thelegislation accelerates the time frame for disclosures by public companies, asthey must immediately disclose any material changes in their financialcondition or operations.  Directors andexecutive officers must also provide information for most changes in ownershipin a company’s securities within two business days of the change.

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The Act also increases the oversight of, andcodifies certain requirements relating to audit committees of public companiesand how they interact with the company’s “registered public accounting firm” (“RPAF”).  Audit committee members must be independentand are barred from accepting consulting, advisory or other compensatory feesfrom the issuer.  In addition, companiesmust disclose whether at least one member of the committee is a “financialexpert” (as such term will be defined by the SEC) and if not, why not.  Under the Act, a RPAF is prohibited fromperforming statutorily mandated audit services for a company if such company’schief executive officer, chief financial officer, comptroller, chief accountingofficer or any person serving in equivalent positions has been employed by suchfirm and participated in the audit of such company during the one-year periodpreceding the audit initiation date.  TheAct also prohibits any officer or director of a company or any other personacting under their direction from taking any action to fraudulently influence,coerce, manipulate or mislead any independent public or certified accountantengaged in the audit of the company’s financial statements for the purpose ofrendering the financial statement’s materially misleading.  The Act also requires the SEC to prescriberules requiring inclusion of an internal control report and assessment by managementin the annual report to stockholders. The Act requires the RPAF that issues the audit report to attest to andreport on management’s assessment of the company’s internal controls.  In addition, the Act requires that eachfinancial report required to be prepared in accordance with (or reconciled to)accounting principles generally accepted in the United States of America andfiled with the SEC reflect all material correcting adjustments that areidentified by a RPAF in accordance with accounting principles generallyaccepted in the United States of America and the rules and regulations of theSEC.

**PeoplesCommunity Bank**

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

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

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

The FDIC may terminate thedeposit insurance of any insured depository institution, including the Bank, ifit determines after a hearing that the institution has engaged or is engagingin unsafe or unsound practices, is in an unsafe or unsound condition tocontinue operations, or has violated any applicable law, regulation, order orany condition imposed by an agreement with the FDIC.  It also may suspend deposit insurancetemporarily during the hearing process for the permanent termination ofinsurance, if the institution has no tangible capital.  If insurance of accounts is terminated, theaccounts at the institution at the time of the termination, less subsequentwithdrawals, shall continue to be insured for a period of six months to twoyears, as determined by the FDIC. Management is aware of no existing circumstances which would result intermination of the deposit insurance of the Bank.

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**RegulatoryCapital Requirements.**  Current OTS capital standards require savingsinstitutions to satisfy three different capital requirements. Under thesestandards, savings institutions must maintain “tangible” capital equal to atleast 1.5% of adjusted total assets, “core” capital equal to at least 4.0% ofadjusted total assets and “total” capital (a combination of core and “supplementary”capital) equal to at least 8.0% of “risk-weighted” assets.  Tangible capital generally equals commonstockholders’ equity (including retained earnings) minus intangible assets,with only a limited exception for purchased mortgage servicing rights. Corecapital generally consists of tangible capital plus qualifying intangibleassets.

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

Savings institutions must valuesecurities available for sale at amortized cost for regulatory capitalpurposes. This means that in computing regulatory capital, savings institutionsshould add back any unrealized losses and deduct any unrealized gains, net ofincome taxes, on securities reported as a separate component of generallyaccepted accounting principles capital.

AtDecember 31, 2006, the Bank exceeded all of its OTS capital requirements,with tangible, core and risk-based capital ratios of 8.5%, 8.5% and 12.6%,respectively.

Any savings institution thatfails any of the capital requirements is subject to possible enforcementactions by the Office of Thrift Supervision or the FDIC. Such actions couldinclude a capital directive, a cease and desist order, civil money penalties,the establishment of restrictions on the institution’s operations, terminationof federal deposit insurance and the appointment of a conservator or receiver.The Office of Thrift Supervision’s capital regulation provides that suchactions, through enforcement proceedings or otherwise, could require one ormore of a variety of corrective actions.

**PromptCorrective Action.**  The following table shows the amount ofcapital associated with the different OTS capital categories set forth in theprompt corrective action regulations.
| **Capital Category**      | ** ** | **Total  Risk-Based  Capital** | ** ** | **Tier 1  Risk-Based  Capital** | ** ** | **Tier 1  Leverage  Capital** | ** ** |
|--------------------------------|------------|--------------------------------|------------|--------------------------------------|------------|------------------------------------|------------|
| Well capitalized               |       | 10%  or more                   |       | 6%  or more                          |       | 5%  or more                        |       |
| Adequately capitalized         |       | 8%  or more                    |       | 4%  or more                          |       | 4%  or more                        |       |
| Undercapitalized               |       | Less  than 8%                  |       | Less  than 4%                        |       | Less  than 4%                      |       |
| Significantly undercapitalized |       | Less than 6%                   |       | Less than 3%                         |       | Less than 3%                       |       |

 

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

An institution generallymust file a written capital restoration plan which meets specifiedrequirements within 45 days of the date that the institution receivesnotice or is deemed to have notice that it is undercapitalized, significantlyundercapitalized or critically undercapitalized. A federal banking agency mustprovide the institution with written notice of approval or disapproval within60 days after receiving a capital restoration plan, subject to extensionsby the agency. An 

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institution which is required to submit a capitalrestoration plan must concurrently submit a performance guaranty by eachcompany that controls the institution. In addition, undercapitalizedinstitutions are subject to various regulatory restrictions, and theappropriate federal banking agency also may take any number of discretionarysupervisory actions.

At December 31, 2006,the Bank was deemed a well capitalized institution for purposes of the aboveregulations and as such is not subject to the above mentioned restrictions.

**Safety andSoundness Guidelines.**  The Office of Thrift Supervision and theother federal banking agencies have established guidelines for safety andsoundness, addressing operational and managerial standards, as well ascompensation matters for insured financial institutions. Institutions failingto meet these standards are required to submit compliance plans to their appropriatefederal regulators. The Federal Reserve, the Office of Thrift Supervision, andthe other agencies have also established guidelines regarding asset quality andearnings standards for insured institutions. The Bank believes that it is in compliance with these guidelines andstandards.

**CapitalDistributions.**  Office of Thrift Supervision regulationsgovern capital distributions by savings institutions, which include cashdividends, stock repurchases and other transactions charged to the capital accountof a savings institution to make capital distributions. A savings institutionmust file an application for Office of Thrift Supervision approval of thecapital distribution if either (1) the total capital distributions for theapplicable calendar year exceed the sum of the institution’s retained netincome for that year to date plus the institution’s retained net income for thepreceding two years, (2) the institution would not be at least adequatelycapitalized following the distribution, (3) the distribution would violateany applicable statute, regulation, agreement or OTS-imposed condition, or(4) the institution is not eligible for expedited treatment of itsfilings. If an application is not required to be filed, savings institutionswhich are a subsidiary of a holding company (as well as certain otherinstitutions) must still file a notice with the Office of ThriftSupervision at least 30 days before the board of directors declares adividend or approves a capital distribution.

**CommunityReinvestment Act and the Fair Lending Laws.** Savings institutions have a responsibility under the CommunityReinvestment Act of 1977 and related regulations of the Office of ThriftSupervision to help meet the credit needs of their communities, including low-and moderate-income neighborhoods. In addition, the Equal CreditOpportunity Act and the Fair Housing Act prohibit lenders from discriminatingin their lending practices on the basis of characteristics specified in thosestatutes. An institution’s failure to comply with the provisions of theCommunity Reinvestment Act could, at a minimum, result in regulatoryrestrictions on its activities. Failure to comply with fair lending laws couldresult in enforcement actions by the Office of Thrift Supervision, as well as otherfederal regulatory agencies, and the Department of Justice.

**Qualified Thrift Lender Test.**  Allsavings institutions are required to meet a qualified thrift lender test toavoid certain restrictions on their operations. A savings institution can complywith the qualified thrift lender test by either qualifying as a domesticbuilding and loan association as defined in the Internal Revenue Code or bymaintaining at least 65% of its portfolio assets in certain housing andconsumer-related assets such as loans made to purchase, refinance,construct, improve or repair domestic residential housing; home equity loans;most mortgage-backed securities; stock issued by a Federal Home LoanBank; and direct or indirect obligations of the FDIC.

Asavings institution that does not meet the qualified thrift lender test musteither convert to a bank charter or comply with certain restrictions on itsoperations.  At December 31, 2006,the qualified thrift investments of  theBank were approximately 77.8% of its portfolio assets.

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

 

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Asa member, the Bank is required to purchase and maintain stock in the FederalHome Loan Bank of Cincinnati in an amount equal to at least 1% of its aggregateunpaid residential mortgage loans or similar obligations at the beginning ofeach year. At December 31, 2006, the Bank had $12.9 million in FederalHome Loan Bank of Cincinnati stock, which was in compliance with thisrequirement.   The Bank also hadapproximately $1.1 in Federal Home Loan Bank of Indianapolis stock, which wasobtained through the acquisition of American State Bank in June 2005 andPeoples Federal in December 2005.

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

**FederalReserve System.**  The Federal Reserve Board requires alldepository institutions to maintain reserves against their transaction accounts(primarily NOW and Super NOW checking accounts) and non-personal time deposits.Because required reserves must be maintained in the form of vault cash or anoninterest-bearing account at a Federal Reserve Bank, the effect of thisreserve requirement is to reduce an institution’s earning assets.

**TAXATION**

**FederalTaxation**

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

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

**Bad DebtReserves.**  In 1996, legislation was enacted thatrepealed the reserve method of accounting (including the percentage of taxableincome method) previously used by many savings institutions to calculate theirbad debt reserve for federal income tax purposes. Savings institutions with$500 million or less in assets may, however, continue to use theexperience method.  The Bank mustrecapture that portion of its reserve which exceeds the amount that could havebeen taken under the experience method for post-1987 tax years.  The Bank’s post-1987 excess reserves amountedto approximately $1.2 million.  Therecapture has occurred over a six-year period, which commenced in fiscal 1999.The legislation also requires savings institutions to account for bad debts forfederal income tax purposes on the same basis as commercial banks for tax yearsbeginning after December 31, 1995. This change in accounting method andrecapture of excess bad debt reserves is adequately provided for in the Bank’sdeferred tax liability.

At December 31, 2006,the federal income tax reserves of the Bank included $1.4 million for which nofederal income tax has been provided. Because of these federal income tax reserves and the liquidation accountestablished for the benefit of certain depositors of the Bank in connectionwith the recent conversion, the retained earnings of the Bank are substantiallyrestricted.

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

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**MinimumTax.**  The Code imposes an alternative minimum taxat a rate of 20%. The alternative minimum tax generally applies to a base ofregular taxable income plus certain tax preferences (“alternative minimumtaxable income”) and is payable to the extent such alternative minimum taxableincome is in excess of an exemption amount. Tax preference items includedepreciation and 75% of the excess (if any) of (1) alternative minimum taxable income determined without regard to thispreference and prior to reduction by net operating losses, over (2) adjustedcurrent earnings as defined in the Code.  Peoples has not been subject to the alternative minimum tax or had anysuch amounts available as credits for carry-over.

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

**OtherMatters.**  Federal legislation is introduced from timeto time that would limit the ability of individuals to deduct interest paid onmortgage loans. Individuals are currently not permitted to deduct interest onconsumer loans. Significant increases in tax rates or further restrictions onthe deductibility of mortgage interest could adversely affect Peoples.   Peoples’ federal income tax returns for thetax years ended 2005, 2004 and 2003 are open under the statute of limitationsand are subject to review by the IRS. Peoples is currently undergoing an IRS audit for tax year 2004.

**StateTaxation**

**OhioTaxation.**  Peoples is subject to the Ohio corporationfranchise tax, which is a tax measured by both net earnings and net worth. Therate of tax is the greater of (i) 5.1% on the first $50,000 of computedOhio taxable income and 8.9% of computed Ohio taxable income in excess of$50,000 or (ii) 0.582% times taxable net worth.

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

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

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

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

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

28

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**Item 1A. RiskFactors**

Likeall financial companies, the Company’s business and results of operations aresubject to a number of risks, many of which are outside of the Company’scontrol.  In addition to the otherinformation in this report, readers should carefully consider that thefollowing important risk factors, among others, could materially impact theCompany’s business and future results of operations.  In addition, in analyzing whether to make orcontinue an investment in the Company’s securities, investors should consider,among other factors, the following risk factors.

***Changes in interest rates could have a material adverse effect on thefinancial condition and results of operation.***Theearnings of the Company depend substantially on the interest rate spread, whichis the difference between the rates the Company earns on loans, investmentsecurities and other interest-earning assets, and the interest rates theCompany pays on deposits and borrowings.  These rates are highly sensitive to many factors beyond the control ofthe Company, including general economic conditions and the policies of variousgovernmental and regulatory authorities. While the Company has taken measures intended to manage the risk ofoperating in a changing interest rate environment, there can be no assurancethat such measures will be effective in avoiding undue interest rate risk.

***Regional economic changes in the Company’s markets could adverselyimpact results from operations.***  Like all banks, the Company is subject to theeffects of any economic downturn, and in particular a significant decline inhome values or reduced commercial development in the Company’s markets couldhave a negative effect on results of operations.  The Company’s success depends primarily onthe general economic conditions in the counties in which the Company conductsbusiness, and in the southwest Ohio and southeast Indiana area in general.  Unlike larger banks that are moregeographically diversified, the Company provides banking and financial servicesto customers primarily in the southwest Ohio counties of Butler, Hamilton andWarren counties, as well as Dearborn and Ohio counties in Indiana.  The local economic conditions in these marketareas have a significant impact on the Company’s ability to originate loans,the ability of the borrowers to repay these loans and the value of thecollateral securing these loans.  Asignificant decline in the general economic conditions caused by inflation,recession, unemployment or other factors beyond the Company’s control couldadversely affect the Company’s financial condition and results ofoperations.  Additionally, because theCompany has a significant amount of loans secured by commercial, multi-family,and non-owner occupied investment properties, decreases in tenant occupancy mayalso have a negative effect on the ability of many of the Company’s borrowersto make timely repayments of their loans, which would have an adverse impact onthe Company’s earnings.  A significantdecline in home values would likely lead to increased delinquencies anddefaults in both consumer and home equity loans and owner-occupied residentialreal estate loan portfolios and result in increased losses in theportfolios.  Recently, there has been amoderate downturn in the local economy, a softening in the real estate marketand a oversupply of lots, speculative homes and non-owner occupied rentalunits, leading to cash flow issues faced by local property investors, builders,and developers.  These issues have had amaterial adverse impact on the Bank’s nonaccrual loans.  At December 31, 2006, the Bank’snonperforming loans amounted to $25.8 million, or 3.17% of total netloans.  The resolution of suchnonperforming loans may substantially impact the Company’s provision for loanlosses and allowance for loan losses.

***New or revised tax, accounting and other laws, regulations, rules andstandards could significantly impact strategic initiatives, results ofoperations and financial condition.***  The financial services industry is highlyregulated and laws and regulations may sometimes impose significant limitationson operations.  These limitations, andsources or potential liability for the violation of such laws and regulation,are described in Item 1 of Part I of this report under the heading “Business —Regulation.”  These regulations, alongwith the currently existing tax and accounting laws, regulations, rules andstandards, control the methods by which financial institutions conductbusiness; implement strategic initiatives, as well as past, present, andcontemplated tax planning; and govern financial disclosures.  These laws, regulations, rules, and standardsare constantly evolving and may change significantly over time.  The nature, extent, and timing of theadoption of significant new laws, changes in existing laws, or repeal ofexisting laws may have a material impact on the Company’s results of operationsand financial condition, the effects of which are impossible to predict at thistime.

***Strong competition within the Company’s market area may limitprofitability.***  TheCompany faces significant competition both in attracting deposits and in theorigination of loans, as described in Item 1 of Part I of this report under theheading “Business — Competition.” Mortgage bankers, commercial banks, credit unions and other savingsinstitutions, which have offices in the Bank’s market area have historicallyprovided most of the Company’s competition for deposits.  Many competitors have substantially greaterfinancial and other resources than the Company. Moreover, the Company may face increased competition in the originationof loans if competing thrift institutions convert to stock form, because suchconverting thrifts would likely seek to invest their new capital into loans.  Finally, credit unions do not pay federal orstate income taxes and are subject to fewer regulatory constraints than savingsbanks and as a result, they may enjoy a competitive advantage over the Company.  The Bank competes for loans principally onthe basis of the interest rates and loan fees it charges, the types of loans itoriginates and the quality of services it provides to borrowers.  This advantage places significant competitivepressure on the prices of loans and deposits.

29

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***Losses on a few large loans or lending relationships can causesignificant volatility in earnings.***  Due to the Company’s limited size, individualloan values can be large relative to the Company’s earnings for a particularperiod.  If a few relatively large loanrelationships  become non-performing in aperiod and the Company is required to increase its loss reserves, or to writeoff principal or interest relative to such loans, the operating results of thatperiod could be significantly adversely affected. The effect on results ofoperations for any given period from a change in the performance of arelatively small number of loan relationships may be disproportionately largerthan the impact of such loans on the quality of the Company’s overall loanportfolio.  In each of the third andfourth quarters of 2006, the Company incurred losses on lending relationshipsthat significantly impacted operating results for the relevant period.  As of December 31, 2006, the Bank’snonperforming loans amounted to $25.8 million, with six borrowers owing $12.1million, or 46.9% of the total nonperforming loans.   Nonresidential real estate securednon-accrual loans totaled $8.3 million at December 31, 2006, or 32.1% of thetotal nonperforming loans.

***The extended disruption of vital infrastructure could negatively impactthe Company’s results of operations and financial condition.***  The Company’s operations depend upon, amongother things, its technology and physical infrastructure, including itsequipment and facilities.  Extendeddisruption of its vital infrastructure by fire, power loss, natural disaster,telecommunications failure, computer hacking and viruses, terrorist activity orthe domestic and foreign response to such activity, or other events outside ofthe Company’s control, could have a material adverse impact either on thefinancial services industry as a whole, or on the Company’s business, resultsof operations, and financial condition. In order to mitigate some of this risk, the Company has a businesscontinuity plan that is regularly updated and tested.

***Impairment of goodwill or other intangible assets could require chargesto earnings, which could result in a negative impact on the Company’s resultsof operations. ***Undercurrent accounting standards, goodwill and certain other intangible assets withindeterminate lives are no longer amortized but, instead, are assess forimpairment periodically or when impairment indicators are present.  Assessment of goodwill and such otherintangible assets could result in circumstances where the applicable intangibleasset is deemed to be impaired for accounting purposes.  Under such circumstances, the intangibleasset’s impairment would be reflected as a charge to earnings in the periodduring which such impairment is identified.

***The Company is a thrift holding company and its sources of funds arelimited. ***TheCompany is a thrift holding company, and its operations are primarily conductedby the Bank, which is subject to significant federal regulation.  Cash available to pay dividends to stockholdersof the Company and to service the debt of the Company is largely dependent onthe receipt of dividends from the Bank. In the event that the Bank is unable topay dividends to the Company, the Company may not be able to service the debtor pay dividends on the common stock. Any payment of dividends in the future will depend, in large part, onthe Bank’s earnings, capital requirements, regulatory approval and financialcondition.

***Other risk factors.***  The above description of risk factors is notexhaustive.   Other risk factors aredescribed elsewhere herein as well as in other reports and documents that wefile with or furnish to the SEC.  Otherfactors that could also cause results to differ from our expectations may notbe described in any such report or document. Each of these factors could by itself, or together with one or moreother factors, adversely affect our business, results of operations and/orfinancial condition.

**Item 1B.Unresolved Staff Comments**

Not applicable.

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**Item 2.Properties**

At December 31, 2006,Peoples conducted its business from its main office in West Chester, Ohio andeighteen other branch offices in Hamilton and Warren counties in Ohio andDearborn and Ohio Counties in Indiana. The following table sets forth the net book value (including leaseholdimprovement, furnishings and equipment) and certain other information withrespect to the offices and other properties of Peoples at December 31, 2006.
|                              | ** ** | ** **              | ** ** | **Lease**      | ** ** | **Net Book Value  of Property and  Leasehold  Improvements at** | ** ** | **Deposits at**  | ** ** |
|------------------------------|------------|-------------------------|------------|----------------|------------|------------------------------------------------------------------------------------------|------------|-----------------------|------------|
| ** **                   | ** ** | **Owned or**       | ** ** | **Expiration** | ** ** | **December 31,**                                                                    | ** ** | **December 31,** | ** ** |
| ** **                   | ** ** | **Leased**              | ** ** | **Date**       | ** ** | **2006**                                                                                 | ** ** | **2006**              | ** ** |
| ** **                   | ** ** | **(In thousands)** | ** ** |
| **Main Office:**             |       |                    |       |           |       |                                                                                     |       |                  |       |
| 6100 West  Chester Road      |       |                    |       |           |       |                                                                                     |       |                  |       |
| West Chester, Ohio 45069     |       | Owned                   |       | N/A            |       | $                                                                                        | 2,409      |                  | $          | 57,118 |   |
| ** **                   |       |                    |       |           |       |                                                                                     |       |                  |       |
| **Branch Offices:**          |       |                    |       |           |       |                                                                                     |       |                  |       |
| 7615 Voice of  America Drive |       |                    |       |           |       |                                                                                     |       |                  |       |
| West Chester, Ohio 45069     |       | Owned                   |       | N/A            |       | 3,473                                                                                    |       | 13,889                |       |
| 11 South Broadway            |       |                    |       |           |       |                                                                                     |       |                  |       |
| Lebanon, Ohio 45036          |       | Owned                   |       | N/A            |       | 680                                                                                      |       | 56,325                |       |
| 4825 Marburg  Avenue         |       |                    |       |           |       |                                                                                     |       |                  |       |
| Cincinnati, Ohio 45209       |       | Owned                   |       | N/A            |       | 1,555                                                                                    |       | 31,969                |       |
| 5712 Bridgetown Road         |       |                    |       |           |       |                                                                                     |       |                  |       |
| Cincinnati, Ohio 45248       |       | Owned                   |       | N/A            |       | 1,948                                                                                    |       | 74,274                |       |
| 6570 Harrison  Avenue        |       |                    |       |           |       |                                                                                     |       |                  |       |
| Cincinnati, Ohio 45247       |       | Owned                   |       | N/A            |       | 1,280                                                                                    |       | 41,809                |       |
| 7522 Hamilton Avenue         |       |                    |       |           |       |                                                                                     |       |                  |       |
| Cincinnati, Ohio 45231       |       | Owned                   |       | N/A            |       | 1,244                                                                                    |       | 63,270                |       |
| 4100 State Route  128        |       |                    |       |           |       |                                                                                     |       |                  |       |
| Cleves, Ohio 45002           |       | Owned                   |       | N/A            |       | 882                                                                                      |       | 19,718                |       |
| 1101 Columbus Avenue         |       |                    |       |           |       |                                                                                     |       |                  |       |
| Lebanon, Ohio 45036          |       | Owned                   |       | N/A            |       | 1,335                                                                                    |       | 52,129                |       |
| 5797 South State  Route 48   |       |                    |       |           |       |                                                                                     |       |                  |       |
| Maineville, Ohio 45039       |       | Owned                   |       | N/A            |       | 945                                                                                      |       | 23,503                |       |
| 8350 Arbor Square Drive      |       |                    |       |           |       |                                                                                     |       |                  |       |
| Mason, Ohio 45040            |       | Owned                   |       | N/A            |       | 1,405                                                                                    |       | 24,784                |       |
| 3530 Springdale  Road        |       |                    |       |           |       |                                                                                     |       |                  |       |
| Cincinnati, Ohio 45251       |       | Owned                   |       | N/A            |       | 696                                                                                      |       | 27,457                |       |
| 7200 Blue Ash Road           |       |                    |       |           |       |                                                                                     |       |                  |       |
| Cincinnati, Ohio 45236       |       | Owned                   |       | N/A            |       | 2,526                                                                                    |       | 81,163                |       |
| 2906-6 West US  22 & 3   |       |                    |       |           |       |                                                                                     |       |                  |       |
| Maineville, OH 45039         |       | Leased                  |       | 06/07          |       | —                                                                                   |       | —                |       |
| 8001 Kenwood Road            |       |                    |       |           |       |                                                                                     |       |                  |       |
| Cincinnati, Ohio 45236       |       | Leased                  |       | 02/07          |       | 736                                                                                      |       | 38,786                |       |
| 6945 South  Liberty Drive    |       |                    |       |           |       |                                                                                     |       |                  |       |
| Liberty Township, Ohio 45044 |       | Owned                   |       | N/A            |       | 1,725                                                                                    |       | 1,056                 |       |
| 131 Walnut Street            |       |                    |       |           |       |                                                                                     |       |                  |       |
| Lawrenceburg, Indiana 47025  |       | Leased                  |       | 02/13          |       | 102                                                                                      |       | 49,666                |       |
| 320 Importing  Street        |       |                    |       |           |       |                                                                                     |       |                  |       |
| Aurora, Indiana 47001        |       | Owned                   |       | N/A            |       | 514                                                                                      |       | —                |       |
| 24128 State Line Road        |       |                    |       |           |       |                                                                                     |       |                  |       |
| Bright, Indiana 47025        |       | Owned                   |       | N/A            |       | 335                                                                                      |       | 6,895                 |       |
| 204 Bridgeway  Street        |       |                    |       |           |       |                                                                                     |       |                  |       |
| Aurora, Indiana 47001        |       | Owned                   |       | N/A            |       | 627                                                                                      |       | 74,836                |       |
| 330 Industrial Access Road   |       |                    |       |           |       |                                                                                     |       |                  |       |
| Rising Sun, Indiana 47040    |       | Owned                   |       | N/A            |       | 502                                                                                      |       | 16,614                |       |
|                              |            |                         |            |                |            |                                                                                          |            |                       |            |  |  |

 

31

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Additionally, the Companyhad capitalized construction in progress costs totaling approximately $2.0 atDecember 31, 2006, and has purchased land in Warren County for $1.0million for future expansion.

**Item3. Legal Proceedings**

From time to time, the Bank and Company are involved as plaintiff ordefended in various legal proceedings arising in the normal course ofbusiness.  While the ultimate outcome ofthese various legal proceedings cannot be predicted with certainty, it is theopinion of management that the resolution of these legal actions should nothave a material effect on the Company’s consolidated financial conditions orresults of operations.

**Item4. Submission of Matters to a Vote of Security Holders**

Not applicable

**PARTII**

**Item5. Market for Registrant’s Common Equity, and Related Stockholder Matters andIssuer Purchases of Equity Securities**

(a)  The information required herein isincorporated by reference from page 2 of Peoples’ 2006 Annual Report to Stockholdersfiled as Exhibit 13 hereto (“2006 Annual Report”) and from Part III, Item 12hereof.

(b)  Not applicable.

(c)  Not applicable.

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

The information requiredherein is incorporated from pages 5 and 6 of the 2006 Annual Report.

**Item7. Management’s Discussion and Analysis of Financial Condition and Results ofOperations**

The informationrequired herein is incorporated by reference from pages 7 to 18 of the 2006Annual Report.

**Item7A. Quantitative and Qualitative Disclosures About Market Risk**

The informationrequired herein is incorporated from pages 19 and 20 of the 2006 Annual Report.

**Item8. Financial Statements and Supplementary Data**

The informationrequired herein is incorporated by reference from pages 23 to 63 of the 2006Annual Report.

 

32

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**Report of Independent Registered Public AccountingFirm**

Audit Committee, Board ofDirectors and StockholdersPeoples Community Bancorp, Inc.West Chester, Ohio

We have audited theaccompanying consolidated balance sheets of Peoples Community Bancorp, Inc. asof December 31, 2006 and 2005, and the related consolidated statements ofoperations, comprehensive income (loss), stockholders’ equity and cash flowsfor the year ended December 31, 2006, the three-month period ended December 31,2005 and for each of the two years in the period ended September 30, 2005.  These financial statements are theresponsibility of the Company’s management. Our responsibility is to express an opinion on these financialstatements based on our audits.

We conducted our audits inaccordance with the standards of the Public Company Accounting Oversight Board(United States).  Those standards requirethat we plan and perform the audit to obtain reasonable assurance about whetherthe financial statements are free of material misstatement.  An audit includes examining, on a test basis,evidence supporting the amounts and disclosures in the financialstatements.  An audit also includesassessing the accounting principles used and significant estimates made bymanagement, as well as evaluating the overall financial statementpresentation.  We believe that our auditsprovide a reasonable basis for our opinion.

In our opinion, theconsolidated financial statements referred to above present fairly, in allmaterial respects, the financial position of Peoples Community Bancorp, Inc. asof December 31, 2006 and 2005, and the results of its operations and its cashflows for the year ended December 31, 2006, the three-month period endedDecember 31, 2005 and for each of the two years in the period ended September30, 2005, in conformity with accounting principles generally accepted in theUnited States of America.

Cincinnati, OhioMarch 27, 2007

**Item9. Changes in and Disagreements With Accountants on Accounting and FinancialDisclosure**

Not applicable.

**Item9A. Controls and Procedures**

Our managementevaluated, with the participation of our Chief Executive Officer and ChiefFinancial Officer, the effectiveness of our disclosure controls and procedures(as defined by Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Actof 1934) as of December 31, 2006.  Basedon such evaluation, our Chief Executive Officer and Chief Financial Officerhave concluded that our disclosure controls and procedures are designed toensure that information required to be disclosed by us in the reports that wefile or submit under the Securities Exchange Act of 1934 is recorded,processed, summarized and reported within the time periods specified in the SEC’srules and regulations and are operating in an effective manner.

No change in ourinternal control over financial reporting (as defined in Rules 13a-15(f) and15(d)-15(f) under the Securities Exchange Act of 1934) occurred during thefourth fiscal quarter of fiscal 2006 that has materially affected, or is reasonablylikely to materially affect, our internal control over financial reporting.

33

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**Item 9B.Other Information**

Not applicable.

**PARTIII**

**Item10. Directors, Executive Officers and Corporate Governance**

**Code of Ethics for Executive Officers**

The board of directors has adopted a code of ethicsfor the Company’s executive officers, including the chief executive officer,the chief operating officer and the chief financial officer.  These officers are expected to adhere at alltimes to this code of ethics. Failure to comply with this code of ethics is aserious offense and will result in appropriate disciplinary action.  We have posted this code of ethics on ourwebsite at www.pcbionline.com.

We will disclose on our website atwww.pcbionline.com, to the extent and in the manner permitted by Item 5.05 ofForm 8-K under Section 13 of the Exchange Act, the nature of any amendment tothis code of ethics (other than technical, administrative, or othernon-substantive amendments), our approval of any material departure from aprovision of this code of ethics, and our failure to take action within areasonable period of time regarding any material departure from a provision ofthis code of ethics that has been made known to any of the executive officersnoted above.

Additionalinformation required herein is incorporated by reference from the Registrant’sProxy Statement to be filed within 120 days after the end of the fiscal yearcovered by this Form 10-K (“Proxy Statement”).

**Item11. Executive Compensation**

The informationrequired herein is incorporated by reference from the Proxy Statement.

**Item12. Security Ownership of Certain Beneficial Owners and Management and RelatedStockholder Matters**

**Equity Compensation Plan Information**

The following table sets forth certain informationfor all equity compensation plans and individual compensation arrangements(whether with employees or non-employees, such as directors), in effect as ofDecember 31, 2006.
| **Plan Category**                                      | ** ** | **Number of Shares to  be issued upon the  Exercise of  Outstanding Options,  Warrants and Rights(1)** | ** ** | **Weighted-  Average Exercise  Price of  Outstanding  Options(1)** | ** ** | **Number of Shares  Remaining Available  for Future Issuance  (Excluding Shares  Reflected in the  First Column)** | ** ** |
|-------------------------------------------------------------|------------|----------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------------------------------------------------------------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|
| Equity  Compensation Plans Approved by Security Holders     |       | 228,723                                                                                                                                                  |       | $                                                                            | 18.63      |                                                                                                                                                            | 100,328    |   |
| Equity  Compensation Plans Not Approved by Security Holders |       | —                                                                                                                                                   |       | —                                                                       |       | —                                                                                                                                                          |       |
| Total                                                       |       | 228,723                                                                                                                                                  |       | $                                                                            | 18.63      |                                                                                                                                                            | 100,328    |   |

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(1)                                  Included in such number are 111,999 shareswhich are subject to restricted stock grants which were not vested as of December31, 2006.  The weighted average exerciseprice excludes restricted stock grants.

34

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**Item13. Certain Relationships and Related Transactions and Director Independence**

The informationrequired herein is incorporated by reference from the Proxy Statement.

##### **Item14. Principal Accounting Fees and Services**

The informationrequired herein is incorporated by reference from the Proxy Statement.

**Item15. Exhibits, Financial Statement Schedules**

(a) (1)  The following documents are filed as part ofthis report and are incorporated herein by reference from the Registrant’s 2006Annual Report:

Report ofRegistered Independent Certified Public Accountants.

ConsolidatedStatements of Financial Condition as of December 31, 2006 and 2005.

ConsolidatedStatements of Operations for the Year Ended December 31, 2006, the Three MonthPeriod Ended December 31, 2005, and the Years Ended September 30, 2005, and2004.

ConsolidatedStatements of Comprehensive Income (Loss) for the Year Ended December 31, 2006,the Three Month Period Ended December 31, 2005, and the Years Ended September30, 2005, and 2004.

ConsolidatedStatements of Stockholders’ Equity for the Year Ended December 31, 2006, theThree Month Period Ended December 31, 2005, and the Years Ended September 30,2005, and 2004.

ConsolidatedStatements of Cash Flows for the Year Ended December 31, 2006, the Three MonthPeriod Ended December 31, 2005, and the Years Ended September 30, 2005, and2004.

Notes toConsolidated Financial Statements.

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

(b)  Exhibits.

The followingexhibits are filed as part of this Form 10-K, and this list includes theExhibit Index:
| No.       | ** ** | **Exhibits**                                                                                                                                                            |
|-----------|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|  3.1 |       | Articles of Incorporation of Peoples Community  Bancorp, Inc. (1)                                                                                                       |
|  3.2 |       | Bylaws of Peoples Community Bancorp, Inc.                                                                                                                               |
|  4   |       | Stock Certificate of Peoples Community Bancorp, Inc.  (4)                                                                                                               |
| 10.1      |       | 2001 Stock Option Plan (2)                                                                                                                                              |
| 10.2      |       | 2001 Recognition and Retention Plan (2)                                                                                                                                 |
| 10.3      |       | 2004 Stock Option Plan (3)                                                                                                                                              |
| 10.4      |       | 2004 Recognition and Retention Plan (3)                                                                                                                                 |
| 10.5      |       | Employment Agreements with each of Jerry D.  Williams, Thomas J. Noe, and Teresa A. O’Quinn (4)                                                                    |
| 10.6      |       | Employment Agreement with Stephen P. Wood (5)                                                                                                                           |
| 10.7      |       | Change in Control Agreement with Rick W. Wade (5)                                                                                                                       |
| 10.8      |       | Change in Control Agreement with Lori M. Henn                                                                                                                           |
| 10.9      |       | Change in Control Agreement with Fred L. Darlington                                                                                                                     |
| 10.10     |       | Change in Control Agreement with Jerry L. Gore (6)                                                                                                                      |
| 13.0      |       | Annual Report to Stockholders for the Year Ended  December 31, 2006                                                                                                     |
| 21.0      |       | List of Subsidiaries (See “Item I. Business -  Subsidiaries” in this Form 10-K)                                                                               |
| 23.1      |       | Consent of BKD LLP                                                                                                                                                      |
| 31.1      |       | Certification of Chief Executive Officer Pursuant to  Rules 13a-14 and 15d-14 of the Securities Exchange Act of 1934 and Section  302 of the Sarbanes-Oxley Act of 2002 |

 

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| 31.2 |   | Certification of Chief Financial Officer Pursuant to  Rules 13a-14 and 15d-14 of the Securities Exchange Act of 1934 and Section  302 of the Sarbanes-Oxley Act of 2002 |
|------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 32.1 |   | Certification of Chief Executive Officer Pursuant to  Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. 1350)                                                    |
| 32.2 |   | Certification of Chief Financial Officer Pursuant to  Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. 1350)                                                    |

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(1)           Incorporated herein by reference toPeoples’ Proxy Statement dated January 28, 2002.

(2)           Incorporated herein by reference toPeoples’ Proxy Statement dated January 29, 2001.

(3)           Incorporated herein by reference toPeoples’ Proxy Statement dated January 5, 2004.

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

(5)                                  Incorporatedherein by reference to Peoples’ Current Report on Form 8-K filed with the SECon April 27, 2006.

(6)                                  Incorporatedherein by reference to Peoples’ Current Report on Form 8-K filed with the SECon December 20, 2006.

 

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**SIGNATURES**

Pursuant to therequirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, theregistrant has duly caused this report to be signed on its behalf by theundersigned, thereunto duly authorized.
|            | ** ** | **PEOPLES COMMUNITY BANCORP, INC.** |
|------------|------------|-------------------------------------|
| ** ** | ** ** | ** **                          |   | ** ** |
| ** ** | ** ** | ** **                          |   | ** ** |
|       |       | By:                                 |   | /s/ Jerry D. Williams |
|       |       |                                |   | Jerry D. Williams |
|       |       |                                |   | President, Chief Executive Officer and Director |

 

Pursuant to therequirements of the Securities Exchange Act of 1934, as amended, this reporthas been signed below by the following persons on behalf of the registrant andin the capacities and on the dates indicated.
| /s/ Jerry D. Williams         |   | March 28, 2007 |
|-------------------------------|--------|----------------|
| Jerry D. Williams             |   |           |
| President, Chief Executive    |   |           |
|  Officer and  Director   |   |           |
| (principal executive officer) |   |           |
|                          |   |           |
| /s/ Thomas J. Noe             |   | March 28, 2007 |
| Thomas J. Noe                 |   |           |
| Treasurer and Director        |   |           |
|                          |   |           |
| /s/ Paul E. Hasselbring       |   | March 28, 2007 |
| Paul E. Hasselbring           |   |           |
| Chairman of the Board and     |   |           |
| Director                      |   |           |
|                          |   |           |
| /s/ John E. Rathkamp          |   | March 28, 2007 |
| John E. Rathkamp              |   |           |
| Director                      |   |           |
|                          |   |           |

 

37

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| /s/ John L. Buchanan                         |   | March 28, 2007 |
|----------------------------------------------|--------|----------------|
| John L. Buchanan                             |   |           |
| Director                                     |   |           |
|                                         |   |           |
| /s/ Donald L. Hawke                          |   | March 28, 2007 |
| Donald L. Hawke                              |   |           |
| Director                                     |   |           |
|                                         |   |           |
| /s/ James R. Van DeGrift                     |   | March 28, 2007 |
| James R. Van DeGrift                         |   |           |
| Director                                     |   |           |
|                                         |   |           |
| /s/ Nicholas N. Nelson                       |   | March 28, 2007 |
| Nicholas N. Nelson                           |   |           |
| Director                                     |   |           |
|                                         |   |           |
| /s/ Teresa A. O’Quinn                   |   | March 28, 2007 |
| Teresa A. O’Quinn                       |   |           |
| Chief Financial Officer                      |   |           |
| (principal financial and accounting officer) |   |           |

 

38

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