**SECURITIESAND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

**FORM 10-K**

 

**(Mark One)**

 

**x****        Annual report pursuant to Section 13 or 15(d) ofthe Securities Exchange Act of 1934**

 

**For the fiscal year ended December 31, 2007**

 

**OR**

 

**o****        Transition report pursuant to Section 13 or 15(d) ofthe Securities and Exchange Act of 1934**

 

**CommissionFile No.: 000-29949**

 

**PEOPLESCOMMUNITY BANCORP, INC.**

(Exact Name of Registrant asSpecified 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**

(Registrant’s TelephoneNumber, Including Area Code)

 

Securities registered under Section 12(b) ofthe Exchange 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) ofthe Exchange 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 isnot required to file reports pursuant to Section 13 or Section 15(d) ofthe Act.

Yes  o   No  x

 

Indicate by check mark whether theRegistrant: (1) has filed all reports required to be filed by Section 13or 15(d) of the Exchange Act during the preceding 12 months (or for suchshorter period that the Registrant was required to file such reports), and (2) hasbeen subject to such filing requirements for the past 90 days.     Yes  x   No  o

 

Indicate by check mark if disclosure ofdelinquent filers pursuant to Item 405 of Regulation S-K is not containedherein, and will not be contained, to the best of Registrant’s knowledge, indefinitive proxy or information statements incorporated by reference in Part IIIof this Form 10-K or any amendment to this Form 10-K.  x

 

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

 

Large accelerated filer  o     Accelerated filer  o    Non-accelerated filer  o       Smaller reporting company  x

(Do not check if a smaller reporting company)

 

Indicate by check mark whether the registrantis a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes  o   No  x

 

As of June 30, 2007, the aggregate value of the 3,904,422 sharesof Common Stock of the Registrant issued and outstanding on such date, whichexcludes 934,542 shares held directly or indirectly by all directors andexecutives officers of the Registrant and the Registrant’s Employee StockOwnership Plan (“ESOP”) as a group, was approximately $63.8 million.  This figure is based on the closing salesprice of $16.34 per share of the Registrant’s Common Stock on June 30,2007.  Although directors and executiveofficers and the ESOP were assumed to be “affiliates” of the Registrant forpurposes of this calculation, the classification is not to be interpreted as anadmission of such status.

 

Number of shares of Common Stock outstandingas of April 14, 2008: 4,838,964

 

 

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**TABLE OF CONTENTS**

 
| ** **  | ** **                                                                                                         | **Page** |
|-------------|--------------------------------------------------------------------------------------------------------------------|----------|
|        | PART I                                                                                                        |     |
|        |                                                                                                               |     |
| Item 1.     | Business                                                                                                           |     |
|        | General                                                                                                            | 3        |
|        | Peoples Lending Activities                                                                                         | 5        |
|        | Asset Quality                                                                                                      | 12       |
|        | Investment Securities                                                                                              | 17       |
|        | Sources of Funds                                                                                                   | 18       |
|        | Competition                                                                                                        | 22       |
|        | Regulation                                                                                                         | 22       |
|        | Taxation                                                                                                           | 28       |
|        |                                                                                                               |     |
| Item 1A.    | Risk Factors                                                                                                       | 31       |
| Item 1B.    | Unresolved  Staff Comments                                                                                         | 35       |
| Item 2.     | Properties                                                                                                         | 36       |
| Item 3.     | Legal Proceedings                                                                                                  | 37       |
| Item 4.     | Submission  of Matters to a Vote of Security Holders                                                               | 37       |
|        |                                                                                                               |     |
|        | PART II                                                                                                       |     |
|        |                                                                                                               |     |
| Item 5.     | Market for  Registrant’s Common Equity, Related Stockholder Matters and IssuerPurchases of  Equity Securities | 37       |
| Item 6.     | Selected Financial  Data                                                                                           | 37       |
| Item 7.     | Management’s  Discussion and Analysis of Financial Condition and Resultsof  Operations                        | 37       |
| Item 8.     | Financial  Statements and Supplementary Data                                                                       | 37       |
| Item 9.     | Changes in  and Disagreements with Accountants on Accounting and Financial Disclosure                              | 38       |
| Item 9A(T). | Controls and  Procedures                                                                                           | 38       |
| Item 9B.    | Other Information                                                                                                  | 39       |
|        |                                                                                                               |     |
|        | PART III                                                                                                      |     |
|        |                                                                                                               |     |
| Item 10.    | Directors,  Executive Officers and Corporate Governance                                                            | 40       |
| Item 11.    | Executive  Compensation                                                                                            | 40       |
| Item 12.    | Security  Ownership of Certain Beneficial Owners and Management and RelatedStockholder  Matters                    | 40       |
| Item 13.    | Certain  Relationships and Related Transactions, and Director Independence                                         | 41       |
| Item 14.    | Principal  Accountant Fees and Services                                                                            | 41       |
|        |                                                                                                               |     |
|        | PART IV                                                                                                       |     |
|        |                                                                                                               |     |
| Item 15.    | Exhibits and  Financial Statement Schedules                                                                        | 41       |
|        |                                                                                                               |     |
| Signatures  |                                                                                                               | 44       |

 

2

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**PART I**

 

**Item 1. Business**

 

**General**

 

PeoplesCommunity Bancorp, Inc. (“Peoples” or the “Company”) was organized in December 1999at the direction of the Board of Directors of The People’s Building, Loan andSavings Company, presently Peoples Community Bank (the “Bank”), for the purposeof holding all of the capital stock of the Bank and in order to facilitate theconversion of the Bank from an Ohio-chartered mutual savings and loanassociation to a federally-chartered stock savings bank.  (Unless the context otherwise requires,reference to Peoples includes the Bank). People’s assets consist primarily of the outstanding shares of commonstock of the Bank.  Peoples has nosignificant liabilities other than junior subordinated debentures issued infiscal 2005 and $17.5 million of debt currently outstanding as of April 14,2008 under a line of credit which is secured by the outstanding shares ofcommon stock of the Bank.  The managementof Peoples and the Bank are substantially identical and Peoples neither ownsnor leases any property but instead uses the premises, equipment and furnitureof the Bank.  At December 31, 2007,the Company had $887.4 million in total assets, $735.2 million in deposits,$77.6 million in borrowings (excluding subordinated debentures) and $53.6million of stockholders’ equity.  TheCompany’s principal executive office is located at 6100 West Chester Road, WestChester, Ohio 45069.  The Company’stelephone number is (513) 870-3530.

 

TheBank is a federally-chartered stock savings bank that was originally organizedin 1889.  The Bank conducts its businessfrom nineteen full service offices in Hamilton, Warren and Butler counties inSouthwest Ohio and Dearborn and Ohio Counties in Southeast Indiana.  The Bank is primarily engaged in attractingdeposits from the general public and using those funds to originate loans andinvest in securities.  The Bank’s primarylending emphasis has been, and continues to be, loans secured by first liens onsingle-family (one- to four-units) residential properties located in its localmarket.

 

As a result of acquisitions and internalgrowth, the Company grew from $416.0 million in total assets as of September 30,2001 to a high of $1.0 billion in total assets as of December 31,2005.  Between the completion of thepublic offering in March 2000 and December 31, 2005, the Companyacquired five financial institutions with aggregate total assets as of the timeof acquisition of $428.5 million.  Also,in September 2003, the Company purchased $32.8 million in loans andassumed $55.6 million in deposits in connection with the acquisition of twobranch offices from another financial institution.  The Company supplemented this growth fromacquisitions with loan generation secured primarily by real estate in itsmarket area.  Total gross loans increasedfrom $419.5 million at September 30, 2001 to $851.3 million at December 31,2005.    In addition, since September 30,2000, the Company expanded its franchise through the opening of six fullservice branch offices. These new branch offices, as well as acquired branchoffices, have expanded the Company’s market presence.  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 $735.2 million at December 31,2007.

 

However,beginning in early 2007, the Company began to reduce all aspects of its lendingexposure due in large part to the downturn in the local economy, and, inparticular, values of residential and residential development properties. At December 31,2007, total gross loans amounted to $704.0 million, a decrease of $240.7million or 25.5% compared to $944.7 million of loans at December 31,2005.  In addition, in an attempt toaddress such slowdown and the resulting decrease in the value of itscollateral, the Company charged-off $13.1 million of loans in 2006 and $18.3million of loans in 2007, and provided $17.5 million and $32.8 million during2006 and 2007, respectively, to the allowance for losses on loans.  As a result, the allowance for loan losses tototal gross loans at December 31, 2007 amounted to 4.9%.  Further, beginning in 2006, the Companyrevised its underwriting standards to place an increased focus on cash flowanalysis, tightened its credit standards and provided additional resources tothe resolution of its classified assets.

 

3

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Theactions taken by the Company during 2006 and 2007, discussed above, and thecontinued recessionary forces in the local economy have had a significantadverse impact on the Company’s financial condition and results ofoperations.  For 2006 and 2007, netlosses amounted to $4.1 million and $33.3 million, respectively, andstockholders’ equity decreased from $86.0 million or 8.36% of total assets at December 31,2005 to $53.6 million or 6.04% of total assets at December 31, 2007.  Further, the level of the Company’snon-performing assets has and will continue to negatively impact the Company’sinterest rate spread, interest income, provision for losses on loans and netearnings or loss.  Non-performing assetstotaled $32.8 million, $26.1 million and $18.9 million at December 31,2007, 2006 and 2005, respectively.  Whilethe Bank has devoted and will continue to devote substantial managementresources toward the resolution of all delinquent and non-performing assets, noassurance can be made that management’s efforts will be successful.

 

TheBank’s primary federal regulator, the Office of Thrift Supervision (“OTS”) has,in light of the Company’s recent losses and levels of nonperforming assets,imposed certain operations restrictions on the Company and the Bank, many ofwhich had previously been taken by the Company and the Bank.  On April 2, 2008, the Company and theBank each consented to the terms of Cease and Desist Orders issued by the OTS(the “Orders”).  The Company attachedcopies of the Orders to a Current Report on Form 8-K filed with theSecurities and Exchange Commission on April 3, 2008.

 

TheOrders require the Company and the Bank to, among other things, file with theOTS within proscribed time periods updated business plans, which specificallyincorporate the requirements set forth in the Orders and comments contained inthe most recently completed examinations of the Company and the Bank. On aquarterly basis, the Bank and the Company will be required to compare theprojected operating results from the business plans with the actual results.The results of this variance analysis are to be submitted to the OTS within theproscribed time periods. In addition, the Orders require that the Company andthe Bank receive the permission of the OTS prior to (i) making ordeclaring any dividends or payments on their outstanding securities; (ii) addingor replacing a director or hiring a senior executive officer; and (iii) makingany golden parachute payments to any institution-affiliated party. Pursuant tothe Order issued to the Company, the Company must also receive the permissionof the OTS prior to increasing its debt position and before any repurchase ofits securities.

 

TheOrder issued to the Bank also requires the Bank to take or refrain from certainactions, including (i) not making any new loans or issuing new lines ofcredit for land acquisition or development, speculative residentialconstruction, commercial and multi-family construction, acquisition orretention of commercial property, and non-owner occupied one- to four-familyresidential property; (ii) engaging an independent consultant to conduct aloan portfolio review for the purpose of determining asset quality and theappropriateness of the Bank’s asset classification process related to loanrelationships that equal or exceed $4.0 million; (iii) establishing a planfor reducing adversely classified assets; (iv) reviewing and, whereappropriate, adjusting the Bank’s allowance for loan and lease lossesmethodology; (v) limiting asset growth during each calendar quarter to anamount not to exceed net interest credited on deposit liabilities; and (vi) establishingan Oversight Committee of the Bank’s Board of Directors comprised ofindependent outside directors.  In aneffort to proactively address the downturn in the local real estate market, theBank had previously curtailed or ceased the lending activities restricted inthe Orders.

 

Management of the Company and the Bank isworking diligently to resolve the issues associated with the Company’snonperforming assets and to provide the information or take the actionsrequired by the Orders.  Concurrently,management and the Board of Directors are considering all strategicalternatives available to the Company and the Bank.  As required, the Company and the Bank havefiled a consolidated business plan with the OTS covering operations through2010.  The Company’s business plancontemplates, among other things, a consolidation of the Company’s operationsthrough branch sales and a reduction in adversely classified assets throughloan resolutions, repayments, sales and charge-offs.  Branch sale transactions would decrease theCompany’s assets and liabilities, generate additional capital, generate taxableincome, and reduce general, administrative and other expense.  In addition, the Bank would dividend funds tothe Company to provide liquidity to service the Company’s debt, provided thatapproval would be received from the OTS. The business plan was submitted by theCompany to the OTS on April 7, 2008 and is subject to review and approvalby the OTS.

 

4

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The report of the Company’s independentregistered accounting firm contains an explanatory paragraph as to the Company’sability to continue as a going concern primarily due to the Company’s currentlack of liquidity to repay its $17.5 million obligation under an outstandingline of credit due June 30, 2008. The line of credit is secured by all outstanding shares of common stockof the Bank.  Although the Bank exceedsall of its capital requirements and is considered well capitalized at December 31,2007, the Orders prohibit the Bank from paying cash dividends to the Companywithout the prior consent of the OTS and the Company will only be able to relyupon existing cash and cash equivalents as sources of its liquidity.  Without the ability to rely on dividends fromthe Bank, the Company will require funds from other capital sources to meet itsobligations such as restructuring the current line of credit or replacing thecurrent line of credit.  The Company wasnot in compliance with one of the loan covenants at December 31, 2007 andthe lender has the ability to accelerate all outstanding amounts upon noticeand the passage of 30 days. The Company is currently negotiating with thelender regarding a waiver of default, and a modification and/or extension ofthe line of credit.

 

In light of the matters discussed above, the Company established a $4.4million valuation allowance of deferred federal income taxes, thus decreasingthe tax benefit recorded during the year by the Company.  Generally, the losses incurred in 2006 and2007 resulted in deferred federal income taxes or deferred tax assets which maybe utilized against current period earnings, carried back against prior years’earnings or utilized to the extent of management’s estimate of future taxableincome.  The valuation allowance wasestablished since the Company’s current liquidity position may impair theCompany’s ability to generate future taxable income, and therefore, impair itsability to realize all benefits of the deferred tax asset.

 

Current OTS capital standards require savingsinstitutions to satisfy three different capital requirements.  Under these standards, savings institutionsmust maintain tangible capital equal to at least 1.5% of adjusted total assets,core capital equal to at least 4.0% of adjusted total assets and total capitalequal to at least 8.0% of risk-weighted assets. At December 31, 2007, the Bank exceeded all of such capitalrequirements, with tangible, core and risk-based capital ratios of 7.0%, 7.0%and 11.4%, respectively.  Further, atsuch date, the Bank was deemed a well capitalized institution under theregulatory framework for prompt correction action purposes.

 

The Bank is subject toexamination and comprehensive regulation by the OTS, which is the Bank’schartering authority and primary federal regulator.  The Bank is also regulated by the FederalDeposit Insurance Corporation (the “FDIC”), administrator of the DepositInsurance Fund.  The Bank is a member ofthe Federal Home Loan Bank (the “FHLB”) of Cincinnati, which is one of the 12regional banks comprising the FHLB System.

 

As previously announced, the Board ofDirectors of the Company adopted an amendment to Article VI of the Company’sBylaws to change the Company’s fiscal year end from September 30, to December 31,effective retroactively to January 1, 2006, in order to increaseoperational efficiency.  As a result, theconsolidated statements of financial condition compares December 31, 2007to December 31, 2006, while the consolidated statements of operations, theconsolidated statements of comprehensive income (loss), and the consolidatedstatements of cash flow reflect, as applicable, the twelve month periods ended December 31,2007 and December 31, 2006, the three month period ended December 31,2005, and the twelve month period ended September 30, 2005.

 

**PeoplesLending Activities**

 

**General.**  At December 31,2007, the net loan portfolio of Peoples totaled $634.4 million, representingapproximately 71.5% of total assets at that date. Historically, the principallending activity of Peoples has been  theorigination of residential and nonresidential real estate loans. At December 31,2007, residential loans (including construction loans secured by residentialreal estate) amounted to $525.9 million, or 74.7% of the gross loanportfolio.  Nonresidential real estateand land loans totaled $129.0 million, or 18.3% of the gross loan 

 

5

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portfolio and nonresidential construction loans amounted to $12.4million, or 1.8% of the gross loan portfolio as of December 31, 2007.  Further, commercial loans amounted to $20.0million, or 2.8% of the gross loan portfolio at December 31, 2007 andconsumer loans amounted to $16.8 million, or 2.4% of the gross loan portfolioat such time.  The Company curtailed itsacquisition and development lending, one- to four-family residential investmentlending, and unsecured commercial lending beginning in early 2007 due in largepart to the downturn in the local housing market, the increase in the Bank’snonaccrual loans and charge-offs, and to realign the portfolio due to loanconcentrations.   Further, as discussedabove, the Bank is currently prohibited from making any new loans or issuingnew lines of credit for the following purposes:

 

·                  Land acquisition or development

 

·                  Speculative residential construction

 

·                  Commercial and multi-family construction

 

·                  Acquisition or retention of commercial property,and

 

·                  Non-owner occupied one- to four-familyproperty.

 

Asavings institution generally may not make loans to one borrower and relatedentities in an amount which exceeds 15% of its unimpaired capital andsurplus.  However, loans in an amount equalto an additional 10% of unimpaired capital and surplus may be made to aborrower if the loans are fully secured by readily marketable securities.   At December 31, 2007, Peoples’regulatory limit on loans-to-one borrower was $13.7 million.  All of Peoples’ five largest loans or groupsof loans-to-one borrower, amounting to $12.9 million, $11.9 million, $9.7million, $9.0 million and $8.8 million at December 31, 2007 wereperforming in accordance with their terms at such date.

 

6

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

 
| ** **                              | ** ** | **December 31,**                | ** ** | **September 30,** | ** ** |
|-----------------------------------------|------------|--------------------------------------|------------|------------------------|------------|
| ** **                              | ** ** | **2007**                             | ** ** | **2006**               | ** ** | **2005** | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** |
| ** **                              | ** ** | ** **                           | ** ** | **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               |       | $                                    | 311,968    |                   | 49.2       | % | $ | 343,346 |   | 42.3 | % | $ | 341,233 |   | 40.1 | % | $ | 252,424 |   | 35.8 | % | $ | 226,735 |   | 37.8 | % | $ | 230,775 |   | 41.7 | % |
| Multi-family residential                |       | 82,176                               |       | 12.9                   |       | 122,221 |   | 15.0 |   | 124,984 |   | 14.7 |   | 122,802 |   | 17.4 |   | 106,799 |   | 17.8 |   | 95,459 |   | 17.2 |   |
| Nonresidential real estate and land     |       | 128,955                              |       | 20.3                   |       | 140,909 |   | 17.3 |   | 147,086 |   | 7.3 |   | 132,502 |   | 18.8 |   | 158,907 |   | 26.5 |   | 131,444 |   | 23.7 |   |
| Construction loans                      |       | 144,171                              |       | 22.7                   |       | 234,830 |   | 28.9 |   | 259,249 |   | 30.4 |   | 220,733 |   | 31.3 |   | 124,996 |   | 20.9 |   | 122,598 |   | 22.1 |   |
| Total mortgage loans                    |       | 667,270                              |       | 105.1                  |       | 841,306 |   | 103.5 |   | 872,552 |   | 102.5 |   | 728,461 |   | 103.3 |   | 617,437 |   | 103.0 |   | 580,276 |   | 104.7 |   |
|                                    |       |                                 |       |                   |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Commercial loans                        |       | 20,012                               |       | 3.2                    |       | 30,933 |   | 3.8 |   | 47,258 |   | 5.6 |   | 43,231 |   | 6.1 |   | 33,238 |   | 5.5 |   | 29,955 |   | 5.4 |   |
| Consumer loans                          |       | 16,758                               |       | 2.6                    |       | 23,022 |   | 2.9 |   | 24,898 |   | 2.9 |   | 22,502 |   | 3.2 |   | 21,781 |   | 3.6 |   | 11,769 |   | 2.1 |   |
| Total loans receivable                  |       | 704,040                              |       | 110.9                  |       | 895,261 |   | 110.2 |   | 944,708 |   | 111.0 |   | 794,194 |   | 112.6 |   | 672,456 |   | 112.1 |   | 622,000 |   | 112.2 |   |
| Less:                                   |       |                                 |       |                   |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Undisbursed portion of loans in process |       | (33,661                              | )          | (5.3                   | )          | (62,042 | ) | (7.6 | ) | (77,094 | ) | (9.1 | ) | (72,894 | ) | (10.3 | ) | (59,045 | ) | (9.8 | ) | (55,308 | ) | (10.0 | ) |
| Allowance for loan losses               |       | (34,499                              | )          | (5.4                   | )          | (18,369 | ) | (2.3 | ) | (13,444 | ) | (1.6 | ) | (13,697 | ) | (1.9 | ) | (11,025 | ) | (1.8 | ) | (9,744 | ) | (1.8 | ) |
| Deferred loan fees                      |       | (1,459                               | )          | (0.2                   | )          | (2,272 | ) | (0.3 | ) | (2,900 | ) | (0.3 | ) | (2,889 | ) | (0.4 | ) | (2,920 | ) | (0.5 | ) | (2,597 | ) | (0.4 | ) |
|                                    |       |                                 |       |                   |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Loans receivable, net                   |       | $                                    | 634,421    |                   | 100.0      | % | $ | 812,578 |   | 100.0 | % | $ | 851,270 |   | 100.0 | % | $ | 704,714 |   | 100.0 | % | $ | 599,466 |   | 100.0 | % | $ | 554,351 |   | 100.0 | % |

 

7

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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 ofPeoples.  The Bank’s underwritingstandards primarily focuses on the borrower’s cash flow capacity to service theloan and to a lesser extent, the collateral value.  This represents a transition fromunderwriting standards primarily based on collateral value, which are generallyused by thrifts, to underwriting standards more widely used by banks.

 

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.  Borrowersmust also obtain flood insurance policies when the property is in a floodhazard area as designated by the Department of Housing and UrbanDevelopment.  Peoples does not requireborrowers to advance funds to an escrow account for the payment of real estatetaxes or hazard insurance premiums.

 

Peoples’ loan 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 beapproved by three senior officers and loans greater than $1.0 million must beapproved by the Board of Directors or the executive committee of the Board ofDirectors.

 

Unsecuredloans up to $500,000 require approval by three senior executive officers andthose greater than $500,000, individually or in the aggregate, must be approvedby the Board of Directors or the executive committee of the Board ofDirectors.  The executive committeeratifies all approvals and presents its report on a monthly basis for the Boardof Directors review and approval.

 

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

 
| ** **                                  | ** ** | **Year Ended December 31,** | ** ** | **Three Months  Ended  December 31,** | ** ** | **Year Ended September 30,** | ** ** |
|---------------------------------------------|------------|--------------------------------------------|------------|-------------------------------------------------|------------|---------------------------------------------|------------|
| ** **                                  | ** ** | **2007**                                   | ** ** | **2006**                                        | ** ** | **2005**                                    | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** |
| ** **                                  | ** ** | **(In Thousands)**                         | ** ** |
|                                        |       |                                       |       |                                            |       |                                        |       |   |   |   |   |   |   |
| Total loans held at beginning of period     |       | $                                          | 895,261    |                                            | $          | 944,708                                     |       | $ | 794,194 |   | $ | 672,456 |   | $ | 622,000 |   | $ | 556,850 |   |
| Originations of loans:                      |       |                                       |       |                                            |       |                                        |       |   |   |   |   |   |   |
| Mortgage loans:                             |       |                                       |       |                                            |       |                                        |       |   |   |   |   |   |   |
| Single-family residential                   |       | 58,345                                     |       | 90,797                                          |       | 29,831                                      |       | 79,588 |   | 89,145 |   | 63,502 |   |
| Multi-family residential                    |       | 7,664                                      |       | 40,510                                          |       | 12,659                                      |       | 42,248 |   | 29,357 |   | 50,686 |   |
| Construction                                |       | 29,131                                     |       | 106,240                                         |       | 19,295                                      |       | 91,494 |   | 75,278 |   | 101,019 |   |
| Nonresidential real estate and land         |       | 49,626                                     |       | 80,004                                          |       | 32,450                                      |       | 85,658 |   | 70,158 |   | 30,170 |   |
| Commercial loans                            |       | 15,012                                     |       | 18,995                                          |       | 8,899                                       |       | 34,768 |   | 23,051 |   | 25,852 |   |
| Consumer loans                              |       | 2,656                                      |       | 5,093                                           |       | 846                                         |       | 11,058 |   | 12,374 |   | 7,344 |   |
| Total originations (1)                      |       | 162,434                                    |       | 341,639                                         |       | 103,980                                     |       | 344,814 |   | 289,465 |   | 278,573 |   |
| 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 |   |
| Transfers to real estate owned              |       | (6,861                                     | )          | (1,008                                          | )          | —                                      |       | (1,854 | ) | (513 | ) | (2,863 | ) |
| Charge-offs                                 |       | (18,284                                    | )          | (13,103                                         | )          | (2,206                                      | )          | (1,081 | ) | (2,360 | ) | (2,122 | ) |
| Other increases (decreases) (2)             |       | (59,147                                    | )          | (48,481                                         | )          | 2,188                                       |       | 5,197 |   | (9,641 | ) | 5,879 |   |
| Repayments                                  |       | (269,363                                   | )          | (366,524                                        | )          | (76,091                                     | )          | (263,696 | ) | (236,398 | ) | (247,086 | ) |
| Net activity in loans                       |       | (191,221                                   | )          | (49,447                                         | )          | 150,514                                     |       | 121,738 |   | 50,456 |   | 65,150 |   |
| Gross loans held at end of period           |       | $                                          | 704,040    |                                            | $          | 895,261                                     |       | $ | 944,708 |   | $ | 794,194 |   | $ | 672,456 |   | $ | 622,000 |   |

 

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(1)                      Undisbursed portions of loans in processtotaled $33.7 million, $62.0 million, $77.1 million, $72.9 million, $59.0million, and $55.3 million at December 31, 2007, 2006 and 2005, and September 30,2005, 2004, and 2003, respectively.

 

8

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(2)                      Includes loan participations sold of $4.9million, $5.1 million, $1.1 million, $5.0 million, and $10.2 million in fiscal2007, 2006, 2005, 2004 and 2003, respectively. There were no loan participations sold for the three months ended December 31,2005.  For fiscal 2007, 2006 and 2005,includes whole loans sold of $27.1 million, $29.5 million and $6.7 million,respectively, and for the three months ended December 31, 2005, includeswhole loans sold of $3.5 million. The reduction in total loans resulting fromsales of loans and loan participations in fiscal 2007 and 2006, the threemonths ended December 31, 2005, and fiscal 2005, 2004, and 2003 wereoffset (increased) by increases (decreases) in undisbursed loans in process,and other net items totaling approximately $(27.1) million, $(13.9) million,$5.7 million, $13.0 million, $5.3 million, and $16.1 million, respectively.

 

Thesignificant repayments of $269.4 million, $366.5 million, $263.7 million,$236.4 million and $247.1 million during fiscal 2007, 2006, 2005, 2004, and2003 respectively, were primarily due to the repayment of short-termconstruction loans and land development loans as well as the refinancingactivity related to adjustable-rate single-family residential loans that wereset to reprice in the current year.

 

Charge-offs of $18.3million during fiscal 2007 consisted primarily of $8.5 million in loans securedby one- to four-family residential real estate (including $7.4 million ofnon-owner occupied investment property), $4.7 million in loans secured bymulti-family residential real estate, $844,000 in construction loans, $1.3million in loans secured by commercial real estate and land, and $2.9 millionin commercial and consumer loans.  Theincrease in charged-off loans was primarily due to both (i) real estateinvestors and developers experiencing cash flow difficulties and (ii) thedownturn in the local economy.  See “AssetQuality.”

 

Althoughfederal laws and regulations permit savings institutions to originate andpurchase loans secured by real estate located throughout the United States,Peoples generally confines its lending activity to its primary market area ofWarren, Butler and Hamilton Counties in Ohio and Dearborn and Ohio Counties inIndiana.  Subject to its loans-to-oneborrower limitation, Peoples is permitted to invest without limitation inresidential mortgage loans and up to 400% of its capital in loans secured bynon-residential or commercial real estate. Peoples may also invest in secured and unsecured consumer loans in anamount not exceeding 35% of total assets. This 35% limitation may be exceeded for certain types of consumerloans.  In addition, Peoples may investup to 10% of its total assets in secured and unsecured loans for commercial,corporate, business or agricultural purposes. At December 31, 2007, Peoples was within each of the above lendinglimits.  Notwithstanding the foregoing,Peoples’ lending activities are significantly restricted due to therequirements of the Orders.  See “Business– General.”

 

**One- toFour-Family Residential Real Estate Loans.**  Theprimary real estate lending activity of Peoples continues to be the originationof loans secured by residential real estate. At December 31, 2007, $312.0 million, or 49.2% of the net loanportfolio of Peoples consisted of conventional one- to four-family residentialloans, compared to $343.3 million, or 42.3% at December 31, 2006 and  $341.2 million or 40.1% of the net loanportfolio at December 31, 2005. Owner occupied residential real estateloans are not restricted by the Orders.

 

The loan-to-value ratio, maturity and otherprovisions of the loans made by Peoples generally have reflected Peoples’policy of making less than the maximum loan permissible under applicableregulations, in accordance with sound lending practices, market conditions andunderwriting standards established by Peoples. Peoples’ lending policies on one- to four-family residential mortgageloans generally limit the loan-to-value ratio to 80% of the lesser of theappraised value or purchase price of the property. Residential mortgage loansare amortized on a monthly basis with principal and interest due each month.The loans generally include “due-on-sale” clauses.

 

Theresidential mortgage loans originated by Peoples consist of fixed rate andadjustable rate loans.  Presently, thesingle-family fixed-rate residential mortgage loans originated by Peoples haveterms of up to 30 years.  In addition,Peoples originates adjustable-rate mortgage loans on which the interest rateadjusts every one, three or five years based upon the one-year or three-yearrate on T-bills plus a specified margin. During fiscal 2004, Peoples introduced a five year fixed rate balloonproduct and a five year fixed rate product which adjusts on an annual basisthereafter based on the one-year rate on the T-bill.  At December 31, 2007, $157.6 million, or50.5% of our single-family residential loans were fixed rate and $154.4million, or 49.5% were adjustable rate. Most of Peoples’ single-family loans in 2007 were originated for itsportfolio, and some of these loans did not conform to Fannie Mae and FreddieMac requirements and therefore, could not be sold in the secondary market.

 

Peoples’non-owner occupied residential mortgage loans have been originated primarily toinvestors and builders, and have been made on substantially the same terms asowner occupied residential real estate loans. In 2007, the Company curtailed its one- to four-family residential  lending to investors, due in large part tothe downturn in the local housing market, the increase in the Bank’s nonaccrualloans and charge-offs, and to realign the portfolio due to loanconcentrations.  As previously stated,Peoples is currently prohibited from originating such loans.  See “Business – General.”

 

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**Multi-family Residential Loans.** Peoples has also originated multi-family (over four units) residentialloans.  Peoples’ multi-family loans areprimarily secured by apartment buildings or apartments being converted tocondominium units.  The multi-familyresidential mortgage loans of Peoples have been underwritten on substantiallythe same basis as its nonresidential real estate loans, discussed below,although loan-to-value ratios are generally limited to 80%.  At December 31, 2007, Peoples had $82.2million in multi-family residential mortgage loans, which amounted to 12.9% ofPeoples’ net loan portfolio, compared to $122.2 million, or 15.0% of Peoples’net loan portfolio at December 31, 2006. As previously stated, Peoples is currently prohibited from originatingsuch loans.  See “Business – General.”

 

**Nonresidential Real Estate and Land Loans.** Peoples’ nonresidential real estate and land loan portfolio primarilyconsists of loans secured by land for development purposes, professionaloffices, small retail centers, warehouses and building lots located withinPeoples’ primary market area. Nonresidential real estate and land loans amounted to $129.0 million, or20.3% of the net loan portfolio at December 31, 2007.  This compares to $140.9 million, or 17.3% at December 31,2006.   As previously stated, Peoples iscurrently prohibited from originating such loans.  See “Business – General.”

 

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

 

The land loans of Peoples generally are secured bysingle-family residential lots or undeveloped land being held for residentialdevelopment.  Lot loans generally have aloan-to-value ratio of 80% or less (on an undeveloped basis) and are typicallyinterest only loans with one-year maturities. Loans originated on developed land generally have a loan to value ratioof 75% or less 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 a loan-to-valueratio of 80% or less.

 

Nonresidential real estate lending is generallyconsidered to involve a higher degree of risk than one- to four-familyresidential lending. Such lending typically involves large loan balancesconcentrated in a single borrower or groups of related borrowers for rental orbusiness properties. In addition, the payment experience on loans secured byincome-producing properties is typically dependent on the success of theoperation of the related project and thus is typically affected by adverseconditions in the real estate market and in the economy. Peoples generallyattempts to mitigate the risks associated with its nonresidential real estatelending by, among other things, lending primarily in its market area and usingreasonable loan-to-value ratios in the underwriting process.

 

Landdevelopment and acquisition loans involve significant additional risks whencompared with loans on existing residential properties. These loans may involvelarger loan balances to single borrowers, and the payment experience may bedependent on the successful development of the land and the sale of the lots.These risks can be significantly impacted by supply and demand conditions aswell as local economic conditions.  Inearly 2007, the Bank curtailed new origination of land development andacquisition loans based on the downturn in the local housing market, theincrease in the Bank’s nonaccrual loans and charge-offs, and to realign theportfolio due to loan concentrations.  Aspreviously stated, Peoples is currently prohibited from originating suchloans.  See “Business – General.”

 

**ConstructionLoans. **At December 31, 2007, Peoples hadapproximately $144.2 million, or 22.7% of the net loan portfolio, inconstruction loans, compared to $234.8 million, or 28.9% of the total loanportfolio at December 31, 2006.  Ofthis amount at December 31, 2007, $131.8 million, or 91.4%, consisted ofresidential construction loans and $12.4 million, or 8.6%, consisted ofnonresidential construction loans.  Theconstruction loans of Peoples have been comprised of loans made to builders ona pre-sold basis, as well as to builders for homes on an unsold or speculativebasis. 

 

10

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Peoples’ construction loans to builders have generally been made with aterm not to exceed twelve months. Interest-only payments are required during the construction period,which is typically twelve months. Peoples generally limits the number of unsold homes under constructionto its builders. This number is dependent on the financial strength of thebuilder, marketability 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.

 

Peopleshas also originated loans for the construction of nonresidential real estatesuch as small office buildings and warehouses. These loans are typically originated as construction/permanent loanswith interest only payments during the construction period and converting to apermanent loan at the end of the construction period.  These loans are generally made with aconstruction term of 12 months.  The loanto value ratio is generally limited to 75% on these loans on an “as 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 the uncertaintiesof construction, including the possibility of costs exceeding the initialestimates and the need to obtain a tenant or purchaser if the property will notbe owner-occupied.  Peoples generallyattempts to mitigate the risks associated with construction lending by, amongother things, primarily lending in its market area, using conservativeunderwriting guidelines, and monitoring the construction process.

 

Peoples is currentlyprohibited from originating speculative residential construction loans,multi-family residential construction loans and commercial constructionloans.  See “Business – General.”

 

**Commercial Loans.** Peoples’commercial loans consist primarily of secured and unsecured lines of creditpredominantly to builders and developers for working capital purposes, and to alesser extent, loans secured by business equipment.  At December 31, 2007, commercial loansamounted to $20.0 million, or 3.2% of Peoples’ net loan portfolio, compared to$30.9 million, or 3.8% of the net loan portfolio at December 31,2006.  In early 2007, the Bank curtailednew origination of commercial unsecured loans in recognition of the downturn inthe local housing market and the increase in the Bank’s nonaccrual loans andcharge-offs.  As previously stated,Peoples is currently prohibited from originating such loans.  See “Business – General.”

 

**ConsumerLoans.** Peoples’ consumer and other loans consist ofloans secured by deposit accounts, automobiles and stock.  At December 31, 2007, consumer and otherloans amounted to $16.8 million, or 2.6% of Peoples’ net loan portfolio,compared to $23.0 million, or 2.9% of Peoples’ net loan portfolio as of December 31,2006.

 

**LoanOrigination and Other Fees.**  In addition to interest earnedon loans, Peoples receives loan origination fees or “points” for originatingloans.  Loan points are a percentage ofthe principal 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 Standards No. 91,loan origination fees and certain related direct loan origination costs areoffset, and the resulting net amount is deferred and amortized as interestincome over the contractual life of the related loans as an adjustment to theyield of such loans. Peoples had $1.5 million and $2.3 million of deferred loanfees at December 31, 2007 and December 31, 2006, respectively.

 

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**Contractual Principal Repayments and Interest Rates.**  Thefollowing table sets forth scheduled contractual amortization of Peoples’ loansat December 31, 2007 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** | ** ** |
| ** **                          | ** ** | ** **                                                                                                   | ** ** | ** ** | ** ** | ** ** | ** ** | **2011-** | ** ** | **2013-** | ** ** | **2019-** | ** ** | **There-** | ** ** | **December 31,** | ** ** |
| ** **                          | ** ** | **2008**                                                                                                     | ** ** | **2009** | ** ** | **2010** | ** ** | **2012** | ** ** | **2018** | ** ** | **2023** | ** ** | **after** | ** ** | **2007** | ** ** |
| ** **                          | ** ** | **(In Thousands)**                                                                                           | ** ** |
|                                |       |                                                                                                         |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Mortgage loans:                     |       |                                                                                                         |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Single-family residential           |       | $                                                                                                            | 79,836     |   | $ | 10,071 |   | $ | 10,186 |   | $ | 20,281 |   | $ | 54,804 |   | $ | 41,490 |   | $ | 95,299 |   | $ | 311,967 |   |
| Multi-family residential            |       | 19,242                                                                                                       |       | 3,096 |   | 3,241 |   | 5,990 |   | 11,932 |   | 8,785 |   | 29,890 |   | 82,176 |   |
| Nonresidential real estate and land |       | 57,577                                                                                                       |       | 5,362 |   | 5,413 |   | 9,670 |   | 18,557 |   | 16,895 |   | 16,423 |   | 129,897 |   |
| Construction loans                  |       | 118,917                                                                                                      |       | 6,623 |   | 2,766 |   | 1,421 |   | 3,813 |   | 2,137 |   | 7,553 |   | 143,230 |   |
| Commercial loans                    |       | 15,348                                                                                                       |       | 2,717 |   | 885 |   | 666 |   | 397 |   | — |   | — |   | 20,013 |   |
| Consumer loans                      |       | 16,307                                                                                                       |       | 224 |   | 138 |   | 86 |   | 2 |   | — |   | — |   | 16,757 |   |
|                                |       |                                                                                                         |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Total (1)                           |       | $                                                                                                            | 307,227    |   | $ | 28,093 |   | $ | 22,629 |   | $ | 38,114 |   | $ | 89,505 |   | $ | 69,307 |   | $ | 149,165 |   | $ | 704,040 |   |

 

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| (1) | Of the $396.8 million of loan principal payments contractually due  after December 31, 2008, $150.2 million have fixed rates of interest and  $246.6 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, the weighted-averageyield on loans decreases as higher yielding loans are repaid or refinanced atlower 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 $6.9 millionand $333,000 at December 31, 2007 and December 31, 2006,respectively.  At December 31, 2007,approximately $5.1 million of real estate owned consisted of a residentialdevelopment for multi-family residences and condominiums in a northernCincinnati suburb.

 

At December 31, 2007, the Company had $25.9 million ofnon-performing loans.  If the currentdownturn in the local economy continues and borrowers are not able to meettheir debt service obligations, the Company may experience a continuedmigration of non-performing loans to real estate owned.

 

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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, 2007  31-59 Days  Delinquent** | ** ** | **At December 31, 2007  60-89 Days  Delinquent** | ** ** | **At December 31, 2006  60-89 Days  Delinquent** | ** ** | **At December 31, 2005  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                       |       | $                                                                    | 7,641      |                                                                 | 2.18       | %                                                                    | $          | 3,465                                                                |       | 1.12 | % | $ | 3,140 |   | 0.91 | % | $ | 2,832 |   | 0.83 | % |
| Multi-family                        |       | 7,670                                                                |       | 7.09                                                                 |       | —                                                               |       | —                                                               |       | 1,699 |   | 1.39 |   | — |   | — |   |
| Nonresidential real estate and land |       | 6,032                                                                |       | 4.27                                                                 |       | 2,892                                                                |       | 2.24                                                                 |       | 2,804 |   | 1.99 |   | 1,646 |   | 1.12 |   |
| Commercial                          |       | 335                                                                  |       | 1.67                                                                 |       | 359                                                                  |       | 1.80                                                                 |       | 1,377 |   | 4.45 |   | 1,106 |   | 2.34 |   |
| Consumer                            |       | 101                                                                  |       | 0.60                                                                 |       | 715                                                                  |       | 4.27                                                                 |       | 45 |   | 0.20 |   | 163 |   | 0.65 |   |
| Total                               |       | $                                                                    | 21,779     |                                                                 | 3.09       | %                                                                    | $          | 7,431                                                                |       | 1.06 | % | $ | 9,065 |   | 1.01 | % | $ | 5,747 |   | 0.61 | % |

 

**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,** | ** ** |
|-----------------------------------------|------------|-------------------------------|------------|--------------------------------|------------|
| ** **                              | ** ** | **2007**                      | ** ** | **2006**                       | ** ** | **2005** | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** |
| ** **                              | ** ** | **(Dollars in Thousands)**    | ** ** |
|                                    |       |                          |       |                           |       |   |   |   |   |   |   |   |   |
| Non-accrual loans:                      |       |                          |       |                           |       |   |   |   |   |   |   |   |   |
| Single-family residential               |       | $                             | 4,834      |                           | $          | 7,140 |   | $ | 5,481 |   | $ | 6,674 |   | $ | 2,090 |   | $ | 1,752 |   |
| Multi-family residential                |       | 5,225                         |       | 4,243                          |       | 928 |   | 2,325 |   | 2,535 |   | 3,557 |   |
| Nonresidential real estate and land     |       | 10,070                        |       | 8,273                          |       | 2,488 |   | 3,787 |   | 197 |   | — |   |
| Construction loans                      |       | 4,643                         |       | 2,302                          |       | 4,361 |   | 2,640 |   | 1,039 |   | 1,951 |   |
| Commercial loans                        |       | 537                           |       | 2,028                          |       | 4,759 |   | 3,220 |   | 165 |   | — |   |
| Consumer loans                          |       | 8                             |       | 97                             |       | 742 |   | 741 |   | 3 |   | 4 |   |
| Total non-accrual loans                 |       | 25,317                        |       | 24,083                         |       | 18,758 |   | 19,387 |   | 6,029 |   | 7,264 |   |
| Loans 90 days past due and accruing     |       | 613                           |       | 1,716                          |       | — |   | 1,266 |   | — |   | — |   |
| Total non-performing loans              |       | 25,930                        |       | 25,799                         |       | 18,758 |   | 20,653 |   | 6,029 |   | 7,264 |   |
| Other real estate owned, net            |       | 6,916                         |       | 333                            |       | 188 |   | 207 |   | 301 |   | 1,293 |   |
| Total non-performing assets             |       | $                             | 32,846     |                           | $          | 26,132 |   | $ | 18,946 |   | $ | 20,860 |   | $ | 6,330 |   | $ | 8,557 |   |
| Non-performing assets to total assets   |       | 3.70                          | %          | 2.54                           | %          | 1.82 | % | 2.07 | % | 0.71 | % | 1.16 | % |
| Non-performing loans to total loans-net |       | 4.09                          | %          | 3.17                           | %          | 2.20 | % | 2.96 | % | 1.01 | % | 1.31 | % |

 

Nonperformingassets totaled $32.8 million, $26.1 million, and $18.9 million at December 31,2007, 2006 and 2005, respectively. Nonperforming assets at December 31, 2007 consisted of $4.8 millionof loans secured by single-family residential real estate, $5.2 million ofloans secured by multi-family residential real estate, $10.6 million of loanssecured by nonresidential real estate and land, $4.6 million in constructionloans, $562,000 of commercial and consumer loans, and $6.9 million inforeclosed real estate.  Of the $25.9million of nonperforming loans at December 31, 2007, approximately $1.6million were less than 30 days past due. Over the past two years, the Bank has revised its methods of reviewingloans for potential weaknesses, which includes a strong emphasis on cash flowanalysis.  The Bank’s managementcontinues to take this proactive approach, in addition to aggressively pursuingthe collection and resolution of all delinquent and nonperforming loans. Theincrease in nonperforming loans was due in large part to the downturn in thelocal housing market and resultant cash flow issues faced by local propertyinvestors.

 

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AtDecember 31, 2007, non-accrual loans secured by one- to four-familyresidential real estate consisted of $1.9 million in owner-occupied residenceswith an average balance of $69,000, and $2.9 million in non-owner occupiedresidential real estate with an average balance of $71,000.   Three borrowers represented $1.9 million ofthe non-owner occupied one-  four-familyresidential non-accrual loans. Non-accrual loans secured by multi-family residential real estateamounted to $5.2 million with an average balance of $435,000.  Two borrowers represented $3.9 million of themulti-family residential non-accrual loans, with the largest borrower owing$2.8 million.

 

Nonresidentialreal estate and land secured non-accrual loans totaled $10.1 million at December 31,2007.  The average balance of these 25loans was $403,000.  Approximately $6.3million of the nonresidential real estate and land secured non-accrual loanswere loan acquisition and development loans, with the largest borrower owing$3.8 million.  Loans secured by buildinglots included in the nonresidential real estate secured non-accrual loanstotaled $990,000 at December 31, 2007, and were primarily comprised of 3borrowers, with the largest borrower owing $783,000.  Twelve nonresidential real estate securednon-accrual loans totaling $2.8 million were secured by commercial real estate,with the largest borrower owing $933,000.

 

Non-accrualconstruction loans totaled $4.6 million at December 31, 2007, with anaverage balance of $244,000. Approximately $3.8 million of these construction loans are secured byone-to four-family residential real estate. Commercial and consumer non-accrual loans totaled $545,000, with$503,000 of these loans being unsecured.

 

If the $25.3 million of non-accruing loans of Peoples had been currentin accordance with their terms during fiscal 2007, the gross income on suchloans would have been approximately $2.8 million.  A total of approximately $913,000 of interestincome was actually recorded by Peoples on such loans in the fiscal year ended December 31,2007.

 

**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.An asset classified loss is considered uncollectible and of such little valuethat continuance as an asset of the institution is not warranted. Anothercategory designated “special mention” also must be established and maintainedfor assets which do not currently expose an insured institution to a sufficientdegree of risk 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.

 

The following tablesets forth information with respect to classified assets as identified byPeoples, at the dates indicated.

 
| ** **                                | ** ** | **At December 31, 2007** | ** ** | **At December 31, 2006** | ** ** |
|-------------------------------------------|------------|-----------------------------------------|------------|-----------------------------------------|------------|
| ** **                                | ** ** | **Substandard**                         | ** ** | **Doubtful**                            | ** ** | **Loss** | ** ** | **Substandard** | ** ** | **Doubtful** | ** ** | **Loss** | ** ** |
| ** **                                | ** ** | **(in thousands)**                 | ** ** |
| Single-family residential loans           |       | $                                       | 6,348      |                                    | $          | — |   | $ | — |   | $ | 14,083 |   | $ | 1,213 |   | $ | — |   |
| Multi-family residential loans            |       | 5,621                                   |       | —                                  |       | — |   | 8,567 |   | — |   | — |   |
| Nonresidential real estate and land loans |       | 15,673                                  |       | —                                  |       | — |   | 10,079 |   | — |   | — |   |
| Construction loans                        |       | 4,643                                   |       | —                                  |       | — |   | 3,750 |   | — |   | — |   |
| Commercial loans                          |       | 1,323                                   |       | —                                  |       | — |   | 3,916 |   | 61 |   | — |   |
| Consumer loans                            |       | 38                                      |       |                                    |       |   |   | 101 |   | 2 |   |   |   |
| Real estate owned                         |       | 6,915                                   |       | —                                  |       | — |   | 333 |   | — |   | — |   |
|                                      |       | $                                       | 40,551     |                                    | $          | — |   | $ | — |   | $ | 40,830 |   | $ | 1,276 |   | $ | — |   |

 

14

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Peoples’ totalclassified assets at December 31, 2007 amounted to $40.6 million, with noassets classified doubtful or loss.  Itwas management’s opinion that as of December 31, 2007, no loans exhibitedcharacteristics to warrant a doubtful classification, while loans classifiedloss were charged off in full.   Thelargest classified loan at December 31, 2007 was a $3.8 million loansecured by a land development project. The remaining $36.8 million of classified assets at December 31,2007 consisted of approximately $4.4 million secured by  non-owner occupied residential real estate,$1.9 million secured by  owner-occupiedresidential real estate, $5.6 million secured by multi-family residential realestate, $4.6 million in residential construction loans, $11.9 million in loanssecured by nonresidential real estate and land, $1.4 million of commercial andconsumer loans, and $6.9 million of foreclosed real estate.  The real estate owned consisted of $5.5million of land and land development, $546,000 of single-family residentialreal estate, and $393,000 of multi-family real estate.

 

Approximately $43.1 million of loans were categorized as specialmention by the Bank as of December 31, 2007, compared to $31.6 million at December 31,2006.  Although these loans are notdeemed 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 two years, the Bank has revisedits methods of reviewing loans for potential weaknesses, which includes astrong emphasis on cash flow analysis. The Bank’s management believes that thisproactive approach has resulted in earlier detection of loans with potentialexposure.  The Bank’s management has alsoincreased its monitoring of these loans and is working proactively withborrowers to remediate and mitigate risk associated with these loans.

 

**Allowance for Loan Losses.**  Theallocation of the allowance for loan losses based on particular types of loanswas as follows:

 
| ** **                          | ** ** | **December 31,**       | ** ** | **September 30,** | ** ** |
|-------------------------------------|------------|-----------------------------|------------|------------------------|------------|
| ** **                          | ** ** | **2007**                    | ** ** | **2006**               | ** ** | **2005** | ** ** | **2005** | ** ** |
| ** **                          | ** ** | ** **                  | ** ** | **Percent of**    | ** ** | ** ** | ** ** | **Percent of** | ** ** | ** ** | ** ** | **Percent of** | ** ** | ** ** | ** ** | **Percent of** | ** ** |
| ** **                          | ** ** | **Balance**                 | ** ** | **total**              | ** ** | **Balance** | ** ** | **total** | ** ** | **Balance** | ** ** | **total** | ** ** | **Balance** | ** ** | **total** | ** ** |
| ** **                          | ** ** | **(Dollars  in Thousands)** | ** ** |
| ** **                          | ** ** | ** **                  | ** ** |
| Single-family residential           |       | $                           | 13,217     |                   | 38.3       | % | $ | 4,615 |   | 25.2 | % | $ | 1,328 |   | 9.88 | % | $ | 2,097 |   | 15.3 | % |
| Multi-family residential            |       | 6,599                       |       | 19.1                   |       | 4,084 |   | 22.2 |   | 477 |   | 3.55 |   | 517 |   | 3.8 |   |
| Nonresidential real estate and land |       | 6,154                       |       | 17.8                   |       | 2,904 |   | 15.8 |   | 3,229 |   | 24.02 |   | 3,020 |   | 22.0 |   |
| Construction loans                  |       | 4,893                       |       | 14.2                   |       | 2,027 |   | 11.0 |   | 1,194 |   | 8.88 |   | 976 |   | 7.1 |   |
| Commercial loans                    |       | 3,475                       |       | 10.1                   |       | 4,551 |   | 24.8 |   | 6,688 |   | 49.75 |   | 6,587 |   | 48.1 |   |
| Consumer loans                      |       | 161                         |       | 0.5                    |       | 188 |   | 1.0 |   | 528 |   | 3.93 |   | 500 |   | 3.7 |   |
|                                |       | $                           | 34,499     |                   | 100.0      | % | $ | 18,369 |   | 100.0 | % | $ | 13,444 |   | 100.0 | % | $ | 13,697 |   | 100.0 | % |

 

Theallowance for loan losses is maintained by management at a level consideredsufficient to cover estimated losses inherent in the existing portfolio basedon prior loan loss experience, known risks in the portfolio, adverse situationsthat may affect the borrower’s ability to repay, the estimated value of anyunderlying collateral, general economic conditions, and other factors andestimates which are subject to change over time.

 

Aquarterly analysis of the allowance for loan loss requirements includes generalallocations based on the type of collateral securing the loan.  In the analysis, loans determined to have ahigher risk, such as land development loans, non-owner occupied residentialreal estate loans, and unsecured commercial loans, will have higher allowancerequirements. ** **Additionalallowance requirements are allocated to criticized assets, based on theclassified status of 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.

 

Peoplesincreased its allowance for loan losses by recording a $24.5 million provisionfor losses on loans in the fourth quarter of 2007 and a total of $32.8 millionfor fiscal year 2007 based on the current level of non-performing, classifiedand criticized loans.  The level of theseloans is primarily due to delinquent loans in the Bank’s non-owner occupied(investment property) residential loan portfolio and its acquisition,development, and construction loan portfolio. The delinquencies in these portfoliosare due primarily to the continuing downturn in the local economy and resultantcash flow issues faced by local property investors and developers.

 

15

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Atthe beginning of 2007, the Company curtailed its acquisition and developmentlending, one- to four-family residential investment lending, and unsecuredcommercial lending.  While managementbelieves that it determines the size of the allowance based on the best informationavailable at the time, the allowance will need to be adjusted as circumstanceschange and assumptions are updated. Future adjustments to the allowance could significantly affect futurenet earnings.

 

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,** | ** ** |
|--------------------------------------------------------------------------|------------|--------------------------------------------|------------|-------------------------------------------------|------------|---------------------------------------------|------------|
| ** **                                                               | ** ** | **2007**                                   | ** ** | **2006**                                        | ** ** | **2005**                                    | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** |
| ** **                                                               | ** ** | **(Dollars in Thousands)**       | ** ** |
| ** **                                                               | ** ** | ** **                                 | ** ** |
| Allowance at beginning of period                                         |       | $                                          | 18,369     |                                            | $          | 13,444                                      |       | $ | 13,697 |   | $ | 11,025 |   | $ | 9,744 |   | $ | 7,656 |   |
| Increase due to Peoples Federal acquisition                              |       | —                                     |       | —                                          |       | 907                                         |       | — |   | — |   | — |   |
| Increase due to Mercantile acquisition                                   |       | —                                     |       | 302                                             |       | —                                      |       | — |   | — |   | — |   |
| Provision for losses on loans                                            |       | 32,800                                     |       | 17,450                                          |       | 900                                         |       | 3,600 |   | 3,600 |   | 4,198 |   |
| Charge-offs:                                                             |       |                                       |       |                                            |       |                                        |       |   |   |   |   |   |   |
| Single-family residential                                                |       | (8,484                                     | )          | (4,053                                          | )          | (1,519                                      | )          | (103 | ) | (609 | ) | (97 | ) |
| Multi-family residential                                                 |       | (4,741                                     | )          | (2,369                                          | )          | (360                                        | )          | (940 | ) | (1,431 | ) | — |   |
| Nonresidential real estate and land                                      |       | (1,274                                     | )          | (1,307                                          | )          | (204                                        | )          | — |   | (151 | ) | (1,097 | ) |
| Construction                                                             |       | (844                                       | )          | (1,601                                          | )          | —                                      |       | (16 | ) | — |   | (62 | ) |
| Commercial                                                               |       | (2,887                                     | )          | (1,042                                          | )          | —                                      |       | — |   | (145 | ) | (866 | ) |
| Consumer and other loans                                                 |       | (54                                        | )          | (2,731                                          | )          | (123                                        | )          | (22 | ) | _ (24 | ) | — |   |
| Total charge-offs                                                        |       | (18,284                                    | )          | (13,103                                         | )          | (2,206                                      | )          | (1,081 | ) | (2,360 | ) | (2,122 | ) |
| Recoveries:                                                              |       |                                       |       |                                            |       |                                        |       |   |   |   |   |   |   |
| Single-family residential                                                |       | 357                                        |       | 78                                              |       | —                                      |       | 9 |   | — |   | 12 |   |
| Multi-family residential                                                 |       | 190                                        |       | 9                                               |       | —                                      |       | 140 |   | — |   | — |   |
| Nonresidential real estate and land                                      |       | 199                                        |       | —                                          |       | —                                      |       | — |   | — |   | — |   |
| Construction                                                             |       | 593                                        |       | 1                                               |       | —                                      |       | — |   | — |   | — |   |
| Commercial                                                               |       | 158                                        |       | 73                                              |       | 142                                         |       | — |   | 21 |   | — |   |
| Consumer and other loans                                                 |       | 117                                        |       | 115                                             |       | 4                                           |       | 4 |   | 20 |   | — |   |
| Total recoveries                                                         |       | 1,614                                      |       | 276                                             |       | 146                                         |       | 153 |   | 41 |   | 12 |   |
| Net loans charged-off to allowance for loan  losses                      |       | (16,670                                    | )          | (12,827                                         | )          | (2,060                                      | )          | (928 | ) | (2,319 | ) | (2,110 | ) |
| Allowance at end of period                                               |       | $                                          | 34,499     |                                            | $          | 18,369                                      |       | $ | 13,444 |   | $ | 13,697 |   | $ | 11,025 |   | $ | 9,744 |   |
|                                                                     |       |                                       |       |                                            |       |                                        |       |   |   |   |   |   |   |
| Allowance for loan losses to total nonperforming  loans at end of period |       | 133.0                                      | %          | 71.20                                           | %          | 71.67                                       | %          | 66.32 | % | 182.87 | % | 134.15 | % |
|                                                                     |       |                                       |       |                                            |       |                                        |       |   |   |   |   |   |   |
| Allowance for loan losses to total gross loans  at end of period         |       | 4.90                                       | %          | 2.05                                            | %          | 1.42                                        | %          | 1.72 | % | 1.64 | % | 1.57 | % |

 

16

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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 savings institutions,certain bankers’ acceptances and federal funds. Each large purchase of an investment security is approved by the Boardof Directors.

 

Theinvestment policy of Peoples is designed to maintain adequate liquidity, manageinvestment assets in conjunction with interest rate risk and maximize stabilitythrough diversification.  Excess fundsnot utilized to meet loan demand are typically invested using the guidelines ofthe investment policy to seek the maximum return with minimal risk. All investmentsare approved to be held as “Available for sale” or “Held to maturity”.  Peoples does not maintain any investments as “Trading”or “Held to Maturity”.  Peoples transactsall investment activity through a select group of securities dealers approvedby 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,** | ** ** |
|------------------------------|------------|-----------------------|------------|------------------------|------------|
| ** **                   | ** ** | **2007**              | ** ** | **2006**               | ** ** | **2005** | ** ** | **2005** | ** ** |
| ** **                   | ** ** | **Amortized**         | ** ** | **Fair**               | ** ** | **Amortized** | ** ** | **Fair** | ** ** | **Amortized** | ** ** | **Fair** | ** ** | **Amortized** | ** ** | **Fair** | ** ** |
| ** **                   | ** ** | **Cost**              | ** ** | **Value**              | ** ** | **Cost** | ** ** | **Value** | ** ** | **Cost** | ** ** | **Value** | ** ** | **Cost** | ** ** | **Value** | ** ** |
| ** **                   | ** ** | **(In Thousands)**    | ** ** |
| Available  for sale:         |       |                  |       |                   |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Mortgage-backed securities   |       | 63,258                |       | 63,335                 |       | $ | 52,818 |   | $ | 52,669 |   | $ | 71,401 |   | $ | 71,024 |   | $ | 199,845 |   | $ | 199,716 |   |
| Mutual funds                 |       | 1,251                 |       | 1,210                  |       | 1,199 |   | 1,146 |   | 1,149 |   | 1,101 |   | 1,136 |   | 1,096 |   |
| US treasuries and agencies   |       | 1,974                 |       | 1,993                  |       | 1,966 |   | 1,965 |   | 1,242 |   | 1,211 |   | 5,549 |   | 5,535 |   |
| Municipal securities         |       | 1,027                 |       | 1,034                  |       | 1,114 |   | 1,111 |   | 1,151 |   | 1,146 |   | 1,009 |   | 1,019 |   |
| Other equity securities      |       | —                |       | —                 |       | 7 |   | 8 |   | — |   | — |   | — |   | — |   |
| Total                        |       | $                     | 67,510     |                   | $          | 67,572 |   | $ | 57,104 |   | $ | 56,899 |   | $ | 74,943 |   | $ | 74,482 |   | $ | 207,539 |   | $ | 207,366 |   |
| Required  investment:        |       |                  |       |                   |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Federal Home Loan Bank stock |       | $                     | 14,024     |                   | $          | 14,024 |   | $ | 14,024 |   | $ | 14,024 |   | $ | 13,122 |   | $ | 13,122 |   | $ | 11,871 |   | $ | 11,871 |   |

 

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,** | ** ** |
|-------------------------------------------------------------------------------------------|------------|----------------------------------|------------|--------------------------------------------|------------|------------------------------------|------------|
| ** **                                                                                | ** ** | **2007**                         | ** ** | **2006**                                   | ** ** | **2005**                           | ** ** | **2005** | ** ** |
| ** **                                                                                | ** ** | **(In Thousands)**               | ** ** |
|                                                                                      |       |                             |       |                                       |       |                               |       |   |   |
| Securities  at beginning of period                                                        |       | $                                | 70,923     |                                       | $          | 87,604                             |       | $ | 219,237 |   | $ | 239,995 |   |
| Purchases  (1)                                                                            |       | 29,854                           |       | 721                                        |       | 177                                |       | 88,667 |   |
| Sales of  available for sale securities                                                   |       | (8                               | )          | (2,008                                     | )          | (110,272                           | )          | (41,186 | ) |
| Amortization  of premiums and discounts                                                   |       | (90                              | )          | (628                                       | )          | (247                               | )          | (1,768 | ) |
| Repayments,  prepayments and maturities                                                   |       | (19,349                          | )          | (22,425                                    | )          | (22,482                            | )          | (76,502 | ) |
| Securities  acquired through acquisition – net                                       |       | —                           |       | 7,407                                      |       | 1,480                              |       | 9,699 |   |
| Increase (decrease) in unrealized gains  (losses) on  available-for-sale  securities |       | 266                              |       | 252                                        |       | (289                               | )          | 332 |   |
|                                                                                      |       |                             |       |                                       |       |                               |       |   |   |
| Securities  at end of period (2)                                                          |       | $                                | 81,596     |                                       | $          | 70,923                             |       | $ | 87,604 |   | $ | 219,237 |   |

 

----

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

 

17

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(2)                                  At December 31, 2007, 2006 and 2005, andSeptember 30, 2005, $78.2 million or 95.9%, $67.3 million or 94.8%, $85.8million or 97.9%, and $199.6 million or 91.1%, respectively, of Peoples’securities portfolio consisted of adjustable-rate securities .

 

The following table sets forth certaininformation regarding the maturities of Peoples’ security portfolio at December 31,2007.

 
| ** **                  | ** ** | **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      |       | $                          | 23         |   | 5.40 | % | $ | 1,150 |   | 4.79 | % | $ | 638 |   | 4.85 | % | $ | 1,216 |   | 5.32 | % |
| Mortgage-backed  securities |       | 101                        |       | 4.50 |   | — |   | — |   | 943 |   | 4.24 |   | 62,291 |   | 5.15 |   |
|                        |       |                       |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|                        |       | $                          | 124        |   | 4.67 | % | $ | 1,150 |   | 4.79 | % | $ | 1,581 |   | 4.49 | % | $ | 63,507 |   | 5.15 | % |

 

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

 

Mortgage-backed securities are typically issued with stated principalamounts, and the securities are backed by pools of mortgages that have loanswith interest rates that are within a range and have varying maturities.  The underlying pool of mortgages, i.e.,fixed-rate or adjustable-rate, as well as prepayment risk, are passed on to thecertificate holder.  The life of amortgage-backed pass-through security approximates the life of the underlyingmortgages.

 

The mortgage-backed securities of Peoples may consist of GovernmentNational Mortgage Association (“Ginnie Mae”), Federal Home Loan MortgageCorporation (“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 loans whichunderlie 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, 2007, Peoples hadmortgage-backed securities with a fair value totaling $63.3 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.

 

18

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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,** | ** ** |
|---------------------------------------------------------------|------------|----------------------------------|------------|--------------------------------------------|------------|------------------------------------|------------|
| ** **                                                    | ** ** | **2007**                         | ** ** | **2006**                                   | ** ** | **2005**                           | ** ** | **2005** | ** ** |
| ** **                                                    | ** ** | ** **                       | ** ** | **(In Thousands)**                         | ** ** | ** **                         | ** ** |
|                                                          |       |                             |       |                                       |       |                               |       |   |   |
| Beginning balance                                             |       | $                                | 755,261    |                                       | $          | 726,629                            |       | $ | 612,199 |   | $ | 472,436 |   |
|                                                          |       |                             |       |                                       |       |                               |       |   |   |
| Net increase (decrease) before interest  credited             |       | (20,546                          | )          | 28,230                                     |       | 114,358                            |       | 139,568 |   |
| Interest credited                                             |       | 497                              |       | 402                                        |       | 72                                 |       | 195 |   |
|                                                          |       |                             |       |                                       |       |                               |       |   |   |
| Net increase (decrease) in deposits (including  acquisitions) |       | (20,049                          | )          | 28,632                                     |       | 114,430                            |       | 139,763 |   |
|                                                          |       |                             |       |                                       |       |                               |       |   |   |
| Ending balance                                                |       | $                                | 735,212    |                                       | $          | 755,261                            |       | $ | 726,629 |   | $ | 612,199 |   |

 

The following table sets forth by various interest rate categories thecertificates of deposit with Peoples at the dates indicated.

 
|           |   | **December 31,** |       | **September 30,** |       |
|----------------|--------|-----------------------|------------|------------------------|------------|
|           |   | **2007**              | ** ** | **2006**               | ** ** | **2005** | ** ** | **2005** |   |
|           |   | **(In Thousands)**    |       |
|           |   |                  |       |                   |       |   |   |   |   |
| 0.00% to 2.99% |   | $                     | 1,475      |                   | $          | 8,438 |   | $ | 71,821 |   | $ | 95,437 |   |
| 3.00% to 3.99% |   | 41,767                |       | 78,277                 |       | 137,292 |   | 107,399 |   |
| 4.00% to 4.99% |   | 227,548               |       | 253,708                |       | 215,232 |   | 140,226 |   |
| 5.00% to 6.99% |   | 241,002               |       | 158,864                |       | 17,112 |   | 18,514 |   |
| 7.00% to 8.99% |   | 5                     |       | 5                      |       | — |   | — |   |
|           |   |                  |       |                   |       |   |   |   |   |
| Total          |   | $                     | 511,797    |                   | $          | 499,292 |   | $ | 441,457 |   | $ | 361,576 |   |

 

19

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The following table sets forth the amount and remaining maturities ofPeoples’ certificates of deposit at December 31, 2007.

 
| ** **     | ** ** | **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% |       | $                                 | 1,370      |                                                     | $          | 28                                                      |       | $                                                          | 38         |                           | $          | 39 |   | $ | — |   |
| 3.00% to 3.99% |       | 17,420                            |       | 13,097                                                   |       | 11,011                                                  |       | 239                                                        |       | —                         |       |
| 4.00% to 4.99% |       | 112,049                           |       | 32,336                                                   |       | 28,567                                                  |       | 29,966                                                     |       | 24,630                         |       |
| 5.00% to 6.99% |       | 211,087                           |       | 18,613                                                   |       | 4,761                                                   |       | 3,244                                                      |       | 3,297                          |       |
| 7.00% to 8.99% |       | —                            |       | 5                                                        |       | —                                                  |       | —                                                     |       | —                         |       |
|           |       |                              |       |                                                     |       |                                                    |       |                                                       |       |                           |       |
| Total          |       | $                                 | 341,926    |                                                     | $          | 64,079                                                  |       | $                                                          | 44,377     |                           | $          | 33,488 |   | $ | 27,927 |   |

 

As of December 31, 2007, theaggregate amount of outstanding certificates of deposit at Peoples, in amountsgreater than $100,000, was approximately $152.4 million.  The following table presents the maturity ofthese certificates of deposit at such date.

 
| ** **                      | ** ** | **December 31, 2007** | ** ** |
|---------------------------------|------------|----------------------------|------------|
| ** **                      | ** ** | **(In Thousands)**         | ** ** |
|                            |       |                       |       |
| 3 months or less                |       | $                          | 45,175     |   |
| Over 3 months through 6 months  |       | 52,756                     |       |
| Over 6 months through 12 months |       | 23,576                     |       |
| Over 12 months                  |       | 30,871                     |       |
|                            |       |                       |       |
|                            |       | $                          | 152,378    |   |

 

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,** | ** ** |
|--------------------------------|------------|--------------------------------------|------------|--------------------------------|------------|
| ** **                     | ** ** | **2007**                             | ** ** | **2006**                       | ** ** | **2005** | ** ** | **2005** | ** ** |
| ** **                     | ** ** | **Amount**                           | ** ** | **Percentage**                 | ** ** | **Amount** | ** ** | **Percentage** | ** ** | **Amount** | ** ** | **Percentage** | ** ** | **Amount** | ** ** | **Percentage** | ** ** |
| ** **                     | ** ** | **(Dollars in thousands)** | ** ** |
| ** **                     | ** ** | ** **                           | ** ** | ** **                     | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Non-interest checking accounts |       | $                                    | 21,936     |                           | 2.99       | % | $ | 21,967 |   | 2.91 | % | $ | 24,125 |   | 3.32 | % | $ | 20,150 |   | 3.29 | % |
| Savings and checking accounts  |       | 182,414                              |       | 24.81                          |       | 213,139 |   | 28.22 |   | 242,593 |   | 33.39 |   | 210,590 |   | 34.40 |   |
| Certificates of deposit        |       | 511,797                              |       | 69.61                          |       | 499,292 |   | 66.11 |   | 441,457 |   | 60.75 |   | 361,576 |   | 59.06 |   |
| Money market accounts          |       | 19,065                               |       | 2.59                           |       | 20,863 |   | 2.76 |   | 18,454 |   | 2.54 |   | 19,883 |   | 3.25 |   |
|                           |       |                                 |       |                           |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Total                          |       | $                                    | 735,212    |                           | 100.00     | % | $ | 755,261 |   | 100.00 | % | $ | 726,629 |   | 100.00 | % | $ | 612,199 |   | 100.00 | % |

 

Theaverage daily deposits for the years ended December 31, 2007, December 31,2006 and September 30, 2005, and the average rates paid on those depositsare summarized in table on the following page.

 

20

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| ** **                    | ** ** | **For Year Ended December 31, 2007** | ** ** | **For Year Ended December 31, 2006** | ** ** | **For Year Ended September 30, 2005** | ** ** |
|-------------------------------|------------|---------------------------------------------------------------|------------|---------------------------------------------------------------|------------|----------------------------------------------------------------|------------|
| ** **                    | ** ** | **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         |       | $                                                             | 22,394     |                                                          | 0.00       | %                                                              | $          | 23,944 |   | 0.00 | % | $ | 15,668 |   | 0.00 | % |
| Savings and checking accounts |       | 193,845                                                       |       | 2.80                                                          |       | 230,353                                                        |       | 2.65 |   | 190,901 |   | 2.23 |   |
| Certificates of deposit       |       | 506,294                                                       |       | 4.78                                                          |       | 478,148                                                        |       | 4.30 |   | 295,636 |   | 3.61 |   |
| Money market accounts         |       | 20,097                                                        |       | 1.97                                                          |       | 20,303                                                         |       | 1.92 |   | 25,019 |   | 1.22 |   |
|                          |       |                                                          |       |                                                          |       |                                                           |       |   |   |   |   |   |   |
| Total deposits                |       | $                                                             | 742,630    |                                                          | 4.04       | %                                                              | $          | 752,748 |   | 3.59 | % | $ | 527,224 |   | 2.89 | % |

 

**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, 2007,Peoples was permitted to borrow, subject to security pledge agreements, up to$450.6 million from the Federal Home Loan Bank of Cincinnati.  At such date, Peoples had $61.1 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 $61.1 million ofadvances at December 31, 2007, $2.0 million mature in fiscal 2008.

 

In addition, Peoples has a $17.5 million line of credit with anotherfinancial institution, which matures in June 2008.  As of December 31, 2007, Peoples had anoutstanding balance on this line of credit of $16.5 million. The loan issecured by the outstanding shares of the Bank. The loan agreement contains certain financial covenants which, if notcomplied with, could allow the lender to accelerate repayment of the loan.   As of December 31, 2007, the Companywas not in compliance with the covenant requiring the Company to maintain aminimum Tier 1 Leverage Capital of 7.0%.  The Company is currently negotiating with the lender regarding amodification, waiver of such default and/or an extension of the line of credit.

 

The following table shows certain information regarding the borrowings ofPeoples 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** | ** ** |
|----------------------------------------------------------------|------------|-------------------------------------------------|------------|-----------------------------------------------------------|------------|--------------------------------------------------|------------|
| ** **                                                     | ** ** | **2007**                                        | ** ** | **2006**                                                  | ** ** | **2005**                                         | ** ** | **2005** | ** ** |
| ** **                                                     | ** ** | ** **                                      | ** ** | **(Dollars in thousands)**                                | ** ** | ** **                                       | ** ** |
|                                                           |       |                                            |       |                                                      |       |                                             |       |   |   |
| Federal Home Loan Bank advances:                               |       |                                            |       |                                                      |       |                                             |       |   |   |
| Average balance outstanding                                    |       | $                                               | 102,745    |                                                      | $          | 172,073                                          |       | $ | 262,102 |   | $ | 296,527 |   |
| Maximum amount outstanding at any month-end  during the period |       | $                                               | 142,181    |                                                      | $          | 203,148                                          |       | $ | 260,564 |   | $ | 320,474 |   |
| Balance outstanding at end of period                           |       | $                                               | 61,128     |                                                      | $          | 144,185                                          |       | $ | 193,132 |   | $ | 273,569 |   |
| Average interest rate during the period                        |       | 4.08                                            | %          | 4.10                                                      | %          | 3.94                                             | %          | 3.35 | % |
| Weighted-average interest rate at end of  period               |       | 3.91                                            | %          | 3.96                                                      | %          | 3.89                                             | %          | 3.89 | % |
|                                                           |       |                                            |       |                                                      |       |                                             |       |   |   |
| Line of Credit:                                                |       |                                            |       |                                                      |       |                                             |       |   |   |
| Average balance outstanding                                    |       | $                                               | 14,705     |                                                      | $          | 1,357                                            |       | $ | — |   | $ | — |   |
| Maximum amount outstanding at any month-end  during the period |       | $                                               | 16,500     |                                                      | $          | 12,700                                           |       | $ | — |   | — |   |
| Balance outstanding at end of period                           |       | $                                               | 16,500     |                                                      | $          | 12,700                                           |       | $ | — |   | — |   |
| Average interest rate during the period                        |       | 7.78                                            | %          | 7.84                                                      | %          | n/a                                              |       | n/a |   |
| Weighted-average interest rate at end of  period               |       | 7.24                                            | %          | 7.37                                                      | %          | n/a                                              |       | n/a |   |

 

21

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**Total Employees**

 

Peoples had 183 full-time equivalent employees at December 31, 2007.  None of these employees are represented  by a collective bargaining agent, and Peoplesbelieves that it enjoys good relations with 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 for loans comes principally from mortgage bankingcompanies, commercial banks, other savings institutions and credit unions.  It competes for loan originations primarilythrough the interest rates and loan fees it charges, and the efficiency andquality of services it provides borrowers. Factors which affect competition include general and local economicconditions, current interest rate levels and volatility in the mortgagemarkets. Competition may increase as a result of the continuing reduction of restrictionson the interstate operations of financial institutions and the anticipatedslowing of refinancing activity.

 

**REGULATION**

 

The following is a summary of certain statutes and regulationsaffecting Peoples and the Bank.  Thissummary is qualified in its entirety by such statutes and regulations.  A change in applicable laws or regulationsmay have a material effect on Peoples, the Bank and the business of Peoples andthe Bank.

 

**General**

 

Financial institutions and their holding companies are extensivelyregulated under federal and state law. Consequently, the growth and earnings performance of Peoples and theBank can be affected not only by management decisions and general economicconditions, but also by the statutes administered by, and the regulations andpolicies of, various governmental regulatory authorities.  Those authorities include, but are notlimited to, the Office of Thrift Supervision, the Federal Reserve Board, theFDIC, the Internal Revenue Service, and state taxing authorities.  The effect of such statutes, regulations andpolicies can be significant, and cannot be predicted with a high degree ofcertainty.

 

Federal and state laws and regulations generally applicable tofinancial institutions and their holding companies regulate, among otherthings, the scope of business, investments, reserves against deposits, capitallevels relative to operations, lending activities and practices, the nature andamount of collateral for loans, the establishment of branches, mergers,consolidations and dividends.  The systemof supervision and regulation applicable to Peoples and the Bank establishes acomprehensive framework for their respective operations and is intendedprimarily for the protection of the FDIC’s deposit insurance funds, thedepositors of the Bank and the public, rather than shareholders of the Bank orPeoples.

 

Federal law and regulations establish supervisory standards applicableto the lending activities of the Bank, including internal controls, creditunderwriting, loan documentation and loan-to-value ratios for loans secured byreal property.

 

22

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**Peoples Community Bancorp**

 

Peoples is a registered savings and loan holding company within themeaning of Section 10 of the Home Owners’ Loan Act, and is subject to OTSexamination and supervision as well as certain reporting requirements. Federal law generally prohibits a savings and loan holding company, withoutprior OTS approval, from acquiring the ownership or control of any other savingsinstitution or savings and loan holding company, or all, or substantially all,of the assets or more than 5% of the voting shares thereof.  Theseprovisions also prohibit, among other things, any director or officer of asavings and loan holding company, or any individual who owns or controls morethan 25% of the voting shares of such holding company, from acquiring controlof any savings institution not a subsidiary of such savings and loan holdingcompany, unless the acquisition is approved by the OTS.

 

**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 added provisions of the Bank Holding Company Act. Multiplesavings and loan holding companies may:

 

| ·                                                            |   | furnish or perform management services for a savings association  subsidiary of a savings and loan holding company;                                                                                     |
|-------------------------------------------------------------------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                                                              |   |                                                                                                                                                                                                    |
| ·                                                            |   | hold, manage or liquidate assets owned or acquired from a savings  association subsidiary of a savings and loan holding company;                                                                        |
|                                                              |   |                                                                                                                                                                                                    |
| ·                                                            |   | hold or manage properties used or occupied by a savings association  subsidiary of a savings and loan holding company;                                                                                  |
|                                                              |   |                                                                                                                                                                                                    |
| ·                                                            |   | engage in activities determined by the Federal Reserve to be closely  related to banking and a proper incident thereto; and                                                                             |
|                                                              |   |                                                                                                                                                                                                    |
| ·                                                            |   | engage in services and activities previously determined by the  Federal Home Loan Bank Board by regulation to be permissible for 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 or securities;                                                                                                        |
|                                                              |   |                                                                                                                                                                                                    |
| ·                                                            |   | insuring, guaranteeing or indemnifying others, issuing annuities, and  acting as principal, agent or broker for purposes of the foregoing;                                                              |
|                                                              |   |                                                                                                                                                                                                    |
| ·                                                            |   | providing financial, investment or economic advisory services,  including advising an investment company;                                                                                               |
|                                                              |   |                                                                                                                                                                                                    |
| ·                                                            |   | issuing or selling interests in pooled assets that a bank could hold  directly;                                                                                                                         |
|                                                              |   |                                                                                                                                                                                                    |
| ·                                                            |   | underwriting, dealing in or making a market in securities; and                                                                                                                                          |
|                                                              |   |                                                                                                                                                                                                    |
| ·                                                            |   | merchant banking activities.                                                                                                                                                                            |

 

If the OTS determines that there is reasonable cause to believe thatthe continuation by a savings and loan holding company of an activityconstitutes a serious risk to the financial safety, soundness or stability ofits subsidiary savings institution, the OTS may impose such restrictions asdeemed necessary to address such risk. These restrictions include limiting thefollowing:

 

| · |   | the payment of dividends by the savings institution;                                                                                                                                   |
|--------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                   |
| · |   | transactions between the savings institution and its affiliates; and                                                                                                                   |
|   |   |                                                                                                                                                                                   |
| · |   | any activities of the savings institution that might create a serious  risk that the liabilities of the holding company and its affiliates may be  imposed on the savings institution. |

 

Every savings institution subsidiary of a savings and loan holdingcompany is required to give OTS at least 30 days’ advance notice of anyproposed dividends to be made on its guaranty, permanent or othernon-withdrawable stock, or else such dividend will be invalid.  See “PeoplesCommunity Bank - Capital Distributions.”

 

23

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**Restrictions on Transactions With Affiliates.**  Transactions between a savingsinstitution and its “affiliates” are subject to quantitative and qualitativerestrictions under Sections 23A and 23B of the Federal Reserve Act and OTSregulations. Affiliates of a savings institution generally include, among otherentities, the savings institution’s holding company and companies that are controlledby or under common control with the savings institution.  However, mostsubsidiaries of savings institutions are not considered affiliates for thepurposes of these rules.

 

In general, a savings institution or its subsidiaries may engage incertain “covered transactions” with affiliates up to certain limits. Inaddition, a savings institution and its subsidiaries may engage in coveredtransactions and certain other transactions only on terms and undercircumstances that are substantially the same, or at least as favorable to thesavings institution or its subsidiary, as those prevailing at the time forcomparable transactions with nonaffiliated companies. A “covered transaction”is defined to include a loan or extension of credit to an affiliate; a purchaseof investment securities issued by an affiliate; a purchase of assets from anaffiliate, with certain exceptions; the acceptance of securities issued by anaffiliate as collateral for a loan or extension of credit to any party; or theissuance of a guarantee, acceptance or letter of credit on behalf of anaffiliate. In addition, a savings institution may not:

 

| · |   | make a loan or extension of credit to an affiliate unless the  affiliate is engaged only in activities permissible for bank holding  companies;                                                                              |
|--------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                         |
| · |   | purchase or invest in securities of an affiliate other than shares of  a subsidiary;                                                                                                                                         |
|   |   |                                                                                                                                                                                                                         |
| · |   | purchase a low-quality asset from an affiliate; or                                                                                                                                                                           |
|   |   |                                                                                                                                                                                                                         |
| · |   | engage in covered transactions and certain other transactions between  a savings institution or its subsidiaries and an affiliate except on terms  and conditions that are consistent with safe and sound banking practices. |

 

With certain exceptions, each loan or extension of credit by a savingsinstitution to an affiliate must be secured by collateral with a market valueranging from 100% to 130% (depending on the type of collateral) of the amountof the loan or extension of credit.

 

**FederalSecurities Laws**.  Peoples registered its common stock with theSecurities and Exchange Commission under Section 12(g) of theSecurities Exchange Act of 1934.  Peoplesis subject to the proxy and tender offer rules, insider trading reportingrequirements and restrictions, and certain other requirements under theExchange Act.

 

**Sarbanes-Oxley Act of 2002.**  On July 30,2002, the President signed into law the Sarbanes-Oxley Act of 2002 implementinglegislative reforms intended to address corporate and accounting fraud.  In addition to the establishment of a newaccounting oversight board which will enforce auditing, quality control andindependence standards and will be funded by fees from all publicly tradedcompanies, the bill restricts provision of both auditing and 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.

 

Longer prison terms and increased penalties willalso be applied to corporate executives who violate federal securities laws,the period during which certain types of suits can be brought against a companyor its officers has been extended, and bonuses issued to top executives priorto restatement of a company’s financial statements are now subject todisgorgement if such restatement was due to corporate misconduct.  Executives are also prohibited from insidertrading during retirement plan “blackout” periods, and loans to companyexecutives are restricted.  In addition,a provision directs that civil penalties levied by the SEC as a result of anyjudicial or administrative action under the Act be deposited to a fund for thebenefit of harmed investors.  The FederalAccounts for Investor Restitution (“FAIR”) provision also requires the SEC todevelop methods of improving collection rates. The legislation accelerates the time frame for disclosures by publiccompanies, as they must immediately disclose any material changes in theirfinancial condition or operations. Directors and executive officers must also provide information for mostchanges in ownership in a company’s securities within two business days of thechange.

 

24

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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 prescribe rules requiringinclusion of an internal control report and assessment by management in theannual report to stockholders.  The Actrequires the RPAF that issues the audit report to attest to and report onmanagement’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 ofthe SEC.

 

**Peoples Community Bank**

 

**General.**   The Bank is a federally chartered stocksavings bank.  The OTS is the charteringauthority and primary federal regulator of the Bank. The OTS has extensiveauthority over the operations of federally chartered savings institutions.  As part of this authority, federallychartered savings institutions are required to file periodic reports with theOTS and are subject to periodic examinations by the OTS and the FDIC.  The Bank also is subject to regulation andexamination by the FDIC and to requirements established by the Federal ReserveBoard.  The investment and lendingauthority of savings institutions are prescribed by federal laws andregulations, and such institutions are prohibited from engaging in anyactivities not permitted by such laws and regulations.  Such regulation and supervision is primarilyintended for the protection of depositors and the Deposit Insurance Fund (“DIF”).

 

The OTS’s enforcementauthority over all savings institutions and their holding companies includes,among other things, the ability to assess civil money penalties, to issue ceaseand desist or removal orders and to initiate injunctive actions.  In general, these enforcement actions may beinitiated for violations of laws and regulations and unsafe or unsound practices.Other actions or inactions may provide the basis for enforcement action,including misleading or untimely reports filed with the OTS.

 

**Insuranceof Accounts.**  On February 8,2006, President Bush signed into law legislation that merges the Bank InsuranceFund (“BIF”) and the Savings Association Insurance Fund (“SAIF”), eliminatesany disparities in bank and thrift risk-based premium assessments, reduces theadministrative burden of maintaining and operating two separate funds andestablishes certain new insurance coverage limits and a mechanism for possibleperiodic increases.  The legislation alsogives the FDIC greater discretion to identify the relative risks allinstitutions present to the DIF and set risk-based premiums.

 

Major provisions in the legislationinclude:  maintaining basic deposit andmunicipal account insurance coverage at $100,000 but providing for a new basicinsurance coverage for retirement accounts of $250,000; allowing insurancecoverage for basic deposit and retirement accounts to be increased forinflation every five years in $10,000 increments beginning in 2011; providingthe FDIC with the ability to set the designated reserve ratio within a range ofbetween 1.15% and 1.50%, rather than maintaining 1.25% at all times regardless ofprevailing economic conditions; providing a one-time assessment credit of $4.7billion to banks and savings associations in existence on December 31,1996, which may be used to offset future premiums with certain limitations;requiring the payment of dividends of 100% of the amount that the insurancefund exceeds 1.5% of the estimated insured deposits; requiring the payment ofdividends of 50% of the amount that the insurance fund exceeds 1.35% of theestimated insured deposits (when the reserve is greater than 1.35% but no morethan 1.5%); and requiring that the merger of the SAIF and BIF occur no laterthan July 1, 2006.

 

TheFDIC merged the BIF and SAIF to form the DIF on March 31, 2006 inaccordance with the Federal Deposit Insurance Reform Act of 2005.  The FDIC maintains the DIF by assessingdepository institutions an insurance premium. The FDIC Board approved a new risk-based premiums system in November 2006,effective January 1, 2007.  The FDIC’snew regulations for risk-based deposit insurance assessments establish fourRisk Categories.  Risk Category I, forwell-capitalized 

 

25

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institutionsthat are financially sound with only a few minor weaknesses, includesapproximately 95% of FDIC-insured institutions. Risk Categories II, III, and IV present progressively greater risksto the DIF.  Effective January 1,2007, Risk Category I Institutions pay quarterly assessments for depositinsurance at annual rates of five to seven basis points.  The rates for Risk Categories II, III,and IV are seven, 28, and 43 basis points, respectively.  Rates are subject to change with advancenotice to insured institutions.  As aresult of recent regulatory examinations and the imposition of  the Orders, the Bank’s quarterly assessmentrate has recently been significantly increased. This increase will significantly increase the Company’s other operatingexpense and negatively impact net earnings or loss.

 

Within Risk Category I, theprecise rate for an individual institution with less than $10 billion in assetsis generally determined by a formula using CAMELS ratings, which are assignedin regulatory examinations, and financial ratios.  A different method applies for larger institutions.  The rate for an individual institution isapplied to its assessment base, which is generally its deposit liabilitiessubject to certain adjustments.  Aninstitution insured by the FDIC on December 31, 1996 which had previouslypaid assessments (or its successor) is eligible for certain credit againstdeposit insurance assessments.

 

The Bank, like other formerSAIF insured institutions and BIF insured institutions, is required to pay aFinancing Corporation (“FICO”) assessment in order to fund the interest onbonds issued to resolve thrift failures in the 1980s.  For the first quarter of fiscal year 2008,the annual rate of this assessment is 1.14 basis points for each $100 indomestic deposits.  These assessments,which may be revised based upon the level of former BIF and SAIF classifiedinsured institution’s deposits, will continue until the bonds mature in 2017through 2019.

 

The deposits of the Bank areinsured to the maximum extent permitted by the DIF, which is administered bythe FDIC, and are backed by the full faith and credit of the U.S.Government.  As insured, the FDIC isauthorized to conduct examinations of, and to require reporting by,FDIC-insured institutions.  It also mayprohibit any FDIC-insured institution from engaging in any activity the FDICdetermines by regulation or order to pose a serious threat to the FDIC.  The FDIC also has the authority to initiateenforcement actions against savings institutions, after giving the OTS anopportunity to take such action.

 

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 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 that would result intermination of the Bank’s deposit insurance.

 

**RegulatoryCapital Requirements.** Current OTS capital standards require savings institutions to satisfythree different capital requirements. Under these standards, savings institutionsmust maintain “tangible” capital equal to at least 1.5% of adjusted totalassets, “core” capital equal to at least 4.0% of adjusted total assets and “total”capital (a combination of core and “supplementary” capital) equal to at least8.0% of “risk-weighted” assets.  Tangiblecapital generally equals common stockholders’ equity (including retainedearnings) minus intangible assets, with only a limited exception for purchasedmortgage servicing rights. Core capital generally consists of tangible capitalplus qualifying intangible assets.

 

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.

 

Savingsinstitutions must value securities available for sale at amortized cost forregulatory capital purposes. This means that in computing regulatory capital,savings institutions should add back any unrealized losses and deduct anyunrealized gains, net of income taxes, on securities reported as a separatecomponent of generally accepted accounting principles capital.

 

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At December 31, 2007, the Bank exceeded all ofits OTS capital requirements, with tangible, core and risk-based capital ratiosof 7.0%, 7.0% and 11.4%, respectively.

 

Any savings institution thatfails any of the capital requirements is subject to possible enforcementactions by the OTS or the FDIC. Such actions could include a capital directive,a cease and desist order, civil money penalties, the establishment ofrestrictions on the institution’s operations, termination of federal depositinsurance and the appointment of a conservator or receiver. The OTS’s capitalregulation provides that such actions, through enforcement proceedings orotherwise, could require one or more of a variety of corrective actions.

 

**PromptCorrective Action.**  Thefollowing table shows the amount of capital associated with the different OTScapital categories set forth in the prompt corrective action regulations.

 
| ** **

**Capital Category** | ** ** | **Total**

**Risk-Based**

**Capital** | ** ** | **Tier 1**

**Risk-Based**

**Capital** | ** ** | **Tier 1**

**Leverage**

**Capital** | ** ** |
|----------------------------------|------------|----------------------------------------|------------|-----------------------------------------|------------|---------------------------------------|------------|
|                             |       |                                   |       |                                    |       |                                  |       |
| Well capitalized                 |       | 10% or more                            |       | 6% or more                              |       | 5% or more                            |       |
| Adequately capitalized           |       | 8% or more                             |       | 4% or more                              |       | 4% or more                            |       |
| Undercapitalized                 |       | Less than 8%                           |       | Less than 4%                            |       | Less than 4%                          |       |
| Significantly undercapitalized   |       | Less than 6%                           |       | Less than 3%                            |       | Less than 3%                          |       |

 

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 institution which is required to submit a capital restorationplan must concurrently submit a performance guaranty by each company thatcontrols the institution. In addition, undercapitalized institutions aresubject to various regulatory restrictions, and the appropriate federal bankingagency also may take any number of discretionary supervisory actions.

 

At December 31, 2007,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.**  TheOTS and the other federal banking agencies have established guidelines forsafety and soundness, addressing operational and managerial standards, as wellas compensation matters for insured financial institutions. Institutionsfailing to meet these standards are required to submit compliance plans totheir appropriate federal regulators. The Federal Reserve, the OTS, and theother agencies have also established guidelines regarding asset quality andearnings standards for insured institutions.

 

**CapitalDistributions.**  OTSregulations govern capital distributions by savings institutions, which includecash dividends, stock repurchases and other transactions charged to the capitalaccount of a savings institution to make capital distributions. A savingsinstitution must file an application for OTS approval of the capital distributionif either (1) the total capital distributions for the applicable calendaryear exceed the sum of the institution’s retained net income for that year todate plus the institution’s retained net income for the preceding two years, (2) theinstitution would not be at least adequately capitalized following thedistribution, (3) the distribution would violate any applicable statute,regulation, agreement or OTS-imposed condition, or (4) the institution isnot eligible for expedited treatment of its filings. If an application is notrequired to be filed, savings institutions which are a subsidiary of a holdingcompany (as well as certain other institutions) must still file a noticewith the OTS at least 30 days before the board of directors declares adividend or 

 

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approves a capital distribution. The Bank is currently prohibited by the Order issued by the OTS fromdeclaring or making any capital distributions without the prior writtenapproval of the OTS.

 

**CommunityReinvestment Act and the Fair Lending Laws.**  Savings institutions have a responsibilityunder the Community Reinvestment Act of 1977 and related regulations of the OTSto help meet the credit needs of their communities, including low- and moderate-incomeneighborhoods. In addition, the Equal Credit Opportunity Act and the FairHousing Act prohibit lenders from discriminating in their lending practices onthe basis of characteristics specified in those statutes. An institution’sfailure to comply with the provisions of the Community Reinvestment Act could,at a minimum, result in regulatory restrictions on its activities. Failure tocomply with fair lending laws could result in enforcement actions by the OTS,as well as other federal regulatory agencies, and the Department of Justice.

 

**QualifiedThrift Lender Test.**  All savingsinstitutions are required to meet a qualified thrift lender test to avoidcertain restrictions on their operations. A savings institution can comply withthe qualified thrift lender test by either qualifying as a domestic buildingand loan association as defined in the Internal Revenue Code or by maintainingat least 65% of its portfolio assets in certain housing and consumer-relatedassets such as loans made to purchase, refinance, construct, improve or repairdomestic residential housing; home equity loans; most mortgage-backedsecurities; stock issued by a Federal Home Loan Bank; and direct orindirect obligations of the FDIC.

 

A savings institution that does not meet the qualifiedthrift lender test must either convert to a bank charter or comply with certainrestrictions on its operations.  At December 31,2007, the qualified thrift investments of the Bank were approximately 84.1% of its portfolio assets.

 

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

 

As a member, the Bank is required to purchaseand maintain stock in the Federal Home Loan Bank of Cincinnati in an amountequal to at least 1% of its aggregate unpaid residential mortgage loans orsimilar obligations at the beginning of each year. At December 31, 2007,the Bank had $12.9 million in Federal Home Loan Bank of Cincinnati stock, whichwas in compliance with this requirement.  The Bank also had approximately $1.1 million in Federal Home Loan Bankof Indianapolis stock, which was obtained through the acquisition of Americanin June 2005 and Peoples 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 have adverselyaffected the level of Federal Home Loan Bank dividends paid in the past andcould do so in the future. These contributions also could have an adverseeffect on the value of Federal Home Loan Bank stock in the future.

 

**FederalReserve System.**  The FederalReserve Board requires all depository institutions to maintain reserves againsttheir transaction accounts (primarily NOW and Super NOW checking accounts) andnon-personal time deposits. Because required reserves must be maintained in theform of vault cash or a noninterest-bearing account at a Federal Reserve Bank,the effect of this reserve requirement is to reduce an institution’s earningassets.

 

**TAXATION**

 

**FederalTaxation**

 

**General.**  Peoples and the Bank are subject to thecorporate tax provisions of the Internal Revenue Code, and the Bank is subjectto certain additional provisions which apply to thrifts and other types offinancial institutions. The following discussion of federal taxation isintended only to summarize certain pertinent federal income tax matters relevantto the taxation of Peoples and the Bank and is not a comprehensive discussionof the tax rules applicable to Peoples and the Bank.

 

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

 

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

 

At December 31, 2007,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.**  If the Bank were to distribute cash orproperty to its stockholders, and the distribution was treated as being fromits accumulated bad debt reserves, the distribution would cause the Bank tohave additional taxable income.  Adistribution is from accumulated bad debt reserves if (a) the reservesexceed the amount that would have been accumulated on the basis of actual lossexperience, and (b) the distribution is a “non-qualified distribution.”  A distribution with respect to its stock is anon-qualified distribution to the extent that, for federal income tax purposes,(1) it is in redemption of its shares, (2) it is pursuant to aliquidation of the institution, or (3) in the case of a currentdistribution, together with all other such distributions during the taxableyear, it exceeds the institution’s current and post-1951 accumulated earningsand profits.  The amount of additionaltaxable income created by a non-qualified distribution is an amount that whenreduced by the tax attributable to it is equal to the amount of thedistribution.

 

**MinimumTax.**  The Code imposes an alternativeminimum tax at a rate of 20%. The alternative minimum tax generally applies toa base of regular taxable income plus certain tax preferences (“alternativeminimum taxable income”) and is payable to the extent such alternative minimumtaxable income is in excess of an exemption amount. Tax preference itemsinclude depreciation and 75% of the excess (if any) of  (1) alternative minimum taxable incomedetermined without regard to this preference and prior to reduction by net operatinglosses, over (2) adjusted current earnings as defined in the Code.   Peoples has not been subject to thealternative minimum tax or had any such amounts available as credits forcarry-over.

 

**CapitalGains and Corporate Dividends-Received Deduction.**  Corporate net capital gains are taxed at amaximum rate of 35%. Corporations which own 20% or more of the stock of acorporation distributing a dividend may deduct 80% of the dividends received.Corporations which own less than 20% of the stock of a corporation distributinga dividend may deduct 70% of the dividends received. However, a corporationthat receives dividends from a member of the same affiliated group ofcorporations may deduct 100% of the dividends received.

 

**OtherMatters.**  Federallegislation is introduced from time to time that would limit the ability ofindividuals to deduct interest paid on mortgage loans. Individuals arecurrently not permitted to deduct interest on consumer loans. Significantincreases in tax rates or further restrictions on the deductibility of mortgageinterest could adversely affect Peoples.  Peoples’ federal income tax returns for the tax years ended 2007 and2006 are open under the statute of limitations and are subject to review by theIRS.  Various companies that the Bank hasacquired remain under the statute of limitations by the IRS for the years ended2004 through 2007.

 

**StateTaxation**

 

**OhioTaxation.**  Peoples issubject to the Ohio corporation franchise tax, which is a tax measured by bothnet earnings and net worth. The rate of tax is the greater of (i) 5.1% onthe first $50,000 of computed Ohio taxable income and 8.9% of computed Ohiotaxable income in excess of $50,000 or (ii) 0.582% times taxable networth.

 

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 

 

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owns at least 25% of the issued and outstanding capital stock of theBank.  The calculation of the exclusionfrom net worth is based on the ratio of the excludable investment (net of anyappreciation or goodwill included in such investment) to total assetsmultiplied by the net value of the stock. As a holding company, Peoples may be entitled to various otherdeductions in computing taxable net worth that are not generally available tooperating companies.

 

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 Indiana financialinstitution tax, which is tax calculated at eight and one-half (8.5) percent ofthe 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 aMaryland holding company not earning income in Maryland, Peoples is exempt fromMaryland corporate income tax.

 

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#### **Item 1A. Risk Factors**

 

This report may contain “forward-looking statements”within the meaning of Section 27Aof the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, and are made pursuantto the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Such forward-lookingstatements and the currentlyreported results are based upon our current expectations and beliefs concerning future developments and theirpotential effects upon us. These statements and our results reported herein are not guarantees of futureperformance or results andthere can be no assurance that actual developments and economic performancewill be as anticipated by us.Actual developments and/or results may differ significantly and adversely from our expected or currently reportedresults as a result ofsignificant risks, uncertainties and factors, often beyond our control (as well as the various assumptionsutilized in determining our expectations), and which include, but are not limited to, thefollowing:

 

·                  ***ourability to adopt and implement a viable business plan that will permit us tooperate profitably;***

 

·                  ***theimpact******of the Orders on ourability to conduct******our******business;***

 

·                  ***our******ability to maintain sufficient cash flow to meet debtservice************and other******obligations;***

 

·                  ***thevariability of general and specific economic conditions and trends, and changesin, and the level of, interest rates;***

 

·                  ***theimpact of competition and pricing environments on deposit products;***

 

·                  ***theability to access the necessary capital resources in a cost-effective manner tofund our operations;***

 

·                  ***theimpact of changes in the residential, construction and commercial real estatemarkets and changes in the fair values of our assets and loans, including thevalue of the underlying real estate collateral;***

 

·                  ***the effect of certaindeterminations or actions taken by, or the inability to secure regulatoryapprovals from, the OTS on various matters;***

 

·                  ***theability to maintain effective compliance with laws and regulations and controlexpenses;***

 

·                  ***theability to maintain an effective system of internal and financial disclosurecontrols, and to identify and remediate any control deficiencies; and***

 

·                  ***otherevents, risks and uncertainties discussed elsewhere in this Form 10-K andfrom time to time in our other reports, press releases******and filings with the Securities and************Exchange Commission.***

 

We undertake no obligation to publicly updatesuch forward-looking statements.

 

You should carefully consider the followingrisks in light of our current operating environment and regulatory status. Theoccurrence of any of the events described below could materially adverselyaffect our liquidity, results of operations and financial condition. Additionalrisks not presently known by us or that we currently deem immaterial may alsohave a materially adverse impact.

 

**Risks Relating to Our Liquidity**

 

***The Company does not on its own have sufficient resources to satisfyits obligations.***

 

As a savings institution holding company, theCompany has historically paid its operating expenses, interest expense, taxesand other obligations, including interest on its line of credit and juniorsubordinated debentures, from its cash on hand, investments, and intercompanytax payments.  Without an additionalcapital infusion as well as possibly a restructuring of 

 

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existing debt obligations, current cash flows and capital resources ofthe Company will be insufficient to fund the Company’s operating expenses andto meet its debt service obligations on the junior subordinated debenturesbeginning in August, 2008 or, more importantly, to pay off the $17.5 millionline of credit which is due on June 30, 2008.  Since the Orders prohibit the Bank frompaying cash dividends without the prior written consent of the OTS, the Companywill only be able to rely upon****existing cash and cash equivalents****as the sources of itsliquidity.  Without the ability to relyon dividends from the Bank, the Company will require funds from other capitalsources to meet its obligations such as restructuring the current line ofcredit or replacing the current line of credit. Any increase in the Company’s outstanding indebtedness will also requireOTS approval.

 

The Company is actively evaluating variouscapital strategies to meet its obligations, including restructuring itsoutstanding debt and selling branch offices. The Company cannot provide assurance that it will succeed inaccomplishing any restructuring of its existing debt or selling branches beforeits capital resources are depleted. Failure to restructure the Company’s debt obligations or to sellbranches will have a material adverse effect on, and impair, the Company’sbusiness, financial condition and ability to operate as a going concern.  See “–Independent Registered PublicAccounting Firm’s Report with Disclosure of Going Concern Issue.”

 

***The Company’s line of credit is secured by the Bank’s common stock.***

 

The Company’s primary asset consists of theoutstanding shares of common stock of the Bank. The Company’s $17.5 million line of credit, all of which is currentlyoutstanding as of April 14, 2008, is secured by the outstanding shares ofcommon stock of the Bank.  Although the$17.5 million outstanding under the line is due on June 30, 2008, theCompany was not in compliance with one of the loan convents at December 31,2007 and the lender has the ability to accelerate all outstanding amounts uponnotice and the passage of 30 days.  TheCompany is currently negotiating with the lender regarding a waiver of thedefault, and a modification and/or extension of the line of credit.

 

***Effect of Independent Registered Public Accounting Firm’s Report WithDisclosure Of Going Concern Issue.***

 

The report of our independent RegisteredPublic Accountants, which is included in our Annual Report to Stockholders,contains an explanatory paragraph as to our ability to continue as a goingconcern. Among the factors cited by the accountants as raising substantialdoubt as to our ability to continue as a going concern are the recurringlosses, the agreements with the OTS and uncertainty about the Company’s abilityto meet obligations coming due in 2008. See Note P of Notes to Consolidated Financial Statements. See also “Management’sDiscussion and Analysis of Financial Condition and Results of Operations –Changes in Financial Condition” for management’s discussion of our financialcondition at December 31, 2007.

 

**Risks Relating to Our Compliance With ApplicableRegulatory Requirements and****Developments**

 

The Bank is subject to supervision andregulation by the OTS. As a regulated federal savings bank, the Bank’s goodstanding with its regulators is of fundamental importance to the continuationof its business. As more fully described in Item 1 – “Business – General,” on April 2,2008, the Company and the Bank both consented to the Orders issued by theOTS.  The Orders require the Company andthe Bank to, among other things, file with the OTS an updated business plan andsubmit to the OTS, on a quarterly basis, variance reports related to thebusiness plan.  The Order issued to theBank also substantially restricts the Bank’s lending activities. We cannotpredict the further impact of the Orders upon our business, financial conditionor results of operations. In addition, we cannot predict whether the OTS willtake any further action with respect to the Bank or the Company, or, if anysuch further action were taken, whether such action, including the actionsdescribed in Item 1. “Business - General,” would have a material adverseeffect on the Company or the Bank.

 

**Other Risks Related to Our Business**

** **

***Lackof profitable operations in recent periods could continue.***

*** ***

The recessionary forces in the local economyhave impacted the Company’s operations and profitability and may continue to doso.  For the years ended December 31,2007 and 2006, the Company incurred losses of $33.3 million and $4.1 million,respectively.  As the Bank’s primarylending area is the southwest Ohio and southeast Indiana regions, thesignificant downturn in the real estate market in these regions significantlyimpacts the asset quality and provision for loan loss requirements of the Bank.  While the Bank’s management continues toaggressively pursue the collection and resolution of all delinquent and nonperforming loans, future levels of charge offs and adjustments to the allowancecould significantly affect future net earnings.

 

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***Changesin interest rates could have a material adverse effect on the Company’sfinancial condition and results of operations.***

*** ***

The earnings of the Company dependsubstantially on the interest rate spread, which is the difference between therates the Company earns on loans, investment securities and otherinterest-earning assets, and the interest rates the Company pays on depositsand borrowings.   These rates are highlysensitive to many factors beyond the control of the Company, including generaleconomic conditions and the policies of various governmental and regulatoryauthorities.  While the Company has takenmeasures intended to manage the risk of operating in a changing interest rateenvironment, there can be no assurance that such measures will be effective inavoiding undue interest rate risk.

 

***Regionaleconomic changes in the Company’s markets could adversely impact results fromoperations.***

*** ***

Like all banks, the Company is subject to theeffects of any economic downturn, and the significant decline in home values,residential development and commercial properties in the Company’s markets havehad and may continue to have 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 more geographically diversified, the Companyprovides banking and financial services to customers primarily in the southwestOhio counties of Butler, Hamilton and Warren counties, as well as Dearborn andOhio counties in Indiana.  The localeconomic conditions in these market areas have a significant impact on theCompany’s ability to originate loans, the ability of the borrowers to repaythese loans and the value of the collateral securing these loans.  A significant decline in the general economicconditions caused by inflation, recession, unemployment or other factors beyondthe Company’s control could continue to adversely affect the Company’sfinancial condition and results of operations. Additionally, because the Company has a significant amount of loanssecured by commercial, multi-family, and non-owner occupied investmentproperties, decreases in tenant occupancy may also continue to have a negativeeffect on the ability of many of the Company’s borrowers to make timelyrepayments of their loans, which would continue to 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 asignificant downturn in the local economy, a softening in the real estatemarket and a oversupply of lots, speculative homes and non-owner occupiedrental units, leading to cash flow issues faced by local property investors,builders, and developers.  These issueshave had a material adverse impact on the Bank’s nonaccrual loans.  At December 31, 2007, the Bank’snonperforming loans amounted to $25.9 million, or 4.1% of total net loans.  The resolution of such nonperforming loansmay substantially impact the Company’s provision for loan losses and allowancefor loan losses.

 

***Losseson a few large loans or lending relationships can cause significant volatilityin 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 a period and the Company is required toincrease its loss reserves, or to write off principal or interest relative tosuch loans, the operating results of that period could be significantlyadversely affected. The effect on results of operations for any given periodfrom a change in the performance of a relatively small number of loanrelationships may be disproportionately larger than the impact of such loans onthe quality of the Company’s overall loan portfolio.  In each of the third and fourth quarters of2006 and all of 2007, the Company incurred losses on lending relationships thatsignificantly impacted operating results for the relevant period. As of December 31,2007, the Bank’s nonperforming loans amounted to $25.9 million, with eightborrowers owing $14.6 million, or 56.3% of the total nonperforming loans.   In addition, nonresidential real estatesecured non-accrual loans totaled $10.7 million at December 31, 2007, or41.1% of the total nonperforming loans.

 

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*** ***

***Impairmentof goodwill or other intangible assets could require charges to earnings, whichcould result in a negative impact on the Company’s results of operations.***

*** ***

Under current accounting standards, goodwilland certain other intangible assets with indeterminate lives are no longeramortized but, instead, are assessed for impairment periodically or whenimpairment 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 Bank recorded goodwill totaling $23.9million in conjunction with acquisitions of other financial institutions overthe past five years.  Following anupdated valuation in the fourth quarter of 2007 by an independent third party,the Bank incurred a non-cash impairment charge of $11.4 million for thewritedown of goodwill.   This impairmentis primarily attributable to lower market valuations for financial institutionsin the latter part of 2007, the weakening of the credit market in the secondhalf of 2007, the decline in real estate values, particularly in the Cincinnatiregion, and the net losses recorded by the Bank and Company for the past sixquarters.

 

***Additional valuation allowance of deferred tax asset would negativelyimpact net earnings or loss.***

 

During 2007, the Company recorded a valuationallowance of $4.4 million based principally on uncertainty about the Company’sability to generate sufficient future taxable income to realize all of therelated temporary differences.  TheCompany believes that it will realize the remaining deferred tax assets throughtaxable income resulting from the planned profitable sale of branches of theBank within the next twelve months.  Tothe extent that the Bank does not generate taxable income, through the sale ofbranches or otherwise, the Company may be required to record a furthervaluation allowance which would adversely impact net earnings or loss.

 

***Newor 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 the adoptionof significant new laws, changes in existing laws, or repeal of existing lawsmay have a material impact on the Company’s results of operations and financialcondition, the effects of which are impossible to predict at this time.

 

***Strongcompetition within the Company’s market area may limit profitability.***

*** ***

The Company faces significant competitionboth in attracting deposits and in the origination of loans, as described inItem 1 of Part I of this report under the heading “Business – Competition.”  Mortgage bankers, commercial banks, creditunions and other savings institutions, which have offices in the Bank’s marketarea have historically provided most of the Company’s competition fordeposits.  Many competitors havesubstantially greater financial and other resources than the Company.  Moreover, the Company may face increased competitionin the origination of loans if competing thrift institutions convert to stockform, because such converting thrifts would likely seek to invest their newcapital into loans.  Finally, creditunions do not pay federal or state income taxes and are subject to fewerregulatory constraints than savings banks and as a result, they may enjoy acompetitive advantage over the Company. The Bank competes for loans principally on the basis of the interestrates and loan fees it charges, the types of loans it originates and thequality of services it provides to borrowers. This advantage places significant competitive pressure on the prices ofloans and deposits.

 

***Theextended disruption of vital infrastructure could negatively impact the Company’sresults 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.

 

34

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** **

**Risks Relating to Our Capital Stock**

** **

***Wedo not anticipate declaring dividends for the foreseeable future.***

*** ***

The Company’s Board of Directors has notdeclared any dividends since the third quarter of 2007.  The Orders prohibit the Bank from paying cashdividends to the Company, which is its primary source for funding dividends tothe Company’s shareholders, without the prior approval of the OTS.  The Company believes it has very limited orno ability to pay cash dividends in the foreseeable future, and is prohibitedby the Orders from doing so without the consent of the OTS.

 

***Otherrisk 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.

 

35

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

 

At December 31,2007, Peoples conducted its business from its main office in West Chester, Ohioand eighteen 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 31,2007.

 
| ** **                                        | ** ** | ** **   | ** ** | ** **     | ** ** | **Net Book  Value**   | ** ** | ** **            | ** ** |
|---------------------------------------------------|------------|--------------|------------|----------------|------------|-----------------------|------------|-----------------------|------------|
| ** **                                        | ** ** | ** **   | ** ** | ** **     | ** ** | **of  Property and**  | ** ** | ** **            | ** ** |
| ** **                                        | ** ** | ** **   | ** ** | ** **     | ** ** | **Leasehold**         | ** ** | ** **            | ** ** |
| ** **                                        | ** ** | ** **   | ** ** | **Lease**      | ** ** | **Improvements  at**  | ** ** | **Deposits  at**      | ** ** |
| ** **                                        | ** ** | **Owned or** | ** ** | **Expiration** | ** ** | **December 31,** | ** ** | **December 31,** | ** ** |
| ** **                                        | ** ** | **Leased**   | ** ** | **Date**       | ** ** | **2007**              | ** ** | **2007**              | ** ** |
| ** **                                        | ** ** | ** **   | ** ** | ** **     | ** ** | **(In  thousands)**   | ** ** |
| **Main Office:**                                  | ** ** | ** **   | ** ** | ** **     | ** ** | ** **            | ** ** | ** **            | ** ** |
| 6100 West Chester Road   West Chester, Ohio 45069 |       | Owned        |       | N/A            |       | $                     | 2,224      |                  | $          | 45,623 |   |
|                                              |       |         |       |           |       |                  |       |                  |       |
| **Branch  Offices:**                              |       |         |       |           |       |                  |       |                  |       |
| 7615 Voice  of America Drive                      |       |         |       |           |       |                  |       |                  |       |
| West Chester, Ohio 45069                          |       | Owned        |       | N/A            |       | 3,269                 |       | 11,322                |       |
| 11 South  Broadway                                |       |         |       |           |       |                  |       |                  |       |
| Lebanon, Ohio 45036                               |       | Owned        |       | N/A            |       | 655                   |       | 51,032                |       |
| 4825 Marburg  Avenue                              |       |         |       |           |       |                  |       |                  |       |
| Cincinnati, Ohio 45209                            |       | Owned        |       | N/A            |       | 1,503                 |       | 28,775                |       |
| 5712  Bridgetown Road                             |       |         |       |           |       |                  |       |                  |       |
| Cincinnati, Ohio 45248                            |       | Owned        |       | N/A            |       | 1,848                 |       | 73,945                |       |
| 6570  Harrison Avenue                             |       |         |       |           |       |                  |       |                  |       |
| Cincinnati, Ohio 45247                            |       | Owned        |       | N/A            |       | 1,208                 |       | 41,886                |       |
| 7522  Hamilton Avenue                             |       |         |       |           |       |                  |       |                  |       |
| Cincinnati, Ohio 45231                            |       | Owned        |       | N/A            |       | 1,209                 |       | 60,670                |       |
| 4100 State  Route 128                             |       |         |       |           |       |                  |       |                  |       |
| Cleves, Ohio 45002                                |       | Owned        |       | N/A            |       | 832                   |       | 18,831                |       |
| 1101  Columbus Avenue                             |       |         |       |           |       |                  |       |                  |       |
| Lebanon, Ohio 45036                               |       | Owned        |       | N/A            |       | 1,308                 |       | 52,222                |       |
| 5797 South  State Route 48                        |       |         |       |           |       |                  |       |                  |       |
| Maineville, Ohio 45039                            |       | Owned        |       | N/A            |       | 915                   |       | 23,455                |       |
| 8350 Arbor  Square Drive                          |       |         |       |           |       |                  |       |                  |       |
| Mason, Ohio 45040                                 |       | Owned        |       | N/A            |       | 1,342                 |       | 25,153                |       |
| 3530  Springdale Road                             |       |         |       |           |       |                  |       |                  |       |
| Cincinnati, Ohio 45251                            |       | Owned        |       | N/A            |       | 658                   |       | 28,443                |       |
| 7200 Blue  Ash Road                               |       |         |       |           |       |                  |       |                  |       |
| Cincinnati, Ohio 45236                            |       | Owned        |       | N/A            |       | 2,440                 |       | 76,417                |       |
| 9360  Montgomery Road                             |       |         |       |           |       |                  |       |                  |       |
| Cincinnati, Ohio 45242                            |       | Owned        |       | N/A            |       | 1,910                 |       | 35,007                |       |
| 6945 South  Liberty Drive                         |       |         |       |           |       |                  |       |                  |       |
| Liberty Township, Ohio 45044                      |       | Owned        |       | N/A            |       | 1,631                 |       | 3,545                 |       |
| 131 Walnut  Street                                |       |         |       |           |       |                  |       |                  |       |
| Lawrenceburg, Indiana 47025                       |       | Leased       |       | 02/13          |       | 68                    |       | 61,705                |       |
| 320  Importing Street                             |       |         |       |           |       |                  |       |                  |       |
| Aurora, Indiana 47001                             |       | Owned        |       | N/A            |       | 2,409                 |       | 68,545                |       |
| 24128 State  Line Road                            |       |         |       |           |       |                  |       |                  |       |
| Bright, Indiana 47025                             |       | Owned        |       | N/A            |       | 314                   |       | 7,867                 |       |
| 204  Bridgeway Street                             |       |         |       |           |       |                  |       |                  |       |
| Aurora, Indiana 47001                             |       | Owned        |       | N/A            |       | 510                   |       | N/A                   |       |
| 330  Industrial Access Road                       |       |         |       |           |       |                  |       |                  |       |
| Rising Sun, Indiana 47040                         |       | Owned        |       | N/A            |       | 463                   |       | 20,769                |       |
|                                                   |            |              |            |                |            |                       |            |                       |            |  |  |

 

Additionally, the Company haspurchased land in Warren County for $1.0 million for future expansion, and hasapproximately $586,000 invested in land in Butler County also for futureexpansion.

 

36

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**Item 3. Legal Proceedings**

 

From time to time, the Bank andCompany are involved as plaintiff or defended in various legal proceedingsarising in the normal course of business. It is the opinion of management that the resolution of these legalactions should not have a material effect on the Company’s consolidatedfinancial conditions or results of operations.

 

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

 

Not applicable

 

**PART II**

 

**Item 5. Market for Registrant’s CommonEquity, and Related Stockholder Matters and Issuer Purchases of EquitySecurities**

 

(a)  The information required herein is incorporated by referencefrom page 3 of Peoples’ 2007 Annual Report to Stockholders filed as Exhibit 13hereto (“2007 Annual Report”) and from Part III, Item 12 hereof.

(b)  Not applicable.

(c)  Not applicable.

 

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

 

The information required herein isincorporated from pages 4 and 5 of the 2007 Annual Report.

 

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

 

The information required herein is incorporated by reference from pages 6to 18 of the 2007 Annual Report.

 

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

 

The information required herein is incorporated from pages 23 and24 of the 2007 Annual Report.

 

**Item 8. Financial Statements andSupplementary Data**

 

The information required herein isincorporated by reference from pages 27 to 70 of the 2007 Annual Report.

 

37

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**Reportof Independent Registered Public Accounting Firm**

 

Audit Committee, Board of Directors andStockholders

Peoples Community Bancorp, Inc.

West Chester, Ohio

 

We have audited the accompanying consolidatedstatements of financial condition of Peoples Community Bancorp, Inc. as ofDecember 31, 2007 and 2006, and the related consolidated statements ofoperations, comprehensive income (loss), stockholders’ equity and cash flowsfor each of the years ended December 31, 2007 and 2006, the three-month periodended December 31, 2005 and for the year ended September 30, 2005. The Company’smanagement is responsible for these financial statements. Our responsibility isto express an opinion on these financial statements based on our audits.

 

We conducted our audits in accordance withthe standards of the Public Company Accounting Oversight Board (United States).Those standards require that we plan and perform the audits to obtainreasonable assurance about whether the financial statements are free ofmaterial misstatement. The Company is not required to have, nor were we engagedto perform, an audit of its internal control over financial reporting. Ouraudits included consideration of internal control over financial reporting as abasis for designing auditing procedures that are appropriate in thecircumstances, but not for the purpose of expressing an opinion on theeffectiveness of the Company’s internal control over financial reporting.Accordingly, we express no such opinion. Our audits also included examining, ona test basis, evidence supporting the amounts and disclosures in the financialstatements, assessing the accounting principles used and significant estimatesmade by management and evaluating the overall financial statement presentation.We believe that our audits provide a reasonable basis for our opinion.

 

In our opinion, the consolidated financialstatements referred to above present fairly, in all material respects, thefinancial position of Peoples Community Bancorp, Inc. as of December 31, 2007and 2006, and the results of its operations and its cash flows for the yearsended December 31, 2007 and 2006, the three-month period ended December 31,2005, and for the year ended September 30, 2005, in conformity with accountingprinciples generally accepted in the United States of America.

 

The accompanying financial statements havebeen prepared assuming the Company will continue as a going concern. Asdiscussed in Note P, the Company has suffered recurring losses from operationsand will operate under restrictions set forth by the formal agreements with theCompany’s and Bank’s federal regulators, which result in uncertainty about theCompany’s ability to meet obligations coming due in 2008. These factors raisesubstantial doubt about its ability to continue as a going concern. Management’splans in regards to these matters are also described in Note P. The financialstatements do not include any adjustments that might result from the outcome ofthis uncertainty.

 

BKD,LLP

 

Cincinnati, Ohio

April 15, 2008
|        | 312 Walnut Street, Suite 3000   Cincinnati, OH  45202-4025   513 621-8300   Fax 513 621-8345 |  |
|-------------|-------------------------------------------------------------------------------------------------------------------------------------------|--|
| **bkd.com** |                                                                                                                                           |

 

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

 

Not applicable.

 

**Item 9A(T). Controls and Procedures**

 

**Disclosure Controls and Procedures**

 

Our management evaluated, with theparticipation of our Chief Executive Officer and Chief Financial Officer, theeffectiveness of our disclosure controls and procedures (as defined by Rules 13a-15(e) and15d-15(e) under the Securities Exchange Act of 1934) as of December 31,2007.  Based on such evaluation, ourChief Executive Officer and Chief Financial Officer have concluded that, as aresult of the material weaknesses in internal control over financial reportingdiscussed below, as of December 31, 2007 our disclosure controls andprocedures were not effective to ensure that information required to bedisclosed by us in the reports that we file or submit under the SecuritiesExchange Act of 1934 is recorded, processed, summarized and reported within thetime periods specified in the SEC’s rules and regulations.

 

In connection with the above evaluation ofour disclosure controls and procedures, no change in our internal control overfinancial reporting was identified that occurred during our fourth quarter of2007 that has materially affected, or is reasonably likely to materiallyaffect, our internal control over financial reporting. However, our managementhas taken remedial steps to address the material weaknesses described below in “Management’sAnnual Report on Internal Control Over Financial Reporting.”

 

**Management’s Annual Report on InternalControl Over Financial Reporting**

 

Management is responsible for establishingand maintaining adequate internal control over financial reporting, as suchterm is defined under Exchange Act Rule 13a-15(f).  The Company’s internal control over financialreporting is designed to provide reasonable assurance to its management andboard of directors regarding the preparation and fair presentation of publishedfinancial statements.  Under thesupervision and with the participation of our management, including ourprincipal executive officer and principal financial officer, we conducted anevaluation of the effectiveness of our internal control over financialreporting based on the framework in *InternalControl-Integrated Framework*issued by the Committee of SponsoringOrganizations of the Treadway Commission . Based on this evaluation, management has concluded that the Company’sdisclosure controls and procedures are not effective because of theidentification of several material weaknesses in our internal control overfinancial reporting which we view as an integral part of our disclosurecontrols and procedures.  A materialweakness is a deficiency, or a combination of control deficiencies, in internalcontrol over financial reporting such that there is a reasonable possibility thata material misstatement of the Company’s annual or interim financial statementswill not be prevented or detected on a timely basis.

 

38

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During the course of our external audit for2007, we noted several adjustments identified by our external auditors relatedto the calculation of the allowance for loan losses, significant adjustments toaccruals and contingent liabilities and testing for impairment of goodwill.While management has concluded that the Company did not maintain effectiveinternal control over financial reporting as of December 31, 2007 due to thesematerial weaknesses, this did not result in a material misstatement of any ofthe Company’s financial statements, including the annual and interim financialstatements for 2007.

 

This annual report does not include anattestation of the Company’s registered public accounting firm regardinginternal controls over financial reporting. The internal control over financial reporting was not subject toattestation by the Company’s registered public accounting firm pursuant totemporary rules of the Securities and Exchange Commission that permit theCompany to provide only management’s report in this annual report.

 

**Item 9B. Other Information**

 

Not applicable.

 

39

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**PART III**

 

**Item 10. Directors, Executive Officers andCorporate Governance**

 

**Code of Ethics for Executive Officers**

 

The board of directors has adopted a code ofethics for the Company’s executive officers, including the chief executiveofficer, 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 of Form 8-Kunder Section 13 of the Exchange Act, the nature of any amendment to thiscode of ethics (other than technical, administrative, or other non-substantiveamendments), our approval of any material departure from a provision of thiscode of ethics, and our failure to take action within a reasonable period oftime regarding any material departure from a provision of this code of ethicsthat has been made known to any of the executive officers noted above.

 

Additional information required herein isincorporated by reference from the Registrant’s Proxy Statement to be filedwithin 120 days after the end of the fiscal year covered by this Form 10-K(“Proxy Statement”).

 

**Item 11. Executive Compensation**

 

The information required herein isincorporated by reference from the Proxy Statement.

 

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

 

**EquityCompensation Plan Information**

 

The following table sets forth certain information for all equitycompensation plans and individual compensation arrangements (whether withemployees or non-employees, such as directors), in effect as of December 31,2007.

 
| **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     |       | 252,161                                                                                                                                                  |       | $                                                                            | 18.08      |                                                                                                                                                                | 79,264     |   |
|                                                        |       |                                                                                                                                                     |       |                                                                         |       |                                                                                                                                                                |       |
| Equity Compensation Plans Not Approved by  Security Holders |       | —                                                                                                                                                   |       | —                                                                       |       | —                                                                                                                                                              |       |
|                                                        |       |                                                                                                                                                     |       |                                                                         |       |                                                                                                                                                                |       |
| Total                                                       |       | 252,161                                                                                                                                                  |       | $                                                                            | 18.08      |                                                                                                                                                                | 79,264     |   |

 

----

(1)                                  Included in such number are 109,844 shareswhich are subject to restricted stock grants which were not vested as of December 31,2007.  The weighted average exerciseprice excludes restricted stock grants.

 

40

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**Item 13. Certain Relationships and RelatedTransactions and Director Independence**

 

The information required herein isincorporated by reference from the Proxy Statement.

 

##### **Item 14. Principal Accounting Fees andServices**

##### ** **

The information required herein isincorporated by reference from the Proxy Statement.

 

**Item 15. Exhibits, Financial StatementSchedules**

 

(a) (1)  The following documentsare filed as part of this report and are incorporated herein by reference fromthe Registrant’s 2007 Annual Report:

 

Report of Registered Independent CertifiedPublic Accountants.

 

Consolidated Statements of FinancialCondition as of December 31, 2007 and 2006.

 

Consolidated Statements of Operations for theYears Ended December 31, 2007 and 2006, the Three Month Period Ended December 31,2005, and the Year Ended September 30, 2005.

 

Consolidated Statements of ComprehensiveIncome (Loss) for the Years Ended December 31, 2007 and 2006, the ThreeMonth Period Ended December 31, 2005, and the Year Ended September 30,2005.

 

Consolidated Statements of Stockholders’Equity for the Years Ended December 31, 2007 and 2006, the Three MonthPeriod Ended December 31, 2005, and the Yeas Ended September 30,2005.

 

Consolidated Statements of Cash Flows for theYears Ended December 31, 2007 and 2006, the Three Month Period Ended December 31,2005, and the Year Ended September 30, 2005.

 

Notes to Consolidated Financial Statements.

 

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

 

(b)  Exhibits.

 

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

 
| **No.** | ** ** | **Exhibits**                                                                                                                                                                      |
|---------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 3.1     |       | Articles of Incorporation of Peoples  Community Bancorp, Inc. (1)                                                                                                            |
| 3.2     |       | Bylaws of Peoples Community  Bancorp, Inc. (2)                                                                                                                               |
| 4       |       | Stock Certificate of Peoples Community  Bancorp, Inc. (3)                                                                                                                    |
| 10.1    |       | 2001 Stock Option Plan (4)                                                                                                                                                        |
| 10.2    |       | 2001 Recognition and Retention Plan (4)                                                                                                                                           |
| 10.3    |       | 2004 Stock Option Plan (5)                                                                                                                                                        |
| 10.4    |       | 2004 Recognition and Retention Plan (5)                                                                                                                                           |
| 10.5    |       | Employment Agreements with each of Jerry D.  Williams, Thomas J. Noe, and Teresa A. O’Quinn (3)                                                                              |
| 10.6    |       | Employment Agreement with Stephen P. Wood  (6)                                                                                                                                    |
| 10.7    |       | Change in Control Agreement with Rick W.  Wade (6)                                                                                                                                |
| 10.8    |       | Change in Control Agreement with Lori M.  Henn (7)                                                                                                                                |
| 10.9    |       | Change in Control Agreement with Fred L.  Darlington (7)                                                                                                                          |
| 10.10   |       | Change in Control Agreement with Jerry L.  Gore (8)                                                                                                                               |
| 13.0    |       | Annual Report to Stockholders for the Year  Ended December 31, 2007                                                                                                          |
| 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 |
|         |            |                                                                                                                                                                                   |  |

 

41

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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)                                                        |

 

----

(1)                                  Incorporatedherein by reference to Peoples’ Proxy Statement dated January 28, 2002.

(2)                                  Incorporatedherein by reference to Peoples’ Current Report on Form 8-K filed with theSEC on December 6, 2007.

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

(4)                                  Incorporatedherein by reference to Peoples’ Proxy Statement dated January 29, 2001.

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

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

(7)                                  Incorporatedherein by reference to Peoples’ Annual Report on Form 10-K for the yearended December 31, 2006, filed with the SEC on April 2, 2007.

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

 

42

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**SIGNATURES**

 

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

 

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

 

 

Pursuant to the requirements of theSecurities Exchange Act of 1934, as amended, this report has been signed belowby the following persons on behalf of the registrant and in the capacities andon the dates indicated.

 

 
| /s/Jerry D. Williams          |   | April 15, 2008 |
|-------------------------------|--------|---------------------|
| Jerry D. Williams             |   |                |
| President, Chief Executive    |   |                |
|   Officer and Director   |   |                |
| (principal executive officer) |   |                |
|                          |   |                |
|                          |   |                |
| /s/Thomas J. Noe              |   | April 15, 2008 |
| Thomas  J. Noe                |   |                |
| Treasurer and Director        |   |                |
|                          |   |                |
|                          |   |                |
| /s/Donald L. Hawke            |   | April 15, 2008 |
| Donald L. Hawke               |   |                |
| Chairman of the Board and     |   |                |
| Director                      |   |                |
|                          |   |                |
|                          |   |                |
| /s/John E. Rathkamp           |   | April 15, 2008 |
| John E. Rathkamp              |   |                |
| Director                      |   |                |

 

43

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| /s/John L. Buchanan                           |   | April 15, 2008 |
|-----------------------------------------------|--------|---------------------|
| John L. Buchanan                              |   |                |
| Director                                      |   |                |
|                                          |   |                |
|                                          |   |                |
| /s/James R. Van DeGrift                       |   | April 15, 2008 |
| James R. Van DeGrift                          |   |                |
| Director                                      |   |                |
|                                          |   |                |
|                                          |   |                |
| /s/Nicholas N. Nelson                         |   | April 15, 2008 |
| Nicholas N. Nelson                            |   |                |
| Director                                      |   |                |
|                                          |   |                |
|                                          |   |                |
| /s/Teresa A. O’Quinn                     |   | April 15, 2008 |
| Teresa A. O’Quinn                        |   |                |
| Chief Financial Officer                       |   |                |
| (principal financial and accounting  officer) |   |                |

 

44

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