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**Exhibit 13**

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**2006 ANNUAL REPORT**

**TO STOCKHOLDERS**

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**TABLE OF CONTENTS**
|                                                                                             | ** ** | **Page** | ** ** |
|---------------------------------------------------------------------------------------------|------------|----------|------------|
| President’s Letter to  Stockholders                                                    |       | 1        |       |
|                                                                                        |       |     |       |
| Business of Peoples  Community Bancorp, Inc                                                 |       | 2        |       |
|                                                                                        |       |     |       |
| Market Price of Peoples  Community Bancorp Common Shares and Related Stockholder Matters    |       | 3        |       |
|                                                                                        |       |     |       |
| Performance Graph                                                                           |       | 4        |       |
|                                                                                        |       |     |       |
| Selected Consolidated  Financial and Other Data                                             |       | 5        |       |
|                                                                                        |       |     |       |
| Management’s Discussion  and Analysis of Financial Condition and Results of Operations |       | 7        |       |
|                                                                                        |       |     |       |
| Consolidated Financial  Statements:                                                         |       |     |       |
| Report of Independent  Registered Public Accounting Firm                                    |       | 22       |       |
| Consolidated  Statements of Financial Condition                                             |       | 23       |       |
| Consolidated  Statements of Operations                                                      |       | 24       |       |
| Consolidated  Statements of Comprehensive Income (Loss)                                     |       | 25       |       |
| Consolidated  Statements of Stockholders’ Equity                                       |       | 26       |       |
| Consolidated Statements  of Cash Flows                                                      |       | 27       |       |
| Notes to  Consolidated Financial Statements                                                 |       | 29       |       |
|                                                                                        |       |     |       |
| Directors and Executive  Officers                                                           |       | 63       |       |
|                                                                                        |       |     |       |
| Banking Locations and Stockholder Information                                               |       | 64       |       |

 

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Dear FellowShareholders:

Our2006 Annual Report to Stockholders reflects both the significant growthachieved by Peoples Community Bancorp, Inc. for the seven year period endedDecember 31, 2006 and, during 2006, the effects of the downturn in the localeconomy on our growth, asset quality and earnings.  Although we facilitated our strategy toexpand our franchise through the acquisition of the Mercantile Savings Bank inKenwood, Ohio in June, 2006, our internal loan and asset growth was hindered bylocal economic conditions, the softening in the real estate market and thefinancial difficulties experienced by real estate investors anddevelopers.  Combined, these issuesheavily impacted our results of operations for the year ended December 31,2006.

Duein large part to the significant increase in non-performing loans and relatedcharge-offs and provisions for loan losses, Peoples Bancorp incurred a net lossof $4.1 million or $0.88 per share for the year ended December 31, 2006compared to net income of $2.9 million or $0.73 per share for the year endedSeptember 30, 2005.  Non-performing loansincreased from $18.8 million at December 31, 2005 to $24.1 million at December31, 2006, due primarily to an increase in non-performing single-family loans(including non-owner occupied investment property), multi-family loans andnon-residential real estate and land loans.

During2006, we proactively addressed these issues by charging-off $13.1 million ofloans and providing $17.5 million to our allowance for loan losses.  At December 31, 2006, our allowance for loanlosses of $18.4 million equated to 2.05% of total loans and 71.20% of totalnon-performing loans.  In addition, overthe past year, we have revised our methods of reviewing loans for potentialweaknesses by emphasizing cash flow analysis rather than collateral value.  Further, we have determined to curtail ourone- to four-family residential investment lending, our acquisition anddevelopment lending and our unsecured commercial lending.  We are encouraged by the steps we took in2006 to more effectively deal with our asset quality issues and we remaincommitted to aggressively pursuing the collection and resolution of alldelinquent and non-performing loans.

On adifferent note, we are pleased to report that the previous adjustments to ourbalance sheet in view of an increasing interest rate environment resulted in anincrease in our interest rate spread and net interest margin from 2.25% and2.45%, respectively, for the year ended September 30, 2005 to 2.84% and 3.00%,respectively, for the year ended December 31, 2006.  These increases contributed to a $7.4 millionor 34.6% increase in net interest income for the year ended December 31, 2006compared to the year ended September 30, 2005.

Likeyou, our directors, executive officers and a significant portion of ouremployees are stockholders of Peoples Community Bancorp and, as such, we sharemutual interests.  We realize that theissues presented in 2006 will continue to create a challenging environment forPeoples Community Bancorp.  However, weexpect that the numerous actions we took in 2006 will provide the basis for theresolution of these issues and the foundation for a stronger institution. Onbehalf or our directors and our officers and employees who are overseeing orimplementing our strategic initiatives, I thank you for your continued support.

Sincerely,

Jerry D. Williams

Presidentand Chief Executive Officer

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

Peoples Community Bancorp, Inc., a Marylandcorporation (the “Company”), is a registered savings and loan holding companywhich owns all of the outstanding common shares of Peoples Community Bank (“Peoples”or the “Bank”), a federally chartered savings bank.

The Company was formed in December 1999 in connection with the mutualto stock conversion of the Bank, and the sale of 1,190,000 shares of commonstock to depositors and members of the community.  The Bank conducts its business from nineteenfull service offices in Hamilton, Warren and Butler counties in Southwest Ohioand Dearborn  and Ohio Counties inSoutheast Indiana.  The Bank’s businessis conducted through the marketing of its lending products and services to thecommunities in its market area and through the continued development of innovativelending programs that give Peoples a competitive advantage.  The Bank offers a wide variety of loanproducts, including single and multi-family residential loans, nonresidentialreal estate and land loans and construction loans.  In addition, the Bank invests insecurities.  The funds for the Bank’slending and investment activities are primarily provided by deposits andborrowings.  At December 31, 2006, theCompany had $1.0 billion in total assets, $755.3 million in deposits, $156.9million in borrowings (excluding subordinated debentures) and $87.6 million ofstockholders’ equity.  The Company’sprincipal executive office is located at 6100 West Chester Road, P.O. Box 1130,West Chester, Ohio 45071-1130.  TheCompany’s telephone number is (513) 870-3530.

As a result of acquisitions and internal growth, the Company has grownsignificantly from $416.0 million in total assets as of September 30, 2001 to$1.0 billion in total assets as of December 31, 2006.  Between the completion of the initial publicoffering in March 2000 and December 31, 2006, the Company acquired sixfinancial institutions with aggregate total assets as of the time ofacquisition of $495.6 million.  Also, inSeptember 2003, the Company purchased $32.8 million in loans and assumed $55.6million in deposits in connection with the acquisition of two branch officesfrom another financial institution.  TheCompany has supplemented this growth from acquisitions with loan generationsecured primarily by real estate in its market area.  Loan originations increased from $241.1million in the year ended September 30, 2001, $261.6 million in the year endedSeptember 30, 2002, $278.6 million in the year ended September 30, 2003, $289.5million in the year ended September 30, 2004 and $337.0 million in the yearended September 30, 2005 to $341.6 million in the year ended December 31,2006.  Loans receivable, net increasedfrom $377.7 million at September 30, 2001 to $812.6 million at December 31,2006.  In addition, since September 30,2000, the Company has 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 and facilitated its loanproduction growth.  The Company’s loangrowth has been funded in part by deposits. The Company has placed an emphasis on deposit generation both internallyand through whole bank and branch acquisitions. Deposits have increased from $233.1 million at September 30, 2001 to$755.3 million at December 31, 2006.

The Company is subject to regulation,supervision and examination by the Office of Thrift Supervision.  Peoples is subject to regulation, supervisionand examination by the Office of Thrift Supervision (the “OTS”) as its primaryfederal regulator and the Federal Deposit Insurance Corporation (the “FDIC”),which administers the Savings Association Insurance Fund and the Bank InsuranceFund.  The FDIC insures deposits inPeoples up to applicable limits.

As previously announced, the Board of Directors of the Company adoptedan amendment to Article VI of the Company’s Bylaws to change the Company’sfiscal year end from September 30, to December 31, effective retroactively toJanuary 1, 2006, in order to increase operational efficiency.  As a result, the consolidated statements offinancial condition compares December 31, 2006 to December 31, 2005, while theconsolidated statements of operations, the consolidated statements ofcomprehensive income (loss), and the consolidated statements of cash flowreflect, as applicable, the twelve month period ended December 31, 2006, thethree month period ended December 31, 2005, the twelve month period endedSeptember 30, 2005 and the twelve month period ended September 30, 2004.  Further, for purposes of the section entitled“Management’s Discussion and Analysis of Financial Condition and Results ofOperations” herein, the discussion of changes in financial condition comparesDecember 31, 2006 to December 31, 2005 and the discussion of results ofoperations compares the year ended December 31, 2006 to the year endedSeptember 30, 2005 as well as the year ended September 30, 2005 to the yearended September 30, 2004.

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**MARKET PRICE OF PEOPLES COMMUNITY BANCORP COMMON SHARESAND RELATED STOCKHOLDER MATTERS**

The Company’s common shares are currently listedon the Nasdaq Global Market (“Nasdaq”) under the symbol “PCBI.”  Presented below are the high and low tradingprices for the Company’s common shares for the three years ended December 31,2006.  Such prices do not include retailfinancial markups, markdowns or commissions. Information relating to prices has been obtained from Nasdaq.  In addition, the Company initiated aquarterly cash dividend of $.15 per share effective with the quarter ended June30, 2004.
| **Fiscal 2006** | ** ** | **High** | ** ** | **Low** | ** ** | **Dividends** | ** ** |
|----------------------|------------|----------|------------|---------|------------|---------------|------------|
| Quarter ended:       |       |     |       |    |       |          |       |
| December 31, 2006    |       | $        | 19.60      |    | $          | 16.35         |       | $ | .15 |   |
| September 30, 2006   |       | 19.85    |       | 17.25   |       | .15           |       |
| June 30, 2006        |       | 20.95    |       | 18.50   |       | .15           |       |
| March 31, 2006       |       | 21.83    |       | 19.91   |       | .15           |       |
|                 |       |     |       |    |       |          |       |
| Quarter ended:       |       |     |       |    |       |          |       |
| December 31,  2005   |       | $        | 21.81      |    | $          | 19.63         |       | .15 |   |
|                      |            |          |            |         |            |               |            |  |  |  |

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

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

 

As of March 28, 2007, the Company had4,829,699 common shares outstanding held of record by approximately 1,130stockholders.  The number of stockholdersdoes not reflect the number of persons or entities who may hold stock innominee or “street” name through brokerage firms or others.

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**PEOPLES COMMUNITY BANCORP, INC.**

**PERFORMANCE GRAPH**

The following graph represents $100 invested in ourcommon stock at the closing price of the common stock on the Nasdaq GlobalMarket on December 31, 2001.  The graphdemonstrates comparison of the cumulative total returns for the common stock ofPeoples Community Bancorp, the NASDAQ Composite Index and the SNL $500M-$1 BThrift Index for the period commencing on December 31, 2001 to the close oftrading on December 31, 2006.

 
| ** **                       | ** ** | **Period Ending** | ** ** |
|----------------------------------|------------|------------------------|------------|
| **Index**                        | ** ** | **12/31/01**           | ** ** | **12/31/02** | ** ** | **12/31/03** | ** ** | **12/31/04** | ** ** | **12/31/05** | ** ** | **12/31/06** | ** ** |
| Peoples  Community Bancorp, Inc. |       | 100.00                 |       | 109.66 |   | 108.69 |   | 116.41 |   | 102.31 |   | 94.06 |   |
| NASDAQ Composite                 |       | 100.00                 |       | 68.76 |   | 103.67 |   | 113.16 |   | 115.57 |   | 127.58 |   |
| SNL $500M-$1 B Thrift  Index     |       | 100.00                 |       | 140.09 |   | 199.47 |   | 220.65 |   | 209.70 |   | 256.94 |   |

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* Source:  SNLFinancial LC, Charlottesville, VA

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**PEOPLES COMMUNITY BANCORP, INC.**

**SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA**

The following selected consolidated financial and otherdata does not purport to be complete and is qualified in its entirety byreference to the more detailed financial information, including theConsolidated Financial Statements and related notes, appearing elsewhereherein.
| **Se**lected Consolidated Financial                      | ** ** | **At December 31,** | ** ** | **At September 30,** | ** ** |
|--------------------------------------------------------------------|------------|-------------------------------|------------|--------------------------------|------------|
| **Condition Data: (1)**                                  | ** ** | **2006**                      | ** ** | **2005**                       | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** |
| ** **                                                         | ** ** | **(In thousands)**       | ** ** |
| Total assets                                                       |       | $                             | 1,028,079  |                           | $          | 1,040,912 |   | $ | 1,006,654 |   | $ | 889,121 |   | $ | 738,683 |   | $ | 581,632 |   |
| Cash and cash  equivalents                                         |       | 57,459                        |       | 21,558                         |       | 17,061 |   | 14,430 |   | 10,244 |   | 26,637 |   |
| Investment  securities available for sale                          |       | 4,230                         |       | 3,458                          |       | 7,650 |   | 1,069 |   | 2,156 |   | 1,231 |   |
| Mortgage-backed  securities available for sale                     |       | 52,669                        |       | 71,024                         |       | 199,716 |   | 228,085 |   | 133,828 |   | 18,763 |   |
| Loans  receivable, net                                             |       | 812,578                       |       | 851,270                        |       | 704,714 |   | 599,466 |   | 554,351 |   | 504,012 |   |
| Deposits                                                           |       | 755,261                       |       | 726,629                        |       | 612,199 |   | 472,436 |   | 455,900 |   | 369,080 |   |
| Advances from  the Federal Home Loan Bank and other borrowed money |       | 156,885                       |       | 221,483                        |       | 301,920 |   | 324,500 |   | 232,400 |   | 165,450 |   |
| Stockholders’ equity  (2)                                     |       | 87,616                        |       | 86,047                         |       | 86,700 |   | 75,775 |   | 46,699 |   | 42,990 |   |
|                                                                    |            |                               |            |                                |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

** **
| ** **                                               | ** ** | ** **                                                         | ** ** | **Three Months** | ** ** | ** **                                  | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
|----------------------------------------------------------|------------|--------------------------------------------------------------------|------------|-----------------------|------------|---------------------------------------------|------------|------------|------------|------------|------------|------------|------------|
| ** **                                               | ** ** | **Year Ended**                                                | ** ** | **Ended**             | ** ** | ** **                                  | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Selected Consolidated  Operating**                | ** ** | **December 31,**                                              | ** ** | **December 31,** | ** ** | **Year Ended September 30,** | ** ** |
| **Data: (1)**                                            | ** ** | **2006**                                                           | ** ** | **2005**              | ** ** | **2005**                                    | ** ** | **2004**   | ** ** | **2003**   | ** ** | **2002**   | ** ** |
| ** **                                               | ** ** | **(In thousands, except per share data)** | ** ** |
| Interest income                                          |       | $                                                                  | 65,475     |                  | $          | 14,402                                      |       | $          | 47,748     |       | $          | 40,171     |       | $ | 37,169 |   | $ | 33,712 |   |
| Interest expense                                         |       | 36,485                                                             |       | 8,155                 |       | 26,204                                      |       | 19,813     |       | 18,072     |       | 15,598     |       |
| Net interest  income                                     |       | 28,990                                                             |       | 6,247                 |       | 21,544                                      |       | 20,358     |       | 19,097     |       | 18,114     |       |
|                                                     |       |                                                               |       |                  |       |                                        |       |       |       |       |       |       |       |
| Provision for  losses on loans                           |       | 17,450                                                             |       | 900                   |       | 3,600                                       |       | 3,600      |       | 4,198      |       | 5,265      |       |
| Net interest  income after provision for losses on loans |       | 11,540                                                             |       | 5,347                 |       | 17,944                                      |       | 16,758     |       | 14,899     |       | 12,849     |       |
| Other income                                             |       | 3,213                                                              |       | (764                  | )          | 2,114                                       |       | 1,181      |       | 1,251      |       | 2,509      |       |
| General,  administrative and other expense               |       | 21,122                                                             |       | 4,530                 |       | 15,827                                      |       | 13,750     |       | 10,504     |       | 9,817      |       |
|                                                     |       |                                                               |       |                  |       |                                        |       |       |       |       |       |       |       |
| Earnings before  income taxes                            |       | (6,369                                                             | )          | 53                    |       | 4,231                                       |       | 4,189      |       | 5,646      |       | 5,541      |       |
| Federal income  taxes (benefits)                         |       | (2,308                                                             | )          | (34                   | )          | 1,375                                       |       | 1,320      |       | 1,922      |       | 2,392      |       |
| Net earnings  (loss)                                     | ** ** | **$**                                                              | **(4,061** | **)**                 | **$**      | **87**                                      | ** ** | **$**      | **2,856**  | ** ** | **$**      | **2,869**  | ** ** | **$** | **3,724** | ** ** | **$** | **3,149** | ** ** |
|                                                     |       |                                                               |       |                  |       |                                        |       |       |       |       |       |       |       |
| Earnings (loss)  per share                               |       |                                                               |       |                  |       |                                        |       |       |       |       |       |       |       |
| Basic                                                    | ** ** | **$**                                                              | **(0.88**  | **)**                 | **$**      | **0.02**                                    | ** ** | **$**      | **0.73**   | ** ** | **$**      | **0.92**   | ** ** | **$** | **1.51** | ** ** | **$** | **1.29** | ** ** |
| Diluted                                                  | ** ** | **$**                                                              | **(0.88**  | **)**                 | **$**      | **0.02**                                    | ** ** | **$**      | **0.72**   | ** ** | **$**      | **0.91**   | ** ** | **$** | **1.48** | ** ** | **$** | **1.27** | ** ** |

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(See footnotes on next page)

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| ** **                                                               | ** ** | **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,** | ** ** |
|--------------------------------------------------------------------------|------------|----------------------------------------------------------------------|------------|-------------------------------------------------------------------------------|------------|-------------------------------------------------------------------------------|------------|
| **Key Operating Ratios:  (1)**                                 | ** ** | **2006**                                                             | ** ** | **2005**                                                                      | ** ** | **2005**                                                                      | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** |
| ** **                                                               |       |                                                                 |       |                                                                          |       |                                                                          |       |   |   |   |   |   |   |
| **Performance Ratios: (1)**                                    |       |                                                                 |       |                                                                          |       |                                                                          |       |   |   |   |   |   |   |
| Return on average assets                                                 |       | (0.38                                                                | )%         | .03                                                                           | %          | .30                                                                           | %          | .34 | % | .59 | % | .67 | % |
| Return on average equity                                                 |       | (4.48                                                                | )          | .40                                                                           |       | 3.65                                                                          |       | 4.97 |   | 8.28 |   | 8.09 |   |
| Average interest-earning assets to average  interest-bearing liabilities |       | 104.02                                                               |       | 104.00                                                                        |       | 106.63                                                                        |       | 104.82 |   | 105.83 |   | 107.27 |   |
| Interest rate spread (2)                                                 |       | 2.84                                                                 |       | 2.49                                                                          |       | 2.25                                                                          |       | 2.40 |   | 2.96 |   | 3.74 |   |
| Net interest margin (2)                                                  |       | 3.00                                                                 |       | 2.63                                                                          |       | 2.45                                                                          |       | 2.52 |   | 3.13 |   | 3.99 |   |
| General, administrative and other expense to average  assets             |       | 1.99                                                                 |       | 1.78                                                                          |       | 1.69                                                                          |       | 1.61 |   | 1.65 |   | 2.07 |   |
| Dividend payout ratio                                                    |       | n/a                                                                  |       | 750.00                                                                        |       | 82.19                                                                         |       | 32.61 |   | — |   | — |   |
| ** **                                                               |       |                                                                 |       |                                                                          |       |                                                                          |       |   |   |   |   |   |   |
| **Asset  Quality Ratios:**                                               |       |                                                                 |       |                                                                          |       |                                                                          |       |   |   |   |   |   |   |
| Nonperforming assets to total assets at end of  period (3)               |       | 2.54                                                                 | %          | 1.82                                                                          | %          | 2.07                                                                          | %          | .71 | % | 1.16 | % | 1.30 | % |
| Allowance for loan losses to nonperforming loans at  end of period       |       | 71.20                                                                |       | 71.67                                                                         |       | 66.32                                                                         |       | 182.87 |   | 134.15 |   | 102.19 |   |
| Allowance for loan losses to total loans at end of  period               |       | 2.05                                                                 |       | 1.42                                                                          |       | 1.72                                                                          |       | 1.64 |   | 1.57 |   | 1.37 |   |
| ** **                                                               |       |                                                                 |       |                                                                          |       |                                                                          |       |   |   |   |   |   |   |
| **Capital  and Other Ratios:**                                           |       |                                                                 |       |                                                                          |       |                                                                          |       |   |   |   |   |   |   |
| Average stockholders’ equity to average assets                      |       | 8.54                                                                 | %          | 8.55                                                                          | %          | 8.35                                                                          | %          | 6.77 | % | 7.07 | % | 8.22 | % |
| Tangible stockholders’ equity to tangible assets                    |       | 7.12                                                                 |       | 8.07                                                                          |       | 9.75                                                                          |       | 8.38 |   | 7.51 |   | 8.75 |   |
| Tier 1 capital  to risk-weighted assets                                  |       | 10.52                                                                |       | 11.02                                                                         |       | 14.29                                                                         |       | 13.79 |   | 11.94 |   | 13.69 |   |

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

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

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

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**PEOPLES COMMUNITY BANCORP, INC.**

**MANAGEMENT’S DISCUSSION ANDANALYSIS OF FINANCIAL CONDITIONAND RESULTS OF OPERATION**

###### **General**

The Company’s profitability depends primarily on netinterest income, which is the difference between interest and dividend incomeon interest-earning assets, principally loans, mortgage-backed securities,investment securities and interest-earning deposits in other financialinstitutions, and interest expense, principally on interest-bearing depositsand borrowings from the Federal Home Loan Bank. Net interest income is dependent upon the level of interest rates andthe extent to which such rates are changing. The Company’s profitability also depends, to a lesser extent, on thelevel of other income, the provision for losses on loans, general,administrative and other expenses and federal income taxes.

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

During the period between September 30, 2004 andDecember 31, 2006, total assets increased $139.0 million or 15.6% from $889.1million to $1.0 billion.  The Company’sgrowth has been funded primarily by deposits and supplemented by borrowingsfrom the Federal Home Loan Bank.

As previously announced, the Board of Directors of the Company adoptedan amendment to Article VI of the Company’s Bylaws to change the Company’sfiscal year end from September 30, to December 31, effective retroactively toJanuary 1, 2006, in order to increase operational efficiency.  As a result, the consolidated statements offinancial condition compares December 31, 2006 to December 31, 2005, while theconsolidated statements of operations, the consolidated statements ofcomprehensive income (loss), and the consolidated statements of cash flowreflect, as applicable, the twelve month period ended December 31, 2006, thethree month period ended December 31, 2005, the twelve month period endedSeptember 30, 2005 and the twelve month period ended September 30, 2004.  Further, for purposes of this section, thediscussion of changes in financial condition compares December 31, 2006 toDecember 31, 2005 and the discussion of results of operations compares the yearended December 31, 2006 to the year ended September 30, 2005 as well as theyear ended September 30, 2005 to the year ended September 30, 2004.

**Critical Accounting Policies**

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

Material estimates that are particularly susceptible to significantchange in the near term relate to the determination of the allowance for loanlosses and goodwill impairment.  Actualresults could differ from those estimates.

**Allowance for Loan Losses.**  The procedures for assessingthe adequacy of the allowance for loan losses reflect management’s evaluationof credit risk after consideration of all information available.  In developing this assessment, managementmust rely on estimates and exercise judgment regarding matters where theultimate outcome is unknown, such as economic factors, developments affectingcompanies in specific industries and issues with respect to single

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borrowers.  Depending on changesin circumstances, future assessments of credit risk may yield materiallydifferent results, which may require an increase or a decrease in the allowancefor loan losses.

The allowance is regularly reviewed by management to determine whetherthe amount is considered adequate to absorb probable losses.  This evaluation includes specific lossestimates on certain individually reviewed loans, statistical loss estimatesfor loan pools that are based on historical loss experience, and general lossestimates that are based  upon the size,quality, and  concentration  characteristics  of the various loan  portfolios, adverse situations that mayaffect a borrower’s ability to repay, and current economic and industryconditions.  Also considered as part ofthat judgment is a review of the Bank’s trends in delinquencies and loanlosses, as well as trends in delinquencies and losses for the region andnationally, and economic factors.

**Goodwill.**  The Company has developed procedures to testgoodwill for impairment on an annual basis using September 30 financialdata.  The evaluation of possibleimpairment is outsourced to a third party. This evaluation is based on the analysis set forth below.

The test involves assigning tangible assets and liabilities, identifiedintangible assets and goodwill of the Bank (which is the Company’s reportingunit as defined under SFAS No. 142) and comparing the fair value of thisreporting unit to its carrying value including goodwill.  The value is determined assuming a freelynegotiated transaction between a willing buyer and a willing seller, neitherbeing under any compulsion to buy or sell and both having reasonable knowledgeof relevant facts.  The third partyselected by management utilizes the following common approaches to valuingbusiness combination transactions involving financial institutions to derivethe fair value of the reporting unit: (1) the comparable transactions approach which is specifically based onearnings, book value, assets and deposit premium multiples received in recentsales of comparable bank franchises; and (2) the discounted cash flow  approach. The application of the valuation techniques takes into account thereporting unit’s operating history, the current market environment and futureprospects.  As of the most recentevaluation, the only reporting unit carrying goodwill is the Bank.

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

After each testing period, the third party compiles a summary of thetest that is then provided to the audit committee for review.

**Forward-Looking Statements AreSubject to Change**

Certain statements are made in this document as towhat management expects may happen in the future.  These statements usually contain the words “believe,”“estimate,” “project,” “expect,” “anticipate,” “intend” or similarexpressions.  Because these statementslook to the future, they are based on management’s current expectations andbeliefs.  Actual results or events maydiffer materially from those reflected in the forward-looking statements.  Management’s current expectations and beliefsas to future events are subject to change at any time, and no assurances can beprovided that the future events will actually occur.  All forward-looking statements in thisdocument are based on information available to us on the date this document isfiled.  We do not intend to, and assumeno responsibility for, updating any forward-looking statements that may be madeby us or on our behalf in this document or otherwise.

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# **AVERAGE BALANCES, NET INTEREST INCOME, YIELDS EARNED AND RATES PAID**

The following table presents for the periods indicated the total dollaramount of interest income from average interest-earning assets and theresultant yields, as well as interest expense on average interest-bearingliabilities, expressed both in dollars and rates, and the net interest margin.
| ** **                                                               | ** ** | **Year ended**                  | ** **    | **Year ended**              | ** ** |
|--------------------------------------------------------------------------|------------|--------------------------------------|---------------|----------------------------------|------------|
| ** **                                                               | ** ** | **December 31, 2006**      | ** **    | **September 30, 2005** | ** ** | **September 30, 2004** | ** ** |
| ** **                                                               | ** ** | **Average**                          | ** **    | **Interest**                     | ** ** | ** ** | ** ** | **Average** | ** ** | **Interest** | ** ** | ** ** | ** ** | **Average** | ** ** | **Interest** | ** ** | ** ** | ** ** |
| ** **                                                               | ** ** | **outstanding**                      | ** **    | **earned/**                      | ** ** | **Yield/** | ** ** | **outstanding** | ** ** | **earned/** | ** ** | **Yield/** | ** ** | **outstanding** | ** ** | **earned/** | ** ** | **Yield/** | ** ** |
| ** **                                                               | ** ** | **balance**                          | ** **    | **paid**                         | ** ** | **rate** | ** ** | **balance** | ** ** | **paid** | ** ** | **rate** | ** ** | **balance** | ** ** | **paid** | ** ** | **rate** | ** ** |
| ** **                                                               | ** ** | **(Dollars in thousands)** | ** **    |
| Interest-earning  assets:                                                |       |                                 |          |                             |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Loans receivable (1)                                                     |       | 870,327                              |          | 61,096                           |       | 7.02% |   | $ | 655,256 |   | $ | 41,628 |   | 6.35% |   | $ | 588,251 |   | $ | 34,712 |   | 5.90% |   |
| Mortgage-backed securities                                               |       | 60,474                               |          | 2,467                            |       | 4.08 |   | 204,500 |   | 5,292 |   | 2.59 |   | 203,638 |   | 4,908 |   | 2.41 |   |
| Investment securities (2)                                                |       | 17,473                               |          | 951                              |       | 5.44 |   | 13,992 |   | 664 |   | 4.75 |   | 12,509 |   | 480 |   | 3.84 |   |
| Interest-earning deposits                                                |       | 18,206                               |          | 961                              |       | 5.28 |   | 5,327 |   | 164 |   | 3.08 |   | 4,175 |   | 71 |   | 1.70 |   |
| Total interest-earning assets                                            |       | 966,480                              |          | 65,475                           |       | 6.77 |   | 879,075 |   | 47,748 |   | 5.43 |   | 808,573 |   | 40,171 |   | 4.97 |   |
| Non-interest-earning  assets                                             |       | 93,635                               |          |                             |       |   |   | 57,477 |   |   |   |   |   | 43,683 |   |   |   |   |   |
| Total assets                                                             | ** ** | **$**                                | **1,060,115** | ** **                       | ** ** | ** ** | ** ** |   | **$** | **936,552** |   |   |   |   |   | **$** | **852,256** |   |   |   |   |   |
| Interest-bearing  liabilities:                                           |       |                                 |          |                             |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Savings and checking accounts                                            |       | $                                    | 230,353       |                             | 6,162      |   | 2.65 |   | $ | 190,901 |   | 4,250 |   | 2.23 |   | $ | 151,613 |   | 2,790 |   | 1.84 |   |
| Money market deposit accounts                                            |       | 20,303                               |          | 395                              |       | 1.92 |   | 25,019 |   | 306 |   | 1.22 |   | 33,482 |   | 407 |   | 1.22 |   |
| Certificates of deposit                                                  |       | 478,148                              |          | 20,682                           |       | 4.30 |   | 295,636 |   | 10,671 |   | 3.61 |   | 273,428 |   | 8,275 |   | 3.03 |   |
| FHLB advances and other borrowings                                       |       | 173,622                              |          | 7,163                            |       | 4.13 |   | 296,527 |   | 9,934 |   | 3.35 |   | 300,324 |   | 7,702 |   | 2.56 |   |
| Subordinated debentures                                                  |       | 26,740                               |          | 2,083                            |       | 7.79 |   | 16,299 |   | 1,043 |   | 6.40 |   | 12,566 |   | 639 |   | 5.09 |   |
| Total interest-bearing liabilities                                       |       | 929,166                              |          | 36,485                           |       | 3.93 |   | 824,382 |   | 26,204 |   | 3.18 |   | 771,413 |   | 19,813 |   | 2.57 |   |
| Non-interest-bearing  liabilities                                        |       | 40,384                               |          |                             |       |   |   | 33,933 |   |   |   |   |   | 23,107 |   |   |   |   |   |
| Total liabilities                                                        |       | 969,550                              |          |                             |       |   |   | 858,315 |   |   |   |   |   | 794,520 |   |   |   |   |   |
| Stockholders’  equity                                               |       | 90,565                               |          |                             |       |   |   | 78,237 |   |   |   |   |   | 57,736 |   |   |   |   |   |
| Total liabilities and stockholders’ equity                          | ** ** | **$**                                | **1,060,115** | ** **                       | ** ** | ** ** | ** ** |   | **$** | **936,552** |   | ** ** |   |   |   | **$** | **852,256** |   | ** ** |   |   |   |
| Net interest  income                                                     | ** ** | ** **                           | ** **    | **$**                            | **28,990** | ** ** | ** ** |   |   |   | **$** | **21,544** |   |   |   |   |   | **$** | **20,358** |   |   |   |
| Interest rate  spread                                                    | ** ** | ** **                           | ** **    | ** **                       | ** ** | **2.84** | **%** |   |   |   |   | **2.25** | **%** |   |   | ** ** |   | **2.40** | **%** |
| Net interest  margin (3)                                                 | ** ** | ** **                           | ** **    | ** **                       | ** ** | **3.00** | **%** |   |   |   |   | **2.45** | **%** |   |   |   |   | **2.52** | **%** |
| Average  interest-earning assets to average interest-bearing liabilities | ** ** | ** **                           | ** **    | ** **                       | ** ** | **104.02** | **%** |   |   |   |   | **106.63** | **%** |   |   |   |   | **104.82** | **%** |
|                                                                          |            |                                      |               |                                  |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

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(1)                                     Includes non-accruing loans.

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

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

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# **Rate/Volume Analysis**

The following table shows the extent to which changes in interest ratesand changes in volume of interest-related assets and liabilities affected theCompany’s interest income and expense during the periods indicated.  For each category of interest-earning assetsand interest-bearing liabilities, information is provided on changesattributable to (i) changes in volume (change in volume multiplied byprior year rate), and (ii) changes in rate (change in rate multiplied by prioryear volume).  The combined effect ofchanges in both rate and volume has been allocated proportionately to thechange due to rate and the change due to volume.
| ** **                          | ** ** | **September 30, 2005 to  December 31, 2006  Increase (Decrease)  Due to Changes In** | ** ** | **September 30, 2004 to  September 30, 2005  Increase (Decrease)  Due to Changes In** | ** ** |
|-------------------------------------|------------|-----------------------------------------------------------------------------------------------------------------------------------|------------|------------------------------------------------------------------------------------------------------------------------------------|------------|
| ** **                          | ** ** | **Rate**                                                                                                                          | ** ** | **Volume**                                                                                                                         | ** ** | **Total** | ** ** | **Rate** | ** ** | **Volume** | ** ** | **Total** | ** ** |
| ** **                          | ** ** | **(In thousands)**                                                                                                           | ** ** |
| Interest-earning  assets:           |       |                                                                                                                              |       |                                                                                                                               |       |   |   |   |   |   |   |   |   |
| Loans receivable                    |       | $                                                                                                                                 | 4,698      |                                                                                                                               | $          | 14,770 |   | $ | 19,468 |   | $ | 2,816 |   | $ | 4,100 |   | $ | 6,916 |   |
| Mortgage-backed  securities         |       | 12,599                                                                                                                            |       | (15,424                                                                                                                            | )          | (2,825 | ) | 363 |   | 21 |   | 384 |   |
| Investment  securities (1)          |       | 105                                                                                                                               |       | 182                                                                                                                                |       | 287 |   | 123 |   | 61 |   | 184 |   |
| Interest-earning  deposits          |       | 182                                                                                                                               |       | 615                                                                                                                                |       | 797 |   | 69 |   | 24 |   | 93 |   |
| Total interest-earning assets       |       | 17,584                                                                                                                            |       | 143                                                                                                                                |       | 17,727 |   | 3,371 |   | 4,206 |   | 7,577 |   |
|                                |       |                                                                                                                              |       |                                                                                                                               |       |   |   |   |   |   |   |   |   |
| Interest-bearing  liabilities:      |       |                                                                                                                              |       |                                                                                                                               |       |   |   |   |   |   |   |   |   |
| Savings and  checking accounts      |       | 912                                                                                                                               |       | 1,000                                                                                                                              |       | 1,912 |   | 656 |   | 804 |   | 1,460 |   |
| Money market  deposit accounts      |       | 133                                                                                                                               |       | (44                                                                                                                                | )          | 89 |   | — |   | (101 | ) | (101 | ) |
| Certificates of deposit             |       | 2,367                                                                                                                             |       | 7,644                                                                                                                              |       | 10,011 |   | 1,683 |   | 713 |   | 2,396 |   |
| FHLB advances  and other borrowings |       | 3,552                                                                                                                             |       | (6,323                                                                                                                             | )          | (2,771 | ) | 2,328 |   | (96 | ) | 2,232 |   |
| Subordinated  debentures            |       | 152                                                                                                                               |       | 888                                                                                                                                |       | 1,040 |   | (152 | ) | 556 |   | 404 |   |
| Total interest-bearing liabilities  |       | 7,116                                                                                                                             |       | 3,165                                                                                                                              |       | 10,281 |   | 4,515 |   | 1,876 |   | 6,391 |   |
| Increase in net  interest income    | ** ** | **$**                                                                                                                             | **10,468** | ** **                                                                                                                         | **$**      | **(3,022** | **)** | **$** | **7,446** | ** ** | **$** | **(1,144** | **)** | **$** | **2,330** | ** ** | **$** | **1,186** | ** ** |

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

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**Discussion of Financial ConditionChanges from December 31, 2005 to December 31, 2006**

At December 31, 2006, the Company’s total assets amounted to $1.0billion, a decrease of $12.8 million, or 1.2%, compared to total assets atDecember 31, 2005.  The decrease inassets was comprised primarily of a $38.7 million net decrease in loansreceivable and a $17.6 million net decrease in investment securities, partiallyoffset by an increase of $67.1 million in assets from the acquisition ofMercantile Financial Corporation (“Mercantile”) and its subsidiary, MercantileSavings Bank, in June 2006.

Liquid assets (i.e. cash and interest-bearing deposits) totaled $57.4million at December 31, 2006, an increase of $35.9 million, or 166.5%, comparedto the amount at December 31, 2005.  Theincrease in liquid assets as of December 31, 2006 was a result of future cashflow requirements and the current favorable interest rate environment forshort-term investments.  Approximately$25.0 million was invested in fed funds with a yield of 5.16% on December 31,2006.

Investment securities totaled $56.9 million at December 31, 2006, adecrease of $17.6 million, or 23.6%, from the amount at December 31, 2005.  The decrease was comprised primarily of $24.1million in sales and principal repayments, partially offset by the $7.4 millionin investment securities acquired in the acquisition of Mercantile.

Loans receivable totaled $812.6 million at December 31, 2006, adecrease of $38.7 million, or 4.5%, over December 31, 2005 levels. Loandisbursements amounted to $341.6 million during fiscal 2006, which were offsetby principal repayments of $366.5 million and loans and participations soldtotaling $34.6 million.  Over the pastfive fiscal years, the Bank has placed an increasing emphasis on multi-familyresidential loans, nonresidential real estate and land loans, constructionloans, unsecured commercial loans and consumer loans.  As a result, as a percentage of the totalloan portfolio, one- to four-family residential loans have decreased from 57.8%at September 30, 2001 to 38.3% at December 31, 2006, while multi-familyresidential loans, construction loans, commercial loans and consumer loans haveincreased during the same time period from 8.7% to 13.7%, 15.0% to 26.2%, 2.3%to 3.5% and 0.5% to 2.6%, respectively. During the same time period, nonresidential real estate and land loansremained constant at 15.7% of the total loan portfolio.  Nonresidential real estate lending andunsecured commercial lending are generally considered  to involve a higher degree of risk than residential real estate lending due to therelatively  larger loan amounts and theeffect of general economic conditions on the successful operation of therelated business and/or income-producing properties.  Peoples has endeavored to reduce such risk byevaluating the credit history and past performance of the borrower, thelocation of the real estate, the quality of the borrowers’ management, the debtservice ratio, the quality and characteristics of the income stream generatedby the business or the property and appraisals supporting the property’svaluation, as applicable.

The allowance for loan losses totaled $18.4 million at December 31,2006, an increase of $4.9 million, or 36.6% compared to the allowance atDecember 31, 2005.  Due primarily to anincrease in internally classified loans, significant charge-offs during theyear, the moderate downturn in the local economy, and the relative credit riskof the loan portfolio, $17.5 million was added to the allowance through theprovision for losses on loans during fiscal 2006.  Approximately $302,000 of the allowance forloan losses was obtained in the acquisition of Mercantile, while approximately$13.1 million of loans were charged-off during the year.  The charged-off loans were comprised of $4.1million in loans secured by one- to four-family residential real estate(including non-owner occupied investment property), $2.4 million in loanssecured by multi-family residential real estate, $1.6 million in constructionloans, $1.3 million in loans secured by commercial real estate and land, and$3.7 million in commercial and consumer loans. The increase in charged-off loans was primarily due to real estateinvestors and developers experiencing financial difficulties.

The allowance for loan losses represented 2.1% and 1.4% of total loansat December 31, 2006 and 2005, respectively. The allowance for loan losses represented 71.2% and 71.7% ofnonperforming loans at December 31, 2006 and 2005, respectively.  Nonperforming assets totaled $26.1 millionand $18.9 million at December 31, 2006 and 2005, respectively.  Nonperforming assets at December 31, 2006consisted of $7.1 million of loans secured by one- to four-family residentialreal estate, $4.2 million of  loanssecured  by  multi-family residential real estate, $8.3million of loans

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secured by nonresidential real estate and land, $2.3 million inconstruction loans, $2.1 million of commercial and consumer loans, $1.7 millionof loans 90 days or more past due and still accruing, and $333,000 inforeclosed real estate.  The Bank’smanagement continues to aggressively pursue the collection and resolution ofall delinquent loans.

At December 31, 2006, non-accrual loans secured by one- to four-familyresidential real estate consisted of $4.4 million in owner-occupied residences and$2.7 million in non-owner occupied residences, each with an average balance of$67,000.  Two borrowers represented $1.0million of the non-owner occupied one- to four-family residential non-accrualloans.

Non-accrual loans secured by multi-family residential real estateamounted to $4.2 million at December 31, 2006, with an average balance of$386,000.  Two borrowers represented $3.4million of this total, with the largest borrower owing $1.8 million.  Commercial real estate and land securednon-accrual loans totaled $8.3 million at December 31, 2006.  The average balance of these 22 loans was$376,000.  Three borrowers represented$5.0 million of the non-accrual loans secured by commercial real estate andland, with the largest borrower owing $2.4 million.

Non-accrual construction loans totaled $2.3 million at December 31,2006, with an average balance of $177,000. Approximately $2.0 million of these construction loans are secured byone- to four-family residential real estate. Commercial and consumer non-accrual loans totaled $2.1 million, with$2.0 million of these loans being unsecured. The Bank is currently analyzingits non-owner occupied, residential investment portfolio, and its unsecuredcommercial portfolio, in light of the local economic conditions, to assessvarious actions to reduce credit risk in these portfolios.

Management has considered these loan concentrations as a part of itsoverall evaluation of the adequacy of the Bank’s allowance for loanlosses.  Although management believesthat its allowance for loan losses at December 31, 2006 was appropriate basedupon the available facts and circumstances at such time, there can be noassurance that additions to such allowance will not be necessary in futureperiods, which would adversely affect the Bank’s results of operations.

Deposits totaled $755.3 million at December 31, 2006, an increase of$28.6 million, or 3.9%, over the total at December 31, 2005.  Total demand, transaction and savingsdeposits decreased by $29.2 million, or 10.2%, to $256.0 million at December31, 2006, while total certificates of deposit increased by $57.8 million, or13.1%, to $499.3 million at December 31, 2006. A total of $48.7 million in deposits were obtained in the acquisition ofMercantile Savings Bank in June 2006. Management continues its efforts to grow deposits through competitivepricing strategies on all deposit products, which include advertised specialrates on certificates of deposit and development of new products.  The shift in deposit mix was primarily due tothe rate sensitive nature of the Company’s depositors in a rising interest rateenvironment.

Advances from the Federal Home Loan Bank and other borrowings totaled$156.9 million at December 31, 2006, a decrease of $36.2 million, or 18.8%,compared to December 31, 2005 totals. The Bank obtained $6.4 million of FHLB advances in June 2006 inconjunction with the acquisition of Mercantile. During fiscal year 2006, $50.0 million in fixed-rate convertible FHLBadvances were paid in full on their conversion date with no penalty usingavailable cash and proceeds from both mortgage-backed security repayments andloan sales and payments.  In December2006, the Bank took advantage of a fixed rate advance special with FHLB for$25.0 million.  This special offeringprovides a fixed rate of interest of 4.07% for a minimum of 1 year and amaximum of 10 years.  After the firstyear and quarterly thereafter, the FHLB has the option to require the borrowerto prepay the advance without a fee or allow the advance to remain at theoriginal contracted fixed rate.

In December 2006, the Company redeemed $12.9 million of subordinateddebentures issued by the Delaware trust owned by the Company (the “Trust I”).  These adjustable-rate debt securities wereissued in November 2001 and were redeemed with no penalty.  Partial funding on a $17.5 millionadjustable-rate line of credit that the Company obtained with a local financialinstitution was utilized to pay the debt securities.  At the time, this refinancing resulted in adecreased cost of approximately 175 basis points.  As of December 31, 2006, the Company had abalance of $12.7 million on the line of credit.

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Stockholders’ equity totaled $87.6 million at December 31, 2006, anincrease of $1.6 million, or 1.8%, over the amount at December 31,2005.  The increase resulted primarilyfrom $7.6 million in stock issued for the acquisition of Mercantile, theamortization effects of the stock benefit plans totaling $616,000 and a $168,000decrease in net unrealized losses on available for sale securities, which weresubstantially offset by net losses of $4.1 million and dividends paid on commonstock totaling $2.8 million.

**Comparison of Results of Operations for the Fiscal YearsEnded December 31, 2006 and September 30, 2005**

# **General**

The inclusion of the accounts of American State Bank, Peoples FederalSavings Bank, and Mercantile Savings Bank, which the Company acquired in June2005, December 2005, and June 2006, respectively, in transactions accounted forusing the purchase method of accounting, contributed to the increases in thelevel of income and expense during the fiscal year ended December 31, 2006,compared to the year ended September 30, 2005. In accordance with the purchase method of accounting, the consolidatedstatement of earnings for the fiscal year ended September 30, 2005 was notrestated for the acquisition.

The Company recorded a net loss of $4.1 million for the fiscal yearended December 31, 2006, compared to net earnings of $2.9 million for thefiscal year ended September 30, 2005. The net loss was primarily due to an increase in the provision forlosses on loans of $13.9 million, and an increase of $5.3 million, or33.5%,  in general, administrative andother expense, partially offset by a $7.4 million, or 34.6%, increase in netinterest income, an increase of $1.1 million, or 52.0%, in other income, and a$3.7 million decrease in provision for federal income taxes.

# **Net Interest Income**

Total interest income amounted to $65.5 million for the fiscal yearended December 31, 2006, a $17.7 million, or 37.1%, increase over the fiscalyear ended September 30, 2005.  Theincrease was due to an $87.4 million, or 9.9%, increase in averageinterest-earning assets, coupled with a 134 basis point increase in the averageyield for the year ended December 31, 2006 compared to the year ended September30, 2005.

Interest income on loans totaled $61.1 million for the fiscal yearended December 31, 2006, an increase of $19.5 million, or 46.8%, from the yearended September 30, 2005.  This increasewas primarily due to a $215.1 million, or 32.8%, increase in the averageportfolio balance outstanding for the year ended December 31, 2006 compared tothe year ended September 30, 2005, coupled with a 67 basis point increase inthe weighted-average yield to 7.02% for fiscal 2006. The increase in theaverage balance was primarily due to $122.6 million and $38.0 million in loansobtained in the acquisition of Peoples Federal and Mercantile, respectively, infiscal 2006, coupled with continued strong loan origination activity,particularly with respect to single-family residential loans, constructionloans, and nonresidential real estate and land loans.  The increase in the Bank’s yield reflects amoderate upward shift in market rates and the corresponding impact onadjustable-rate loans as well as new originations in higher yielding loanproducts.

Interest income on mortgage-backed securities totaled $2.5 million forfiscal 2006, a decrease of $2.8 million, or 53.4%, compared to the year ended September30, 2005, due to a $144.0 million, or 70.4%, decrease in the average balanceoutstanding for the year ended December 31, 2006 compared to the year endedSeptember 30, 2005, partially offset by a 149 basis point increase in theweighted-average yield. The decrease in the average balances of themortgage-backed securities was primarily due to approximately $108.9 million ofsecurities sold in the three months ended December 31, 2005, in order torestructure a portion of the securities portfolio, repay higher rate short-termadvances and manage balance sheet growth. Interest income on investment securities and interest-bearing depositstotaled $1.9 million, an increase of $1.1 million, or 130.9%, due primarily toa $16.4 million, or 84.7%, increase in the average balance of  the related assets,  in conjunction with a 107 basis pointincrease in the weighted-average yield for

13

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the year ended December 31, 2006 compared to the year ended September30, 2005.  The increase ininterest-bearing deposits is primarily due to future cash flow requirements andthe current favorable interest rate environment for short-terminvestments.  The increase in theweighted-average yields of the mortgage-backed securities, investmentsecurities and interest-bearing deposits was due to an increase in market ratesand the repricing of adjustable-rate securities held in the portfolio.

Interest expense on deposits totaled $27.2 million for the fiscal yearended December 31, 2006, an increase of $12.0 million, or 78.9%, over the $15.2million recorded in the year ended September 30, 2005.  The increase was due primarily to a $217.1million, or 42.5%, increase in the average balance of deposits outstanding forthe year ended December 31, 2006 compared to the year ended September 30, 2005,coupled with increase in the weighted-average cost of deposits of 76 basispoints, to 3.74% for fiscal 2006.  Theincrease in the average balance was primarily due to $88.7 million and $48.7million in deposits obtained in the acquisitions of Peoples Federal andMercantile, respectively, in fiscal 2006, in addition to continued marketingefforts.  The increase in the averagecost of deposits was primarily due to the increase in market interest rates, aswell as advertised special rates on certificates of deposits throughout theyear.

Interest expense on borrowings totaled $9.2 million for fiscal 2006, adecrease of $1.7 million, or 15.8%, compared to the year ended September 30,2005, due primarily to a $122.5 million decrease in the average balance ofborrowings outstanding, partially offset by a 111 basis point increase in theaverage cost of borrowings for fiscal 2006. During the three months ended December 31, 2005, the Bank repaidapproximately $100.0 million of short-term advances at a weighted average rateof 4.27%, using the proceeds from the sale of investment securities with aweighted average rate of 3.16%.  Theincrease in the average cost of borrowings was due primarily to the increase ininterest rates on overnight adjustable-rate advances from the Federal Home LoanBank, which the Bank utilized primarily to manage daily cash flow.

As a result of the foregoing changes in interest income and interestexpense, net interest income increased by $7.4 million, or 34.6%, during thefiscal year ended December 31, 2006, compared to fiscal year ended September30, 2005.  The interest rate spreadamounted to 2.84% for fiscal 2006 compared to 2.25% for the year endedSeptember 30, 2005.  The net interestmargin totaled 3.00% and 2.45% for the fiscal years ended December 31, 2006 andSeptember 30, 2005, respectively.

# **Provision for Losses on Loans**

A provision for losses on loans is charged to earnings to bring thetotal allowance for loan losses to a level considered appropriate by managementbased on historical loss experience, the volume and type of lending conductedby the Bank, the status of past due principal and interest payments, generaleconomic conditions, particularly as such conditions relate to the Bank’smarket area, and other factors related to the collectibility of the Bank’s loanportfolio.  After considering the abovefactors, management recorded a provision for losses on loans totaling $17.5million and $3.6 million for the fiscal years ended December 31, 2006 andSeptember 30, 2005, respectively.  Theprovision recorded during the fiscal 2006 period was predicated on highernon-performing, classified and criticized assets for the fiscal year 2006, aswell as significant charge-offs during 2006. The increase in such loans is primarily due to delinquent loans in theBank’s non-owner occupied (investment property) residential loan portfolio andits acquisition, development, and construction loan portfolio.  The delinquencies in these portfolios are dueprimarily to the moderate downturn in the local economy and resultant cash flowissues faced by local property investors and developers.  There can be no assurance that the allowancefor loan losses will be sufficient to cover losses on nonperforming loans inthe future.

14

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# **Other Income**

Other income totaled $3.2 million for the fiscal year ended December31, 2006, an increase of $1.1 million, or 52.0%, compared to the year endedSeptember 30, 2005.  The increase was dueprimarily to a $1.2 million, or 95.4%, increase in other operating income, andan increase of $527,000 in income from bank-owned life insurance.  In fiscal 2006, the Company recognized twelvemonths of income from bank-owned life insurance which it acquired at the end ofJune 2005, compared to three months of income recognized during the twelvemonths ended September 30, 2005.  Theincrease in other operating income resulted primarily from an increase ofapproximately $652,000 in fees generated from the growth in deposit accountsand $111,000 in loan servicing fees relating to the loan servicing portfolioobtained in the acquisition of Mercantile in June 2006.  These increases were partially offset by adecrease in the gain on sale of securities of $641,000, or 86.5%.

# **General, Administrative and Other Expense**

General, administrative and other expense totaled $21.1 million for thefiscal year ended December 31, 2006, an increase of $5.3 million, or 33.5%,compared to the fiscal year ended September 30, 2005.  This increase resulted primarily from a $1.8million, or 22.1%, increase in employee compensation and benefits, a $926,000,or 35.9%, increase in occupancy and equipment expense, a $102,000, or 11.7%,increase in franchise tax, a $1.5 million increase in amortization ofintangibles, an $839,000, or 27.0%, increase in other operating expense, and an$88,000, or 9.6%, increase in data processing expense.

The Bank employed approximately 217 and169 full-time employees as of December 31, 2006 and September 30, 2005,respectively.  A total of 23 full-timeemployees were added in conjunction with the acquisitions of Peoples Federal inDecember 2005 and Mercantile in June 2006. The increase in employee compensation and benefits was also due to theincrease in staffing levels to support growth in the overall infrastructure ofthe Company, as well as normal merit increases and increases in other employeebenefit costs.

The increase in occupancy and equipmentexpense primarily reflects increased depreciation and maintenance costsassociated with the three offices in Southeast Indiana acquired with thepurchase of American State Bank in June 2005, the three offices in SoutheastIndiana acquired with the purchase of Peoples Federal Savings Bank in December2005 and the one office in Cincinnati acquired with the purchase of MercantileSavings Bank in June 2006.The increase in franchise taxes reflects the continued growth of the equity inthe Bank.  The increase in amortizationof intangibles was due to the additional core deposit intangibles recorded inconjunction with the acquisitions of American State in June 2005, PeoplesFederal in December 2005 and Mercantile in June 2006.  The increase in other operating expense wasprimarily due to increased loan collection expenses of approximately $310,000,and an increase in other operating costs associated with the Bank’s overallgrowth for the year ended December 31, 2006 compared to the year endedSeptember 30, 2005.

# **Federal Income Taxes**

The Company recorded a credit provision for federal income taxestotaling $2.3 million for the fiscal year ended December 31, 2006,compared to a provision of $1.4 million for fiscal year ended September 30,2005.  The effective tax rate was 32.4%for the fiscal year ended September 30, 2005.

15

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**Results of Operations for the Three Months Ended December 31,2005**

Net earnings amounted to $87,000 for the threemonths ended December 31, 2005.  Netinterest income for the three-months totaled $6.2 million and federal incometax benefits totaled $34,000, which were substantially offset by $900,000 inprovision for losses on loans, $4.5 million in general, administrative andother expenses, and a $764,000 loss in other income.

Approximately $1.4 million in securities losses wasrecorded in the three-months ended December 31, 2005.  The Company sold certain investmentsecurities in order to (i) restructure a portion of its securities portfolio,(ii) repay higher rate short-term advances and (iii) manage balance sheetgrowth.  To implement this restructuring,the Company sold $108.9 million of investment securities, of which $108.4million consisted of adjustable-rate mortgage-backed securities with a weightedaverage interest yield of 3.16%.  TheCompany used a significant portion of such proceeds to repay $100.0 million ofshort-term advances with a weighted average rate of 4.27%.  The restructuring was also undertaken tomanage the Company’s growth in light of the acquisition of PFS Bancorp inDecember 2005.

**Comparison of Results of Operations for the Fiscal YearsEnded September 30, 2005 and 2004**

# **General**

The inclusion of the accounts of American State Bank, which the Companyacquired in June 2005, in a transaction accounted for using the purchase methodof accounting, contributed to the increases in the level of income and expenseduring the fiscal year ended September 30, 2005, compared to fiscal 2004.  In accordance with the purchase method ofaccounting, the consolidated statement of earnings for the fiscal year endedSeptember 30, 2004 was not restated for the acquisition.

The Company recorded net earnings of $2.9 million for both fiscal yearsended September 30, 2005 and September 30, 2004.  Net interest income increased by $1.2million, or 5.8% to $21.6 million and total other income increased by $933,000,or 79.0% to $2.1 million for the fiscal year ended September 30, 2005 ascompared to the fiscal year ended September 30, 2004.  These increases in income were substantiallyoffset by an increase of $2.1 million, or 15.1%, to $15.8 million in general,administrative and other expenses for the fiscal year ended September 30, 2005.

# **Net Interest Income**

Total interest income amounted to $47.7 million for the fiscal yearended September 30, 2005, a $7.6 million, or 18.9%, increase over fiscal2004.  The increase was due to a $70.5million, or 8.7%, increase in average interest-earning assets, coupled with a46 basis point increase in the average yield year to year.

Interest income on loans totaled $41.6 million for the fiscal yearended September 30, 2005, an increase of $6.9 million, or 19.9%, from fiscal2004.  This increase was primarily due toa $67.0 million, or 11.4%, increase in the average portfolio balanceoutstanding year to year, coupled with a 45 basis point increase in theweighted-average yield, to 6.35% for fiscal 2005. The increase in the average balancewas due to continued strong loan origination activity, particularly withrespect to single-family residential loans and nonresidential real estate andland loans.  The increase in the Bank’syield on its loan portfolio was due primarily to an increase in market interestrates. Interest income on mortgage-backed securities totaled $5.3 million forfiscal 2005, an increase of $384,000, or 7.8%, over fiscal 2004, due to a$862,000, or 0.4%, increase in the average balance outstanding year to year andan 18 basis point increase in the weighted-average yield.  Interest income on investment securities andinterest-bearing deposits and other totaled $828,000, an increase of $277,000,or 50.3%, due primarily to a $2.6 million, or 15.8%, increase in the averagebalance of the related assets, in conjunction with a 99 basis point increase inthe weighted-average yield year to year.

16

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

Interest expense on borrowings totaled $11.0 million for fiscal 2005,an increase of $2.6 million, or 31.6%, compared to fiscal 2004, due primarilyto 84 basis point increase in the average cost of borrowings, to 3.51% forfiscal 2005, partially offset with a $64,000 decrease in the average balance ofborrowings outstanding.  The increase inthe average cost resulted primarily from the increase in interest rates onovernight adjustable-rate advances from the Federal Home Loan Bank, which theBank utilizes primarily to manage the daily cash flow.

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

# **Provision for Losses on Loans**

A provision for losses on loans is charged to earnings to bring thetotal allowance for loan losses to a level considered appropriate by managementbased on historical loss experience, the volume and type of lending conductedby the Bank, the status of past due principal and interest payments, generaleconomic conditions, particularly as such conditions relate to the Bank’smarket area, and other factors related to the collectibility of the Bank’s loanportfolio.

After considering the above factors, management recorded a provisionfor losses on loans totaling $3.6 million for both fiscal years ended September30, 2005 and 2004.  The provisionrecorded during the fiscal 2005 period was predicated primarily upon the $120.9million, or 18.0%, of growth in the gross loan portfolio, as well as theincrease in loans secured by multi-family and nonresidential real estate, theorigination of approximately $35.8 million in unsecured commercial lines ofcredit during fiscal 2005 and the increase in the level of nonperforming loansyear to year.  Multi-family loans,nonresidential real estate loans and unsecured commercial lines of credit aregenerally considered to involve a higher degree of risk than one-to-four familyresidential lending.  There can be noassurance that the allowance for loan losses will be sufficient to cover losseson nonperforming loans in the future.

# **Other Income**

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

17

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# **General, Administrative and Other Expense**

General, administrative and other expense totaled $15.8 million for thefiscal year ended September 30, 2005, an increase of $2.1 million, or 15.1%,compared to fiscal 2004.  This increaseresulted primarily from a $722,000, or 9.6%, increase in employee compensationand benefits, a $550,000, or 27.1%, increase in occupancy and equipmentexpense, a $168,000, or 23.8%, increase in franchise tax, and a $778,000, or31.8%, increase in other operating expense, offset by a $141,000, or 13.3%,decrease in data processing expense.

The Bank employed approximately 169 and 142 full-time employees as ofSeptember 30, 2005 and 2004, respectively. Fifteen full-time employees wereadded in conjunction with the acquisition of American State Corporation inJune, 2005. The increase in employee compensation and benefits was also due to theincrease in staffing levels to support growth in the overall infrastructure ofthe Company, as well as normal merit increases and increases in other employeebenefit costs.

The increase in occupancy and equipmentexpense primarily reflects increased depreciation and maintenance costsassociated with the Company’s new branch offices, including the three officesin Southeast Indiana acquired with the purchase of American State Corporationin June 2005.  The increase in franchise taxes reflects thecontinued growth of the equity in the Bank. The increase in other operating expense was due primarily to an increasein costs related to maintaining real estate acquired through foreclosure, anincrease in costs for compliance with the Sarbanes Oxley Act, and an increasein other operating costs associated with the Company’s overall growth year toyear. The decrease in data processing expenses was due to nonrecurring costs ofapproximately $640,000 incurred in fiscal year 2004 directly associated with afull data conversion to a new core processor in June 2004.

# **Federal Income Taxes**

The Company recorded a tax provision totaling $1.4 million for thefiscal year ended September 30, 2005, compared to a provision of $1.3 millionfor fiscal 2004.  The effective tax rateswere 32.4% and 31.5% for the fiscal years ended September 30, 2005 and 2004,respectively.

**Exposure to Changes in Interest Rates**

The Company’s ability to maintain net interest income depends upon itsability to earn a higher yield on interest-earning assets than the rates paidon deposits and borrowings.  The Bank’sability to maintain a positive spread between the interest earned on assets andthe interest paid on deposits and borrowings can be adversely affected whenmarket rates of interest fluctuate.  Historicallylong-term, fixed-rate mortgage loans made up a significant portion of Peoplesinterest-earning assets.  A predominanceof long-term fixed-rate loans would make Peoples particularly susceptible tothe risk of changing interest rates, particularly in a rising rateenvironment.  However, during fiscal2000, the Bank began to emphasize the origination of adjustable-rate mortgage (“ARM”)loans and shorter-term loans such as non-residential real estate loans,construction loans, commercial loans and consumer loans, in an effort toimprove its interest rate risk position. As a result, at December 31, 2006, approximately $346.2 million, or38.7%, of the Company’s loan portfolio consisted of loans with fixed-rates ofinterest and approximately $549.1 million, or 61.3%, had adjustable-rates ofinterest.  Further, nonresidential realestate and land loans, construction loans, commercial loans and consumer loanstotaled $429.7 million or 48.0% of the total loan portfolio at December 31,2006 compared to $203.6 million or 36.6% of the total loan portfolio atSeptember 30, 2002.  These loanstypically have higher rates and/or shorter terms to maturity compared tosingle-family residential mortgage loans.

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**Quantitative Analysis**

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

The following tables present the Bank’s netportfolio value as of December 31, 2006 and December 31, 2005, as calculated bythe OTS, based on information provided to the OTS by the Bank.
| **December 31, 2006**      | ** ** |
|--------------------------------------|------------|
| ** **                           | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | **Change in** | ** ** |
| **Change in**                   | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | **Net Portfolio** | ** ** | **Net Portfolio** | ** ** |
| **Interest Rates**              | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | **Value as a % of** | ** ** | **Value as a % of** | ** ** |
| **In Basis Points**        | ** ** | ** ** | ** ** | **Net Portfolio** | ** ** | ** ** | ** ** | **Portfolio Value** | ** ** | **Portfolio Value** | ** ** |
| **(Rate Shock)**                | ** ** | **Amount** | ** ** | **Value $ Change** | ** ** | **% Change** | ** ** | **of Assets** | ** ** | **of Assets** | ** ** |
| **(Dollars in thousands)** | ** ** |
| 300                                  | bp         | $ | 93,611 |   | $ | (26,697 | ) | (22 | )% | 9.46 | % | (231 | )bp |
| 200                                  |       | 104,620 |   | (15,688 | ) | (13 | ) | 10.44 |   | (133 | ) |
| 100                                  |       | 113,622 |   | (6,685 | ) | (6 | ) | 11.22 |   | (55 | ) |
| 0                                    |       | 120,308 |   | — |   | — |   | 11.77 |   |   |   |
| (100)                                |       | 123,615 |   | 3,307 |   | 3 |   | 12.00 |   | 23 |   |
| (200)                                |       | 122,663 |   | 2,355 |   | 2 |   | 11.82 |   | 5 |   |
|                                      |            |  |  |  |  |  |  |  |  |  |  |  |  |

** **
| **December 31, 2005**      | ** ** |
|--------------------------------------|------------|
| ** **                           | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | **Change in** | ** ** |
| **Change in**                   | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | **Net Portfolio** | ** ** | **Net Portfolio** | ** ** |
| **Interest Rates**              | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | **Value as a % of** | ** ** | **Value as a % of** | ** ** |
| **In Basis Points**        | ** ** | ** ** | ** ** | **Net Portfolio** | ** ** | ** ** | ** ** | **Portfolio Value** | ** ** | **Portfolio Value** | ** ** |
| **(Rate Shock)**                | ** ** | **Amount** | ** ** | **Value $ Change** | ** ** | **% Change** | ** ** | **of Assets** | ** ** | **of Assets** | ** ** |
| **(Dollars in thousands)** | ** ** |
| 300                                  | bp         | $ | 98,572 |   | $ | (9,897 | ) | (9 | )% | 9.83 | % | (67 | )bp |
| 200                                  |       | 103,120 |   | (5,348 | ) | (5 | ) | 10.17 |   | (32 | ) |
| 100                                  |       | 106,653 |   | (1,816 | ) | (2 | ) | 10.41 |   | (8 | ) |
| 0                                    |       | 108,469 |   | — |   | — |   | 10.49 |   |   |   |
| (100)                                |       | 106,622 |   | (1,847 | ) | (2 | ) | 10.24 |   | (26 | ) |
| (200)                                |       | 99,841 |   | (8,627 | ) | (8 | ) | 9.53 |   | (96 | ) |
|                                      |            |  |  |  |  |  |  |  |  |  |  |  |  |

 

As shown by the 2006 table above, a 100 basis pointincrease in interest rates would result in a decrease in the Bank’s netportfolio value based on OTS calculations as of December 31, 2006.  A 200 and 300 basis point increase wouldresult in larger decreases in net portfolio value. Conversely, the 2006 tableindicates an increase in net portfolio value at a 100 and 200 basis pointdecrease in interest rates.  Theinstantaneous shock as indicated in the tables is subject to periodic interestrate adjustments and caps as dictated by the underlying notes.

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

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

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

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

(4)           Purchasing adjustable-ratemortgage-backed securities;

(5)           Utilizing fixed-rate longer-termadvances offered by the Federal Home Loan Bank; and

(6)           Developinga strong core deposit base.

**Liquidity and Capital Resources**

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

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

Liquid assets as of December 31, 2006, included cash and deposits inother financial institutions totaling $57.5 million, in addition to investmentsecurities and mortgage-backed securities available for sale at a total marketvalue of $56.9 million.  These liquidassets as well as the ability to borrow funds, sell loan participations andattract deposits through local pricing or through brokers will allow the Bankto meet its obligations and commitments as indicated in the table below.  Any future excess liquidity generated viaoperations will be utilized to repay borrowings or purchase investment andmortgage-backed securities.

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Thefollowing table sets forth information regarding the Bank’s obligations andcommitments to make future payments under contract as of December 31, 2006.
| ** **                                 | ** ** | **Payments due by period** | ** **  |
|--------------------------------------------|------------|-------------------------------------------|-------------|
| ** **                                 | ** ** | **Less**                                  | ** **  | ** ** | ** ** | ** ** | ** ** | **More** | ** ** | ** ** | ** ** |
| ** **                                 | ** ** | **than**                                  | ** **  | **1-3** | ** ** | **3-5** | ** ** | **than** | ** ** | ** ** | ** ** |
| ** **                                 | ** ** | **1 year**                           | ** **  | **years** | ** ** | **years** | ** ** | **5 years** | ** ** | **Total** | ** ** |
| ** **                                 | ** ** | **(In thousands)**                   | ** **  |
| Contractual  obligations:                  |       |                                      |        |   |   |   |   |   |   |   |   |
| Operating lease obligations                |       | $                                         | 67          |   | $ | 76 |   | $ | 76 |   | $ | 45 |   | $ | 264 |   |
| Contracts to purchase office premises      |       | —                                    |        | — |   | — |   | — |   | — |   |
| Advances from the Federal Home Loan        |       |                                      |        |   |   |   |   |   |   |   |   |
| Bank and other borrowings                  |       | 6,452                                     |        | 6,384 |   | 101,955 |   | 29,394 |   | 144,185 |   |
| Certificates of deposit                    |       | 380,956                                   |        | 70,414 |   | 47,922 |   | — |   | 499,292 |   |
|                                       |       |                                      |        |   |   |   |   |   |   |   |   |
| Amount of  commitments expiring per period |       |                                      |        |   |   |   |   |   |   |   |   |
| Commitments to originate loans:            |       |                                      |        |   |   |   |   |   |   |   |   |
| Consumer lines of credit                   |       | 25,660                                    |        | — |   | — |   | — |   | 25,660 |   |
| Commercial lines of credit                 |       | 5,090                                     |        | — |   | — |   | — |   | 5,090 |   |
| One-to-four family and multi-family loans  |       | 3,307                                     |        | — |   | — |   | — |   | 3,307 |   |
| Non-residential real estate and land loans |       | 1,736                                     |        | — |   | — |   | — |   | 1,736 |   |
| Commitments to fund commercial or other:   |       |                                      |        |   |   |   |   |   |   |   |   |
| Letters of credit                          |       | 5,756                                     |        | — |   | — |   | — |   | 5,756 |   |
| Total  contractual obligations             | ** ** | **$**                                     | **429,024** | ** ** | **$** | **76,874** | ** ** | **$** | **149,953** | ** ** | **$** | **29,439** | ** ** | **$** | **685,290** | ** ** |

 

TheBank is required to maintain regulatory capital sufficient to meet tangible,core and risk-based capital ratios of at least 1.5%, 4.0% and 8.0%,respectively.  At December 31, 2006, theBank exceeded each of the capital requirements with tangible, core andrisk-based capital ratios of 8.5%, 8.5% and 12.6%, respectively.

**Impact of Inflation and Changing Prices**

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

 

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**Reportof Independent Registered Public Accounting Firm**

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

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

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

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

Cincinnati, OhioMarch 27, 2007

 

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**PEOPLESCOMMUNITY BANCORP, INC.**

**CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION**

December31, 2006 and 2005

(In thousands,except share data)
| ** **                                                                                                                                         | ** ** | **2006**   | ** **    | **2005**   | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------|---------------|------------|------------|
| **ASSETS**                                                                                                                                         |       |       |          |       |       |
| Cash and due from banks                                                                                                                            |       | $          | 26,272        |       | $          | 19,988 |   |
| Interest-bearing  deposits in other financial institutions                                                                                         |       | 31,187     |          | 1,570      |       |
| Cash and cash  equivalents                                                                                                                         |       | 57,459     |          | 21,558     |       |
|                                                                                                                                               |       |       |          |       |       |
| Securities designated  as available for sale                                                                                                       |       | 56,899     |          | 74,482     |       |
| Loans receivable - net                                                                                                                             |       | 812,578    |          | 851,270    |       |
| Office premises and  equipment                                                                                                                     |       | 27,879     |          | 25,287     |       |
| Real estate acquired  through foreclosure                                                                                                          |       | 333        |          | 188        |       |
| Federal Home Loan Bank  stock                                                                                                                      |       | 14,024     |          | 13,122     |       |
| Accrued interest  receivable                                                                                                                       |       | 5,461      |          | 5,204      |       |
| Bank-owned life  insurance                                                                                                                         |       | 17,093     |          | 15,320     |       |
| Prepaid expenses and  other assets                                                                                                                 |       | 3,404      |          | 5,852      |       |
| Goodwill                                                                                                                                           |       | 23,911     |          | 20,282     |       |
| Intangible Assets                                                                                                                                  |       | 5,903      |          | 5,330      |       |
| Deferred federal income  taxes                                                                                                                     |       | 3,135      |          | 3,017      |       |
|                                                                                                                                               |       |       |          |       |       |
| Total assets                                                                                                                                       | ** ** | **$**      | **1,028,079** | ** ** | **$**      | **1,040,912** |   |
|                                                                                                                                               | ** ** | ** ** | ** **    | ** ** |       |
| **LIABILITIES AND STOCKHOLDERS’  EQUITY**                                                                                                     |       |       |          |       |       |
| ** **                                                                                                                                         |       |       |          |       |       |
| Deposits                                                                                                                                           |       | $          | 755,261       |       | $          | 726,629 |   |
| Advances from the  Federal Home Loan Bank and Other Borrowings                                                                                     |       | 156,885    |          | 193,132    |       |
| Subordinated debentures                                                                                                                            |       | 15,464     |          | 28,351     |       |
| Accrued interest  payable                                                                                                                          |       | 577        |          | 700        |       |
| Other liabilities                                                                                                                                  |       | 12,276     |          | 6,053      |       |
| Total  liabilities                                                                                                                                 |       | 940,463    |          | 954,865    |       |
|                                                                                                                                               |       |       |          |       |       |
| Commitments and  contingent liabilities                                                                                                            |       | —     |          | —     |       |
|                                                                                                                                               |       |       |          |       |       |
| Stockholders’ equity                                                                                                                          |       |       |          |       |       |
| Common stock -  15,000,000 shares of $.01 par value authorized; 4,829,699 and 4,424,449  shares issued at December 31, 2006 and 2005, respectively |       | 48         |          | 44         |       |
| Additional  paid-in capital                                                                                                                        |       | 70,987     |          | 62,945     |       |
| Retained  earnings                                                                                                                                 |       | 17,929     |          | 24,785     |       |
| Shares acquired  by stock benefit plan                                                                                                             |       | (1,212     | )             | (1,423     | )          |
| Accumulated  comprehensive loss                                                                                                                    |       | (136       | )             | (304       | )          |
| Total  stockholders’ equity                                                                                                                   |       | 87,616     |          | 86,047     |       |
|                                                                                                                                               |       |       |          |       |       |
| Total liabilities and  stockholders’ equity                                                                                                   | ** ** | **$**      | **1,028,079** | ** ** | **$**      | **1,040,912** |   |

 

Theaccompanying notes are an integral part of these statements.

23

----

** **

**PEOPLESCOMMUNITY BANCORP, INC.**

**CONSOLIDATED STATEMENTS OF OPERATIONS**

(In thousands,except share data)
| ** **                                                  | ** ** | **For Year Ended** | ** ** | **For Three Months** | ** ** | **For Years Ended** | ** ** |
|-------------------------------------------------------------|------------|------------------------------|------------|--------------------------------|------------|-------------------------------|------------|
| ** **                                                  | ** ** | **December 31,**        | ** ** | **December 31,**          | ** ** | **September 30,**        | ** ** |
| ** **                                                  | ** ** | **2006**                     | ** ** | **2005**                       | ** ** | **2005**                      | ** ** | **2004** | ** ** |
| Interest income                                             |       |                         |       |                           |       |                          |       |   |   |
| Loans                                                       |       | $                            | 61,096     |                           | $          | 12,620                        |       | $ | 41,628 |   | $ | 34,712 |   |
| Mortgage-backed securities                                  |       | 2,467                        |       | 1,463                          |       | 5,292                         |       | 4,908 |   |
| Investment securities                                       |       | 951                          |       | 245                            |       | 664                           |       | 480 |   |
| Interest-bearing deposits and other                         |       | 961                          |       | 74                             |       | 164                           |       | 71 |   |
| Total interest income                                       |       | 65,475                       |       | 14,402                         |       | 47,748                        |       | 40,171 |   |
|                                                        |       |                         |       |                           |       |                          |       |   |   |
| Interest expense                                            |       |                         |       |                           |       |                          |       |   |   |
| Deposits                                                    |       | 27,239                       |       | 5,111                          |       | 15,226                        |       | 11,472 |   |
| Borrowings                                                  |       | 9,246                        |       | 3,044                          |       | 10,978                        |       | 8,341 |   |
| Total interest expense                                      |       | 36,485                       |       | 8,155                          |       | 26,204                        |       | 19,813 |   |
|                                                        |       |                         |       |                           |       |                          |       |   |   |
| Net interest income                                         |       | 28,990                       |       | 6,247                          |       | 21,544                        |       | 20,358 |   |
|                                                        |       |                         |       |                           |       |                          |       |   |   |
| Provision for  losses on loans                              |       | 17,450                       |       | 900                            |       | 3,600                         |       | 3,600 |   |
|                                                        |       |                         |       |                           |       |                          |       |   |   |
| Net interest income after provision for losses on  loans    |       | 11,540                       |       | 5,347                          |       | 17,944                        |       | 16,758 |   |
|                                                        |       |                         |       |                           |       |                          |       |   |   |
| Other income                                                |       |                         |       |                           |       |                          |       |   |   |
| Gain (loss) on sale of investment securities                |       | 100                          |       | (1,407                         | )          | 741                           |       | 19 |   |
| Gain (loss) on sale of branch premises, deposits and  loans |       | (59                          | )          | (15                            | )          | (58                           | )          | 371 |   |
| Income from bank-owned life insurance                       |       | 685                          |       | 162                            |       | 158                           |       |   |   |
| Other operating                                             |       | 2,487                        |       | 496                            |       | 1,273                         |       | 791 |   |
| Total other income                                          |       | 3,213                        |       | (764                           | )          | 2,114                         |       | 1,181 |   |
|                                                        |       |                         |       |                           |       |                          |       |   |   |
| General,  administrative and other expense                  |       |                         |       |                           |       |                          |       |   |   |
| Employee compensation and benefits                          |       | 10,058                       |       | 2,343                          |       | 8,235                         |       | 7,513 |   |
| Occupancy and equipment                                     |       | 3,505                        |       | 728                            |       | 2,579                         |       | 2,029 |   |
| Franchise taxes                                             |       | 975                          |       | 240                            |       | 873                           |       | 705 |   |
| Data processing                                             |       | 1,004                        |       | 201                            |       | 916                           |       | 1,057 |   |
| Amortization of intangibles                                 |       | 1,633                        |       | 116                            |       | 116                           |       | — |   |
| Other operating                                             |       | 3,947                        |       | 902                            |       | 3,108                         |       | 2,446 |   |
| Total general, administrative and other expense             |       | 21,122                       |       | 4,530                          |       | 15,827                        |       | 13,750 |   |
|                                                        |       |                         |       |                           |       |                          |       |   |   |
| Earnings (loss) before income taxes                         |       | (6,369                       | )          | 53                             |       | 4,231                         |       | 4,189 |   |
|                                                        |       |                         |       |                           |       |                          |       |   |   |
| Federal income  taxes (benefits)                            |       |                         |       |                           |       |                          |       |   |   |
| Current                                                     |       | (817                         | )          | 493                            |       | 1,945                         |       | 2,165 |   |
| Deferred                                                    |       | (1,491                       | )          | (527                           | )          | (570                          | )          | (845 | ) |
| Total federal income taxes (benefits)                       |       | (2,308                       | )          | (34                            | )          | 1,375                         |       | 1,320 |   |
|                                                        |       |                         |       |                           |       |                          |       |   |   |
| Net Earnings (Loss)                                         | ** ** | **$**                        | **(4,061** | **)**                          | **$**      | **87**                        | ** ** | **$** | **2,856** | ** ** | **$** | **2,869** | ** ** |
|                                                        | ** ** | ** **                   | ** ** | ** **                     | ** ** | ** **                    | ** ** | ** ** | ** ** |
| Earnings (Loss) per share                                   |       |                         |       |                           |       |                          |       |   |   |
| Basic                                                       | ** ** | **$**                        | **(.88**   | **)**                          | **$**      | **.02**                       | ** ** | **$** | **.73** | ** ** | **$** | **.92** | ** ** |
|                                                        | ** ** | ** **                   | ** ** | ** **                     | ** ** | ** **                    | ** ** | ** ** | ** ** |
| Diluted                                                     | ** ** | **$**                        | **(.88**   | **)**                          | **$**      | **.02**                       | ** ** | **$** | **.72** | ** ** | **$** | **.91** | ** ** |

 

Theaccompanying notes are an integral part of these statements.

24

----

**PEOPLESCOMMUNITY BANCORP, INC.**

**CONSOLIDATED STATEMENTS OF COMPREHENSIVEINCOME (LOSS)**

(In thousands)
| ** **                                                                                                                                                                                                                                                                                             | ** ** | **For Year Ended** | ** ** | **For Three Months** | ** ** | **For Years Ended** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------------|------------|--------------------------------|------------|-------------------------------|------------|
| ** **                                                                                                                                                                                                                                                                                             | ** ** | **December 31,**        | ** ** | **December 31,**          | ** ** | **September 30,**        | ** ** |
| ** **                                                                                                                                                                                                                                                                                             | ** ** | **2006**                     | ** ** | **2005**                       | ** ** | **2005**                      | ** ** | **2004** | ** ** |
|                                                                                                                                                                                                                                                                                                   |       |                         |       |                           |       |                          |       |   |   |
| Net earnings  (loss)                                                                                                                                                                                                                                                                                   |       | $                            | (4,061     | )                              | $          | 87                            |       | $ | 2,856 |   | $ | 2,869 |   |
|                                                                                                                                                                                                                                                                                                   |       |                         |       |                           |       |                          |       |   |   |
| Other  comprehensive income, net of tax:                                                                                                                                                                                                                                                               |       |                         |       |                           |       |                          |       |   |   |
| Unrealized holding gains (losses) on securities  during the period, net of tax effects (benefits) of $120, $(576), $365, and  $177 in fiscal year ended December 31, 2006, three months ended December 31,  2005, fiscal year ended September 30, 2005 and September 30, 2004,  respectively           |       | 234                          |       | (1,119                         | )          | 708                           |       | 369 |   |
|                                                                                                                                                                                                                                                                                                   |       |                         |       |                           |       |                          |       |   |   |
| Reclassification adjustment for realized losses  (gains) included in earnings, net of tax (effects) benefits of $(34), $478,  $(252) and $(6) in fiscal year ended December 31, 2006, three monthsended  December 31, 2005, fiscal year ended September 30, 2005 and September 30,  2004, respectively |       | (66                          | )          | 929                            |       | (489                          | )          | (13 | ) |
|                                                                                                                                                                                                                                                                                                   |       |                         |       |                           |       |                          |       |   |   |
| Comprehensive  income (loss)                                                                                                                                                                                                                                                                           | ** ** | **$**                        | **(3,893** | **)**                          | **$**      | **(103**                      | **)**      | **$** | **3,075** | ** ** | **$** | **3,225** | ** ** |
|                                                                                                                                                                                                                                                                                                   | ** ** | ** **                   | ** ** | ** **                     | ** ** | ** **                    | ** ** | ** ** | ** ** |
| Accumulated  comprehensive income (loss)                                                                                                                                                                                                                                                               | ** ** | **$**                        | **(136**   | **)**                          | **$**      | **(304**                      | **)**      | **$** | **(114** | **)** | **$** | **(333** | **)** |

 

Theaccompanying notes are an integral part of these statements.

25

----

 

**PEOPLESCOMMUNITY BANCORP, INC.**

**CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY**

 (In thousands)
| ** **                                                                                    | ** ** | **Common  stock** | ** ** | **Additional  paid-in  capital** | ** ** | **Retained  earnings** | ** ** | **Shares  acquired by  stock benefit  plan** | ** ** | **Unrealized  gains (losses)  on securities  designated as  available  for sale** | ** ** | **Total** | ** ** |
|-----------------------------------------------------------------------------------------------|------------|-------------------|------------|----------------------------------|------------|------------------------|------------|--------------------------------------------------------|------------|-------------------------------------------------------------------------------------------------------|------------|-----------|------------|
| Balance at October 1,  2003                                                                   |       | 25                |       | 24,478                           |       | 23,171                 |       | (286                                                   | )          | (689                                                                                                  | )          | 46,699    |       |
|                                                                                          |       |              |       |                             |       |                   |       |                                                   |       |                                                                                                  |       |      |       |
| Amortization expense of  stock benefit plans                                                  |       | —            |       | 432                              |       | 19                     |       | 263                                                    |       | —                                                                                                |       | 714       |       |
| Compensation expense  relating to vested stock options                                        |       | —            |       | 191                              |       | —                 |       | —                                                 |       | —                                                                                                |       | 191       |       |
| Issuance of common  shares                                                                    |       | 14                |       | 26,800                           |       | —                 |       | (700                                                   | )          | —                                                                                                |       | 26,114    |       |
| Net earnings for the  year ended September 30, 2004                                           |       | —            |       | —                           |       | 2,869                  |       | —                                                 |       | —                                                                                                |       | 2,869     |       |
| Dividends paid of $.30  per common share                                                      |       | —            |       | —                           |       | (1,168                 | )          | —                                                 |       | —                                                                                                |       | (1,168    | )          |
| Unrealized gains on  securities designated as available for sale, net of related tax effects  |       | —            |       | —                           |       | —                 |       | —                                                 |       | 356                                                                                                   |       | 356       |       |
|                                                                                          |       |              |       |                             |       |                   |       |                                                   |       |                                                                                                  |       |      |       |
| Balance at September 30,  2004                                                                |       | $                 | 39         |                             | $          | 51,901                 |       | $                                                      | 24,891     |                                                                                                  | $          | (723      | )          | $ | (333 | ) | $ | 75,775 |   |
|                                                                                          |       |              |       |                             |       |                   |       |                                                   |       |                                                                                                  |       |      |       |
| Amortization expense of  stock benefit plans                                                  |       | —            |       | 392                              |       | —                 |       | 221                                                    |       | —                                                                                                |       | 613       |       |
| Compensation expense  relating to vested stock options                                        |       | —            |       | 184                              |       | —                 |       | —                                                 |       | —                                                                                                |       | 184       |       |
| Issuance of common  shares                                                                    |       | 5                 |       | 10,245                           |       | —                 |       | (962                                                   | )          | —                                                                                                |       | 9,288     |       |
| Exercise of stock  options                                                                    |       | —            |       | 150                              |       | —                 |       | —                                                 |       | —                                                                                                |       | 150       |       |
| Net earnings for the  year ended September 30, 2005                                           |       | —            |       | —                           |       | 2,856                  |       | —                                                 |       | —                                                                                                |       | 2,856     |       |
| Dividends paid of $.60  per common share                                                      |       | —            |       | —                           |       | (2,385                 | )          | —                                                 |       | —                                                                                                |       | (2,385    | )          |
| Unrealized gains on  securities designated as available for sale, net of related tax effects  |       | —            |       | —                           |       | —                 |       | —                                                 |       | 219                                                                                                   |       | 219       |       |
|                                                                                          |       |              |       |                             |       |                   |       |                                                   |       |                                                                                                  |       |      |       |
| Balance at September 30,  2005                                                                |       | $                 | 44         |                             | $          | 62,872                 |       | $                                                      | 25,362     |                                                                                                  | $          | (1,464    | )          | $ | (114 | ) | $ | 86,700 |   |
|                                                                                          |       |              |       |                             |       |                   |       |                                                   |       |                                                                                                  |       |      |       |
| Amortization expense of  stock benefit plans                                                  |       | —            |       | —                           |       | —                 |       | 41                                                     |       | —                                                                                                |       | 41        |       |
| Compensation expense  relating to vested stock options                                        |       | —            |       | 53                               |       | —                 |       | —                                                 |       | —                                                                                                |       | 53        |       |
| Exercise of stock  options                                                                    |       | —            |       | 20                               |       | —                 |       | —                                                 |       | —                                                                                                |       | 20        |       |
| Net earnings for the  three months ended December 31, 2005                                    |       | —            |       | —                           |       | 87                     |       | —                                                 |       | —                                                                                                |       | 87        |       |
| Dividends paid of $.15  per common share                                                      |       | —            |       | —                           |       | (664                   | )          | —                                                 |       | —                                                                                                |       | (664      | )          |
| Unrealized losses on  securities designated as available for sale, net of related tax effects |       | —            |       | —                           |       | —                 |       | —                                                 |       | (190                                                                                                  | )          | (190      | )          |
|                                                                                          |       |              |       |                             |       |                   |       |                                                   |       |                                                                                                  |       |      |       |
| Balance at December 31,  2005 (balance carried forward)                                       |       | $                 | 44         |                             | $          | 62,945                 |       | $                                                      | 24,785     |                                                                                                  | $          | (1,423    | )          | $ | (304 | ) | $ | 86,047 |   |
|                                                                                          |       |              |       |                             |       |                   |       |                                                   |       |                                                                                                  |       |      |       |
| Balance at December 31,  2005 (balance brought forward)                                       |       | $                 | 44         |                             | 62,945     |                   | 24,785     |                                                   | (1,423     | )                                                                                                     | (304       | )         | 86,047     |   |
| Amortization expense of  stock benefit plans                                                  |       | —            |       | 235                              |       | —                 |       | 211                                                    |       | —                                                                                                |       | 446       |       |
| Compensation expense  relating to vested stock options                                        |       | —            |       | 170                              |       | —                 |       | —                                                 |       | —                                                                                                |       | 170       |       |
| Exercise of stock  options                                                                    |       | —            |       | 46                               |       | —                 |       | —                                                 |       | —                                                                                                |       | 46        |       |
| Issuance of common  shares                                                                    |       | 4                 |       | 7,591                            |       | —                 |       | —                                                 |       | —                                                                                                |       | 7,595     |       |
| Net losses for the year  ended December 31, 2006                                              |       | —            |       | —                           |       | (4,061                 | )          | —                                                 |       | —                                                                                                |       | (4,061    | )          |
| Dividends paid of $.60  per common share                                                      |       | —            |       | —                           |       | (2,795                 | )          | —                                                 |       | —                                                                                                |       | (2,795    | )          |
| Unrealized losses on  securities designated as available for sale, net of related tax effects |       | —            |       | —                           |       | —                 |       | —                                                 |       | 168                                                                                                   |       | 168       |       |
|                                                                                          |       |              |       |                             |       |                   |       |                                                   |       |                                                                                                  |       |      |       |
| Balance at December 31, 2006                                                                  |       | $                 | 48         |                             | $          | 70,987                 |       | $                                                      | 17,929     |                                                                                                  | $          | (1,212    | )          | $ | (136 | ) | $ | 87,616 |   |

 

Theaccompanying notes are an integral part of these statements.

26

----

**PEOPLESCOMMUNITY BANCORP, INC.**

**CONSOLIDATED STATEMENTS OF CASH FLOWS**

(In thousands)
| ** **                                                                                                   | ** ** | **For Year Ended** | ** ** | **For Three Months** | ** ** | **For Years Ended** | ** ** |
|--------------------------------------------------------------------------------------------------------------|------------|------------------------------|------------|--------------------------------|------------|-------------------------------|------------|
| ** **                                                                                                   | ** ** | **December 31,**        | ** ** | **December 31,**          | ** ** | **September 30,**        | ** ** |
| ** **                                                                                                   | ** ** | **2006**                     | ** ** | **2005**                       | ** ** | **2005**                      | ** ** | **2004** | ** ** |
| Cash flows provided by (used in) operating activities:                                                       |       |                         |       |                           |       |                          |       |   |   |
| Net earnings (loss) for the year                                                                             |       | $                            | (4,061     | )                              | $          | 87                            |       | $ | 2,856 |   | $ | 2,869 |   |
| Adjustments to reconcile net earnings to net cash  provided by (used in) operating activities:               |       |                         |       |                           |       |                          |       |   |   |
| Amortization of premiums and discounts on securities                                                         |       | 628                          |       | 247                            |       | 1,768                         |       | 1,493 |   |
| Amortization of deferred loan origination fees &  premiums                                               |       | (948                         | )          | (413                           | )          | (1,630                        | )          | (730 | ) |
| Amortization of premiums and discounts on deposits                                                           |       | (424                         | )          | —                         |       | —                        |       | — |   |
| Amortization of premiums and discounts on borrowings                                                         |       | 159                          |       | (404                           | )          | —                        |       | — |   |
| Expense of stock benefit plans                                                                               |       | 616                          |       | 94                             |       | 797                           |       | 905 |   |
| Amortization of other intangible assets                                                                      |       | 1,633                        |       | 116                            |       | 116                           |       | — |   |
| Amortization of mortgage servicing rights                                                                    |       | 101                          |       | —                         |       | —                        |       | — |   |
| Depreciation                                                                                                 |       | 1,407                        |       | 340                            |       | 1,116                         |       | 893 |   |
| Provision for losses on loans                                                                                |       | 17,450                       |       | 900                            |       | 3,600                         |       | 3,600 |   |
| Investment securities dividends                                                                              |       | (57                          | )          | (12                            | )          | (46                           | )          | (51 | ) |
| Federal Home Loan Bank stock dividends                                                                       |       | (664                         | )          | (165                           | )          | (510                          | )          | (424 | ) |
| Income from bank-owned life insurance                                                                        |       | (685                         | )          | (162                           | )          | (158                          | )          | — |   |
| Undistributed income from investment in Columbia                                                             |       | (172                         | )          | (48                            | )          | (95                           | )          | — |   |
| Loss (gain) on sale of securities                                                                            |       | (100                         | )          | 1,407                          |       | (741                          | )          | (19 | ) |
| Loss (gain) on sale of branch premises, deposits and  equipment                                              |       | 21                           |       | (4                             | )          | 58                            |       | (261 | ) |
| Gain on sale of loans                                                                                        |       | (9                           | )          | —                         |       | (93                           | )          | (110 | ) |
| Gain on sale of real estate                                                                                  |       | (9                           | )          | —                         |       | —                        |       | — |   |
| Loss on sale of foreclosed real estate                                                                       |       | 56                           |       | 18                             |       | 33                            |       | — |   |
| Proceeds from sale of loans in the secondary market                                                          |       | 831                          |       | —                         |       | 6,714                         |       | 10,013 |   |
| Loans originated for sale in the secondary market                                                            |       | (822                         | )          | —                         |       | (6,543                        | )          | (9,903 | ) |
| Increase (decrease) in cash, due to changes in:                                                              |       |                         |       |                           |       |                          |       |   |   |
| Accrued interest receivable                                                                                  |       | (56                          | )          | (7                             | )          | (882                          | )          | (1,030 | ) |
| Prepaid expenses and other assets                                                                            |       | (770                         | )          | 3,170                          |       | 580                           |       | (2,345 | ) |
| Accrued interest payable and other liabilities                                                               |       | 4,981                        |       | (967                           | )          | 2,062                         |       | (161 | ) |
| Net cash provided by operating activities                                                                    |       | 19,106                       |       | 4,197                          |       | 9,002                         |       | 4,739 |   |
|                                                                                                         |       |                         |       |                           |       |                          |       |   |   |
| Cash flows provided by (used in) investing  activities:                                                      |       |                         |       |                           |       |                          |       |   |   |
| Purchase of investment in Columbia                                                                           |       | —                       |       | —                         |       | (2,524                        | )          | — |   |
| Sale of investment in Columbia                                                                               |       | 2,856                        |       | —                         |       | —                        |       | — |   |
| Purchase of bank-owned life insurance                                                                        |       | —                       |       | —                         |       | (15,000                       | )          | — |   |
| Purchases of investment securities and  mortgage-backed securities                                           |       | —                       |       |                           |       | (88,111                       | )          | (146,953 | ) |
| Proceeds from sale of investment securities and  mortgage-backed securities designated as available for sale |       | 1,635                        |       | 108,865                        |       | 41,919                        |       | 1,410 |   |
| Principal repayments on investment securities and  mortgage-backed securities                                |       | 22,425                       |       | 22,482                         |       | 76,510                        |       | 51,489 |   |
| Proceeds from sale of loans and loan participations                                                          |       | 34,635                       |       | 3,490                          |       | 1,055                         |       | 5,003 |   |
| Principal repayments (disbursements) on loans—net                                                       |       | 24,885                       |       | (27,889                        | )          | (73,387                       | )          | (53,067 | ) |
| Purchase of office premises and equipment                                                                    |       | (4,035                       | )          | (640                           | )          | (6,880                        | )          | (6,380 | ) |
| Proceeds from sale of branch premises, deposits and  equipment                                               |       | 15                           |       | 4                              |       | 565                           |       | 988 |   |
| Purchase of Federal Home Loan Bank stock                                                                     |       | —                       |       | —                         |       | —                        |       | (196 | ) |
| Redemption of Federal Home Loan Bank stock                                                                   |       | 473                          |       | —                         |       | —                        |       | — |   |
| Proceeds from sale of real estate acquired through  foreclosure                                              |       | 830                          |       | —                         |       | 880                           |       | 1,071 |   |
| Cash received in acquisition of Mercantile Financial  Corporation.- net                                      |       | 11,123                       |       | —                         |       | —                        |       | — |   |
| Cash paid in acquisition of PFS Bancorp, Inc.—net                                                       |       | —                       |       | (30,008                        | )          | —                        |       | — |   |
| Cash received in acquisition of American State  Corporation—net                                         |       | —                       |       | —                         |       | 8,349                         |       | — |   |
| Net cash provided by (used in) investing activities                                                          |       | 94,842                       |       | 76,304                         |       | (56,624                       | )          | (146,635 | ) |
| Net  cash provided by (used in) operating and investing activities (balance  carried forward)                |       | $                            | 113,948    |                           | $          | 80,501                        |       | $ | (47,622 | ) | $ | (141,896 | ) |

** **

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** **
| ** **                                                                                    | ** ** | **For Year Ended** | ** ** | **For Three Months** | ** ** | **For Years Ended** | ** ** |
|-----------------------------------------------------------------------------------------------|------------|------------------------------|------------|--------------------------------|------------|-------------------------------|------------|
| ** **                                                                                    | ** ** | **December 31,**        | ** ** | **December 31,**          | ** ** | **September 30,**        | ** ** |
| ** **                                                                                    | ** ** | **2006**                     | ** ** | **2005**                       | ** ** | **2005**                      | ** ** | **2004** | ** ** |
| Net cash  provided by (used in) operating and investing activities (balance brought  forward) |       | $                            | 113,948    |                           | $          | 80,501                        |       | $ | (47,622 | ) | $ | (141,896 | ) |
|                                                                                          |       |                         |       |                           |       |                          |       |   |   |
| Cash flows  provided by (used in) financing activities:                                       |       |                         |       |                           |       |                          |       |   |   |
| Net increase (decrease) in deposit accounts                                                   |       | (19,627                      | )          | 25,740                         |       | 81,768                        |       | 16,536 |   |
| Proceeds from Federal Home Loan Bank advances and  other borrowings                           |       | 97,500                       |       | 49,900                         |       | 213,000                       |       | 210,800 |   |
| Repayment of Federal Home Loan Bank advances and  other borrowings                            |       | (140,284                     | )          | (151,000                       | )          | (267,032                      | )          | (106,200 | ) |
| Proceeds from issuance of subordinated debentures                                             |       | —                       |       | —                         |       | 15,464                        |       | — |   |
| Redemption of subordinated debentures                                                         |       | (12,887                      | )          | —                         |       | —                        |       | — |   |
| Proceeds from issuance of common stock                                                        |       | —                       |       | —                         |       | 10,250                        |       | 26,814 |   |
| Dividends paid on common stock                                                                |       | (2,795                       | )          | (664                           | )          | (2,385                        | )          | (1,168 | ) |
| Proceeds from exercise of stock options                                                       |       | 46                           |       | 20                             |       | 150                           |       | — |   |
| Shares acquired by ESOP                                                                       |       | —                       |       | —                         |       | (962                          | )          | (700 | ) |
| Net cash  provided by (used in) financing activities                                          |       | (78,047                      | )          | (76,004                        | )          | 50,253                        |       | 146,082 |   |
|                                                                                          |       |                         |       |                           |       |                          |       |   |   |
| Net increase in  cash and cash equivalents                                                    |       | 35,901                       |       | 4,497                          |       | 2,631                         |       | 4,186 |   |
|                                                                                          |       |                         |       |                           |       |                          |       |   |   |
| Cash and cash  equivalents at beginning of period                                             |       | 21,558                       |       | 17,061                         |       | 14,430                        |       | 10,244 |   |
|                                                                                          |       |                         |       |                           |       |                          |       |   |   |
| Cash and cash  equivalents at end of period                                                   | ** ** | **$**                        | **57,459** | ** **                     | **$**      | **21,558**                    | ** ** | **$** | **17,061** | ** ** | **$** | **14,430** |   |
|                                                                                          | ** ** | ** **                   | ** ** | ** **                     | ** ** | ** **                    | ** ** | ** ** |   |
| Supplemental  disclosure of cash flow information:                                            |       |                         |       |                           |       |                          |       |   |   |
| Cash paid during the year for:                                                                |       |                         |       |                           |       |                          |       |   |   |
| Federal income taxes                                                                          |       | **$**                        | **380**    | ** **                     | **$**      | **500**                       | ** ** | **$** | **1,200** | ** ** | **$** | **3,500** | ** ** |
|                                                                                          |       | ** **                   | ** ** | ** **                     | ** ** | ** **                    | ** ** | ** ** | ** ** |
| Interest on deposits and borrowings                                                           |       | **$**                        | **36,608** | ** **                     | **$**      | **8,300**                     | ** ** | **$** | **25,587** | ** ** | **$** | **20,294** | ** ** |
|                                                                                          |       | ** **                   | ** ** | ** **                     | ** ** | ** **                    | ** ** | ** ** | ** ** |
| Supplemental  disclosure of noncash investing activities:                                     |       |                         |       |                           |       |                          |       |   |   |
| Transfers from loans to real estate acquired through  Foreclosure                             |       | **$**                        | **1,008**  | ** **                     | **$**      | **—**                    | ** ** | **$** | **1,854** | ** ** | **$** | **513** | ** ** |
|                                                                                          |       | ** **                   | ** ** | ** **                     | ** ** | ** **                    | ** ** | ** ** | ** ** |
| Loans disbursed to facilitate sale of real estate  acquired through foreclosure               | ** ** | **$**                        | **—** | ** **                     | **$**      | **—**                    | ** ** | **$** | **1,276** | ** ** | **$** | **339** |   |
|                                                                                          | ** ** | ** **                   | ** ** | ** **                     | ** ** | ** **                    | ** ** | ** ** |   |
| Loans disbursed to facilitate sale of real estate                                             | ** ** | **$**                        | **308**    | ** **                     | **$**      | **—**                    | ** ** | **$** | **—** | ** ** | **$** | **490** |   |
|                                                                                          | ** ** | ** **                   | ** ** | ** **                     | ** ** | ** **                    | ** ** | ** ** |   |
| Common stock  issued in acquisition of Mercantile Financial Corp.                             | ** ** | **$**                        | **7,595**  | ** **                     | **$**      | **—**                    | ** ** | **$** | **—** | ** ** | **$** | **—** |   |

 

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**PEOPLESCOMMUNITY BANCORP, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**NOTE A - SUMMARY OF SIGNIFICANTACCOUNTING POLICIES**

PeoplesCommunity Bancorp, Inc. (the “Company”) is a registered savings and loanholding company whose activities are primarily limited to holding the stock ofPeoples Community Bank (“Peoples” or the “Bank”).  The Company conducts a general bankingbusiness in southwestern Ohio and southeastern Indiana which consists ofattracting deposits from the general public and primarily applying those fundsto the origination of loans for residential, consumer and nonresidentialpurposes.  The Company’s profitability issignificantly dependent on net interest income, which is the difference betweeninterest income generated from interest-earning assets (i.e. loans andinvestments) and the interest expense paid on interest-bearing liabilities(i.e. customer deposits and borrowed funds). Net interest income is affected by the relative amount of interest-earningassets and interest-bearing liabilities and the interest received or paid onthese balances.  The level of interestrates paid or received by the Company can be significantly influenced by anumber of factors, such as governmental monetary policy, that are outside ofmanagement’s control.

TheCompany has entered into a number of acquisitions, divestitures and othermaterial financial transactions during the years covered by these financialstatements.

OnApril 27, 2004, Peoples Community Bancorp completed a secondary offering of1,365,674 shares of common stock.  Thenet proceeds of the offering, totaling approximately $26.8 million, have beenused to fund Peoples Community Bancorp’s growth strategy and for generalcorporate purposes.

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

OnJune 10, 2005, the Company acquired American State Corporation, the parentcompany of American State Bank (“American”) with three branch offices in theSoutheast Indiana communities of Lawrenceburg, Aurora and Bright.  The Bank paid $4.79 in cash for each of the1,469,062 outstanding common shares of American.  American’s outstanding preferred stock wasredeemed for cash at par value, totaling $700,000.   The expansion in this Southeast Indianacommunity further enhances Peoples Community Bank’s ability to increase itsmarket share and scale of operations, as well as expand its distributionnetwork within the greater Cincinnati area.

On August 11, 2005, theCompany completed a private placement of 500,000 shares of its common stockwith certain institutional investors and directors and officers. The netproceeds of $10.3 million were utilized to supplement the Company’s capital andalso will serve as an additional source to fund the Company’s growth strategyand for general corporate purposes.

OnDecember 16, 2005, the Company acquired PFS Bancorp, Inc. (“PFS”), the parentcompany of Peoples Federal Savings Bank (“Peoples Federal”).  Peoples Federal operated three offices in theSoutheast Indiana communities of Aurora, Rising Sun, and Vevay.  The Company paid $23.00 in cash for each ofthe outstanding 1,473,728 shares of PFS, resulting in aggregate mergerconsideration of approximately $32.8 million. The acquisition was accounted for using the purchase method ofaccounting.

On June 9, 2006, the Company acquired MercantileFinancial Corporation (“Mercantile”) and Peoples Community Bank (“Bank”)acquired Mercantile Savings Bank which operated one branch office inCincinnati, Ohio.  The Bank paid $34.78in cash and exchanged 43.10 shares of stock for each of the outstanding commonshares of Mercantile, resulting in aggregate merger consideration ofapproximately

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$9.3 million, including acquisition costs.  This acquisition complements the Bank’smarket area, and increases its market share.

OnAugust 25, 2006, the Board of Directors approved a change of the Company’s andthe Bank’s fiscal year end from September 30 to December 31, retroactively toJanuary 1, 2006 in order to increase operational efficiency.

On December 29, 2006, the Company soldits 69,925 shares of Columbia for an aggregate sales price of $2.9million.  In conjunction with thisdivesture, the Company converted its charter to a registered savings and loanholding company.

Theconsolidated financial information presented herein has been prepared inaccordance with accounting principles generally accepted in the United Statesof America (“U.S. GAAP”) and general accounting practices within the financialservices industry.  In preparingconsolidated financial statements in accordance with U.S. GAAP, management isrequired to make estimates and assumptions that affect the reported amounts ofassets and liabilities and the disclosure of contingent assets and liabilitiesat the date of the financial statements and revenues and expenses during thereporting period.  Actual results coulddiffer from such estimates.

Thefollowing is a summary of the Company’s significant accounting policies whichhave been consistently applied in the preparation of the accompanyingconsolidated financial statements.

1.  Principles of Consolidation

The accompanyingconsolidated financial statements include the accounts of the Company and theBank, it’s wholly-owned subsidiary.  Allsignificant inter-company items have been eliminated.  In December 2003, FASB issued a revision toFIN 46 to clarify certain provisions that affected the accounting for trustpreferred securities.  As a result of theprovisions in FIN 46, Peoples Bancorp Capital Trust I was deconsolidated as ofJune 30, 2004, with the Company accounting for its investment in PeoplesCommunity Bancorp Capital Trust I as an asset, its subordinated debentures asdebt, and the interest paid thereon as interest expense.  The Company had previously classified thetrust preferred securities as debt, but eliminated its common stockinvestment.  The subordinated debenturesissued by Peoples Bancorp Capital Trust I were redeemed on December 8, 2006,resulting in Peoples Bancorp Capital Trust I being dissolved.  The investment in Peoples Community BancorpCapital Trust II is accounted for using provisions of FIN 46 as revised by theFASB.

2.  Investment Securities and Mortgage-BackedSecurities

TheCompany accounts for investments in debt and equity securities asheld-to-maturity, trading, or available for sale.  Securities classified as held-to-maturity arecarried at cost only if the Company has the positive intent and ability to holdthese securities to maturity. Securities designated as available for sale arecarried at fair value with resulting unrealized gains or losses recorded tostockholders’ equity.

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Realizedgains and losses on sales of securities are recognized using the specificidentification method.  Amortization ofpremiums and accretion of discounts are recorded on a principal pay-down methodbased on the estimated duration of the underlying security.

3.  Loans Receivable

Loans receivable are stated at theprincipal amount outstanding, adjusted for deferred loan origination fees andthe allowance for loan losses.  Interestis accrued as earned unless the collectibility of the loan is in doubt.  Uncollectible interest on loans that arecontractually past due is charged off, or an allowance is established based onmanagement’s periodic evaluation.  Theallowance is established by a charge to interest income equal to all interestpreviously accrued.  Income issubsequently recognized only to the extent that cash payments are receiveduntil, in management’s judgment, the borrower’s ability to make periodicinterest and principal payments has returned to normal.  In this case the loan is returned to accrualstatus.  If the ultimate collectibilityof principal is in doubt, in whole or in part, all payments received onnonaccrual loans are applied to reduce principal until such doubt iseliminated.

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

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

4.  Loan Origination Fees

Peoples’accounts for loan origination fees received from loans, net of directorigination costs, as deferred items, and amortize such amounts to interestincome using the level-yield method, giving effect to actual loanprepayments.  Loan origination costs arelimited to the direct costs of originating a loan, i.e., principally directpersonnel costs.  Fees received for loancommitments that are expected to be drawn upon, based on Peoples’ experiencewith similar commitments, are deferred and amortized over the life of the loanusing the level-yield method.  Fees forother loan commitments are deferred and amortized over the loan commitmentperiod on a straight-line basis.

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5.  Allowance for Loan Losses

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

Peoples’accounts for impaired loans based upon the present value of expected futurecash flows discounted at the loan’s effective interest rate or, as analternative, at the loan’s observable market price or fair value of thecollateral.  Peoples’ current proceduresfor evaluating impaired loans result in carrying such loans at the lower ofcost or fair value.

Aloan is defined as impaired when, based on current information and events, itis probable that a creditor will be unable to collect all amounts due accordingto the contractual terms of the loan agreement. The Bank considers its investment in one-to-four family residentialloans and consumer loans to be homogeneous and therefore excluded from separateidentification for evaluation of impairment. With respect to Peoples’ investment in multi-family, nonresidential realestate and land loans, and its evaluation of impairment thereof, such loans arecollateral dependent, and as a result, are carried as a practical expedient atthe lower of cost or fair value.  Withrespect to the Bank’s investment in unsecured commercial lines of credit,impairment is measured based upon the present value of expected future cashflows.

Itis Peoples’ policy to charge off unsecured credits that are more than ninetydays delinquent.  Similarly, collateraldependent loans which are more than ninety days delinquent are considered toconstitute more than a minimum delay in repayment and are evaluated forimpairment at that time.

6.   Office Premises and Equipment

Officepremises and equipment are originally recorded at cost and include expenditureswhich extend the useful lives of existing assets.  Maintenance, repairs and minor renewals areexpensed as incurred.  For financialreporting, depreciation and amortization are provided on the straight-line andaccelerated methods over the useful lives of the assets, estimated to be fortyto fifty years for buildings, ten to fifty years for building improvements, andthree to ten years for furniture and equipment. An accelerated method is used for tax reporting purposes.

7.   Real Estate Acquired Through Foreclosure

Realestate acquired through foreclosure is carried at fair value less estimatedselling expenses at the date of acquisition. Real estate loss provisions are recorded if the properties’ fair valuesubsequently declines below the amount determined at the recording date.  In determining the fair value at acquisition,costs relating to development and improvement of property are capitalized.  Costs relating to holding real estate acquiredthrough foreclosure, net of rental income, are charged against earnings asincurred.

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8.               Investmentin Columbia Bancorp, Inc.

InJanuary 2005, the Company acquired 69,925 shares of Columbia Bancorp, Inc.,Cincinnati, Ohio, a privately held bank holding company for an aggregatepurchase price of $2.5 million.  Theseshares represented approximately 38% of Columbia’s issued and outstandingcommon stock.  The investment was carriedat cost, adjusted for the Company’s equity in the undistributed income ofColumbia Bancorp, Inc.  In December 2006,the Company sold its investment in Columbia for an aggregate purchase price of$2.9 million.

9.               Goodwill

Goodwill is tested annuallyfor impairment,  If the implied fairvalue of goodwill is lower than its carrying amount, a goodwill impairment isindicated and goodwill is written down to its implied fair value.  Subsequent increases in goodwill value arenot recognized in the financial statements. Peoples evaluated the unamortized goodwill balance during fiscal 2006,with no impairment indicated.

In June 2005, December 2005, and June2006, the Bank acquired American, Peoples Federal and Mercantile resulting ingoodwill of approximately $3.9 million, $9.9 million, and $4.0 million,respectively.

The changes in the carrying amount of goodwill for theyear ended December 31, 2006, the three-month period ended December 31,2005 and the years ended September 30, 2005, and 2004, is summarized on thefollowing page.

|                                                  | ** ** | **For Year Ended** | ** ** | **For Three Months** | ** ** | **For Years Ended** | ** ** |
|--------------------------------------------------|------------|------------------------------|------------|--------------------------------|------------|-------------------------------|------------|
| ** **                                       | ** ** | **December 31,**        | ** ** | **December 31,**          | ** ** | **September 30,**        | ** ** |
| ** **                                       | ** ** | **2006**                     | ** ** | **2005**                       | ** ** | **2005**                      | ** ** | **2004** | ** ** |
| ** **                                       | ** ** | **(In thousands)**      | ** ** |
| Balance at  beginning of period                  |       | $                            | 20,282     |                           | $          | 10,028                        |       | $ | 6,089 |   | $ | 6,089 |   |
| Purchase of American State                       |       | —                       |       | —                         |       | 3,939                         |       | — |   |
| Purchase of Peoples Federal and final adjustment |       | (334                         | )          | 10,254                         |       | —                        |       | — |   |
| Purchase of Mercantile                           |       | 3,963                        |       | —                         |       | —                        |       | — |   |
| Balance at end of  period                        |       | $                            | 23,911     |                           | $          | 20,282                        |       | $ | 10,028 |   | $  | 6,089 |   |

 

10.   Other Intangible Assets

The Bank had no otherintangible assets at September 30, 2004. In June 2005, the Bank recorded $1.9 million of core deposit intangiblesin conjunction with the acquisition of American State Corporation. In December2005, the Bank recorded $3.7 million in core deposit intangibles in conjunctionwith the acquisition of PFS Bancorp, Inc., and recorded $2.2 million in coredeposit intangibles in conjunction with the acquisition of Mercantile FinancialCorp. in June 2006.

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Thecore deposit intangibles are being amortized on an accelerated basis over anoriginal period of seven years.  Thecarrying basis and accumulated amortization of recognized intangible assets atDecember 31, 2006 and 2005 were:

|                           | ** ** | **2006**                | ** ** | **2005** | ** ** |
|---------------------------|------------|-------------------------|------------|----------|------------|
| ** **                | ** ** | **(in thousands)** | ** ** |
| Core deposits             |       |                    |       |     |       |
| Gross Carrying Amount     |       | $                       | 7,768      |     | $          | 5,562 |   |
| Accumulated  Amortization |       | 1,865                   |       | 232      |       |
|                           |            |                         |            |          |            |  |  |

 

Amortization expense for the year endedDecember 31, 2006, the three-month period ending December 31, 2005 and the yearended September 30, 2005 was $1,633,000, $116,000 and $116,000,respectively.  No amortization expense wasrecorded in fiscal 2004.  The followingtable summarizes the Bank’s current estimates for future amortization expenseof the core deposit intangible

|                     | ** ** | **(In thousands)** | ** ** |
|---------------------|------------|-------------------------|------------|
| 2007                |       | $                       | 1,671      |   |
| 2008                |       | $                       | 1,393      |   |
| 2009                |       | $                       | 1,116      |   |
| 2010                |       | $                       | 839        |   |
| 2011 and thereafter |       | $                       | 884        |   |

 

11.     Loan Servicing

Inconjunction with it’s acquisition of Mercantile, the Company obtainedapproximately $86.7 million of residential mortgage loans serviced for FreddieMac and Fannie Mae.  Mortgage loansserviced for others are not included in the accompanying consolidated balancesheets.  The unpaid principal balance ofmortgage loans serviced for others was $81.1 million at December 31, 2006.  There were no mortgage loans serviced forothers at December 31, 2005.

The Bank recorded amortization related tomortgage servicing rights totaling $111,000 for the fiscal year endedSeptember 30, 2004. No mortgage servicing rights existed at September 30,2005 or 2004.  In conjunction with itsacquisition of Mercantile in June 2006, the Bank acquired $926,000 in mortgageservicing rights and recorded amortization related to the mortgage servicingrights totaling $101,000 for the fiscal year ended December 31, 2006.  The balance and fair value of mortgageservicing rights as of December 31, 2006 was $825,000.

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12.     Federal Income Taxes

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

13.  Benefit Plans

Peoples’has a noncontributory unfunded retirement plan that covers all members of itsBoard of Directors.  Peoples’ policy isto maintain an accrued liability equal to the present value of benefitscomputed using a predetermined annual benefit amount at retirement.  The plan provides for immediate and totalvesting for all participants.  Theprovision for director’s retirement expense totaled $94,000,  $19,000, and $45,000 for the fiscal yearsended December 31, 2006, September 30, 2005 and 2004, respectively.  There was no provision recorded for the threemonths ended December 31, 2005.

TheBank has an Employee Stock Ownership Plan (“ESOP”) which provides retirementbenefits for substantially all full-time employees who have completed one year ofservice. The Bank makes annual contributions to the ESOP equal to the ESOP’sdebt service less dividends received by the ESOP on unallocated shares.  Shares in the ESOP were acquired using fundsprovided by a loan from the Company and accordingly the cost of those shares isshown as a reduction of stockholders’ equity. Shares are released to participants proportionately as the loan isrepaid. Dividends on allocated shares are recorded as dividends and charged toretained earnings.  Dividends on unallocatedshares are used to repay the loan and are treated as compensation expense.  Compensation expense is recorded equal to thefair market value of the stock for shares committed to be released. The Bankaccounts for the ESOP in accordance with Statement of Position (“SOP”) 93-6, “Employers’Accounting for Employee Stock Ownership Plans.” SOP 93-6 requires that compensation expense recorded by employers equalthe fair value of ESOP shares allocated to participants during a given fiscalyear.  In April 2004, the Bank added35,000 shares to the ESOP plan in connection with its secondary stock offeringat a total value of $700,000.  In March2005, an additional 40,000 shares were acquired and added to the ESOP plan at atotal value of approximately $962,000.  Expenserecognized related to the ESOP totaled $207,000, $43,000, $261,000, and$484,000 for the fiscal year ended December 31, 2006, the three-month periodended December 31, 2005 and the fiscal years ended September 30, 2005, and2004, respectively.

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|                                                                          | ** ** | **For Year Ended** | ** ** | **For Three Months**  | ** ** | **For Years Ended** | ** ** |
|--------------------------------------------------------------------------|------------|------------------------------|------------|---------------------------------|------------|-------------------------------|------------|
| ** **                                                               | ** ** | **December 31**         | ** ** | **Ended December 31** | ** ** | **September 30,**        | ** ** |
| ** **                                                               | ** ** | **2006**                     | ** ** | **2005**                        | ** ** | **2005**                      | ** ** | **2004** | ** ** |
| Allocated shares                                                         |       | 96,542                       |       | 98,921                          |       | 99,013                        |       | 86,309 |   |
| Shares committed  to be released                                         |       | 1,875                        |       | 1,875                           |       | —                        |       | — |   |
| Unearned shares                                                          |       | 54,211                       |       | 63,754                          |       | 65,629                        |       | 39,523 |   |
| Total ESOP  shares                                                       |       | 152,628                      |       | 164,550                         |       | 164,642                       |       | 125,832 |   |
|                                                                     |       |                         |       |                            |       |                          |       |   |   |
| Fair value of unearned  shares at end of period (expressed in thousands) |       | $                            | 976        |                            | $          | 1,288                         |       | $ | 1,401 |   | $ | 910 |   |
|                                                                          |            |                              |            |                                 |            |                               |            |  |  |  |  |  |  |

 

14.  Share-Based Compensation Plans

EffectiveOctober 1, 2005, the Company adopted the fair value recognition provisions ofStatement of Financial Accounting Standards (SFAS) No. 123R, Share-BasedPayment.  The adoption of this Statementhad no material impact on the Company’s financial statement as the Company waspreviously accounting for stock compensation under Statement of FinancialAccounting Standards No. 123.  BothStatements utilize the fair value method at grant date for stock compensationand expense such cost against additional paid-in capital in its ConsolidatedStatement of Financial Condition.

TheBank has two share-based compensation plans, which are described below.  The compensation cost that has been chargedagainst income for those plans was $341,000, $138,000, $507,000, and $454,000for the fiscal year ended December 31, 2006, the three months ended December31, 2005 and for the fiscal years ended September 30, 2005 and 2004,respectively.  The total income taxbenefit recognized in the income statement for share-based compensationarrangements was $70,000 $47,000, $172,000, and $154,000 for the fiscal yearended December 31, 2006, the three months ended December 31, 2005, and for thefiscal years ended September 30, 2005 and 2004, respectively.

During fiscal 2001 the Board of Directorsadopted the Peoples Community Bancorp, Inc. Stock Option and Incentive Plan(the “2001 Plan”) that provides for the issuance of 197,773 shares ofauthorized but unissued shares of common stock at fair value at the date ofgrant.  Through December 31, 2006, theCompany has granted all options under the 2001 Plan.  The 2004 Stock Option and Incentive Plan (the“2004 Plan”), as approved by stockholders, provides for the issuance of 150,000shares of authorized but unissued shares of common stock at fair value at thedate of grant.  As of December 31, 2006,49,672 options, net of forfeitures, have been granted under the 2004 Plan.  All option awards are granted with anexercise price equal to the market price of the Company’s stock at the date ofgrant. Options under both plans have a 10-year term.

Both plans provide that one-fifth of theoptions granted become exercisable on each of the first five anniversaries ofthe date of grant. The remaining shares in the plans may be granted to employeesin increments of 20% per year based on management’s discretion.

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

Thefair value of the option grants are estimated on the date of grant using themodified Black-Scholes options-pricing model that uses the assumptions noted inthe following table. The objective of the measurement process is to estimatethe fair value of options based on the stock price at the grant date, to whichemployees will become entitled when they have rendered the requisite serviceand satisfy all other conditions necessary to earn the right to benefit fromthe options. In deriving the fair value of the stock options through theBlack-Scholes model, the stock price at the grant date is reduced by the valueof any dividends to be paid during the life of the option, since the options donot give holders the benefit of dividends paid before exercise. The expectedlife of all options is 10 years. The risk-free rate for the expected term ofthe option is the constant maturity yield on a U.S. Government obligation, witha term equal to the expected life of the options at the grant date.

|                              | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** |
|------------------------------|------------|----------|------------|----------|------------|----------|------------|
|                         |       |     |       |     |       |     |       |
| Expected  volatility         |       | 17.3     | %          | 19.5     | %          | 26.6     | %          |
|                         |       |     |       |     |       |     |       |
| Weighted average  volatility |       | 17.3     | %          | 19.5     | %          | 26.6     | %          |
|                         |       |     |       |     |       |     |       |
| Expected dividends           |       | 3.0      | %          | 3.0      | %          | 2.5      | %          |
|                         |       |     |       |     |       |     |       |
| Expected term  (in years)    |       | 10       |       | 10       |       | 10       |       |
|                         |       |     |       |     |       |     |       |
| Risk-free rate               |       | 5.2      | %          | 4.0      | %          | 4.6      | %          |

 

Asummary of the status of the Plan as of and for the fiscal year ended December31, 2006 is presented below:

|                                                               | ** ** | ** **  | ** ** | ** **              | ** ** | **Weighted-Average** | ** ** | **Aggregate** | ** ** |
|---------------------------------------------------------------|------------|-------------|------------|-------------------------|------------|----------------------|------------|---------------|------------|
| ** **                                                    | ** ** | ** **  | ** ** | ** **              | ** ** | **Remaining**        | ** ** | **Intrinsic** | ** ** |
| ** **                                                    | ** ** | ** **  | ** ** | **Weighted-average**    | ** ** | **Contractual**      | ** ** | **Value**     | ** ** |
| ** **                                                    | ** ** | **Shares**  | ** ** | **exercise price** | ** ** | **Term**             | ** ** | **($000)**    | ** ** |
| Outstanding at January  1, 2006                               |       | 177,696     |       | $                       | 18.20      |                 |       |          |       |   |
| Granted                                                       |       | 61,480      |       | 19.85                   |       |                 |       |          |       |
| Exercised                                                     |       | 3,248       |       | 14.00                   |       |                 |       |          |       |
| Forfeited & Expired                                       |       | 7,205       |       | 20.49                   |       |                 |       |          |       |
|                                                          |       |        |       |                    |       |                 |       |          |       |
| Outstanding at  December 31, 2006                             | ** ** | **228,723** | ** ** | **18.63**               | ** ** | **6.96**             | ** ** | **297**       | ** ** |
|                                                          |       |        |       |                    |       |                 |       |          |       |
| Options exercisable at  December 31, 2006                     | ** ** | **116,724** | ** ** | **16.81**               | ** ** | **5.30**             | ** ** | **$**         | **297**    | ** ** |
|                                                          |       |        |       |                    |       |                 |       |          |       |
| Weighted-average  fair value of options granted during period |       |        |       | **$ **             | **4.52**   |                 |       |          |       |   |
|                                                               |            |             |            |                         |            |                      |            |               |            |  |  |

 

37

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The weighted-average grant-date fair value of optionsgranted during the year ended December 31, 2006, September 30, 2005 andSeptember 30, 2004 was $4.52, $4.17, and $4.50, respectively.  There were no options granted during thethree-month period ended December 31, 2005. The total intrinsic value of options exercised during the year endedDecember 31, 2006 and year ended September 30, 2005 was $19,000 and$82,000, respectively.  There were nooptions exercised during the three months ended December 31, 2005 and the yearended September 30, 2004.

The Company also has a 2001Management Recognition Plan (“2001 MRP”) which provides for awards of up to79,109 shares of the Company’s common stock to members of the Board ofDirectors, management and employees.  Asof December 31, 2006, all shares from the 2001 MRP had been awarded to membersof the Board of Directors, management and employees.  Common shares awarded to outside members ofthe Board of Directors were fully expensed when granted, while shares awardedto members of management and employees will vest over a five year periodbeginning with the date of the award. Shares awarded under the MRP are distributed from previously authorizedbut unissued shares.

In2004, the stockholders approved a 2004 Management Recognition Plan (“2004 MRP”)which provides for awards of an additional 60,000 shares of the Company’scommon stock to management and employees. As of December 31, 2006, 6,781 shares have been awarded from the 2004MRP.  Shares distributed to recipients of the awardstotaled 54,020 shares as of December 31, 2006.

|                                 | ** ** | ** ** | ** ** | **Weighted-average** | ** ** |
|---------------------------------|------------|------------|------------|----------------------|------------|
| ** **                      | ** ** | ** ** | ** ** | **grant date**  | ** ** |
| ** **                      | ** ** | **Shares** | ** ** | **fair value**  | ** ** |
|                            |       |       |       |                 |       |
| Nonvested at  January 31, 2006  |       | 36,251     |       | $                    | 20.29      |   |
| Granted                         |       | 9,860      |       | 19.85                |       |
| Vested                          |       | 13,488     |       | 18.48                |       |
| Forfeited                       |       | 1,059      |       | 21.03                |       |
|                            |       |       |       |                 |       |
| Nonvested at December  31, 2006 | ** ** | **31,564** | ** ** | **$**                | **20.90**  | ** ** |

 

Asof December 31, 2006, there was $784,000 of total unrecognized compensationcost related to the share-based compensation plans.  The cost is expected to be recognized over aweighted-average period of 1.65 years. The total fair value of shares vested during the year ended December 31,2006, September 30, 2005 and September 30, 2004 was $268,000, $267,000, and$259,000, respectively.  There were noshares vested during the three-month period ended December 31, 2005.

38

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15.  Earnings Per Share 

Diluted earnings pershare is computed taking into consideration common shares outstanding anddilutive potential common shares to be issued under the Company’s stock optionplan.  There is no adjustment to netearnings (loss) for the calculation of diluted earnings per share.  The computations were as follows:

|                                                       | ** ** | ** **            | ** ** | **Three Months** | ** ** | ** **             | ** ** | ** **             | ** ** |
|-------------------------------------------------------|------------|-----------------------|------------|-----------------------|------------|------------------------|------------|------------------------|------------|
| ** **                                            | ** ** | **Year Ended**   | ** ** | **Ended**             | ** ** | **Year Ended**    | ** ** |
| ** **                                            | ** ** | **December 31,** | ** ** | **December 31,** | ** ** | **September 30,** | ** ** | **September 30,** | ** ** |
| ** **                                            | ** ** | **2006**              | ** ** | **2005**              | ** ** | **2005**               | ** ** | **2004**               | ** ** |
| Weighted-average common  shares outstanding (basic)   |       | 4,591,802             |       | 4,358,840             |       | 3,920,398              |       | 3,106,694              |       |
| Dilutive effect of  assumed exercise of stock options |       | —                |       | 27,257                |       | 38,741                 |       | 42,657                 |       |
| Weighted-average common shares outstanding (diluted)  | ** ** | **4,591,802**         | ** ** | **4,386,097**         | ** ** | **3,959,139**          | ** ** | **3,149,351**          | ** ** |

 

Basic earnings per share for each period presentedis based upon the weighted-average shares outstanding during the year lessunallocated ESOP shares. Options to purchase 46,417, 48,746 and 53,019 sharesof common stock and MRP awards of 13,543, 14,486 and 20,564 shares at aweighted-average price of $23.21, $23.21 and $23.21 were outstanding atDecember 31, 2005 and September 30, 2005, and 2004, respectively, but wereexcluded from the computation of diluted earnings per share for the periodbecause the exercise price was greater than the average market price of thecommon shares.

16.  FairValue of Financial Instruments

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

Themethods used are greatly affected by the assumptions applied, including thediscount rate and estimates of future cash flows.  Therefore, the fair values presented may notrepresent amounts that could be realized in an exchange for certain financialinstruments.

Thefollowing methods and assumptions were used by the Company in estimating itsfair value disclosures for financial instruments at December 31, 2006 and 2005:

Cash and cash equivalents:  The carrying amounts presented in theconsolidated statements of financial condition for cash and cash equivalentsare deemed to approximate fair value.

39

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

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

Federal Home Loan Bankstock:  The carryingamount presented in the consolidated statements of financial condition isdeemed to approximate fair value.

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

Advances from the FederalHome Loan Bank:  Thefair value of these advances is estimated using the rates currently offeredfor similar advances of similar remaining maturities.

Other borrowed money:  The fair value of other borrowed money isestimated using the rates currently offered for similar borrowings of similarremaining maturities.

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

Commitments to extendcredit:  For fixed-rateand adjustable-rate loan commitments, the fair value estimate considersthe difference between current levels of interest rates and committedrates.  At December 31, 2006 and 2005,the difference between the fair value and notional amount of loan commitmentswas not material.

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

40

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Based on the foregoing methods and assumptions,the carrying value and fair value of the Company’s financial instruments atDecember 31 are as follows:

|                                                                | ** ** | **2006**                | ** **  | **2005**   | ** ** |
|----------------------------------------------------------------|------------|-------------------------|-------------|------------|------------|
| ** **                                                     | ** ** | **Carrying**            | ** **  | **Fair**   | ** ** | **Carrying** | ** ** | **Fair** | ** ** |
| ** **                                                     | ** ** | **value**               | ** **  | **value**  | ** ** | **value** | ** ** | **value** | ** ** |
| ** **                                                     | ** ** | **(In thousands)** | ** **  |
| Financial assets                                               |       |                    |        |       |       |   |   |   |   |
| Cash and cash equivalents                                      |       | $                       | 57,459      |       | $          | 57,459 |   | $ | 21,558 |   | $ | 21,558 |   |
| Investment securities                                          |       | 4,230                   |        | 4,230      |       | 3,458 |   | 3,458 |   |
| Mortgage-backed securities                                     |       | 52,669                  |        | 52,669     |       | 71,024 |   | 71,024 |   |
| Loans receivable                                               |       | 812,578                 |        | 815,357    |       | 851,270 |   | 848,863 |   |
| Accrued interest receivable                                    |       | 5,461                   |        | 5,461      |       | 5,204 |   | 5,204 |   |
| Federal Home Loan Bank stock                                   |       | 14,024                  |        | 14,024     |       | 13,122 |   | 13,122 |   |
| ** **                                                     | ** ** | **$**                   | **946,421** | ** ** | **$**      | **949,200** | ** ** | **$** | **965,636** | ** ** | **$** | **963,229** | ** ** |
| Financial  liabilities                                         |       |                    |        |       |       |   |   |   |   |
| Deposits                                                       |       | $                       | 755,261     |       | $          | 753,745 |   | $ | 726,629 |   | $ | 697,564 |   |
| Advances from the Federal Home Loan Bank and other  borrowings |       | 156,885                 |        | 155,609    |       | 193,132 |   | 191,900 |   |
| Accrued interest payable                                       |       | 577                     |        | 577        |       | 700 |   | 700 |   |
| Subordinated debentures                                        |       | 15,464                  |        | 15,464     |       | 28,351 |   | 28,351 |   |
| ** **                                                     | ** ** | **$**                   | **928,187** | ** ** | **$**      | **925,395** | ** ** | **$** | **948,812** | ** ** | **$** | **918,515** | ** ** |

 

17.  Capitalization

TheCompany’s authorized capital stock includes 1,000,000 shares of $.01 per sharepar value voting preferred stock.  Nopreferred shares were issued at December 31, 2006 and 2005.

18.  Cash and Cash Equivalents

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

19.   Restriction on Cash and Due From Banks

The Bank isrequired to maintain reserve funds in cash or in deposits with Federal ReserveBank or Federal Home Loan Bank.  Thereserve required at December 31, 2006 was $3,066,000.

20.   Reclassifications

Certainprior year amounts have been reclassified to conform to the 2006 consolidatedfinancial statement presentation.

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21.                 Effects ofRecent Accounting Pronouncements

In March 2006, theFASB issued Statement of Financial Accounting Standards No. 156, Accounting forServicing of Financial Assets: an amendment of FASB Statement No. 140 (FAS 140and FAS 156).  FAS 140 establishes, amongother things, the accounting for all separately recognized servicing assets andservicing liabilities.  This Statementamends FAS 140 to require that all separately recognized servicing assets andservicing liabilities be initially measured at fair value, if practicable.  This Statement permits, but does not require,the subsequent measurement of separately recognized servicing assets and servicingliabilities at fair value.  Under thisStatement, an entity can elect subsequent fair value measurement to account forits separately recognized servicing assets and servicing liabilities.  Adoption of this Statement is required as ofthe beginning of the first fiscal year that begins after September 15,2006.  The Company  believes that adoption of FAS 156 will havean immaterial impact on the financial position and results of operations of theCompany.

In July 2006, theFASB issued FASB Interpretation No. 48, Accounting for Uncertainty in IncomeTaxes — an interpretation of FASB Statement No. 109 (FIN 48), which clarifiesthe accounting for uncertainty in tax positions.  This Interpretation requires that the Companyrecognize in the financial statements, the impact of a tax position, if thatposition is more than likely than not of being sustained on audit, based on thetechnical merits of the position.  Theprovisions of FIN 48 are effective as of the beginning of the 2007 fiscal year,with the cumulative effect of the change in accounting principle recorded as anadjustment to opening retained earnings. The Company believes the adoption of FIN 48 will have an immaterialimpact on the financial position and results of operations of the Company.

In September 2006,the FASB issued Statement of Financial Accounting Standard No. 157, Fair ValueMeasurement (FAS 157).  FAS 157 enhancesexisting guidance for measuring assets and liabilities using fair value.  Prior to the issuance of FAS 157, guidancefor applying fair value was incorporated in several accountingpronouncements.  FAS 157 provides asingle definition of fair value, together with a framework for measuring it,and requires additional disclosure about the use of fair value to measureassets and liabilities.  FAS 157 alsoemphasizes that fair value is a market-based measurement, not anentity-specific measurement, and sets out a fair value hierarchy with thehighest priority being quoted prices in active markets.  Under FAS 157, fair value measurements aredisclosed by level within that hierarchy. While FAS 157 does not add any new fair value measurements, it doeschange current practice.  Changes topractice include: (1) a requirement for an entity to include its own creditstanding in the measurement of its liabilities; (2) a modification of thetransaction price presumption; (3) a prohibition on the use of block discountswhen valuing large blocks of securities for broker-dealers and investmentcompanies; and (4) a requirement to adjust the value of restricted stock forthe effect of the restriction even if the restriction lapses within oneyear.  FAS 157 is effective for financialstatements issued for fiscal years beginning after November 15, 2007, and interimperiod within those fiscal years.  TheCompany has not determined the impact of adopting FAS 157 on its financialstatements.

In September 2006, the EITF reached a consensus onIssue No. 06-4, Accounting for Deferred Compensation and Postretirement BenefitAspects of Endorsement of Split-Dollar Life Insurance Arrangements.  The consensus requires the recognition of aliability related to the postretirement benefits covered by an endorsementsplit-dollar life insurance arrangement. If the policy holder has agreed to maintain the insurance policy inforce for the employee’s benefit during his or her retirement, then theliability recognized during the employee’s active service period should bebased on the future cost of

42

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insuranceto be incurred during the employee’s retirement.  Alternatively, if the policyholder has agreedto provide the employee with a death benefit, then the liability for the futuredeath benefit should be recognized by following the guidance in Statement 106or Option 12, as appropriate.  Thisapproach requires the policyholder to gain a clear understanding of the benefitbeing provided by the policyholder to its employee given that it is thisbenefit that is being recognized as a liability.  If this consensus is ratified by the FASB, itwill be applicable in fiscal years beginning after December 15, 2007.  The Company is currently evaluating theimpact of adopting Issue No. 06-4 and the impact it will have on the Company’sfinancial statements.

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

Theamortized cost, gross unrealized gains, gross unrealized losses and estimatedfair values of securities at December 31, 2006 and 2005, are summarized asfollows:

|                                  | ** ** | **2006**                | ** ** |
|----------------------------------|------------|-------------------------|------------|
| ** **                       | ** ** | ** **              | ** ** | **Gross** | ** ** | **Gross** | ** ** | **Estimated** | ** ** |
| ** **                       | ** ** | **Amortized**           | ** ** | **unrealized** | ** ** | **unrealized** | ** ** | **fair** | ** ** |
| ** **                       | ** ** | **cost**                | ** ** | **gains** | ** ** | **losses** | ** ** | **value** | ** ** |
| ** **                       | ** ** | **(In thousands)** | ** ** |
| **Available  for sale:**         |       |                    |       |   |   |   |   |   |   |
| US Government Agency Obligations |       | $                       | 1,966      |   | $ | 11 |   | $ | 12 |   | $ | 1,965 |   |
| Municipal Securities             |       | 1,114                   |       | 11 |   | 14 |   | 1,111 |   |
| Mutual Funds                     |       | 1,199                   |       | — |   | 53 |   | 1,146 |   |
| Mortgage Backed Securities       |       | 52,818                  |       | 134 |   | 283 |   | 52,669 |   |
| Other Securities                 |       | 7                       |       | 1 |   | — |   | 8 |   |
| ** **                       | ** ** | **$**                   | **57,104** | ** ** | **$** | **157** | ** ** | **$** | **362** | ** ** | **$** | **56,899** | ** ** |

** **

|                                  | ** ** | **2005**                | ** ** |
|----------------------------------|------------|-------------------------|------------|
| ** **                       | ** ** | ** **              | ** ** | **Gross** | ** ** | **Gross** | ** ** | **Estimated** | ** ** |
| ** **                       | ** ** | **Amortized**           | ** ** | **unrealized** | ** ** | **unrealized** | ** ** | **fair** | ** ** |
| ** **                       | ** ** | **cost**                | ** ** | **gains** | ** ** | **losses** | ** ** | **value** | ** ** |
| ** **                       | ** ** | **(In thousands)** | ** ** |
| **Available  for sale:**         | ** ** | ** **              | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| US Government Agency Obligations |       | $                       | 1,242      |   | $ | - |   | $ | 31 |   | $ | 1,211 |   |
| Municipal Securities             |       | 1,151                   |       | 11 |   | 16 |   | 1,146 |   |
| Mutual Funds                     |       | 1,149                   |       | — |   | 48 |   | 1,101 |   |
| Mortgage Backed Securities       |       | 71,401                  |       | 11 |   | 388 |   | 71,024 |   |
| ** **                       | ** ** | **$**                   | **74,943** | ** ** | **$** | **22** | ** ** | **$** | **483** | ** ** | **$** | **74,482** | ** ** |

 

43

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The amortized cost and fair value ofavailable-for-sale securities at December 31, 2006, by contractual maturity,are shown below.  There were no held-to-maturity securities at December 31,2006.  Expected maturities will differfrom contractual maturities because issuers may have the right to call orprepay obligations with or without call or prepayment penalties.

|                             | ** ** | **Available-for-sale**  | ** ** |
|-----------------------------|------------|-------------------------|------------|
| ** **                  | ** ** | **Amortized**           | ** ** | **Fair** | ** ** |
| ** **                  | ** ** | **Cost**                | ** ** | **Value** | ** ** |
| ** **                  | ** ** | **(In Thousands)** | ** ** |
|                        |       |                    |       |   |   |
| Within one year             |       | $                       | 22         |   | $ | 22 |   |
| One to five  years          |       | 1,136                   |       | 1,145 |   |
| Five to ten  years          |       | 701                     |       | 708 |   |
| After ten years             |       | 1,221                   |       | 1,201 |   |
|                        |       | 3,080                   |       | 3,076 |   |
| Mortgage-backed  securities |       | 52,818                  |       | 52,669 |   |
| Mutual funds                |       | 1,199                   |       | 1,146 |   |
| Other Securities            |       | 7                       |       | 8 |   |
| Totals                      |       | $                       | 57,104     |   | $ | 56,899 |   |

 

In conjunction with the purchase ofMercantile in June 2006, the Company acquired $7.4 million in investmentsecurities which were designated as available for sale.  Proceeds from the sale of investmentsecurities during fiscal year 2006 amounted to $1.6 million, with gross gainsof $126,000 and gross losses of $26,000, for a net realized gain totaling $100,000 and a related tax effect of$34,000.  During the three-month periodended December 31, 2005, the Bank sold $108.9 million in investment securitiesand recorded gross losses of $1.4 million and a related tax effect of$478,000.  During the year endedSeptember 30, 2005, the Bank sold $41.9 million of investment securities withgross gains of $741,000 and a related tax effect of $252,000.  During the year ended September 30, 2004, theBank sold its investment in FHLMC stock for proceeds of $1.4 million resultingin a realized gain of $19,000 and a related tax effect of $7,000.

AtDecember 31, 2006, People’s had $10.7 million of mortgage-backed securitiespledged to secure public deposits, and $35.7 million of mortgage-backedsecurities pledged to secure advances from the Federal Home Loan Bank.  At December 31, 2005, People’s had $13.6million of mortgage-backed securities pledged to secure public deposits, and$49.8 million of mortgage-backed securities pledged to secure advances from theFederal Home Loan Bank.

Certaininvestments in debt and marketable equity securities are reported in thefinancial statements at an amount less than their historical cost.  Total fair value of these investments atDecember 31, 2006 and 2005, were $31.1 million and $65.4 million, respectively,which approximated 54.8% and 87.9% of the Company’s investment portfolio.  These declines primarily resulted from recentincreases in market rates.  Based onevaluation of the available evidence, including recent changes in market rates,credit rating information and information obtained from regulatory filings,management believes the declines in fair value for these securities aretemporary.

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Shouldthe impairment of any of these securities become other than temporary, the costbasis of the investment will be reduced and the resulting loss recognized innet earnings in the period in which the other-than-temporary impairment isidentified.

Thefollowing tables reflect the investments’ gross unrealized loses and fairvalue, aggregated by investment category and length of time that individualsecurities have been in a continuous unrealized loss position at December 31,2006 and 2005.

|                                         | ** ** | **2006**                               | ** ** |
|-----------------------------------------|------------|----------------------------------------|------------|
| ** **                              | ** ** | **Less than 12 months** | ** ** | **12 Months or Longer** | ** ** | **Total** | ** ** |
| ** **                              | ** ** | **Number of**                     | ** ** | **Fair** | ** ** | **Unrealized** | ** ** | **Number of** | ** ** | **Fair** | ** ** | **Unrealized** | ** ** | **Fair** | ** ** | **Unrealized** | ** ** |
| **Description of securities** | ** ** | **investments**                        | ** ** | **value** | ** ** | **Losses** | ** ** | **investments** | ** ** | **value** | ** ** | **Losses** | ** ** | **value** | ** ** | **Losses** | ** ** |
| ** **                              | ** ** | **(In Thousands)**                | ** ** |
| US Government  agency obligations       |       | —                                 |       | $ | — |   | $ | — |   | 2 |   | $ | 980 |   | $ | 12 |   | $ | 980 |   | $ | 12 |   |
| Municipal  securities                   |       | —                                 |       | — |   | — |   | 3 |   | 423 |   | 14 |   | 423 |   | 14 |   |
| Mutual funds                            |       | —                                 |       | — |   | — |   | 2 |   | 1,146 |   | 53 |   | 1,146 |   | 53 |   |
| Mortgage-backed  securities             |       | 3                                      |       | 592 |   | 1 |   | 7 |   | 27,971 |   | 282 |   | 28,563 |   | 283 |   |
| Total temporarily  impaired securities  | ** ** | **3**                                  | ** ** | **$** | **592** | ** ** | **$** | **1** | ** ** | **14** | ** ** | **$** | **30,520** | ** ** | **$** | **361** | ** ** | **$** | **31,112** | ** ** | **$** | **362** | ** ** |

** **

|                                         | ** ** | **2005**                               | ** ** |
|-----------------------------------------|------------|----------------------------------------|------------|
| ** **                              | ** ** | **Less than 12 months** | ** ** | **12 Months or Longer** | ** ** | **Total** | ** ** |
| ** **                              | ** ** | **Number of**                     | ** ** | **Fair** | ** ** | **Unrealized** | ** ** | **Number of** | ** ** | **Fair** | ** ** | **Unrealized** | ** ** | **Fair** | ** ** | **Unrealized** | ** ** |
| **Description of securities** | ** ** | **investments**                        | ** ** | **value** | ** ** | **Losses** | ** ** | **investments** | ** ** | **value** | ** ** | **Losses** | ** ** | **value** | ** ** | **Losses** | ** ** |
| ** **                              | ** ** | **(In Thousands)**                | ** ** |
| US Government  agency obligations       |       | 2                                      |       | $ | 961 |   | $ | 31 |   | — |   | $ | — |   | $ | — |   | $ | 961 |   | $ | 31 |   |
| Municipal  securities                   |       | 6                                      |       | 474 |   | 16 |   | — |   | — |   | — |   | 474 |   | 16 |   |
| Mutual funds                            |       | —                                 |       | — |   | — |   | 2 |   | 1,101 |   | 48 |   | 1,101 |   | 48 |   |
| Mortgage-backed  securities             |       | 11                                     |       | 58,121 |   | 355 |   | 2 |   | 4,788 |   | 33 |   | 62,909 |   | 388 |   |
| Total temporarily  impaired securities  | ** ** | **19**                                 | ** ** | **$** | **59,556** | ** ** | **$** | **402** | ** ** | **4** | ** ** | **$** | **5,889** | ** ** | **$** | **81** | ** ** | **$** | **65,445** | ** ** | **$** | **483** | ** ** |

** **

45

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**NOTE C - LOANS RECEIVABLE**

Thecomposition of the loan portfolio at December 31 is summarized as follows:

|                                          | ** ** | **2006**                | ** **  | **2005**   | ** ** |
|------------------------------------------|------------|-------------------------|-------------|------------|------------|
| ** **                               | ** ** | **(In thousands)** | ** **  |
| Residential real  estate                 |       |                    |        |       |       |
| One-to-four family                       |       | $                       | 343,346     |       | $          | 341,233 |   |
| Multifamily                              |       | 122,221                 |        | 124,984    |       |
| Construction                             |       | 104,764                 |        | 104,882    |       |
| Nonresidential  real estate and land     |       | 140,909                 |        | 147,086    |       |
| Nonresidential  real estate construction |       | 130,066                 |        | 154,367    |       |
| Commercial                               |       | 30,933                  |        | 47,258     |       |
| Consumer and  other                      |       | 23,022                  |        | 24,898     |       |
| Total loans receivable                   |       | 895,261                 |        | 944,708    |       |
| Less:                                    |       |                    |        |       |       |
| Undisbursed portion of loans in process  |       | 62,042                  |        | 77,094     |       |
| Deferred loan origination fees           |       | 2,272                   |        | 2,900      |       |
| Allowance for loan losses                |       | 18,369                  |        | 13,444     |       |
| Loans receivable  — net             | ** ** | **$**                   | **812,578** | ** ** | **$**      | **851,270** | ** ** |

 

Peopleshas continued to change the composition of the loan portfolio with the additionof loans secured by multi-family residential and nonresidential real estatefrom the original primary focus of one-to-four family residential loans.  One-to-four-family residential loans comprisedapproximately $343.3 million, or 42.3%, and $341.2 million, or 40.1%, of thenet loan portfolio at December 31, 2006 and 2005, respectively.  Multi-family residential loans comprisedapproximately $122.2 million, or 15.0%, of the net loan portfolio at December31, 2006, and $125.0 million or 14.7%, of the net loan portfolio at December31, 2005.  Nonresidential real estatelending comprised approximately $271.0 million, or 33.3%, and $301.5 million,or 35.4%, of the net loan portfolio at December 31, 2006 and December 31, 2005,respectively.  Generally, real estateloans have been underwritten on the basis of no more than an 80% loan-to-valueratio, which has historically provided Peoples with adequate collateralcoverage in the event of default. Nevertheless, Peoples, as with any lending institution, is subject tothe risk that real estate values could deteriorate in its primary lending areaof southwestern Ohio and southeaster Indiana, thereby impairing collateralvalues.

Inthe ordinary course of business, Peoples has granted loans to some of itsdirectors, officers and their related business interests.  All loans to related parties have been madeon substantially the same terms as those prevailing at the time for unrelatedthird parties.  The aggregate dollaramount of loans to executive officers and directors was approximately $886,000and $949,000 million at December 31, 2006 and 2005, respectively.  During the fiscal year ended December 31,2006, there was one loan originated to executive officers and directors for$275,000.   For the three month periodended December 31, 2005, there were no loans originated to executive officers and directors.  During the fiscal year ended December 31,2006 and the three month period ended December 31, 2005, principal repaymentsof approximately $92,000 and $26,000, respectively, were received fromexecutive officers and directors

46

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**NOTE D - ALLOWANCE FOR LOANLOSSES**

Theactivity in the allowance for loan losses is summarized as follows the fiscalyear ended December 31, 2006, the three-month period ended December 31, 2005and the fiscal years ended September 30, 2005 and 2004:

|                                            | ** ** | **For Year Ended** | ** ** | **For Three Months** | ** ** | **For Years Ended** | ** ** |
|--------------------------------------------|------------|------------------------------|------------|--------------------------------|------------|-------------------------------|------------|
| ** **                                 | ** ** | **December 31,**        | ** ** | **December 31,**          | ** ** | **September 30,**        | ** ** |
| ** **                                 | ** ** | **2006**                     | ** ** | **2005**                       | ** ** | **2005**                      | ** ** | **2004** | ** ** |
| ** **                                 | ** ** | **(In thousands)**      | ** ** |
| Balance at beginning  of period            |       | $                            | 13,444     |                           | $          | 13,697                        |       | $ | 11,025 |   | $ | 9,744 |   |
| Increase from  Peoples Federal Acquisition |       | —                       |       | 907                            |       | —                        |       | — |   |
| Increase from  Mercantile Acquisition      |       | 302                          |       | —                         |       | —                        |       | — |   |
| Provision for  losses on loans             |       | 17,450                       |       | 900                            |       | 3,600                         |       | 3,600 |   |
| Charge-off of  loans                       |       | (13,103                      | )          | (2,206                         | )          | (1,081                        | )          | (2,360 | ) |
| Recoveries                                 |       | 276                          |       | 146                            |       | 153                           |       | 41 |   |
| Balance at end of  period                  | ** ** | **$**                        | **18,369** | ** **                     | **$**      | **13,444**                    | ** ** | **$** | **13,697** | ** ** | **$** | **11,025** | ** ** |

 

AtDecember 31, 2006, December 31, 2005, September 30, 2005, and September 30,2004 the non-accruing loans amounted to $24.1 million, $18.8 million, $19.4million and $6.0 million, respectively. At December 31, 2006 loans greater than 90 days delinquent and stillaccruing totaled $1.7 million and were deemed to be in process of collection ofboth principal and interest. There were no loans greater than 90 daysdelinquent and still accruing at December 31, 2005.  Interest income which would have beenrecognized if such loans had performed pursuant to contractual terms totaledapproximately $1.4 million, $161,000, $1.1 million and $560,000 for the fiscalyear ended December 31, 2006, the three-month period ended December 31, 2006and the fiscal years ended September 30, 2005 and 2004, respectively.

Informationwith respect to the Bank’s impaired loans at and for the years ended December31, 2006 and 2005 is as follows:

|                                                               | ** ** | **2006**                | ** ** | **2005**   | ** ** |
|---------------------------------------------------------------|------------|-------------------------|------------|------------|------------|
| ** **                                                    | ** ** | **(In thousands)** | ** ** |
| Impaired loans  with related allowance                        |       | $                       | 15,327     |       | $          | 11,446 |   |
| Impaired loans  with no related allowance                     |       | 5,201                   |       | —     |       |
| Total impaired loans                                          | ** ** | **$**                   | **20,528** | ** ** | **$**      | **11,446** | ** ** |
| Allowance for  losses on impaired loans                       |       |                    |       |       |       |
| Beginning balance                                             |       | $                       | 4,650      |       | $          | 3,673 |   |
| Provision for losses on loans                                 |       | 1,500                   |       | 977        |       |
| Charge off of loans                                           |       | 4,035                   |       | —     |       |
| Ending balance                                                | ** ** | **$**                   | **2,115**  | ** ** | **$**      | **4,650** | ** ** |
| Average recorded  investment in impaired loans                | ** ** | **$**                   | **16,297** | ** ** | **$**      | **8,903** | ** ** |
| Interest income  recognized on impaired loans                 | ** ** | **$**                   | **861**    | ** ** | **$**      | **1** | ** ** |
| Interest income  recognized on a cash basis on impaired loans | ** ** | **$**                   | **847**    | ** ** | **$**      | **1** | ** ** |

 

The allowance forimpaired loans is included in the Bank’s overall allowance for loan losses.

47

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**NOTE E - OFFICE PREMISES ANDEQUIPMENT**

Officepremises and equipment are comprised of the following at December 31:

|                                    | ** ** | **2006**                | ** ** | **2005**   | ** ** |
|------------------------------------|------------|-------------------------|------------|------------|------------|
| ** **                         | ** ** | **(In thousands)** | ** ** |
| Land and  improvements             |       | $                       | 9,855      |       | $          | 7,500 |   |
| Office buildings  and improvements |       | 15,323                  |       | 14,697     |       |
| Construction in  progress          |       | 1,957                   |       | 2,116      |       |
| Furniture,  fixtures and equipment |       | 6,414                   |       | 6,093      |       |
|                               |       | 33,549                  |       | 30,406     |       |
| Less accumulated  depreciation     |       | 5,670                   |       | 5,119      |       |
| ** **                         | ** ** | **$**                   | **27,879** | ** ** | **$**      | **25,287** | ** ** |

 

Constructionwas completed on a new branch office in Liberty Township in April, 2006, at atotal cost of $1.8 million.  Duringfiscal 2006, construction began for a new branch office in Montgomery with anestimated cost of $1.2 million, which opened in February, 2007.  Capitalized interest on construction duringfiscal year 2006 was deemed immaterial.

**NOTE F - DEPOSITS**

Depositsconsist of the following major classifications at December 31:

|                                                 | ** ** | **2006**                             | ** **  | **2005**   | ** ** |
|-------------------------------------------------|------------|--------------------------------------|-------------|------------|------------|
| ** **                                      | ** ** | **(Dollars in thousands)** | ** **  |
| Non-interest  bearing checking accounts         |       | $                                    | 21,967      |       | $          | 24,125 |   |
| Checking  accounts                              |       | 55,114                               |        | 50,602     |       |
| Savings accounts                                |       | 158,025                              |        | 191,991    |       |
| Money market  demand deposit                    |       | 20,863                               |        | 18,454     |       |
| Total demand, transaction and passbook deposits |       | 255,969                              |        | 285,172    |       |
| Certificates of  deposit:                       |       |                                 |        |       |       |
| Original maturities of:                         |       |                                 |        |       |       |
| Less than 12 months                             |       | 227,290                              |        | 13,883     |       |
| 12 months to 36 months                          |       | 99,998                               |        | 246,732    |       |
| More than 36 months                             |       | 83,507                               |        | 94,814     |       |
| Individual retirement accounts                  |       | 88,497                               |        | 86,028     |       |
| Total certificates of deposit                   |       | 499,292                              |        | 441,457    |       |
| Total deposits                                  | ** ** | **$**                                | **755,261** | ** ** | **$**      | **726,629** | ** ** |

 

48

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AtDecember 31, 2006 and 2005, Peoples had certificate of deposit accounts withbalances greater than $100,000 totaling $131.9 million and $114.1 million,respectively.

Maturities of outstanding certificates ofdeposit are summarized as follows at December 31:

|                     | ** ** | **2006**                | ** **  | **2005**   | ** ** |
|---------------------|------------|-------------------------|-------------|------------|------------|
| ** **          | ** ** | **(In thousands)** | ** **  |
| One year or less    |       | $                       | 380,956     |       | $          | 252,114 |   |
| One to two years    |       | 33,935                  |        | 72,790     |       |
| Two to three years  |       | 36,479                  |        | 30,262     |       |
| Three to four years |       | 30,960                  |        | 37,123     |       |
| Four to five years  |       | 16,962                  |        | 49,102     |       |
| Five to six years   |       | —                  |        | 66         |       |
| ** **          | ** ** | ** **              | ** **  | ** ** | ** ** |
| ** **          | ** ** | **$**                   | **499,292** | ** ** | **$**      | **441,457** | ** ** |

** **

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

Advances from the Federal Home Loan Bank,collateralized at December 31, 2006 by pledges of certain residential mortgageloans totaling $332.0 million, certain mortgage backed securities totaling$35.7 million, and Peoples’ investment in Federal Home Loan Bank stock, aresummarized as follows:

|                                 | ** ** | **Maturing fiscal**     | ** ** | ** **                           | ** **  |
|---------------------------------|------------|------------------------------|------------|--------------------------------------|-------------|
| **Interest Rate**          | ** ** | **year ending in** | ** ** | **(Dollars in thousands)** | ** **  |
| 2.69% - 7.45%                   |       | 2007                         |       | 6,452                                |        |
| 4.03% - 5.22%                   |       | 2008                         |       | 3,480                                |        |
| 3.73%                           |       | 2009                         |       | 2,904                                |        |
| 7.65%                           |       | 2011                         |       | 2                                    |        |
| 3.58% - 4.53%                   |       | 2012                         |       | 101,953                              |        |
| 4.78%                           |       | 2015                         |       | 1,953                                |        |
| 4.07%                           |       | 2016                         |       | 25,000                               |        |
| 5.60%                           |       | 2018                         |       | 78                                   |        |
| 5.60% - 6.61%                   |       | 2019                         |       | 2,363                                |        |
| ** **                      | ** ** | ** **                   |       | **$**                                | **144,185** |   |
| Weighted-average  interest rate | ** ** | ** **                   |       | **3.96**                             | **%**       |
|                                 |            |                              |            |                                      |             |  |

** **

**NOTE H - OTHER BORROWED MONEY**

The Company has a$17.5 million line of credit with another financial institution, with interestpayable at LIBOR plus 200 basis points (7.35% at December 31, 2006) or primeless 50 basis points (7.75% at December 31, 2006) based on the selection madeby the Company.  The Company had abalance of $12.7 million at December 31, 2006, with an average weighted rate of7.37%.  This line of credit expires inthe fourth quarter of fiscal 2007.  Theloan is secured by the outstanding shares of the Bank.

49

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

In fiscal 2002, a Delaware trust owned bythe Company (the “Trust I”), issued $12.5 million of mandatorily redeemabledebt securities.  The debt securitiesissued by the Trust I were included in the Company’s regulatory capital,specifically as a component of Tier I capital. The subordinated debentures were the sole assets of the Trust I, and theCompany owned all of the common securities of the Trust I.  Interest payments on the debt securities weremade semi-annually at an annual variable interest rate equal to the six-monthLIBOR rate plus 375 basis points, or equal to 8.42% at December 31, 2005 andwere reported as a component of interest expense on borrowings.  Theses subordinated debentures were redeemedin December 2006 with no penalty.  Thefunds to redeem the debentures were obtained through an advance on the Company’sline of credit with another financial institution.

In June 2005, the Company formed a second wholly ownedtrust (the “Trust II”), which issued $15.0 million of mandatorily redeemabledebt securities. These debt securities are included as a component of Tier Icapital for regulatory capital purposes. The subordinated debentures are the sole assets of the Trust II, and theCompany owns all of the common securities of the Trust II.  Interest payments on the debt securities aremade quarterly at an annual variable interest rate equal to the three-monthLIBOR rate plus 175 basis points, or equal to 6.24% at December 31, 2005 and7.11% at December 31, 2006, and are reported as a component of interest expenseon borrowings.   The net proceedsreceived by the Company from the sale of the debt securities were used forgeneral corporate purposes.  Thesubordinated debentures mature in 2035, but can be redeemed through priorapproval by the OTS in any June, September, December or March beginning in2010.

**NOTE J - COMMITMENTS**

Peoples’is a party to financial instruments with off-balance-sheet risk in the normalcourse of business to meet the financing needs of its customers, includingcommitments to extend credit.  Suchcommitments involve, to varying degrees, elements of credit and interest-raterisk in excess of the amount recognized in the consolidated statement offinancial condition.  The contract ornotional amounts of the commitments reflect the extent of Peoples’ involvementin such financial instruments.

Peoples’exposure to credit loss in the event of nonperformance by the other party tothe financial instrument for commitments to extend credit is represented by thecontractual notional amount of those instruments.  Peoples uses the same credit policies inmaking commitments and conditional obligations as those utilized for on-balance-sheetinstruments.

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AtDecember 31, 2006, Peoples had commitments to originate loans totaling $5.0million of which $716,000 were fixed rate and $4.3 million were adjustablerate. Additionally, Peoples had adjustable-rate commitments for unused lines ofcredit under home equity loans totaling $25.2 million, adjustable-ratecommitments for unused commercial lines of credit totaling $5.1 million, andfixed-rate commitments for unused consumer overdraft protection lines totaling$504,000.  Management believes that suchloan commitments are able to be funded through normal cash flow fromoperations.  Additionally, Peoples hadstandby letters of credit for customers totaling $5.8 million at December 31,2006.  From time to time balances withcorrespondent banks may exceed the FDIC $100,000 insurable limit.

AtDecember 30, 2005, Peoples had commitments to originate loans totaling $­­­­13.5million of which $9.1 million were fixed rate and $3.9 million were adjustablerate. Additionally, Peoples had adjustable-rate commitments for unused lines ofcredit under home equity loans totaling $25.2 million, adjustable-ratecommitments for unused commercial lines of credit totaling $14.3 million, andfixed-rate commitments for unused consumer overdraft protection lines totaling$159,000.  Additionally, Peoples hadfixed-rate standby letters of credit for customers totaling $9.7 million atDecember 31, 2005.

Commitmentsto extend credit are agreements to lend to a customer as long as there is noviolation of any condition established in the contract.  Commitments generally have fixed expirationdates or other termination clauses and may require payment of a fee.  Since many of the commitments may expirewithout being drawn upon, the total commitment amounts do not necessarilyrepresent future cash requirements. Peoples evaluates each customer’s creditworthiness on a case-by-casebasis.  The amount of collateralobtained, if it is deemed necessary by Peoples upon extension of credit, isbased on management’s credit evaluation of the counterparty.  Collateral on loans may vary but thepreponderance of loans granted generally include a mortgage interest in realestate as security.

Peoples has also entered into leaseagreements for office premises under operating leases which expire at variousdates through 2013. Rent expense totaled $128,000, $16,000, 37,000 and $95,000for the fiscal year ended December 31, 2006, the three-month period endedDecember 31, 2005 and the fiscal years ended September 30, 2005 and 2004, respectively.The following table summarizes minimum payments due under lease agreements byyear.

|                                             | ** ** | ** **                           | ** ** |
|---------------------------------------------|------------|--------------------------------------|------------|
| **Year ending December 31,** | ** ** | **(Dollars in thousands)** | ** ** |
| 2007                                        |       | $                                    | 67         |   |
| 2008                                        |       | 38                                   |       |
| 2009                                        |       | 38                                   |       |
| 2010                                        |       | 38                                   |       |
| 2011                                        |       | 38                                   |       |
| Thereafter                                  |       | 45                                   |       |
| ** **                                  | ** ** | **$**                                | **264**    | ** ** |

** **

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**NOTE K - FEDERAL INCOME TAXES**

Federalincome taxes differ from the amounts computed at the statutory corporate taxrate for the fiscal year ended December 31, 2006, the three-month period endedDecember 31, 2005 and fiscal years ended September 30, 2005 and 2004 asfollows:

|                                                             | ** ** | **For Year Ended** | ** ** | **For Three Months** | ** ** | **For Years Ended** | ** ** |
|-------------------------------------------------------------|------------|------------------------------|------------|--------------------------------|------------|-------------------------------|------------|
| ** **                                                  | ** ** | **December 31,**        | ** ** | **December 31,**          | ** ** | **September 30,**        | ** ** |
| ** **                                                  | ** ** | **2006**                     | ** ** | **2005**                       | ** ** | **2005**                      | ** ** | **2004** | ** ** |
| ** **                                                  | ** ** | **(In thousands)**      | ** ** |
| Federal income  taxes at statutory rate                     |       | $                            | (2,165     | )                              | $          | 18                            |       | $ | 1,439 |   | $ | 1,424 |   |
| Increase in  taxes resulting from:                          |       |                         |       |                           |       |                          |       |   |   |
| Bank owned life insurance undistributed earnings            |       | (233                         | )          | (55                            | )          | (54                           | )          | — |   |
| Tax exempt interest on municipal securities                 |       | (15                          | )          | (4                             | )          | (5                            | )          |   |   |
| Other                                                       |       | 105                          |       | 7                              |       | (5                            | )          | (104 | ) |
| Federal income  taxes per consolidated financial statements |       | $                            | (2,308     | )                              | $          | (34                           | )          | $ | 1,375 |   | $ | 1,320 |   |
| Effective tax rate                                          | ** ** | **(36.2**                    | **)%**     | **(64.2**                      | **)%**     | **32.4**                      | **%**      | **31.5** | **%** |

 

The composition of the Company’s net deferred taxasset at December 31 is as follows:

|                                                                                       | ** ** | **2006**                | ** ** | **2005**   | ** ** |
|---------------------------------------------------------------------------------------|------------|-------------------------|------------|------------|------------|
| ** **                                                                            | ** ** | **(In thousands)** | ** ** |
| Taxes (payable)  refundable on temporary differences at estimated corporate tax rate: |       |                    |       |       |       |
| Deferred tax assets:                                                                  |       |                    |       |       |       |
| General loan loss allowance                                                           |       | $                       | 6,245      |       | $          | 4,880 |   |
| Deferred compensation                                                                 |       | 476                     |       | 910        |       |
| Stock benefit plans                                                                   |       | 252                     |       | 31         |       |
| Deferred loan origination fees                                                        |       | 772                     |       | 1,008      |       |
| Net operating loss carry forward from acquired  financial institution                 |       | 1,188                   |       | 940        |       |
| Nonaccrual interest                                                                   |       | 293                     |       | —     |       |
| Unrealized losses on securities designated as  available for sale                     |       | 70                      |       | 157        |       |
| Other                                                                                 |       | 37                      |       | —     |       |
| Total deferred tax assets                                                             |       | 9,333                   |       | 7,926      |       |
| Deferred tax liabilities:                                                             |       |                    |       |       |       |
| Federal Home Loan Bank stock dividends                                                |       | (1,919                  | )          | (1,656     | )          |
| Book/tax depreciation differences                                                     |       | (398                    | )          | (254       | )          |
| Mortgage Servicing Rights                                                             |       | (281                    | )          | —     |       |
| Core deposit intangible and other purchase  accounting adjustments                    |       | (3,255                  | )          | (2,754     | )          |
| Other                                                                                 |       | (345)                   |       | (34)       |       |
| Total deferred tax liabilities                                                        |       | (6,198                  | )          | (4,698     | )          |
| Net deferred tax  asset                                                               | ** ** | **$**                   | **3,135**  | ** ** | **$**      | **3,228** | ** ** |

 

52

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As of December 31, 2006, the Company had approximately$3.5 million of net operating loss carry forward available to offset futurefederal taxable income.  The netoperating loss carry forward expires in 2025.

Priorto fiscal 1997, Peoples was allowed a special bad debt deduction based on apercentage of earnings, generally limited to 8% of otherwise taxable income andsubject to certain limitations based on aggregate loans and savings accountbalances at the end of the year.  Thisdeduction totaled approximately $4.9 million as of December 31, 2006.  If the amounts that qualified as deductionsfor federal income tax purposes are later used for purposes other than for baddebt losses, including distributions in liquidation, such distributions will besubject to federal income taxes at the then current corporate income taxrate.  The approximate amount of theunrecognized deferred tax liability relating to the cumulative bad debtdeduction is $1.4 million.

**NOTE L - REGULATORY CAPITAL**

TheBank is subject to various regulatory capital requirements administered by thefederal banking agencies.  Failure tomeet minimum capital requirements can initiate certain mandatory — and possiblyadditional discretionary — actions by regulators that, if undertaken, couldhave a direct material effect on the Bank’s financial statements.   Under capital adequacy guidelines and theregulatory framework for prompt corrective action, the Bank must meet specificcapital guidelines that involve quantitative measures of the bank’s assets,liabilities, and certain off-balance sheet items as calculated under regulatoryaccounting practices.  The Bank’s capitalamounts and classification are also subject to qualitative judgments by theregulators about components, risk weightings, and other factors.

Quantitativemeasures established by regulation to ensure capital adequacy require the Bankto maintain minimum amounts and ratios (set forth in the table below) of totaland Tier 1 capital (as defined in the regulation) to risk-weighted assets (asdefined), and of Tier 1 capital (as defined) to average assets (as defined).  Management believes, as of December 31, 2006,that the Bank meets all capital adequacy requirements to which it is subject.

During fiscal 2006, theBank was notified by the OTS that it was categorized as “well-capitalized”under the regulatory framework for prompt corrective action.  To be categorized as “well-capitalized” theBank must maintain minimum capital ratios as set forth in the followingtables.  There are no conditions orevents since that notification that management believes have changed the Bank’scategory.

Asof December 31, 2006, Peoples Community Bank exceeded all capital adequacyrequirements to which it was subject. Peoples Community Bancorp, as a savingsinstitution holding company at December 31, 2006, is not subject to regulatorycapital requirements separate from those of the bank.

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** **

| Peoples Community Bank               | ** ** | **As of December 31, 2006** | ** ** |
|------------------------------------------------|------------|-------------------------------------------------|------------|
| ** **                                     | ** ** | ** **                                      | ** ** | ** ** | ** ** | **Adequately** | ** ** | **Well** | ** ** |
| ** **                                     | ** ** | **Actual**                                      | ** ** | **Capitalized** | ** ** | **Capitalized** | ** ** |
| ** **                                     | ** ** | **Amount**                                      | ** ** | **Ratio** | ** ** | **Amount** | ** ** | **Ratio** | ** ** | **Amount** | ** ** | **Ratio** | ** ** |
| ** **                                     | ** ** | **(Dollars in thousands)**            | ** ** |
| **Total Capital  (to Risk Weighted Assets):**  |       | $                                               | 94,390     |   | 12.6% |   | 3$59,983 |   | 38.0% |   | 3$74,979 |   | 310.0% |   |
| **Tier 1 Capital  (to Risk-Weighted Assets):** |       | $                                               | 84,906     |   | 11.3% |   | 3$29,991 |   | 34.0% |   | 3$44,987 |   | 36.0% |   |
| **Tier 1 Capital (to Average  Assets):**       |       | $                                               | 84,906     |   | 8.5% |   | 3$39,949 |   | 34.0% |   | 3$49,936 |   | 35.0% |   |

 

PeoplesCommunity Bank and Peoples Community Bancorp, a bank holding company, atDecember 31, 2005, exceeded all capital adequacy requirements to which it wassubject.

|                                                | ** ** | **As of December 31, 2005** | ** ** |
|------------------------------------------------|------------|-------------------------------------------------|------------|
| ** **                                     | ** ** | ** **                                      | ** ** | ** ** | ** ** | **Adequately** | ** ** | **Well** | ** ** |
| ** **                                     | ** ** | **Actual**                                      | ** ** | **Capitalized** | ** ** | **Capitalized** | ** ** |
| ** **                                     | ** ** | **Amount**                                      | ** ** | **Ratio** | ** ** | **Amount** | ** ** | **Ratio** | ** ** | **Amount** | ** ** | **Ratio** | ** ** |
| ** **                                     | ** ** | **(Dollars in thousands)**            | ** ** |
| **Total Capital  (to Risk Weighted Assets):**  |       |                                            |       |   |   |   |   |   |   |   |   |   |   |
| Consolidated                                   |       | $                                               | 98,037     |   | 13.2% |   | 3$59,505 |   | 38.0% |   | 3$74,381 |   | 310.0% |   |
| Peoples  Community Bank                        |       | $                                               | 92,403     |   | 12.0% |   | 3$61,725 |   | 38.0% |   | 3$77,157 |   | 310.0% |   |
| **Tier 1 Capital  (to Risk-Weighted Assets):** |       |                                            |       |   |   |   |   |   |   |   |   |   |   |
| Consolidated                                   |       | $                                               | 81,961     |   | 11.0% |   | 3$29,752 |   | 34.0% |   | 3$44,629 |   | 36.0% |   |
| Peoples  Community Bank                        |       | $                                               | 83,206     |   | 10.8% |   | 3$30,863 |   | 34.0% |   | 3$46,294 |   | 36.0% |   |
| **Tier 1  Capital (to Average Assets):**       |       |                                            |       |   |   |   |   |   |   |   |   |   |   |
| Consolidated                                   |       | $                                               | 81,961     |   | 8.1% |   | 3$40,689 |   | 34.0% |   | 3$50,861 |   | 35.0% |   |
| Peoples Community Bank                         |       | $                                               | 83,206     |   | 8.2% |   | 3$40,550 |   | 34.0% |   | 3$50,687 |   | 35.0% |   |

 

Management believes that, under the current regulatory capitalregulations, the Bank will continue to meet the minimum capital requirements inthe foreseeable future.  However, eventsbeyond the control of the Bank, such as interest rate movements or a downturnin the economy in the Bank’s market area, could adversely affect futureearnings and, consequently, the ability to meet future minimum regulatorycapital requirements.

54

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

The following condensed financial statements summarizethe financial position of Peoples Community Bancorp, Inc. as of December 31,2006 and 2005, and the results of its operations and its cash flows for thefiscal year ended December 31, 2006, the three-month period ended December 31,2005 and the fiscal years ended September 30, 2005 and 2004.

**PEOPLES COMMUNITYBANCORP, INC.STATEMENTS OF FINANCIAL CONDITION**December31, 2006 and 2005(In thousands)

|                                                                                       | ** ** | **2006**   | ** **  | **2005**   | ** ** |
|---------------------------------------------------------------------------------------|------------|------------|-------------|------------|------------|
| **ASSETS**                                                                            |       |       |        |       |       |
| ** **                                                                            |       |       |        |       |       |
| Cash and cash  equivalents                                                            |       | $          | 191         |       | $          | 961 |   |
| Loan receivable  from Bank                                                            |       | 1,212      |        | 1,423      |       |
| Investment in  Peoples Community Bank                                                 |       | 114,617    |        | 108,514    |       |
| Investment in  Columbia                                                               |       | —     |        | 2,684      |       |
| Prepaid federal  income taxes and other assets                                        |       | 1,156      |        | 2,385      |       |
| Total assets                                                                          | ** ** | **$**      | **117,176** | ** ** | **$**      | **115,967** | ** ** |
|                                                                                  | ** ** | ** ** | ** **  | ** ** | ** ** |
| **LIABILITIES  AND STOCKHOLDERS’ EQUITY**                                        |       |       |        |       |       |
| ** **                                                                            |       |       |        |       |       |
| Loan payable                                                                          |       | $          | 12,700      |       | $          | — |   |
| Accrued expenses  and other liabilities                                               |       | 122        |        | 113        |       |
| Accounts payable  to subsidiary                                                       |       | 1,274      |        | 1,456      |       |
| Subordinated  debentures                                                              |       | 15,464     |        | 28,351     |       |
| Total liabilities                                                                     |       | 29,560     |        | 29,920     |       |
| Stockholders’  equity                                                            |       |       |        |       |       |
| Common stock and additional paid-in capital                                           |       | 69,823     |        | 61,566     |       |
| Retained earnings                                                                     |       | 17,929     |        | 24,785     |       |
| Unrealized losses on securities designated as  available for sale, net of tax effects |       | (136       | )           | (304       | )          |
| Total stockholders’ equity                                                       |       | 87,616     |        | 86,047     |       |
| Total  liabilities and stockholders’ equity                                      | ** ** | **$**      | **117,176** | ** ** | **$**      | **115,967** | ** ** |

 

55

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**PEOPLESCOMMUNITY BANCORP, INC.STATEMENTS OF OPERATIONS**

|                                                  | ** ** | **For Year Ended** | ** ** | **For Three Months** | ** ** | **For Years Ended** | ** ** |
|--------------------------------------------------|------------|------------------------------|------------|--------------------------------|------------|-------------------------------|------------|
| ** **                                       | ** ** | **December 31,**        | ** ** | **December 31,**          | ** ** | **September 30,**        | ** ** |
| ** **                                       | ** ** | **2006**                     | ** ** | **2005**                       | ** ** | **2005**                      | ** ** | **2004** | ** ** |
| ** **                                       | ** ** | **(In thousands)**      | ** ** |
| Revenue                                          |       |                         |       |                           |       |                          |       |   |   |
| Interest income                                  |       | $                            | 67         |                           | $          | 39                            |       | $ | 55 |   | $ | 28 |   |
| Equity in earnings (losses) of Peoples Community |       |                         |       |                           |       |                          |       |   |   |
| Bank                                             |       | (2,561                       | )          | 373                            |       | 3,611                         |       | 3,480 |   |
| Equity in earnings of Columbia                   |       | 172                          |       | 65                             |       | 95                            |       | — |   |
| Gain on sale of securities                       |       | 6                            |       | —                         |       | —                        |       | — |   |
| Total revenue (loss)                             |       | (2,316                       | )          | 477                            |       | 3,761                         |       | 3,508 |   |
| Expense                                          |       |                         |       |                           |       |                          |       |   |   |
| Interest expense                                 |       | 2,186                        |       | 463                            |       | 1,043                         |       | 667 |   |
| General and administrative expenses              |       | 252                          |       | 73                             |       | 270                           |       | 287 |   |
| Total expense                                    |       | 2,438                        |       | 536                            |       | 1,313                         |       | 954 |   |
| Earnings (loss) before income taxes              |       | (4,754                       | )          | (59                            | )          | 2,448                         |       | 2,554 |   |
| Federal income  tax benefits                     |       | (693                         | )          | (146                           | )          | (408                          | )          | (315 | ) |
| Net earnings (loss)                              | ** ** | **$**                        | **(4,061** | **)**                          | **$**      | **87**                        | ** ** | **$** | **2,856** | ** ** | **$** | **2,869** | ** ** |

** **

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** **

**PEOPLESCOMMUNITY BANCORP, INC.STATEMENTS OF CASH FLOWS** (In thousands)

|                                                                                               | ** ** | **For Year Ended** | ** ** | **For Three Months** | ** ** | **For Years Ended** | ** ** |
|-----------------------------------------------------------------------------------------------|------------|------------------------------|------------|--------------------------------|------------|-------------------------------|------------|
| ** **                                                                                    | ** ** | **December 31,**        | ** ** | **December 31,**          | ** ** | **September 30,**        | ** ** |
| ** **                                                                                    | ** ** | **2006**                     | ** ** | **2005**                       | ** ** | **2005**                      | ** ** | **2004** | ** ** |
| Cash provided by  (used in) operating activities:                                             |       |                         |       |                           |       |                          |       |   |   |
| Net earnings (losses) for the year                                                            |       | $                            | (4,061     | )                              | $          | 87                            |       | $ | 2,856 |   | $ | 2,869 |   |
| Adjustments to reconcile net earnings to net cash  provided by (used in) operating activities |       |                         |       |                           |       |                          |       |   |   |
| Undistributed losses (earnings) of Peoples Community  Bank                                    |       | 2,561                        |       | (373                           | )          | (3,691                        | )          | (3,480 | ) |
| Undistributed earnings of Columbia                                                            |       | (172                         | )          | (65                            | )          | (95                           | )          | — |   |
| Gain on sale of securities                                                                    |       | (6                           | )          | —                         |       | —                        |       | — |   |
| Increase (decrease) in cash due to changes in:                                                |       |                         |       |                           |       |                          |       |   |   |
| Other assets                                                                                  |       | 1,229                        |       | (146                           | )          | (793                          | )          | (317 | ) |
| Other liabilities                                                                             |       | (214                         | )          | (258                           | )          | 143                           |       | 1,194 |   |
| Net cash  provided by (used in) operating activities                                          |       | (663                         | )          | (755                           | )          | (1,580                        | )          | 266 |   |
|                                                                                          |       |                         |       |                           |       |                          |       |   |   |
| Cash flows  provided by (used in) investing activities:                                       |       |                         |       |                           |       |                          |       |   |   |
| Proceeds from repayment of loan to ESOP                                                       |       | 211                          |       | 41                             |       | 221                           |       | 264 |   |
| Proceeds from sale of investment securities                                                   |       | 126                          |       |                           |       |                          |       |   |   |
| Purchase of interest in Columbia                                                              |       | —                       |       | —                         |       | (2,524                        | )          | — |   |
| Sale of interest in Columbia                                                                  |       | 2,856                        |       | —                         |       | —                        |       | — |   |
| Loan disbursed to ESOP                                                                        |       | —                       |       | —                         |       | (962                          | )          | (700 | ) |
| Cash paid in acquisition of Mercantile Financial -  net                                       |       | (364                         | )          | —                         |       | —                        |       | — |   |
| Contribution to Peoples Community Bank                                                        |       | —                       |       | —                         |       | (25,250                       | )          | (14,438 | ) |
| Net cash  provided by (used in) investing activities                                          |       | 2,829                        |       | 41                             |       | (28,515                       | )          | (14,874 | ) |
|                                                                                          |       |                         |       |                           |       |                          |       |   |   |
| Cash flows  provided by (used in) financing activities:                                       |       |                         |       |                           |       |                          |       |   |   |
| Proceeds from borrowings                                                                      |       | 16,500                       |       | —                         |       | —                        |       | 500 |   |
| Repayment of borrowings                                                                       |       | (3,800                       | )          | —                         |       | —                        |       | (1,900 | ) |
| Dividends paid on common stock                                                                |       | (2,795                       | )          | (664                           | )          | (2,419                        | )          | (1,168 | ) |
| Proceeds from issuance of common stock-net                                                    |       | —                       |       | —                         |       | 10,250                        |       | 26,114 |   |
| Proceeds from exercise of stock options                                                       |       | 46                           |       | 20                             |       | 150                           |       | — |   |
| Proceeds from issuance of subordinated debentures                                             |       | —                       |       | —                         |       | 15,464                        |       | — |   |
| Redemption of subordinated debentures                                                         |       | (12,887                      | )          | —                         |       | —                        |       | — |   |
| Net cash provided by (used in) financing activities                                           |       | (2,936                       | )          | (644                           | )          | 23,445                        |       | 23,546 |   |
|                                                                                          |       |                         |       |                           |       |                          |       |   |   |
| Net increase  (decrease) in cash and cash equivalents                                         |       | (770                         | )          | (1,358                         | )          | (6,650                        | )          | 8,938 |   |
| Cash and cash  equivalents at beginning of year                                               |       | 961                          |       | 2,319                          |       | 8,969                         |       | 31 |   |
| Cash and cash  equivalents at end of year                                                     | ** ** | **$**                        | **191**    | ** **                     | **$**      | **961**                       | ** ** | **$** | **2,319** | ** ** | **$** | **8,969** | ** ** |

 

57

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The Bank issubject to regulations imposed by the OTS regarding the amount of capitaldistributions payable by the Bank to the Company.  Generally, the Bank’s payment of dividends islimited, without prior OTS approval, to net earnings for the current calendaryear plus the two preceding calendar years, less capital distributions paidover the comparable time period.  Insuredinstitutions are required to file an application with the OTS for capitaldistributions in excess of this limitation. At December 31, 2006 the dividendpayment amount available without prior approval approximated $7.9million.

Historically, management has carefully managed stockholders’ equity ina manner whereby the Company’s capital structure is aligned with the perceived risksinherent in its various lines of business. In this regard, the Board and management are continually evaluatingregulatory capital levels in view of projected growth, as well as changes inthe asset mix.  Management strives tomaintain excess regulatory capital at all times and, if necessary, will offeradditional common shares in the future in order to maintain the desired levelsof capital.

**NOTE N - BUSINESS COMBINATIONS**

On June 10, 2005, theCompany acquired American State Corporation (“American State”), the parentcompany of American State Bank, included $38.4 million in loans receivable,$1.3 million in fixed assets, and $58.0 million in deposits. Goodwill and otherintangible assets of approximately $5.8 million was recorded in theacquisition.

OnDecember 16, 2005, the Company acquired PFS Bancorp, Inc. (“PFS”), the parentcompany of Peoples Federal Savings Bank (“Peoples Federal”), which included$122.6 million in loans receivable, $1.0 million in fixed assets, and $88.7million in deposits.  Goodwill and otherintangible assets of approximately $14.0 million was recorded in thisacquisition.

On June 9, 2006, the Company acquired MercantileFinancial Corporation (“Mercantile”) and Peoples Community Bank (“Bank”)acquired Mercantile Savings Bank which operated one branch office inCincinnati, Ohio.  The acquisitionincluded $38.0 million in loans receivable and $48.7 million in deposits.  Goodwill and other intangible assets ofapproximately $6.2 million were recorded in the acquisition.

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

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Presented below are the estimated fair values ofthe assets acquired and liabilities assumed from the acquisitions in the fiscalyear ended September 30, 2005, the three-month period ended December 31, 2005and the fiscal year ended December 31, 2006.

|                                | ** ** | **American State**     | ** ** | **PFS Bancorp**            | ** ** | **Mercantile**             | ** ** |
|--------------------------------|------------|-----------------------------|------------|---------------------------------|------------|----------------------------|------------|
| ** **                     | ** ** | **June 10, 2005** | ** ** | **December 16, 2005** | ** ** | **June 9, 2006** | ** ** |
| ** **                     | ** ** | **(in thousands)**     | ** ** |
|                           |       |                        |       |                            |       |                       |       |
| Cash and  investments          |       | $                           | 16,086     |                            | $          | 2,740                      |       | $ | 12,913 |   |
| Investment  securities         |       | 9,699                       |       | 1,480                           |       | 7,407                      |       |
| Loans                          |       | 38,358                      |       | 122,643                         |       | 38,030                     |       |
| Office premises  and equipment |       | 1,277                       |       | 1,020                           |       | —                     |       |
| Core deposits                  |       | 1,859                       |       | 3,703                           |       | 2,206                      |       |
| Goodwill                       |       | 3,939                       |       | 9,919                           |       | 3,963                      |       |
| Other Assets                   |       | 1,910                       |       | 2,484                           |       | 2,560                      |       |
|                           |       |                        |       |                            |       |                       |       |
| Total assets acquired          |       | 73,128                      |       | 143,989                         |       | 67,079                     |       |
|                           |       |                        |       |                            |       |                       |       |
| Deposits                       |       | 57,995                      |       | 88,690                          |       | 48,683                     |       |
| Borrowings                     |       | 5,601                       |       | 21,067                          |       | 6,378                      |       |
| Other  liabilities             |       | 1,475                       |       | 1,341                           |       | 2,633                      |       |
|                           |       |                        |       |                            |       |                       |       |
| Total liabilities              |       | 65,071                      |       | 111,098                         |       | 57,694                     |       |
|                           |       |                        |       |                            |       |                       |       |
| Net assets  acquired           |       | $                           | 8,057      |                            | $          | 32,891                     |       | $ | 9,385 |   |

 

Presentedonthe next page are pro-forma condensed consolidated statements of earnings whichhave been prepared as if the American State transaction had been consummated asof the beginning of the fiscal years ended September 30, 2005 and 2004; the PFSBancorp transaction had been consummated at the beginning of the fiscal yearsended September 30, 2005 and 2004 and the three-month period ended December 31,2005; and the Mercantile transaction had been consummated at the beginning of the fiscal years ended September30, 2005 and 2004 and the three-month period ended December 31, 2005 and thefiscal year ended December 31, 2006.

59

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** **

|                                            | ** ** | **Fiscal Year  Ended  December 31,** | ** ** | **Three Months  Ended  December 31,** | ** ** | **Fiscal Year  Ended  September 30,** | ** ** | **Fiscal Year  Ended  September 30,** | ** ** |
|--------------------------------------------|------------|------------------------------------------------|------------|-------------------------------------------------|------------|-------------------------------------------------|------------|-------------------------------------------------|------------|
| ** **                                 | ** ** | **2006**                                       | ** ** | **2005**                                        | ** ** | **2005**                                        | ** ** | **2004**                                        | ** ** |
| ** **                                 | ** ** | **(in thousands)**                        | ** ** |
|                                       |       |                                           |       |                                            |       |                                            |       |                                            |       |
| Total interest  income                     |       | $                                              | 66,720     |                                            | $          | 16,075                                          |       | $                                               | 57,537     |   | $ | 51,181 |   |
| Total interest  expense                    |       | 37,017                                         |       | 9,281                                           |       | 30,507                                          |       | 23,996                                          |       |
| Net interest income                        |       | 29,703                                         |       | 6,794                                           |       | 27,030                                          |       | 27,185                                          |       |
|                                       |       |                                           |       |                                            |       |                                            |       |                                            |       |
| Provision for  losses on loans             |       | 17,450                                         |       | 916                                             |       | 5,844                                           |       | 3,557                                           |       |
| Other income                               |       | 3,471                                          |       | 753                                             |       | 3,527                                           |       | 2,902                                           |       |
| General,  administrative and other expense |       | 22,532                                         |       | 7,528                                           |       | 25,169                                          |       | 23,231                                          |       |
| Earnings before income taxes               |       | (6,808                                         | )          | (897                                            | )          | (456                                            | )          | 3,299                                           |       |
|                                       |       |                                           |       |                                            |       |                                            |       |                                            |       |
| Federal income  taxes                      |       | (2,314                                         | )          | (305                                            | )          | (155                                            | )          | 1,122                                           |       |
|                                       |       |                                           |       |                                            |       |                                            |       |                                            |       |
| Net earnings                               |       | $                                              | (4,494     | )                                               | $          | (592                                            | )          | $                                               | (301       | ) | $ | 2,177 |   |
|                                       |       |                                           |       |                                            |       |                                            |       |                                            |       |
| Pro-forma basic earnings per share         |       | $                                              | (0.94      | )                                               | $          | (0.12                                           | )          | $                                               | (0.07      | ) | $ | 0.62 |   |
|                                       |       |                                           |       |                                            |       |                                            |       |                                            |       |
| Pro-forma diluted  earnings per share      |       | $                                              | (0.94      | )                                               | $          | (0.12                                           | )          | $                                               | (0.07      | ) | $ | 0.62 |   |

 

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

Thefollowing table summarizes the Company’s quarterly results for the fiscal yearsended December 31, 2006, September 30, 2005.  Certain amounts, as previously reported, havebeen reclassified to conform to the 2006 presentation.

|                                            | ** ** | **Three Months Ended**                                   | ** ** |
|--------------------------------------------|------------|--------------------------------------------------------------------|------------|
| ** **                                 | ** ** | **March 31,**                                                 | ** ** | **June 30,** | ** ** | **September 30,** | ** ** | **December 31,** | ** ** |
| ** **                                 | ** ** | **(In thousands, except per share data)** | ** ** |
| **2006:**                                  |       |                                                               |       |   |   |   |   |   |   |
| Total interest  income                     |       | $                                                                  | 15,954     |   | $ | 16,726 |   | $ | 16,716 |   | $ | 16,079 |   |
| Total interest  expense                    |       | 8,500                                                              |       | 9,045 |   | 9,474 |   | 9,466 |   |
|                                       |       |                                                               |       |   |   |   |   |   |   |
| Net interest  income                       |       | 7,454                                                              |       | 7,681 |   | 7,242 |   | 6,613 |   |
| Provision for  losses on loans             |       | 1,200                                                              |       | 1,500 |   | 8,550 |   | 6,200 |   |
| Gain (loss) on  sale of assets             |       | (44                                                                | )          | (23 | ) | 126 |   | (18 | ) |
| Other income                               |       | 626                                                                |       | 716 |   | 862 |   | 968 |   |
| General,  administrative and other expense |       | 5,171                                                              |       | 5,394 |   | 5,694 |   | 4,863 |   |
|                                       |       |                                                               |       |   |   |   |   |   |   |
| Earnings before  income taxes              |       | 1,665                                                              |       | 1,480 |   | (6,014 | ) | (3,500 | ) |
| Federal income  taxes                      |       | 511                                                                |       | 449 |   | (2,105 | ) | (1,163 | ) |
|                                       |       |                                                               |       |   |   |   |   |   |   |
| Net earnings                               | ** ** | **$**                                                              | **1,154**  | ** ** | **$** | **1,031** | ** ** | **$** | **(3,909** | **)** | **$** | **(2,337** | **)** |
|                                       | ** ** | ** **                                                         | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Earnings per  share                        |       |                                                               |       |   |   |   |   |   |   |
| Basic                                      | ** ** | **$**                                                              | **.26**    | ** ** | **$** | **.23** | ** ** | **$** | **(.82** | **)** | **$** | **(.49** | **)** |
| Diluted                                    | ** ** | **$**                                                              | **.26**    | ** ** | **$** | **.23** | ** ** | **$** | **(.82** | **)** | **$** | **(.49** | **)** |

** **

|                                            | ** ** | **Three Months Ended**                                   | ** ** |
|--------------------------------------------|------------|--------------------------------------------------------------------|------------|
| ** **                                 | ** ** | **December 31,**                                              | ** ** | **March 31,** | ** ** | **June 30,** | ** ** | **September 30,** | ** ** |
| ** **                                 | ** ** | **2004**                                                           | ** ** | **2005** | ** ** | **2005** | ** ** | **2005** | ** ** |
| ** **                                 | ** ** | **(In thousands, except per share data)** | ** ** |
| **2005:**                                  |       |                                                               |       |   |   |   |   |   |   |
| Total interest  income                     |       | $                                                                  | 10,785     |   | $ | 11,324 |   | $ | 12,163 |   | $ | 13,476 |   |
| Total interest  expense                    |       | 5,559                                                              |       | 6,039 |   | 6,691 |   | 7,915 |   |
|                                       |       |                                                               |       |   |   |   |   |   |   |
| Net interest  income                       |       | 5,226                                                              |       | 5,285 |   | 5,472 |   | 5,561 |   |
| Provision for  losses on loans             |       | 900                                                                |       | 900 |   | 900 |   | 900 |   |
| Gain (loss) on  sale of assets             |       | 747                                                                |       | 35 |   | 19 |   | (55 | ) |
| Other income                               |       | 225                                                                |       | 302 |   | 309 |   | 532 |   |
| General,  administrative and other expense |       | 3,882                                                              |       | 3,831 |   | 3,824 |   | 4,290 |   |
|                                       |       |                                                               |       |   |   |   |   |   |   |
| Earnings before  income taxes              |       | 1,416                                                              |       | 891 |   | 1,076 |   | 848 |   |
| Federal income  taxes                      |       | 481                                                                |       | 297 |   | 366 |   | 231 |   |
|                                       |       |                                                               |       |   |   |   |   |   |   |
| Net earnings                               | ** ** | **$**                                                              | **935**    | ** ** | **$** | **594** | ** ** | **$** | **710** | ** ** | **$** | **617** | ** ** |
|                                       | ** ** | ** **                                                         | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Earnings per  share                        |       |                                                               |       |   |   |   |   |   |   |
| Basic                                      | ** ** | **$**                                                              | **.24**    | ** ** | **$** | **.15** | ** ** | **$** | **.19** | ** ** | **$** | **.15** | ** ** |
| Diluted                                    | ** ** | **$**                                                              | **.24**    | ** ** | **$** | **.15** | ** ** | **$** | **.18** | ** ** | **$** | **.15** | ** ** |

** **

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**NOTE P — SUBSEQUENT EVENTS**

On March 22, 2007, theCompany announced the execution of an Agreement between the Bank and the Officeof Thrift Supervision (the “OTS”).  ThisAgreement formalizes the Bank’s commitment to take all corrective actionsstipulated in its previously approved Business Plan including the reduction ofclassified assets.  The Bank’s Board ofDirectors has established an Oversight Committee to monitor compliance withthis Agreement and the Business Plan.

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**PEOPLES COMMUNITY BANCORP, INC.**

**DIRECTORS AND EXECUTIVE OFFICERS**

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

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

** **

**EXECUTIVE OFFICERS**
| Jerry D. Williams                                       |     | Thomas J. Noe                                     |
|---------------------------------------------------------|----------|---------------------------------------------------|
| *President and Chief Executive Officer*                 | * * | *Treasurer and Executive Vice President*          |
|                                                    |     |                                              |
| Teresa A. O’Quinn                                  |     | Lori M. Henn                                      |
| *Chief Financial Officer and Executive Vice  President* | * * | *Compliance Officer and Senior Vice President*    |
|                                                    |     |                                              |
| Fred L. Darlington                                      |     | Stephen P. Wood                                   |
| *General Counsel, Senior Vice President and*            | * * | *Chief Lending Officer and Senior Vice President* |
| *Corporate  Secretary*                                  | * * | * *                                          |
|                                                    |     | Jerry Gore                                        |
| Rick Wade                                               |     | *Director of Retail Banking and*                  |
| *Chief Operations Officer and Senior Vice  President*   | * * | *Senior  Vice President*                          |
| * *                                                | * * | * *                                          |
| Joan Woodward                                           |     |                                              |
| *Senior Vice President, Human Resources*                |     |                                              |

** **

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**PEOPLESCOMMUNITY BANCORP, INC.**

**BANKING LOCATIONS AND STOCKHOLDERINFORMATION**

**BANKING LOCATIONS**

Peoples CommunityBancorp, Inc. is a Maryland-incorporated savings and loan holding companyconducting business through its wholly-owned subsidiary, Peoples CommunityBank.  Peoples Community Bank is afederally-chartered, SAIF-insured stock savings bank operating through nineteenoffices in Hamilton, Warren, and Butler counties in southwest Ohio and Dearbornand Ohio Counties in southeast Indiana.
| **Main Office**                                        |
|--------------------------------------------------------|
| 6100 West Chester Road  West Chester, Ohio 45069       |
|                                                   |
| **Branch Offices in Ohio**                             |
|                                                   |   |   |   |   |
| 7615 Voice of  America Drive  West Chester, Ohio 45069 |   | 11 South  Broadway  Lebanon, Ohio 45036 |   | 4825 Marburg  Avenue  Cincinnati, Ohio 45209 |
|                                                   |   |   |   |   |
| 5712 Bridgetown  Road  Cincinnati, Ohio 45248          |   | 6570 Harrison  Avenue  Cincinnati, Ohio 45247 |   | 7522 Hamilton  Avenue  Cincinnati, Ohio 45231 |
|                                                   |   |   |   |   |
| 4100 State Route  128  Cleves, Ohio 45002              |   | 1101 Columbus  Avenue  Lebanon, Ohio 45036 |   | 5797 South State  Route 48  Maineville, Ohio 45039 |
|                                                   |   |   |   |   |
| 8350 Arbor  Square Drive  Mason, Ohio 45040            |   | 3530 Springdale  Road  Cincinnati, Ohio 45251 |   | 7200 Blue Ash  Road  Cincinnati, Ohio 45236 |
|                                                   |   |   |   |   |
| 9360 Montgomery  Road  Cincinnati, Ohio 45242          | ** ** | ** ** |   | 6945 South  Liberty Drive  Liberty Township, Ohio 45044 |
|                                                   | ** ** | ** ** |   |   |
| **Branch  Offices in Indiana**                         |
|                                                   | ** ** | ** ** |   |   |
| 131 Walnut  Street  Lawrenceburg, Indiana 47025        |   | Second and  Bridgeway Streets  Aurora, Indiana 47001 |   | 24128 State Line  Road  Bright, Indiana 47025 |
|                                                   |   |   |   |   |
|                                                   |   | 330 Industrial  Access Road  Rising Sun, Indiana 47040 |   |   |

 

**ANNUAL MEETING**

The Annual Meeting ofStockholders of Peoples Community Bancorp will be held on May 8, 2007 at 10:00a.m., Eastern Time, at the Company’s Voice of America location, 7615 Voice ofAmerica Centre Drive, West Chester, Ohio 45069.

**TRANSFER AGENT/REGISTRAR**

Registrar and TransferCompany10 Commerce DriveCranford, New Jersey 07016(908) 272-8511

**STOCKHOLDER REQUESTS**

Requests for annualreports, quarterly reports and related stockholder literature should bedirected to Thomas J. Noe, Treasurer, Peoples Community Bancorp, Inc., 6100West Chester Road, P. O. Box 1130, West Chester, Ohio  45071. Stockholders needing assistance with stock records, transfers or lostcertificates, please contact Peoples Community Bancorp’s transfer agent,Registrar and Transfer Company.

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