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**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

** **

**FORM 10-K**

 

**(Mark One)**

 

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

** **

**For the fiscal year ended December 31, 2008**

** **

**OR**

 

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

** **

**Commission File No.: 000-29949**

** **

**PEOPLES COMMUNITY BANCORP, INC.**

(Exact Name of Registrant as Specified in ItsCharter)

 

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

 

**(513) 870-3530**

(Registrant’s Telephone Number, IncludingArea Code)

 

Securitiesregistered under Section 12(b) of the Exchange Act:

 

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

 

Securitiesregistered under Section 12(g) of the Exchange Act:

 

**None**

** **

Indicate by check mark ifthe Registrant is a well-known seasoned issuer, as defined in Rule 405 ofthe Securities Act.    Yes  o      No  x

 

Indicate by check mark ifthe Registrant is not required to file reports pursuant to Section 13 or Section 15(d) ofthe Act.    Yes  o      No  x

 

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

 

Indicate by check markwhether the Registrant has submitted electronically and posted on its corporateWeb site, if any, every Interactive Data File required to be submitted andposted pursuant to Rule 405 of Regulation S-T (§ 232.405 of thischapter) during the preceding 12 months (or for such shorter period that theRegistrant was required to submit and post such files).    Yes  x      No  o

 

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

 

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

 

| Large  accelerated filer  o          |   | Accelerated  filer  o         |
|------------------------------------------------|--------|-----------------------------------------|
| Non-accelerated  filer  o            |   | Smaller  reporting company  x |
| (Do not check if a smaller  reporting company) |   |                                    |

 

Indicate by check markwhether the registrant is a shell company (as defined in Rule 12b-2 of theExchange Act).    Yes  o      No  x

 

Asof June 30, 2008, the aggregate value of the 3,904,422 shares of CommonStock of the Registrant issued and outstanding on such date, which excludes940,067 shares held directly or indirectly by all directors and executivesofficers of the Registrant and the Registrant’s Employee Stock Ownership Plan (“ESOP”)as a group, was approximately $8.7 million.  This figure is based on theclosing sales price of $2.24 per share of the Registrant’s Common Stock on June 30,2008.  Although directors and executive officers and the ESOP were assumedto be “affiliates” of the Registrant for purposes of this calculation, theclassification is not to be interpreted as an admission of such status.

 

Numberof shares of Common Stock outstanding as of April 30, 2009: 4,844,489

 

 

 

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**TABLEOF CONTENTS**

 
| ** **  | ** **                                                                                                          | **Page** |
|-------------|---------------------------------------------------------------------------------------------------------------------|----------|
|        | PART I                                                                                                         |     |
|        |                                                                                                                |     |
| Item 1.     | Business                                                                                                            | 1        |
|        | General                                                                                                             | 1        |
|        | Operations                                                                                                          | 1        |
|        | Regulatory  Enforcement Actions                                                                                     | 2        |
|        | Report  of Independent Registered Public Accounting Firms                                                           | 4        |
|        | Default  on Line of Credit and Termination of Strategic Transaction                                                 | 4        |
|        | Establishment  of Valuation Allowance                                                                               | 5        |
|        | Peoples  Lending Activities                                                                                         | 5        |
|        | Asset  Quality                                                                                                      | 13       |
|        | Investment  Securities                                                                                              | 17       |
|        | Sources  of Funds                                                                                                   | 19       |
|        | Employees                                                                                                           | 23       |
|        | Competition                                                                                                         | 23       |
|        | Regulation                                                                                                          | 23       |
|        | Taxation                                                                                                            | 30       |
|        | Forward Looking Statements                                                                                          | 32       |
|        |                                                                                                                |     |
| Item 1A.    | Risk Factors                                                                                                        | 33       |
| Item 1B.    | Unresolved  Staff Comments                                                                                          | 38       |
| Item 2.     | Properties                                                                                                          | 39       |
| Item 3.     | Legal Proceedings                                                                                                   | 40       |
| Item 4.     | Submission  of Matters to a Vote of Security Holders                                                                | 40       |
|        |                                                                                                                |     |
|        | PART II                                                                                                        |     |
|        |                                                                                                                |     |
| Item 5.     | Market for  Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases  of Equity Securities | 40       |
| Item 6.     | Selected  Financial Data                                                                                            | 40       |
| Item 7.     | Management’s  Discussion and Analysis of Financial Condition and Results of Operations                         | 40       |
| Item 7A.    | Quantitative  and Qualitative Disclosures About Market Risk                                                         | 40       |
| Item 8.     | Financial  Statements and Supplementary Data                                                                        | 40       |
| Item 9.     | Changes in  and Disagreements with Accountants on Accounting and Financial Disclosure                               | 40       |
| Item 9A(T). | Controls and  Procedures                                                                                            | 40       |
| Item 9B.    | Other Information                                                                                                   | 41       |
|        |                                                                                                                |     |
|        | PART III                                                                                                       |     |
|        |                                                                                                                |     |
| Item 10.    | Directors,  Executive Officers and Corporate Governance                                                             | 42       |
| Item 11.    | Executive Compensation                                                                                              | 45       |
| Item 12.    | Security  Ownership of Certain Beneficial Owners and Management and Related Stockholder  Matters                    | 49       |
| Item 13.    | Certain  Relationships and Related Transactions and Director Independence                                           | 51       |
| Item 14.    | Principal  Accountant Fees and Services                                                                             | 52       |
|        |                                                                                                                |     |
|        | PART IV                                                                                                        |     |
|        |                                                                                                                |     |
| Item 15.    | Exhibits  and Financial Statement Schedules                                                                         | 53       |
|        |                                                                                                                |     |
| Signatures  |                                                                                                                |     |

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**PART I**

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**Item 1.  Business**

 

**General**

** **

Peoples CommunityBancorp, Inc. (“Peoples” or the “Company”) was organized in December 1999at the direction of the Board of Directors of The People’s Building, Loan andSavings Company, presently Peoples Community Bank (the “Bank”), for the purposeof holding all of the capital stock of the Bank and in order to facilitate theconversion of the Bank from an Ohio-chartered mutual savings and loanassociation to a federally-chartered stock savings bank.  (Unless thecontext otherwise requires, reference to Peoples includes the Bank). People’s assets consist primarily of the outstanding shares of common stock ofthe Bank.  Peoples has no significant liabilities other than juniorsubordinated debentures issued in fiscal 2005 and $17.5 million of principalplus accrued interest and fees currently outstanding as of April 30, 2009under a line of credit which is secured by the outstanding shares of commonstock of the Bank.  The management of Peoples and the Bank aresubstantially identical and Peoples neither owns nor leases any property butinstead uses the premises, equipment and furniture of the Bank.  At December 31,2008, Peoples had $712.4 million in total assets, $630.2 million in deposits,$76.5 million in borrowings (excluding subordinated debentures) and $14.8million of stockholders’ deficit.  Peoples’ principal executive office islocated at 6100 West Chester Road, West Chester, Ohio 45069.  Peoples’telephone number is (513) 870-3530.

 

The Bank is afederally-chartered stock savings bank that was originally organized in1889.  The Bank conducts its business from nineteen full service officesin Hamilton, Warren and Butler counties in Southwest Ohio and Dearborn and Ohiocounties in Southeast Indiana.  The Bank is primarily engaged in attractingdeposits from the general public and using those funds to originate loans andinvest in securities.  The Bank’s primary lending emphasis has been, andcontinues to be, loans secured by first liens on real estate located in itslocal market.

 

The Bank issubject to examination and comprehensive regulation by the Office of ThriftSupervision (“OTS”), which is the Bank’s chartering authority and primaryfederal regulator.  The Bank is also regulated by the Federal DepositInsurance Corporation (the “FDIC”), administrator of the Deposit InsuranceFund.  The Bank is a member of the Federal Home Loan Bank (the “FHLB”) ofCincinnati, which is one of the 12 regional banks comprising the FHLB System.

 

As previouslyannounced, the Board of Directors of the Company adopted an amendment to Article VIof the Company’s Bylaws to change the Company’s fiscal year end from September 30,to December 31, effective retroactively to January 1, 2006, in orderto increase operational efficiency.  As a result, the consolidatedstatements of financial condition compares December 31, 2007 to December 31,2006, while the consolidated statements of operations, the consolidatedstatements of comprehensive income (loss), and the consolidated statements ofcash flow reflect, as applicable, the twelve month periods ended December 31,2007 and December 31, 2006, the three month period ended December 31,2005, and the twelve month period ended September 30, 2005.

 

The Board ofDirectors of the Bank adopted an amendment to Article II of the Bank’sBylaws to eliminate the shareholders’ ability to take action by consent withouta formal meeting.  The amendment waseffective July 10, 2008.

 

**Operations**

 

As a result of acquisitions and internal growth,Peoples grew from $416.0 million in total assets as of September 30, 2001to a high of $1.0 billion in total assets as of December 31, 2005. Between the completion of the public offering in March 2000 and December 31,2005, Peoples acquired five financial institutions with aggregate total assetsas of the time of acquisition of $428.5 million.  Also, in September 2003,Peoples purchased $32.8 million in loans and assumed $55.6 million in depositsin connection with the acquisition of 

 

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two branch offices from another financialinstitution.  Peoples supplemented this growth due to acquisitions withloan generation secured primarily by real estate in its market area. Total gross loans increased from $419.5 million at September 30, 2001 to$944.7 million at December 31, 2005.  In addition, since September 30,2000, Peoples expanded its franchise through the opening of six full servicebranch offices. These new branch offices, as well as acquired branch offices,have expanded Peoples’ market presence.  Peoples’ loan growth was fundedin part by deposits.  Peoples placed an emphasis on deposit generationboth internally and through whole bank and branch acquisitions.  Depositsincreased from $233.1 million at September 30, 2001 to $755.3 million at December 31,2006.

 

Beginning in early 2007,however, Peoples began to reduce all aspects of its lending exposure due inlarge part to the downturn in the local economy and, in particular, values ofresidential and residential development properties. At December 31, 2008,total gross loans amounted to $531.4 million, a decrease of $413.3 million or43.8% compared to $944.7 million of loans at December 31, 2005.  In addition, to address such slowdown and theresulting decrease in the value of its collateral, Peoples charged off $18.3million of loans in 2007 and $47.8 million of loans in 2008, and provided $32.8million and $41.5 million during 2007 and 2008, respectively, to the allowancefor loan losses.  As a result, theallowance for loan losses to total gross loans at December 31, 2008amounted to 5.4%.  Further, beginning in2006, Peoples revised its underwriting standards to place an increased focus oncash flow analysis, tightened its credit standards and provided additionalresources to the resolution of its classified assets.

 

Despite the actions takenby Peoples during 2006, 2007 and 2008, discussed above, the continuedrecessionary forces in the local economy have had a significant adverse impacton Peoples’ financial condition and results of operations.  For 2007 and 2008, net losses amounted to$33.3 million and $68.5 million, respectively, and stockholders’ equitydecreased from $53.6 million or 6.04% of total assets at December 31, 2007to a deficit of $14.8 million at December 31, 2008.  Further, the level of non-performing assetshas and will continue to negatively impact Peoples’ interest rate spread,interest income, provision for losses on loans and net earnings or loss.  Non-performing assets totaled $26.1 million,$32.8 million and $53.3 million at December 31, 2006, 2007 and 2008,respectively.  While Peoples has devotedand will continue to devote substantial resources toward the resolution of alldelinquent and non-performing assets, no assurance can be made that theseefforts will be successful.

 

**Regulatory Enforcement Actions**

** **

The OTS is theprimary federal regulator of Peoples Community Bank.  In light of Peoples’ losses in 2007 and 2006and levels of nonperforming assets, the OTS has imposed certain operationsrestrictions on the Company and the Bank, many of which had previously beentaken by the Company and the Bank. On April 2, 2008, the Company and theBank each consented to the terms of Cease and Desist Orders issued by the OTS(the “Orders”).  The Company attachedcopies of the Orders to a Current Report on Form 8-K filed with theSecurities and Exchange Commission on April 3, 2008.

 

The Orders require theCompany and the Bank to, among other things, file with the OTS withinprescribed time periods updated business plans, which specifically incorporatethe requirements set forth in the Orders and comments contained in the mostrecently completed examinations of the Company and the Bank. On a quarterlybasis, the Company and the Bank are required to compare the projected operatingresults from the business plans with the actual results. The results of thisvariance analysis are to be submitted to the OTS within the prescribed timeperiods. In addition, the Orders require that the Company and the Bank receivethe permission of the OTS prior to (i) making or declaring any dividendsor payments on their outstanding securities; (ii) adding or replacing adirector or hiring an executive officer; and (iii) making any goldenparachute payments to any institution-affiliated party. Pursuant to the Orderissued to the Company, the Company must also receive the permission of the OTSprior to increasing its debt position and before any repurchase of its securities.

 

The Order issuedto the Bank also requires the Bank to take or refrain from certain actions,including (i) not making any new loans or issuing new lines of credit forland acquisition or development, speculative residential 

 

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construction,commercial and multi-family construction, acquisition or retention ofcommercial property, and non-owner occupied one-to-four-family residentialproperty; (ii) engaging an independent consultant to conduct a loanportfolio review for the purpose of determining asset quality and theappropriateness of the Bank’s asset classification process related to loanrelationships that equal or exceed $4.0 million; (iii) establishing a planfor reducing adversely classified assets; (iv) reviewing and, whereappropriate, adjusting the Bank’s allowance for loan and lease lossesmethodology; (v) limiting asset growth during each calendar quarter to anamount not to exceed net interest credited on deposit liabilities; and (vi) establishingan Oversight Committee of the Bank’s Board of Directors comprised ofindependent outside directors.  In an effort to proactively address thedownturn in the local real estate market, the Bank had previously curtailed orceased the lending activities restricted in the Orders.

 

During 2008,management of Peoples worked diligently to resolve the issues associated withthe Bank’s nonperforming assets and to provide the information or take theactions required by the Orders. Concurrently, management and the Board of Directors considered allstrategic alternatives available to the Company and the Bank.  As required, Peoples has filed a consolidatedbusiness plan with the OTS covering operations through 2010.  Peoples’ business plan contemplates, amongother things, a consolidation of its operations through branch sales and areduction in adversely classified assets through loan resolutions, repayments,sales and charge-offs.  Branch saletransactions would decrease Peoples’ assets and liabilities, improve capitalratios, generate income, and reduce general, administrative and otherexpense.  Despite management’s efforts,the extremely difficult economic conditions have continued to negatively impactreal estate values and the ability of borrowers to service or repay theirloans.  As a result, Peoples hascontinued to incur significant losses which has severely impacted stockholders’equity and the related regulatory capital of the Bank.

 

Bankingregulations require savings institutions to satisfy several capitalrequirements.  Savings institutions mustmaintain tangible capital equal to at least 1.5% of adjusted total assets, corecapital equal to at least 4.0% of adjusted total assets and total capital equalto at least 8.0% of risk-weighted assets. A savings institution that fails any of these capital requirements issubject to possible enforcement actions by the OTS or the FDIC. Such actionscould include a capital directive, a cease and desist order, civil moneypenalties, the establishment of restrictions on the institution’s operations,termination of federal deposit insurance and the appointment of a conservatoror receiver. The capital regulations provide that such actions, throughenforcement proceedings or otherwise, could require one or more of a variety ofcorrective actions.  Application of thesecorrective actions are influenced by an institution’s capital levels under theregulatory framework for prompt corrective action.  This framework defines the following fivelevels of capital:  well capitalized;adequately capitalized; undercapitalized; significantly undercapitalized; and criticallyundercapitalized.  For additionaldetails, refer to “Business — Regulation - The Bank - Regulatory CapitalRequirements” contained herein.

 

OnJanuary 30, 2009, the Bank submitted its Thrift Financial Report (“TFR”)to the OTS for the quarter ended December 31, 2008.  This report reflected the Bank’s capitalunder the framework for prompt corrective action at the “adequatelycapitalized” level.  During the course ofour external audit for 2008, management was informed of several adjustmentsidentified by OTS examiners and our external auditors related to the estimationof the allowance for loan losses. These adjustments were due to informationreceived by Peoples subsequent to the initial year-end closing.  As a result, an amended TFR for December 31,2008 was filed on April 9, 2009. The amended TFR reflected regulatory capital under the framework forprompt corrective action at the “significantly undercapitalized” level.

 

TheBank was notified by the OTS by letter dated April 13, 2009 (the“Notice”), that it is subject to certain restrictions and requirements,including the requirement to file a capital restoration plan by April 30,2009 to demonstrate the ability of the Bank to return to an adequatelycapitalized status by June 15, 2009 (the “Capital Plan”).

 

OnApril 28, 2009, the Bank consented to an Amended Order to Cease and Desist(the “Amended Order”) issued by the OTS. The Amended Order became effective on April 29,2009.  The Amended Order supplements and amends the previously issuedCease and Desist Order issued by the OTS against the Bank on April 2,2008.  The Amended Order requires thatthe Bank achieve by July 14, 2009 and maintain: (i) a Tier 1 (Core)Capital Ratio of at least eight percent (8%); and (ii) a Total Risk-BasedCapital Ratio of at least twelve percent (12%). The Amended Order also requires the Bank to file with the OTS a writtencontingency plan by May 14, 2009 that will be implemented by the Bank inthe event it becomes critically undercapitalized (the “ContingencyPlan”).  The Contingency Plan will require that the Bank achieve one ofthe following results: (i) a merger with or acquisition by anotherfederally insured institution or holding company thereof, or (ii) avoluntary liquidation by, among other things, filing the appropriateapplications with OTS in conformity with federal laws and regulations. The Contingency Plan will be implemented if the Bank becomes criticallyundercapitalized or upon notification by the OTS.  In addition, the Amended Order requires theBank to refrain from certain actions, including: (i) accepting, renewingor rolling over any brokered deposit; (ii) acting as a deposit broker; or (iii) solicitingdeposits by offering an effective yield on insured deposits that exceeds thelimitation provided by OTS regulations.

 

OnApril 30, 2009, the Bank filed its Thrift Financial Report for the quarterended March 31, 2009 .  This reportreflected the Bank’s capital under the framework for prompt corrective actionat the “critically undercapitalized” level.

 

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·                                          Enter into any material transactions otherthan in the usual course of business, including any investment, expansion,acquisition, sale of assets, or similar action with respect to which the Bankis required to give notice to OTS;

·                                          Extend credit for any highly leveragedtransaction;

·                                          Amend its charter or bylaws, except to theextent necessary to carry out any other requirement of any law, regulation, ororder;

·                                          Make any material change in accountingmethods;

·                                          Engage in any covered transaction;

·                                          Pay excessive compensation or bonuses; or

·                                          Make payments on subordinated debt.

 

The Company andthe Bank are currently in negotiations concerning a transaction to sell certainbranches of the Bank (the “Branch Transaction”), the proposed results of whichare the basis for the Bank’s Capital Plan, as filed with the OTS on April 30,2009, as required by the Notice.  TheBank intends to negotiate and enter into the Branch Transaction in order toreduce assets and liabilities, generate a deposit premium and return the Bankto an adequately capitalized status. The Company cannot provide assurance thatan agreement related to the Branch Transaction will be entered into orconsummated or that the Bank’s Capital Plan will be acceptable to the OTS.  If the Bank’s Capital Plan is not approved bythe OTS or the Bank cannot enter into and consummate a transaction to returnthe Bank to an adequately capitalized status on a timely basis, the Companywill not be able to continue as a going concern.

 

**Report of Independent Registered Public AccountingFirm**

** **

Thereport of the Company’s independent registered public accounting firm for theyear ended December 31, 2007, contained an explanatory paragraph as to theCompany’s ability to continue as a going concern primarily due to the Company’scurrent lack of liquidity to repay its obligation under an outstanding line ofcredit with Integra Bank, N.A. (“Integra”). The line of credit is secured by all outstanding shares of common stockof the Bank. The Orders prohibit the Bank from paying cash dividends to theCompany without the prior consent of the OTS and the Company will be able torely upon only a limited amount of existing cash and cash equivalents for itsliquidity. Without the ability to rely on dividends from the Bank, the Companywill require funds from other capital sources to meet its obligations such asrestructuring or replacing the line of credit. Peoples is actively evaluating various funding strategies to meet itsobligations, including restructuring its outstanding debt and selling branchoffices.  Any increase in the Company’soutstanding indebtedness will also require OTS approval.  The Company cannot provide assurance that itwill succeed in obtaining funds to meet its financial obligations.  Failure to do so will have a material adverseeffect on, and impair the Company’s business, financial condition and abilityto operate as a going concern.

 

The report of theCompany’s independent registered public accounting firm for the year ended December 31,2008, also contained an explanatory paragraph as to the Company’s ability tocontinue as a going concern. Reasons cited include the Bank’s low level ofcapital, exposure to significant regulatory sanctions and significant lossesfrom operations.

 

**Default on Line of Credit and Termination of StrategicTransaction**

** **

As of December 31,2007, the Company was not in compliance with certain covenants of its line ofcredit with Integra.  On June 30,2008, the loan matured and was due in full. Effective July 24, 2008, the Company entered into a forbearanceagreement with Integra regarding its $17.5 million line of credit. Theforbearance was 

 

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negotiated inorder to extend the repayment period and allow the Company to structure atransaction which would result in repayment of the $17.5 million line ofcredit.

 

On September 12,2008, the Company entered into a purchase and assumption agreement (“Agreement”)with a buyer and a third party.  TheAgreement provided for the purchase of a substantial portion of the Bank’sassets, as well as the assumption of the Bank’s deposits and certain otherliabilities.  The Company or the buyercould terminate the Agreement if the closing of the transactions did not occuron or before December 31, 2008.  By letter dated December 29,2008, the buyer terminated its obligations under the Agreement pursuant to Section 25(f) ofthe Agreement.

 

OnDecember 31, 2008, the Company and the third party entered into the FirstAmendment (“Amendment”) to the Agreement to extend the Company’s and thirdparty’s obligations under the Agreement to January 31, 2009.  TheCompany and the third party reaffirmed their respective representations andwarranties and acknowledged that the third party will require another financialinstitution acceptable to the Office of Thrift Supervision to perform its ortheir obligations under the Agreement. No agreement was reached by January 31, 2009.

 

OnDecember 31, 2008, the Company and Integra extended the forbearance periodto January 31, 2009.  Theforbearance period has expired and the Company is in default on its line of creditwith Integra.  This matter remainsunresolved.

 

**Establishment ofValuation Allowance**

** **

In light of the mattersdiscussed above, the Company established a valuation allowance of deferredfederal income taxes of approximately $4.4 million in 2007.  As of December 31, 2008 the allowancehad been increased to $27.2 million. Generally, the losses incurred in 2006, 2007 and 2008 resulted indeferred federal income taxes or deferred tax assets which may be appliedagainst current period earnings, carried back against prior years’ earnings orused to the extent of management’s estimate of future taxable income.  The valuation allowance was established sincethe Company’s current circumstances might impair the Company’s ability togenerate future taxable income and therefore impair its ability to realize allbenefits of the deferred tax asset.

 

**Peoples Lending Activities**

** **

At December 31,2008, the net loan portfolio of Peoples totaled $461.9 million, representingapproximately 64.8% of total assets at that date. Historically, the principallending activity of Peoples has been the origination of residential andnonresidential real estate loans. At December 31, 2008, residential loans(including construction loans secured by residential real estate) amounted to$425.8 million, or 80.1% of the gross loan portfolio.  Nonresidential realestate and land loans totaled $75.3 million, or 14.2% of the gross loanportfolio and nonresidential construction loans amounted to $9.3 million, or1.7% of the gross loan portfolio as of December 31, 2008.  Further,commercial loans amounted to $8.1 million, or 1.5% of the gross loan portfolioat December 31, 2008 and consumer loans amounted to $13.0 million, or 2.5%of the gross loan portfolio at such time.  Peoples curtailed its acquisitionand development lending, one-to-four-family residential investment lending, andunsecured commercial lending beginning in early 2007 due in large part to thedownturn in the local housing market, the increase in the Bank’s non-accrualloans and charge-offs, and to realign the portfolio due to loanconcentrations.   Further, as discussed above, the Bank is currentlyprohibited from making any new loans or issuing new lines of credit for thefollowing purposes:

 

·                  Land acquisition or development

·                  Speculative residential construction

·                  Commercial and multi-family construction

·                  Acquisition or retention of commercialproperty, and

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

 

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A savingsinstitution generally may not make loans to one borrower and related entities,if not fully secured, in an amount which exceeds 15% of its unimpaired capitaland surplus.  However, loans in an amount equal to an additional 10% ofunimpaired capital and surplus may be made to a borrower if the loans are fullysecured by readily marketable securities.   The Bank’s decrease inunimpaired capital and surplus as of December 31, 2008 has lowered theregulatory limit on loans to one borrower to $6.6 million.  As of December 31, 2008, there were 10borrowers with loans from the Bank totaling over the $6.6 million limit; thelargest being $11.9 million.  Becausethese total amounts were within the Bank’s regulatory limit at the time theloans were made, they are not considered a violation of the loans to oneborrower regulation.  However, they areconsidered non-conforming loans.

 

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

 
| ** **                              | ** ** | **December 31,**                | ** ** | **September 30,** | ** ** |
|-----------------------------------------|------------|--------------------------------------|------------|------------------------|------------|
| ** **                              | ** ** | **2008**                             | ** ** | **2007**               | ** ** | **2006** | ** ** | **2005** | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **                              | ** ** | ** **                           | ** ** | **Percent of**    | ** ** | ** ** | ** ** | **Percent of** | ** ** | ** ** | ** ** | **Percent of** | ** ** | ** ** | ** ** | **Percent of** | ** ** | ** ** | ** ** | **Percent of** | ** ** | ** ** | ** ** | **Percent of** | ** ** |
| ** **                              | ** ** | **Amount**                           | ** ** | **Net loans**     | ** ** | **Amount** | ** ** | **Net loans** | ** ** | **Amount** | ** ** | **Net loans** | ** ** | **Amount** | ** ** | **Net loans** | ** ** | **Amount** | ** ** | **Net loans** | ** ** | **Amount** | ** ** | **Net loans** | ** ** |
| ** **                              | ** ** | **(Dollars in thousands)** | ** ** |
| Mortgage loans:                         |       |                                 |       |                   |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| One-to-four-family                      |       | $                                    | 300,340    |                   | 65.0       | % | $ | 311,968 |   | 49.2 | % | $ | 343,346 |   | 42.3 | % | $ | 341,233 |   | 40.1 | % | $ | 252,424 |   | 35.8 | % | $ | 226,735 |   | 37.8 | % |
| Multi-family                            |       | 55,502                               |       | 12.0                   |       | 82,176 |   | 12.9 |   | 122,221 |   | 15.0 |   | 124,984 |   | 14.7 |   | 122,802 |   | 17.4 |   | 106,799 |   | 17.8 |   |
| Nonresidential real estate and land     |       | 75,251                               |       | 16.3                   |       | 128,955 |   | 20.3 |   | 140,909 |   | 17.3 |   | 147,086 |   | 7.3 |   | 132,502 |   | 18.8 |   | 158,907 |   | 26.5 |   |
| Construction loans                      |       | 79,224                               |       | 17.1                   |       | 144,171 |   | 22.7 |   | 234,830 |   | 28.9 |   | 259,249 |   | 30.4 |   | 220,733 |   | 31.3 |   | 124,996 |   | 20.9 |   |
| Total mortgage loans                    |       | 510,317                              |       | 110.5                  |       | 667,270 |   | 105.1 |   | 841,306 |   | 103.5 |   | 872,552 |   | 102.5 |   | 728,461 |   | 103.3 |   | 617,437 |   | 103.0 |   |
|                                    |       |                                 |       |                   |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Commercial loans                        |       | 8,082                                |       | 1.7                    |       | 20,012 |   | 3.2 |   | 30,933 |   | 3.8 |   | 47,258 |   | 5.6 |   | 43,231 |   | 6.1 |   | 33,238 |   | 5.5 |   |
| Consumer loans                          |       | 13,029                               |       | 2.8                    |       | 16,758 |   | 2.6 |   | 23,022 |   | 2.9 |   | 24,898 |   | 2.9 |   | 22,502 |   | 3.2 |   | 21,781 |   | 3.6 |   |
| Total loans receivable                  |       | 531,428                              |       | 115.1                  |       | 704,040 |   | 110.9 |   | 895,261 |   | 110.2 |   | 944,708 |   | 111.0 |   | 794,194 |   | 112.6 |   | 672,456 |   | 112.1 |   |
| Less:                                   |       |                                 |       |                   |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Undisbursed portion of loans in process |       | (40,110                              | )          | (8.7                   | )          | (33,661 | ) | (5.3 | ) | (62,042 | ) | (7.6 | ) | (77,094 | ) | (9.1 | ) | (72,894 | ) | (10.3 | ) | (59,045 | ) | (9.8 | ) |
| Allowance for loan losses               |       | (28,705                              | )          | (6.2                   | )          | (34,499 | ) | (5.4 | ) | (18,369 | ) | (2.3 | ) | (13,444 | ) | (1.6 | ) | (13,697 | ) | (1.9 | ) | (11,025 | ) | (1.8 | ) |
| Deferred loan fees                      |       | (752                                 | )          | (0.2                   | )          | (1,459 | ) | (0.2 | ) | (2,272 | ) | (0.3 | ) | (2,900 | ) | (0.3 | ) | (2,889 | ) | (0.4 | ) | (2,920 | ) | (0.5 | ) |
| Loans receivable, net                   |       | $                                    | 461,861    |                   | 100.0      | % | $ | 634,421 |   | 100.0 | % | $ | 812,578 |   | 100.0 | % | $ | 851,270 |   | 100.0 | % | $ | 704,714 |   | 100.0 | % | $ | 599,466 |   | 100.0 | % |

 

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 **Originationof Loans.**  In addition to the Orders andapplicable banking laws and regulations, the lending activities of Peoples aresubject to the written underwriting standards and loan origination proceduresestablished by the board of directors and management.  Loan originationsare obtained through a variety of sources, including referrals from real estatebrokers, builders and existing customers. Written loan applications are takenby loan relationship managers and branch personnel.  Credit reports,appraisals and other documentation involved with a loan are obtained asnecessary.  Property valuations are performed by independent outsideappraisers approved by the Board of directors of Peoples.  The Bank’sunderwriting standards primarily focus on the borrower’s cash flow capacity toservice the loan and to a lesser extent, the collateral value.  Thisrepresents a transition from underwriting standards primarily based oncollateral value, which are generally used by thrifts, to underwritingstandards more widely used by commercial banks.

 

Under the realestate lending policy of Peoples, title insurance must be obtained for eachreal estate loan.  Peoples also requires fire and extended coveragecasualty insurance, in order to protect the properties securing its real estateloans.  Borrowers must also obtain flood insurance policies when theproperty is in a flood hazard area as designated by the Department of Housingand Urban Development.  Peoples does not require borrowers to advancefunds to an escrow account for the payment of real estate taxes or hazardinsurance premiums.

 

Peoples’loan approval process is intended to assess the borrower’s ability to repay theloan, the viability of the property or project and the adequacy of the value ofthe collateral that will secure the loan.  The board of directors hasgranted loan approval authority of up to $1 million to any two senior officersor the Loan Committee.  The LoanCommittee, which is chaired by the Chief Lending Officer, may also approveloans being renewed or refinanced for any amount provided that no additionalfunds are advanced.

 

**Activity in Loans.** The following table shows the activity in Peoples’ loans during the periodsindicated.

 
| ** **                              | ** ** | **Year Ended  December 31,** | ** ** | **Three Months  Ended  December 31,** | ** ** | **Year Ended  September 30,** | ** ** |
|-----------------------------------------|------------|----------------------------------------|------------|-------------------------------------------------|------------|-----------------------------------------|------------|
| ** **                              | ** ** | **2008**                               | ** ** | **2007**                                        | ** ** | **2006**                                | ** ** | **2005** | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **                              | ** ** | **(In thousands)**                | ** ** |
|                                    |       |                                   |       |                                            |       |                                    |       |   |   |   |   |   |   |
| Total loans held at beginning of period |       | $                                      | 704,040    |                                            | $          | 895,261                                 |       | $ | 944,708 |   | $ | 794,194 |   | $ | 672,456 |   | $ | 622,000 |   |
| Originations of loans:                  |       |                                   |       |                                            |       |                                    |       |   |   |   |   |   |   |
| Mortgage loans:                         |       |                                   |       |                                            |       |                                    |       |   |   |   |   |   |   |
| One-to-four-family                      |       | 22,513                                 |       | 58,345                                          |       | 90,797                                  |       | 29,831 |   | 79,588 |   | 89,145 |   |
| Multi-family                            |       | 6,739                                  |       | 7,664                                           |       | 40,510                                  |       | 12,659 |   | 42,248 |   | 29,357 |   |
| Construction                            |       | 9,342                                  |       | 29,131                                          |       | 106,240                                 |       | 19,295 |   | 91,494 |   | 75,278 |   |
| Nonresidential real estate and land     |       | 6,329                                  |       | 49,626                                          |       | 80,004                                  |       | 32,450 |   | 85,658 |   | 70,158 |   |
| Commercial loans                        |       | 2,064                                  |       | 15,012                                          |       | 18,995                                  |       | 8,899 |   | 34,768 |   | 23,051 |   |
| Consumer loans                          |       | 1,298                                  |       | 2,656                                           |       | 5,093                                   |       | 846 |   | 11,058 |   | 12,374 |   |
| Total originations (1)                  |       | 48,285                                 |       | 162,434                                         |       | 341,639                                 |       | 103,980 |   | 344,814 |   | 289,465 |   |
| American State acquisition              |       | —                                 |       | —                                          |       | —                                  |       | — |   | 38,358 |   | — |   |
| Peoples Federal acquisition             |       | —                                 |       | —                                          |       | —                                  |       | 122,643 |   | — |   | — |   |
| Mercantile acquisition                  |       | —                                 |       | —                                          |       | 38,030                                  |       | — |   | — |   | — |   |
| Transfers to real estate owned          |       | (5,810                                 | )          | (6,861                                          | )          | (1,008                                  | )          | — |   | (1,854 | ) | (513 | ) |
| Charge-offs                             |       | (47,765                                | )          | (18,284                                         | )          | (13,103                                 | )          | (2,206 | ) | (1,081 | ) | (2,360 | ) |
| Other increases (decreases) (2)         |       | (23,536                                | )          | (59,147                                         | )          | (48,481                                 | )          | 2,188 |   | 5,197 |   | (9,641 | ) |
| Repayments                              |       | (143,786                               | )          | (269,363                                        | )          | (366,524                                | )          | (76,091 | ) | (263,696 | ) | (236,398 | ) |
| Net activity in loans                   |       | (172,612                               | )          | (191,221                                        | )          | (49,447                                 | )          | 150,514 |   | 121,738 |   | 50,456 |   |
| Gross loans held at end of period       |       | $                                      | 531,428    |                                            | $          | 704,040                                 |       | $ | 895,261 |   | $ | 944,708 |   | $ | 794,194 |   | $ | 672,456 |   |

 

8

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(1)   Undisbursedportions of loans in process totaled $40.1 million, $33.7 million, $62.0million, $77.1 million, $72.9 million, and $59.0 million, and at December 31,2008, 2007, 2006 and 2005, and September 30, 2005, and 2004, respectively.

 

(2)   Includesloan participations sold of $69,000, $4.9 million, $5.1 million, $1.1 million,and $5.0 million in fiscal 2008, 2007, 2006, 2005, and 2004,respectively.  There were no loan participations sold for the three monthsended December 31, 2005.  For fiscal 2008, 2007, 2006 and 2005,includes whole loans sold of $28.3 million, $27.1 million, $29.5 million and$6.7 million, respectively, and for the three months ended December 31,2005, includes whole loans sold of $3.5 million. The reduction in total loansresulting from sales of loans and loan participations in fiscal 2008, 2007 and2006, the three months ended December 31, 2005, and fiscal 2005, and 2004were offset (increased) by increases (decreases) in undisbursed loans inprocess, and other net items totaling approximately $4.8 million, $(27.1)million, $(13.9) million, $5.7 million, $13.0 million, and $5.3 million,respectively.

 

The significantrepayments of $143.8 million, $269.4 million, $366.5 million, $76.1 million,$263.7 million, and $236.4 million during 2008, 2007, 2006, the three monthsended December 31, 2005, fiscal 2005 and fiscal 2004, respectively, wereprimarily due to the repayment of short-term construction loans and landdevelopment loans as well as the refinancing activity related toadjustable-rate one-to-four-family residential loans that were set to repricein the current year.

 

Charge offs of $47.8million during fiscal 2008 consisted primarily of $6.7 million in loans securedby one-to-four-family residential real estate, $9.3 million in loans secured bymulti-family residential real estate, $8.8 million in construction loans, $18.9million in loans secured by nonresidential real estate and land, and $4.0million in commercial and consumer loans.  The increase in charged-offloans was primarily due to both real estate investors and developersexperiencing cash flow difficulties and the downturn in the localeconomy.  See “Asset Quality.”

 

Although federal laws andregulations permit savings institutions to originate and purchase loans securedby real estate located throughout the United States, the Bank generallyconfines its lending activity to its primary market area of Warren, Butler andHamilton counties in Ohio and Dearborn and Ohio counties in Indiana. Subject to its loans-to-one borrower limitation, the Bank is permitted toinvest without limitation in residential mortgage loans and up to 400% of itscapital in uninsured or unguaranteed loans secured by non-residential realestate.  The Bank may also invest in secured and unsecured consumer loansin an amount not exceeding 35% of total assets.  This 35% limitation maybe exceeded for certain types of consumer loans.  In addition, the Bankmay invest up to 10% of its total assets in secured and unsecured loans forcommercial, corporate, business or agricultural purposes.  At December 31,2008, the Bank was within each of the above lending limits. Notwithstanding the foregoing, Peoples’ lending activities are significantlyrestricted due to the requirements of the Orders.  See “Business —Regulatory Enforcement Actions.”

 

**One-to-Four-Family Residential Real Estate Loans.** The primary real estate lending activity of Peoples continues to be theorigination of loans secured by residential real estate.  At December 31,2008, $300.3 million, or 65.0% of the loan portfolio of Peoples consisted ofconventional one-to-four-family residential loans, compared to $312.0 million,or 49.2% at December 31, 2007 and $343.3 million or 42.3% of the loanportfolio at December 31, 2006. Owner occupied residential real estateloans are not restricted by the Orders.

 

The loan-to-value ratio,maturity and other provisions of the loans made by Peoples generally havereflected Peoples’ policy of making less than the maximum loan permissibleunder applicable regulations, in accordance with sound lending practices,market conditions and underwriting standards established by Peoples. Peoples’ lending policies on one-to-four-family residential mortgage loansgenerally limit the loan-to-value ratio to 80% of the lesser of the appraisedvalue or purchase price of the property. Residential mortgage loans areamortized on a monthly basis with principal and interest due each month. Theloans generally include “due-on-sale” clauses.

 

The residential mortgageloans originated by Peoples consist of fixed rate and adjustable rateloans.  Presently, the one-to-four-family fixed-rate residential mortgageloans originated by Peoples have terms of up to 30 years.

 

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In addition, Peoplesoriginates adjustable-rate mortgage loans on which the interest rate adjustsevery one, three or five years based upon the one-year or three-year T-billrates plus a specified margin.  During fiscal 2004, Peoples introduced afive year fixed rate balloon product and a five year fixed rate product whichadjusts on an annual basis thereafter based on the one-year rate on the T-bill. At December 31, 2008, $177.8 million, or 59.2% of our one-to-four-familyresidential loans were fixed rate and $122.5 million, or 40.8% were adjustablerate.  Most of Peoples’ one-to-four-family loans in 2008 were originatedfor its portfolio, and some of these loans did not conform to Fannie Mae orFreddie Mac requirements and therefore, could not be readily sold in thesecondary market.

 

Peoples’ non-owneroccupied residential mortgage loans have been originated primarily to investorsand builders.  These loans are generallymade at higher interest rates and fees than owner occupied residential realestate loans.  In 2008, Peoples curtailed its one-to-four-familyresidential  lending to investors, due in large part to the downturn inthe local housing market, the increase in the Bank’s nonaccrual loans andcharge offs, and to realign the portfolio due to loan concentrations.  Aspreviously stated, Peoples is currently prohibited from originating suchloans.  See “Business — Regulatory Enforcement Actions.”

 

**Multi-Family Residential Loans.** Peoples has also originated multi-family (over four units) residentialloans.  Peoples’ multi-family loans are primarily secured by apartmentbuildings or apartments being converted to condominium units.  Themulti-family residential mortgage loans of Peoples have been underwritten onsubstantially the same basis as its nonresidential real estate loans, discussedbelow, although loan-to-value ratios are generally limited to 80%.  At December 31,2008, Peoples had $55.5 million in multi-family residential mortgage loans,which amounted to 12.0% of Peoples’ loan portfolio, compared to $82.2 million,or 12.9% of Peoples’ loan portfolio at December 31, 2007.  Aspreviously stated, Peoples is currently prohibited from originating suchloans.  See “Business — Regulatory Enforcement Actions.”

 

**Nonresidential Real Estate and Land Loans.** Peoples’ nonresidential real estate and land loan portfolio primarily consistsof loans secured by land for development purposes, professional offices, smallretail centers, warehouses and building lots located within Peoples’ primarymarket area.  Nonresidential real estate and land loans amounted to $75.3million, or 16.3% of the net loan portfolio at December 31, 2008. This compares to $129.0 million, or 20.3% at December 31,2007.   As previously stated, Peoples is currently prohibited fromoriginating such loans.  See “Business — Regulatory Enforcement Actions.”

 

Nonresidential realestate loans originated by Peoples typically have a loan-to-value ratio of 75%or less and generally have higher interest rates than one-to-four-familyresidential mortgage loans with similar terms and structure. The maximumoriginal term of Peoples’ nonresidential real estate loans is25 years.  Decisions to lend are based on the economic viability ofthe property and the creditworthiness of the borrower.  Creditworthinessis determined by considering the character, experience, management andfinancial strength of the borrower, and the ability of the property to generateadequate funds to cover both operating expenses and debt service.  Inevaluating whether to make a nonresidential real estate loan, Peoples placesprimary emphasis on the ratio of net cash flow to debt service on the propertyand generally requires a ratio of cash flow to debt service of at least 120%,computed after deduction for a vacancy factor and property expenses as Peoplesdeems appropriate.

 

The land loans of Peoplesgenerally are secured by unimproved land, land which is being developed intolots, or lots which have been developed for single-family homes.   Unimproved land loans generally have aloan-to-value ratio of up to 65%, require monthly payments of interest only,and mature within one year.  Developmentloans generally have a loan-to-value ratio of up to 75%, require monthlypayments of interest only, and mature within one or two years.    Lot loans generally have a loan-to-valueratio of up to 80%, require monthly payments of interest only, and maturewithin one year.

 

Nonresidential real estatelending is generally considered to involve a higher degree of risk thanone-to-four-family residential lending. Such lending typically involves largerloan balances concentrated in a single borrower or groups of related borrowersfor rental or business properties. In addition, the payment experience on

 

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loans secured byincome-producing properties is typically dependent on the success of theoperation of the related project and thus is typically affected by adverseconditions in the real estate market and in the economy. Peoples generallyattempts to mitigate the risks associated with its nonresidential real estatelending by, among other things, lending primarily in its market area and usingreasonable loan-to-value ratios in the underwriting process.

 

Land development andacquisition loans involve significant additional risks when compared with loanson existing residential properties. These loans may involve larger loanbalances to single borrowers, and the payment experience may be dependent onthe successful development of the land and the sale of the lots. These riskscan be significantly impacted by supply and demand conditions as well as localeconomic conditions.  In early 2007, the Bank curtailed new origination ofland development and acquisition loans based on the downturn in the localhousing market, the increase in the Bank’s nonaccrual loans and charge-offs,and to realign the portfolio due to loan concentrations.  As previouslystated, Peoples is currently prohibited from originating such loans.  See “Business — Regulatory Enforcement Actions.”

 

**Construction Loans. **At December 31,2008, Peoples had approximately $79.2 million, or 17.1% of the loan portfolio,in construction loans, compared to $144.2 million, or 22.7% of the total loanportfolio at December 31, 2007.  Of this amount at December 31,2008, $69.9 million, or 15.1%, consisted of residential construction loans and$9.3 million, or 2.0%, consisted of nonresidential construction loans. The construction loans of Peoples have been comprised of loans made to builderson a pre-sold basis, as well as to builders for homes on an unsold orspeculative basis.

 

Peoples’ constructionloans to builders have generally been made with a term not to exceed twelvemonths.  Interest-only payments are required during the constructionperiod, which is typically twelve months.  Peoples generally limits thenumber of unsold homes under construction to its builders. This number isdependent on the financial strength of the builder, marketability of theproperty and the Bank’s experience with and present exposure to thebuilder.  In addition, loans made to borrowers to construct their personalresidences are originated at one closing as a construction/permanent loan.

 

Peoples has alsooriginated loans for the construction of nonresidential real estate such assmall office buildings and warehouses.  These loans are typicallyoriginated as construction/permanent loans with interest only payments duringthe construction period and converting to a permanent loan at the end of theconstruction period.  These loans are generally made with a constructionterm of 12 months.  The loan to value ratio is generally limited to 75% onthese loans on an “as completed” basis.

 

Prior to making acommitment to fund a construction loan, Peoples requires an appraisal of theproperty.  Peoples also generally requires third party inspections of eachproject prior to disbursement of funds.  Loan proceeds are then disbursedbased on a percentage of completion.

 

Construction lending isgenerally considered to involve a higher degree of risk of loss than financingon improved, owner-occupied real estate because of the uncertainties of construction,including the possibility of costs exceeding the initial estimates and the needto obtain a tenant or purchaser if the property will not beowner-occupied.  Peoples generally attempts to mitigate the risksassociated with construction lending by, among other things, primarily lendingin its market area, using conservative underwriting guidelines, and monitoringthe construction process.

 

Peoples is currentlyprohibited from originating speculative residential construction loans,multi-family residential construction loans and commercial constructionloans.  See “Business — Regulatory Enforcement Actions.”

 

**Commercial Loans.** Peoples’commercial loans consist primarily of secured and unsecured lines of creditpredominantly to builders and developers for working capital purposes, and to alesser extent, loans secured by business equipment.  At December 31,2008, commercial loans amounted to $8.0 million, or 1.7% of Peoples’ net loanportfolio, compared to $20.0 million, or 3.2% of the net loan portfolio at December 31,2007.  In early

 

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2007, the Bank curtailed new origination of commercialunsecured loans in recognition of the downturn in the local housing market andthe increase in the Bank’s nonaccrual loans and charge offs.  Aspreviously stated, Peoples is currently prohibited from originating suchloans.  See “Business — Regulatory Enforcement Actions.”

 

**Consumer Loans.** Peoples’consumer and other loans consist of loans secured by deposit accounts,automobiles and stock.  At December 31, 2008, consumer and otherloans amounted to $13.0 million, or 2.8% of Peoples’ net loan portfolio,compared to $16.8 million, or 2.6% of Peoples’ net loan portfolio as of December 31,2007.

 

**Loan Origination and Other Fees.** In addition to interest earned on loans, Peoples receives loan origination feesor “points” for originating some of its loans.  Loan points are apercentage of the principal amount of the mortgage loan and are charged to theborrower in connection with the origination of the loan.  In accordancewith Statement of Financial Accounting Standards No. 91, loan originationfees and certain related direct loan origination costs are offset, and theresulting net amount is deferred and amortized as interest income over thecontractual life of the related loans as an adjustment to the yield of suchloans. Peoples had $752,000 and $1.5 million of deferred loan fees at December 31,2008 and December 31, 2007, respectively. The drop in deferred loan fees is primarily due to the selling of loansand the decline in loan originations in 2008.

 

**ContractualPrincipal Repayments and Interest Rates.**  The following table sets forth scheduledcontractual amortization of Peoples’ loans at December 31, 2008 as well asthe dollar amount of such loans which are scheduled to mature after one yearaccording to fixed or adjustable interest rates.  Demand loans, loanshaving no schedule of repayments and no stated maturity and overdraft loans arereported as due in one year or less.

 
| ** **                          | ** ** | **Principal Repayments Contractually Due for the  Years Ending December 31,** | ** ** |
|-------------------------------------|------------|-----------------------------------------------------------------------------------------------------------------------|------------|
| ** **                          | ** ** | ** **                                                                                                            | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | **Total at** | ** ** |
| ** **                          | ** ** | ** **                                                                                                            | ** ** | ** ** | ** ** | ** ** | ** ** | **2012-** | ** ** | **2014-** | ** ** | **2019-** | ** ** | **There-** | ** ** | **December 31,** | ** ** |
| ** **                          | ** ** | **2009**                                                                                                              | ** ** | **2010** | ** ** | **2011** | ** ** | **2013** | ** ** | **2018** | ** ** | **2023** | ** ** | **after** | ** ** | **2008** | ** ** |
| ** **                          | ** ** | **(In thousands)**                                                                                               | ** ** |
| Mortgage loans:                     |       |                                                                                                                  |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| One-to-four-family                  |       | $                                                                                                                     | 89,193     |   | $ | 18,051 |   | $ | 10,618 |   | $ | 17,576 |   | $ | 47,696 |   | $ | 36,072 |   | $ | 76,846 |   | $ | 296,052 |   |
| Multi-family                        |       | 17,394                                                                                                                |       | 6,266 |   | 2,925 |   | 4,035 |   | 7,149 |   | 4,893 |   | 14,530 |   | 57,192 |   |
| Nonresidential real estate and land |       | 32,607                                                                                                                |       | 5,876 |   | 4,001 |   | 5,170 |   | 11,328 |   | 9,559 |   | 9,181 |   | 77,722 |   |
| Construction loans                  |       | 78,962                                                                                                                |       | — |   | — |   | — |   | — |   | — |   | — |   | 78,962 |   |
| Commercial loans                    |       | 7,633                                                                                                                 |       | 788 |   | 231 |   | 47 |   | 7 |   | — |   | — |   | 8,706 |   |
| Consumer loans                      |       | 9,579                                                                                                                 |       | 455 |   | 433 |   | 851 |   | 1,476 |   | — |   | — |   | 12,794 |   |
| Total (1)                           |       | $                                                                                                                     | 235,368    |   | $ | 31,436 |   | $ | 18,208 |   | $ | 27,679 |   | $ | 67,656 |   | $ | 50,524 |   | $ | 100,557 |   | $ | 531,428 |   |

 

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(1)           Of the $296.1 million of loanprincipal payments contractually due after December 31, 2009, $138.0million have fixed rates of interest and $158.1 million have adjustable ratesof interest.

 

Scheduled contractualmaturities of loans do not necessarily reflect the actual expected term of theloan portfolio. The average life of mortgage loans is substantially less thantheir average contractual terms because of prepayments. The average life ofmortgage loans tends to increase when current mortgage loan rates are higherthan rates on existing mortgage loans and, conversely, decrease when rates oncurrent mortgage loans are lower than existing mortgage loan rates (due torefinancing of adjustable-rate and fixed-rate loans at lower rates). Under thelatter circumstance, the weighted-average yield on loans decreases as higheryielding loans are repaid or refinanced at lower rates.

 

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**AssetQuality**

 

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

 

Loans are placed onnon-accrual status when management believes the probability of collection ofinterest is insufficient to warrant further accrual. When a loan is placed onnon-accrual status, previously accrued but unpaid interest is deducted frominterest income. As a matter of policy, Peoples generally discontinues theaccrual of interest income when the loan becomes 90 days past due as toprincipal or interest, and if collection of the interest is questionable.

 

At December 31,2008, Peoples had $43.1 million of non-performing loans.  If the currentdownturn in the local economy continues and borrowers are not able to meettheir debt service obligations, Peoples may experience a continued migration ofnon-performing loans to real estate owned. The level of non-performing loans has had and will continue to have asignificant adverse impact on the Company’s financial condition and results ofoperations.  Further, the level of theCompany’s non-performing assets has and will continue to negatively impactPeople’s interest rate spread, interest income, provision for losses on loansand net loss.  While the Company hasdevoted and will continue to devote substantial resources toward the resolutionof all delinquent and non-performing assets, no assurance can be made thatmanagement’s efforts will be successful.

 

Real estate acquired byPeoples as a result of foreclosure or by deed-in-lieu of foreclosure isclassified as real estate owned until sold.  Peoples had real estate ownedof $10.2 million and $6.9 million at December 31, 2008 and December 31,2007, respectively.  At December 31, 2008, approximately $5.1 millionof real estate owned consisted of a residential land development formulti-family residences and condominiums in a northern Cincinnati suburb.  Another property consisting of land andsingle-family housing lots is valued at $3.1 million.

 

**Delinquent Loans.** The following tables set forth information concerning delinquent loans at thedates indicated, in dollar amounts and as a percentage of each category ofPeoples’ loan portfolio. The amounts presented represent the total outstandingprincipal balances of the related loans, rather than the actual payment amountswhich are past due.

 
| ** **                          | ** ** | **At December 31, 2008   31-59 Days  Delinquent** | ** ** | **At December 31, 2008  60-89 Days  Delinquent** | ** ** | **At December 31, 2007  60-89 Days  Delinquent** | ** ** | **At December 31, 2006  60-89 Days  Delinquent** | ** ** |
|-------------------------------------|------------|----------------------------------------------------------------------------|------------|----------------------------------------------------------------------|------------|-----------------------------------------------------------------|------------|----------------------------------------------------------------------|------------|
| ** **                          | ** ** | ** **                                                                 | ** ** | **Percent**                                                          | ** ** | ** **                                                      | ** ** | **Percent**                                                          | ** ** | ** ** | ** ** | **Percent** | ** ** | ** ** | ** ** | **Percent** | ** ** |
| ** **                          | ** ** | ** **                                                                 | ** ** | **Of Loan**                                                     | ** ** | ** **                                                      | ** ** | **Of Loan**                                                     | ** ** | ** ** | ** ** | **Of Loan** | ** ** | ** ** | ** ** | **Of Loan** | ** ** |
| ** **                          | ** ** | **Amount**                                                                 | ** ** | **Category**                                                         | ** ** | **Amount**                                                      | ** ** | **Category**                                                         | ** ** | **Amount** | ** ** | **Category** | ** ** | **Amount** | ** ** | **Category** | ** ** |
| ** **                          | ** ** | **(Dollars in thousands)**                                       | ** ** |
| Mortgage loans:                     |       |                                                                       |       |                                                                 |       |                                                            |       |                                                                 |       |   |   |   |   |   |   |   |   |
| One-to-four-family                  |       | $                                                                          | 931        |                                                                 | 0.30       | %                                                               | $          | 3,247                                                                |       | 1.05 | % | $ | 3,465 |   | 1.12 | % | $ | 3,140 |   | 0.91 | % |
| Multi-family                        |       | 375                                                                        |       | 0.56                                                                 |       | —                                                          |       | —                                                               |       | — |   | — |   | 1,699 |   | 1.39 |   |
| Nonresidential real estate and land |       | 527                                                                        |       | 0.37                                                                 |       | 3                                                               |       | —                                                               |       | 2,892 |   | 2.24 |   | 2,804 |   | 1.99 |   |
| Commercial                          |       | —                                                                     |       | 0.00                                                                 |       | —                                                          |       | —                                                               |       | 359 |   | 1.80 |   | 1,377 |   | 4.45 |   |
| Consumer                            |       | 19                                                                         |       | 0.15                                                                 |       | —                                                          |       | —                                                               |       | 715 |   | 4.27 |   | 45 |   | 0.20 |   |
| Total                               |       | $                                                                          | 1,852      |                                                                 | 0.35       |                                                            | $          | 3,250                                                                |       | 0.61 |   | $ | 7,431 |   | 1.06 |   | $ | 9,065 |   | 1.01 |   |
|                                     |            |                                                                            |            |                                                                      |            |                                                                 |            |                                                                      |            |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

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**Non-Performing Assets.** The following table sets forth information with respect to non-performingassets identified by Peoples, including non-accrual loans and other real estateowned.

 
| ** **                              | ** ** | **At December 31,**        | ** ** | **At September 30,** | ** ** |
|-----------------------------------------|------------|--------------------------------------|------------|--------------------------------|------------|
| ** **                              | ** ** | **2008**                             | ** ** | **2007**                       | ** ** | **2006** | ** ** | **2005** | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **                              | ** ** | **(Dollars in thousands)** | ** ** |
|                                    |       |                                 |       |                           |       |   |   |   |   |   |   |   |   |
| Non-accrual loans:                      |       |                                 |       |                           |       |   |   |   |   |   |   |   |   |
| One-to-four-family                      |       | $                                    | 6,566      |                           | $          | 4,834 |   | $ | 7,140 |   | $ | 5,481 |   | $ | 6,674 |   | $ | 2,090 |   |
| Multi-family                            |       | 7,086                                |       | 5,225                          |       | 4,243 |   | 928 |   | 2,325 |   | 2,535 |   |
| Nonresidential real estate and land     |       | 25,216                               |       | 10,070                         |       | 8,273 |   | 2,488 |   | 3,787 |   | 197 |   |
| Construction                            |       | 3,858                                |       | 4,643                          |       | 2,302 |   | 4,361 |   | 2,640 |   | 1,039 |   |
| Commercial                              |       | 200                                  |       | 537                            |       | 2,028 |   | 4,759 |   | 3,220 |   | 165 |   |
| Consumer                                |       | 180                                  |       | 8                              |       | 97 |   | 742 |   | 741 |   | 3 |   |
| Total non-accrual loans                 |       | 43,106                               |       | 25,317                         |       | 24,083 |   | 18,758 |   | 19,387 |   | 6,029 |   |
| Loans 90 days past due and accruing     |       | —                               |       | 613                            |       | 1,716 |   | — |   | 1,266 |   | — |   |
| Total non-performing loans              |       | 43,106                               |       | 25,930                         |       | 25,799 |   | 18,758 |   | 20,653 |   | 6,029 |   |
| Real estate owned, net                  |       | 10,176                               |       | 6,916                          |       | 333 |   | 188 |   | 207 |   | 301 |   |
| Total non-performing assets             |       | $                                    | 53,282     |                           | $          | 32,846 |   | $ | 26,132 |   | $ | 18,946 |   | $ | 20,860 |   | $ | 6,330 |   |
| Non-performing assets to total assets   |       | 7.48                                 | %          | 3.70                           | %          | 2.54 | % | 1.82 | % | 2.07 | % | 0.71 | % |
| Non-performing loans to total loans-net |       | 9.33                                 | %          | 4.09                           | %          | 3.17 | % | 2.20 | % | 2.96 | % | 1.01 | % |

 

Nonperforming assetstotaled $53.3 million, $32.8 million, and $26.1 million at December 31,2008, 2007 and 2006, respectively.  Nonperforming assets at December 31,2008 consisted of $6.6 million of loans secured by one-to-four-familyresidential real estate, $7.1 million of loans secured by multi-familyresidential real estate, $25.2 million of loans secured by nonresidential realestate and land, $3.9 million in construction loans, $380,000 of commercial andconsumer loans, and $10.2 million in foreclosed real estate.  Over thepast two years, the Bank has revised its methods of reviewing loans forpotential weaknesses, which includes a strong emphasis on cash flowanalysis.  The Bank’s management continues to take this proactiveapproach, in addition to aggressively pursuing the collection and resolution ofall delinquent and nonperforming loans. The increase in nonperforming loans wasdue in large part to the downturn in the local housing market and resultantcash flow issues faced by local property investors.

 

At December 31,2008, non-accrual loans secured by one-to-four-family residential real estateconsisted of $4.5 million in owner-occupied residences with an average balanceof $161,000, and $2.1 million in non-owner occupied residential real estatewith an average balance of $71,000.   Non-accrual loans secured bymulti-family residential real estate amounted to $7.1 million with an averagebalance of $787,000.  One borrower represented $5.3 million of themulti-family residential non-accrual loans.

 

Nonresidential realestate and land secured non-accrual loans totaled $25.2 million at December 31,2008.  The average balance of these loans was $647,000.  Threeborrowers represented  $7.8 million ofthe nonresidential real estate and land secured non-accrual loans, with thelargest borrower representing $3.9 million.  Loans secured by buildinglots included in the nonresidential real estate secured non-accrual loanstotaled $1.4 million at December 31, 2008, and were primarily comprised offour borrowers, with the largest borrower representing $1.3 million.

 

Non-accrual constructionloans totaled $3.9 million at December 31, 2008, with an average balanceof $241,000.  Approximately $2.3 million of these construction loans aresecured by one-to-four-family residential real estate.  Commercial andconsumer non-accrual loans totaled $381,000, with $3,000 of these loans beingunsecured.

 

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If the $43.1 million ofnon-accruing loans of Peoples had been current in accordance with their termsduring 2008, the gross income on such loans would have been approximately $1.5million.  A total of approximately $49,000 of interest income was actuallyrecorded by Peoples on such loans in the year ended December 31, 2008.

 

**Classified Assets.** Federal regulations require that each insured savings institution classify itsassets on a regular basis. In addition, in connection with examinations of insuredinstitutions, federal examiners have authority to identify problem assets and,if appropriate, classify them. There are three classifications for problemassets: “substandard,” “doubtful” and “loss.” Substandard assets have one ormore defined weaknesses and are characterized by the distinct possibility thatthe insured institution will sustain some loss if the deficiencies are notcorrected. Doubtful assets have the weaknesses of substandard assets with theadditional characteristic that the weaknesses make collection or liquidation infull on the basis of currently existing facts, conditions and valuesquestionable, and there is a higher possibility of loss. An asset classifiedloss is considered uncollectible and of such little value that continuance asan asset of the institution is not warranted. Another category designated “specialmention” also must be established and maintained for assets which do notcurrently expose an insured institution to a sufficient degree of risk towarrant classification as substandard, doubtful or loss.  Assetsclassified as substandard or doubtful may require the institution to establishgeneral allowances for loan losses.  If an asset or portion thereof isclassified loss, the insured institution must either establish specificallowances for loan losses in the amount of 100% of the portion of the assetclassified loss, or charge-off such amount.  General loss allowancesestablished to cover possible losses related to assets classified substandardor doubtful may be included in determining an institution’s regulatory capital,while specific valuation allowances for loan losses do not qualify asregulatory capital.  Federal examiners may disagree with an insuredinstitution’s classifications and amounts reserved.

 

The following table setsforth information with respect to classified assets as identified by Peoples,at the dates indicated.

 
| ** **                                | ** ** | **At December 31, 2008** | ** ** | **At December 31, 2007** | ** ** |
|-------------------------------------------|------------|-----------------------------------------|------------|-----------------------------------------|------------|
| ** **                                | ** ** | **Substandard**                         | ** ** | **Doubtful**                            | ** ** | **Loss** | ** ** | **Substandard** | ** ** | **Doubtful** | ** ** | **Loss** | ** ** |
| ** **                                | ** ** | **(In thousands)**                 | ** ** |
| One-to-four-family loans                  |       | $                                       | 7,314      |                                    | $          | — |   | $ | — |   | $ | 6,348 |   | $ | — |   | $ | — |   |
| Multi-family loans                        |       | 12,948                                  |       | —                                  |       | — |   | 5,621 |   | — |   | — |   |
| Nonresidential real estate and land loans |       | 33,508                                  |       | —                                  |       | — |   | 15,673 |   | — |   | — |   |
| Construction loans                        |       | 9,466                                   |       | —                                  |       | — |   | 4,643 |   | — |   | — |   |
| Commercial loans                          |       | 2,839                                   |       | —                                  |       | — |   | 1,323 |   | — |   | — |   |
| Consumer loans                            |       | 6,556                                   |       | —                                  |       | — |   | 38 |   | — |   | — |   |
| Real estate owned                         |       | 10,176                                  |       | —                                  |       | — |   | 6,915 |   | — |   | — |   |
| Total                                     |       | $                                       | 82,807     |                                    | $          | — |   | $ | — |   | $ | 40,551 |   | $ | — |   | $ | — |   |

 

Peoples’ total classifiedassets at December 31, 2008, net of full or partial charge offs, amountedto $82.8 million, with no assets classified doubtful or loss.  It wasmanagement’s opinion that as of December 31, 2008, no loans exhibitedcharacteristics to warrant a doubtful classification, while loan amounts classifiedloss were charged off.   The largest classified loan at December 31,2008 was a $7.6 million loan secured by an apartment complex.  Theremaining $75.3 million of classified assets at December 31, 2008consisted of approximately $7.3 million secured by one-to-four-family realestate, $5.6 million secured by multi-family residential real estate, $9.5million in residential construction loans, $33.5 million in loans secured bynonresidential real estate and land, $9.4 million of commercial and consumerloans, and $10.2 million of foreclosed real estate.  The real estate ownedconsisted of $8.6 million of land and land development, $838,000 ofone-to-four-family residential real estate, and $707,000 of constructionprojects.

 

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Approximately $21.1million of loans were categorized as special mention by the Bank as of December 31,2008, compared to $43.1 million at December 31, 2007.  Although theseloans are not deemed classified, these loans have potential weaknesses thatdeserve management’s close attention.  If left uncorrected, thesepotential weaknesses may, at some future date, result in the deterioration ofthe repayment prospects for the credit or the Bank’s credit position. Concerns may lie with cash flow, liquidity, leverage, collateral or industryconditions.  Over the past two years, the Bank has revised its methods ofreviewing loans for potential weaknesses, which includes a strong emphasis oncash flow analysis. The Bank’s management believes that this proactive approachhas resulted in earlier detection of loans with potential exposure.  TheBank’s management has also increased its monitoring of these loans and isworking proactively with borrowers to remediate and mitigate risk associatedwith these loans.

 

 **Allowancefor Loan Losses.**  The allocation of the allowancefor loan losses based on particular types of loans was as follows:

 
| ** **                          | ** ** | **December 31,**       | ** ** |
|-------------------------------------|------------|-----------------------------|------------|
| ** **                          | ** ** | **2008**                    | ** ** | **2007** | ** ** | **2006** | ** ** |
| **Loan Types**                 | ** ** | **Balance**                 | ** ** | **Percent  of Total** | ** ** | **Balance** | ** ** | **Percent  of Total** | ** ** | **Balance** | ** ** | **Percent  of Total** | ** ** |
| ** **                          | ** ** | **(Dollars  in thousands)** | ** ** |
| One-to-four-family                  |       | $                           | 8,916      |   | 31.1 | % | $ | 13,217 |   | 38.3 | % | $ | 4,615 |   | 25.2 | % |
| Multi-family                        |       | 5,452                       |       | 19.0 |   | 6,599 |   | 19.1 |   | 4,084 |   | 22.2 |   |
| Nonresidential real estate and land |       | 9,389                       |       | 32.7 |   | 6,154 |   | 17.8 |   | 2,904 |   | 15.8 |   |
| Construction                        |       | 3,185                       |       | 11.1 |   | 4,893 |   | 14.2 |   | 2,027 |   | 11.0 |   |
| Commercial                          |       | 1,432                       |       | 5.0 |   | 3,475 |   | 10.1 |   | 4,551 |   | 24.8 |   |
| Consumer                            |       | 331                         |       | 1.2 |   | 161 |   | 0.5 |   | 188 |   | 1.0 |   |
| Total                               |       | $                           | 28,705     |   | 100.0 | % | $ | 34,499 |   | 100.0 | % | $ | 18,369 |   | 100.0 | % |

 

The allowance for loanlosses is maintained by management at a level considered sufficient to coverestimated losses inherent in the existing portfolio based on prior loan lossexperience, known risks in the portfolio, adverse situations that may affectthe borrower’s ability to repay, the estimated value of any underlyingcollateral, general economic conditions, and other factors and estimates whichare subject to change over time.

 

A quarterly analysis of the allowance for loan lossrequirements includes general allocations based on the type of collateralsecuring the loan.  In the analysis, loans determined to have a higherrisk, such as land development loans, non-owner occupied residential realestate loans, and unsecured commercial loans, will have higher allowancerequirements. ** **Additionalallowance requirements are allocated to criticized assets, based on theclassified status of the loan.  For example, loans classified substandardrequire higher loan loss allowances as compared to loans classified specialmention.  No special allowances are provided for concentration of loans toone borrower, unless management becomes aware of a potential problem withcollectibility.  Allocations of the allowance may be made for any of theabove loan types, but the entire allowance is available for any loan thatshould be charged off.

 

Peoples increased itsallowance for loan losses by recording a $41.5 million provision for losses onloans for 2008 based on the current level of non-performing, classified andcriticized loans.  The level of these loans is primarily due to delinquentloans in the Bank’s non-owner occupied (investment property) residential loanportfolio and its acquisition, development, and construction loan portfolio.The delinquencies in these portfolios are due primarily to the continuingdownturn in the local economy and resultant cash flow issues faced by localproperty investors and developers.

 

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At the beginningof 2007, Peoples curtailed its acquisition and development lending,one-to-four-family residential investment lending and commercial lending. While management believes that it determines the size of the allowance based onthe best information available at the time, the allowance will need to beadjusted as circumstances change and assumptions are updated.  Futureadjustments to the allowance could significantly affect future net earnings.

 

The followingtable sets forth the activity in the allowance for loan losses during theperiods indicated.

 
| ** **                                                               | ** ** | **Year Ended December 31,** | ** ** | **Three Months  Ended  December 31,** | ** ** | **Year Ended   September 30,** | ** ** |
|--------------------------------------------------------------------------|------------|--------------------------------------------|------------|-------------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                                                               | ** ** | **2008**                                   | ** ** | **2007**                                        | ** ** | **2006**                                      | ** ** | **2005** | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **                                                               | ** ** | **(Dollars in thousands)**       | ** ** |
| Allowance at beginning of period                                         |       | $                                          | 34,499     |                                            | $          | 18,369                                        |       | $ | 13,444 |   | $ | 13,697 |   | $ | 11,025 |   | $ | 9,744 |   |
| Increase due to Peoples Federal acquisition                              |       | —                                     |       | —                                          |       | —                                        |       | 907 |   | — |   | — |   |
| Increase due to Mercantile acquisition                                   |       | —                                     |       | —                                          |       | 302                                           |       | — |   | — |   | — |   |
| Provision for losses on loans                                            |       | 41,477                                     |       | 32,800                                          |       | 17,450                                        |       | 900 |   | 3,600 |   | 3,600 |   |
| Charge-offs:                                                             |       |                                       |       |                                            |       |                                          |       |   |   |   |   |   |   |
| One-to-four-family                                                       |       | (6,666                                     | )          | (8,484                                          | )          | (4,053                                        | )          | (1,519 | ) | (103 | ) | (609 | ) |
| Multi-family                                                             |       | (9,259                                     | )          | (4,741                                          | )          | (2,369                                        | )          | (360 | ) | (940 | ) | (1,431 | ) |
| Nonresidential real estate and land                                      |       | (18,945                                    | )          | (1,274                                          | )          | (1,307                                        | )          | (204 | ) | — |   | (151 | ) |
| Construction                                                             |       | (8,843                                     | )          | (844                                            | )          | (1,601                                        | )          | — |   | (16 | ) | — |   |
| Commercial                                                               |       | (3,982                                     | )          | (2,887                                          | )          | (1,042                                        | )          | — |   | — |   | (145 | ) |
| Consumer                                                                 |       | (70                                        | )          | (54                                             | )          | (2,731                                        | )          | (123 | ) | (22 | ) | _  (24 |   |
| Total charge-offs                                                        |       | (47,765                                    | )          | (18,284                                         | )          | (13,103                                       | )          | (2,206 | ) | (1,081 | ) | (2,360 | ) |
| Recoveries:                                                              |       |                                       |       |                                            |       |                                          |       |   |   |   |   |   |   |
| One-to-four-family                                                       |       | 45                                         |       | 357                                             |       | 78                                            |       | — |   | 9 |   | — |   |
| Multi-family                                                             |       | 187                                        |       | 190                                             |       | 9                                             |       | — |   | 140 |   | — |   |
| Nonresidential real estate and land                                      |       | —                                     |       | 199                                             |       | —                                        |       | — |   | — |   | — |   |
| Construction                                                             |       | —                                     |       | 593                                             |       | 1                                             |       | — |   | — |   | — |   |
| Commercial                                                               |       | 198                                        |       | 158                                             |       | 73                                            |       | 142 |   | — |   | 21 |   |
| Consumer                                                                 |       | 64                                         |       | 117                                             |       | 115                                           |       | 4 |   | 4 |   | 20 |   |
| Total recoveries                                                         |       | 494                                        |       | 1,614                                           |       | 276                                           |       | 146 |   | 153 |   | 41 |   |
| Net loans charged off to allowance for loan losses                       |       | (47,271                                    | )          | (16,670                                         | )          | (12,827                                       | )          | (2,060 | ) | (928 | ) | (2,319 | ) |
| Allowance at end of period                                               |       | $                                          | 28,705     |                                            | $          | 34,499                                        |       | $ | 18,369 |   | $ | 13,444 |   | $ | 13,697 |   | $ | 11,025 |   |
|                                                                     |       |                                       |       |                                            |       |                                          |       |   |   |   |   |   |   |
| Allowance for loan losses to total nonperforming loans at end of  period |       | 66.6                                       | %          | 133.0                                           | %          | 71.20                                         | %          | 71.67 | % | 66.32 | % | 182.87 | % |
|                                                                     |       |                                       |       |                                            |       |                                          |       |   |   |   |   |   |   |
| Allowance for loan losses to total gross loans at end of period          |       | 5.40                                       | %          | 4.90                                            | %          | 2.05                                          | %          | 1.42 | % | 1.72 | % | 1.64 | % |
|                                                                          |            |                                            |            |                                                 |            |                                               |            |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

**Investment Securities**

** **

Peoples hasauthority to invest in various types of securities, including mortgage-backedsecurities, United States Treasury obligations, securities of various federalagencies and of state and municipal governments, 

 

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certificates ofdeposit at federally-insured banks and savings institutions, certain bankers’acceptances and federal funds.  Each large purchase of an investmentsecurity is approved by the Board of Directors.

 

The investmentpolicy of Peoples is designed to maintain adequate liquidity, manage investmentassets in conjunction with interest rate risk and maximize stability throughdiversification.  All investments are approved to be held as “Availablefor sale”.  Peoples does not maintain any investments as “Trading” or “Heldto Maturity”.  Peoples transacts all investment activity through a selectgroup of securities dealers approved by the Board of Directors.

 

The followingtable sets forth information regarding the carrying value and fair value ofPeoples’ securities at the dates indicated.

 
| ** **                   | ** ** | **December 31,** | ** ** |
|------------------------------|------------|-----------------------|------------|
| ** **                   | ** ** | **2008**              | ** ** | **2007** | ** ** | **2006** | ** ** |
| ** **                   | ** ** | **Amortized**         | ** ** | **Fair** | ** ** | **Amortized** | ** ** | **Fair** | ** ** | **Amortized** | ** ** | **Fair** | ** ** |
| ** **                   | ** ** | **Cost**              | ** ** | **Value** | ** ** | **Cost** | ** ** | **Value** | ** ** | **Cost** | ** ** | **Value** | ** ** |
| ** **                   | ** ** | **(In thousands)**    | ** ** |
| Available for sale:          |       |                  |       |   |   |   |   |   |   |   |   |   |   |
| Mortgage-backed securities   |       | $                     | 23,562     |   | $ | 22,985 |   | $ | 63,258 |   | $ | 63,335 |   | $ | 52,818 |   | $ | 52,669 |   |
| Mutual funds                 |       | 1,309                 |       | 1,255 |   | 1,251 |   | 1,210 |   | 1,199 |   | 1,146 |   |
| US treasuries and agencies   |       | 75,497                |       | 75,787 |   | 1,974 |   | 1,993 |   | 1,966 |   | 1,965 |   |
| Municipal securities         |       | 943                   |       | 925 |   | 1,027 |   | 1,034 |   | 1,114 |   | 1,111 |   |
| Other equity securities      |       | —                |       | — |   | — |   | — |   | 7 |   | 8 |   |
| Total                        |       | $                     | 101,311    |   | $ | 100,952 |   | $ | 67,510 |   | $ | 67,572 |   | $ | 57,104 |   | $ | 56,899 |   |
| Membership investment:       |       |                  |       |   |   |   |   |   |   |   |   |   |   |
| Federal Home Loan Bank stock |       | $                     | 14,549     |   | $ | 14,549 |   | $ | 14,024 |   | $ | 14,024 |   | $ | 14,024 |   | $ | 14,024 |   |

 

The followingtable sets forth the activity in Peoples’ aggregate securities portfolio duringthe periods indicated.

 
| ** **                                                                         | ** ** | **Year Ended December 31,** | ** ** |
|------------------------------------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                                                         | ** ** | **2008**                         | ** ** | **2007** | ** ** | **2006** | ** ** |
| ** **                                                                         | ** ** | **(In Thousands)**               | ** ** |
|                                                                               |       |                             |       |   |   |   |   |
| Securities at beginning of period                                                  |       | $                                | 81,596     |   | $ | 70,923 |   | $ | 87,604 |   |
| Purchases (1)                                                                      |       | 82,217                           |       | 29,854 |   | 721 |   |
| Sales of available for sale securities                                             |       | (28,886                          | )          | (8 | ) | (2,008 | ) |
| Amortization of premiums and discounts                                             |       | 167                              |       | (90 | ) | (628 | ) |
| Repayments, prepayments and maturities                                             |       | (19,173                          | )          | (19,349 | ) | (22,425 | ) |
| Securities acquired through acquisition — net                                 |       | —                           |       | — |   | 7,407 |   |
| Increase (decrease) in unrealized gains (losses) on  available-for-sale securities |       | (420                             | )          | 266 |   | 252 |   |
| Securities at end of period (2)                                                    |       | $                                | 115,501    |   | $ | 81,596 |   | $ | 70,923 |   |

 

----

(1)  Includesincreases in Federal Home Loan Bank stock and mutual funds from purchases anddividends.

(2)  At December 31, 2008, 2007 and 2006,$22.5 million or 19.5%, $78.2 million or 95.9% and $67.3 million or 94.8%,respectively, of Peoples’ securities portfolio consisted of adjustable-ratesecurities.

 

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The followingtable sets forth certain information regarding the maturities of Peoples’security portfolio at December 31, 2008.

 
| ** **                 | ** ** | **Contractual Maturity**   | ** ** |
|----------------------------|------------|----------------------------|------------|
| ** **                 | ** ** | ** **                 | ** ** | **Weighted** | ** ** | ** ** | ** ** | **Weighted** | ** ** | ** ** | ** ** | **Weighted** | ** ** | ** ** | ** ** | **Weighted** | ** ** |
| ** **                 | ** ** | **Under 1**                | ** ** | **Average** | ** ** | **1-5** | ** ** | **Average** | ** ** | **6-10** | ** ** | **Average** | ** ** | **Over 10** | ** ** | **Average** | ** ** |
| ** **                 | ** ** | **Year**                   | ** ** | **Yield** | ** ** | **Years** | ** ** | **Yield** | ** ** | **Years** | ** ** | **Yield** | ** ** | **Years** | ** ** | **Yield** | ** ** |
| ** **                 | ** ** | **(Dollars in Thousands)** | ** ** |
| Investment securities      |       | $                          | 75,310     |   | 3.33 | % | $ | 170 |   | 5.76 | % | $ | 531 |   | 4.79 | % | $ | 701 |   | 5.49 | % |
| Mortgage-backed securities |       | —                     |       | — |   | 284 |   | 4.50 |   | 385 |   | 4.05 |   | 22,316 |   | 4.31 |   |
| Total                      |       | $                          | 75,310     |   | 3.33 |   | $ | 454 |   | 4.97 |   | $ | 916 |   | 4.48 |   | $ | 23,017 |   | 4.35 |   |

 

Mortgage-backedsecurities represent a participation interest in a pool of one-to-four-familyor multi-family mortgages.  The mortgage originators use intermediaries,generally U.S. Government agencies and government-sponsored enterprises, topool and repackage the participation interests in the form of securities withinvestors receiving the principal and interest payments on the mortgages. Such U.S. Government agencies and government-sponsored enterprises guaranteethe payment of principal and interest to investors.

 

Mortgage-backedsecurities are typically issued with stated principal amounts, and the securitiesare backed by pools of mortgages that have loans with interest rates that arewithin a range and have varying maturities.  The underlying pool ofmortgages, i.e., fixed-rate or adjustable-rate, as well as prepayment risk, ispassed on to the certificate holder.  The life of a mortgage-backedpass-through security approximates the life of the underlying mortgages.

 

Themortgage-backed securities of Peoples may consist of Government NationalMortgage Association (“Ginnie Mae”), Federal Home Loan Mortgage Corporation (“FHLMC”)and Federal National Mortgage Association (“FNMA”) securities.  Ginnie Maeis a government agency within the Department of Housing and Urban Developmentwhich is intended to help finance government-assisted housing programs. Ginnie Mae securities are backed by loans insured by the Federal HousingAdministration, or guaranteed by the Veterans Administration, and the timelypayment of principal and interest on Ginnie Mae securities are guaranteed byGinnie Mae and backed by the full faith and credit of the U.S. Government.

 

Mortgage-backedsecurities generally yield less than the loans which underlie such securitiesbecause of their payment guarantees or credit enhancements which offer nominalcredit risk. In addition, mortgage-backed securities are more liquid thanindividual mortgage loans and may be used to collateralize borrowings or otherobligations of Peoples.  At December 31, 2008, Peoples hadmortgage-backed securities with a fair value totaling $23.0 million.

 

In addition to theabove investment securities, Peoples also has invested in approximately $18.6million in bank-owned life insurance.

 

**Sources of Funds**

** **

Deposits are theprimary source of Peoples’ funds for lending and other investment purposes. Inaddition to deposits, principal and interest payments on loans andmortgage-backed securities are a source of funds. Loan repayments are arelatively stable source of funds, while deposit inflows and outflows aresignificantly influenced by general interest rates, competition from otherfinancial entities, and money market conditions. Borrowings may also be used ona short-term basis to compensate for reductions in the availability of fundsfrom other sources and on a longer-term basis for general business purposes.

 

**Deposits.**  Deposits are attracted by the Bankprincipally from within its primary market area. Deposit account terms vary,with the principal differences being the minimum balance required, the timeperiods the funds must 

 

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remain on deposit and theinterest rate. The Bank offers traditional passbook savings accounts, moneymarket accounts, checking accounts and certificates of deposit.  The Bank obtains deposits primarily fromresidents of its primary market areas of southwestern Ohio and southeasternIndiana.  The Bank does not solicit deposits from outside its primarymarket area or pay fees to brokers to solicit funds for deposit.

 

Interest ratespaid, maturity terms, service fees and withdrawal penalties are established ona periodic basis. Management determines the rates and terms based on rates paidby competitors, the need for funds or liquidity, growth goals and federal andstate regulations.

 

The followingtable sets forth the activity in Peoples’ deposits during the periodsindicated.

 

| ** **                                       | ** ** | **Year Ended December 31,** | ** ** |
|--------------------------------------------------|------------|----------------------------------|------------|
| ** **                                       | ** ** | **2008**                         | ** ** | **2007** | ** ** | **2006** | ** ** |
| ** **                                       | ** ** | **(In thousands)**               | ** ** |
|                                             |       |                             |       |   |   |   |   |
| Beginning balance                                |       | $                                | 735,212    |   | $ | 755,261 |   | $ | 726,629 |   |
| Net increase (decrease) before interest credited |       | (123,678                         | )          | (47,044 | ) | 4,316 |   |
| Interest credited                                |       | 18,664                           |       | 26,995 |   | 24,316 |   |
| Net increase (decrease) in deposits              |       | (105,014                         | )          | (20,049 | ) | 28,632 |   |
| Ending balance                                   |       | $                                | 630,198    |   | $ | 735,212 |   | $ | 755,261 |   |

 

Thedecrease in deposits was primarily due to pricing by the Bank at levelsintended to provide controlled runoff throughout 2008.

 

The followingtable sets forth by various interest rate categories the certificates ofdeposit with Peoples at the dates indicated.

 
| ** **     | ** ** | **December 31,** | ** ** |
|----------------|------------|-----------------------|------------|
| ** **     | ** ** | **2008**              | ** ** | **2007** | ** ** | **2006** | ** ** |
| ** **     | ** ** | **(In thousands)**    | ** ** |
|           |       |                  |       |   |   |   |   |
| 0.00% to 2.99% |       | $                     | 52,658     |   | $ | 1,475 |   | $ | 8,438 |   |
| 3.00% to 3.99% |       | 140,009               |       | 41,767 |   | 78,277 |   |
| 4.00% to 4.99% |       | 215,326               |       | 227,548 |   | 253,708 |   |
| 5.00% to 6.99% |       | 19,989                |       | 241,002 |   | 158,864 |   |
| 7.00% to 8.99% |       | —                |       | 5 |   | 5 |   |
| Total          |       | $                     | 427,982    |   | $ | 511,797 |   | $ | 499,292 |   |

 

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The following table sets forth the amount and remaining maturities ofPeoples’ certificates of deposit at December 31, 2008.

 
| ** **     | ** ** | **Six  Months  And Less** | ** ** | **Over Six  Months  Through  One  Year** | ** ** | **Over One  Year  Through  Two  Years** | ** ** | **Over Two  Years  Through  Three  Years** | ** ** | **Over  Three  Years** | ** ** |
|----------------|------------|---------------------------|------------|------------------------------------------|------------|-----------------------------------------|------------|--------------------------------------------|------------|------------------------|------------|
| ** **     | ** ** | **(In thousands)**        | ** ** |
|           |       |                      |       |                                     |       |                                    |       |                                       |       |                   |       |
| 0.00% to 2.99% |       | $                         | 31,459     |                                     | $          | 16,992                                  |       | $                                          | 3,033      |                   | $          | 1,174 |   | $ | — |   |
| 3.00% to 3.99% |       | 75,780                    |       | 34,797                                   |       | 23,367                                  |       | 564                                        |       | 5,501                  |       |
| 4.00% to 4.99% |       | 15,039                    |       | 126,688                                  |       | 42,223                                  |       | 12,679                                     |       | 18,697                 |       |
| 5.00% to 6.99% |       | 2,860                     |       | 853                                      |       | 378                                     |       | 1,195                                      |       | 14,703                 |       |
| 7.00% to 8.99% |       | —                    |       | —                                   |       | —                                  |       | —                                     |       | —                 |       |
| Total          |       | $                         | 125,138    |                                     | $          | 179,330                                 |       | $                                          | 69,001     |                   | $          | 15,612 |   | $ | 38,901 |   |

 

As of December 31,2008, the aggregate amount of outstanding certificates of deposit at Peoples,in amounts greater than $100,000, was approximately $106.9 million.  Thefollowing table presents the maturity of these certificates of deposit at suchdate.

 
| ** **                      | ** ** | **December 31, 2008** | ** ** |
|---------------------------------|------------|----------------------------|------------|
| ** **                      | ** ** | **(In thousands)**         | ** ** |
|                            |       |                       |       |
| 3 months or less                |       | $                          | 16,755     |   |
| Over 3 months through 6 months  |       | 18,579                     |       |
| Over 6 months through 12 months |       | 41,320                     |       |
| Over 12 months                  |       | 30,267                     |       |
|                            |       |                       |       |
| Total                           |       | $                          | 106,921    |   |

 

The followingtable sets forth the dollar amount of deposits in various types of depositsoffered by Peoples at the dates indicated.

 
| ** **                     | ** ** | **At December 31,**        | ** ** |
|--------------------------------|------------|--------------------------------------|------------|
| ** **                     | ** ** | **2008**                             | ** ** | **2007** | ** ** | **2006** | ** ** |
| ** **                     | ** ** | **Amount**                           | ** ** | **Percentage** | ** ** | **Amount** | ** ** | **Percentage** | ** ** | **Amount** | ** ** | **Percentage** | ** ** |
| ** **                     | ** ** | **(Dollars in thousands)** | ** ** |
|                           |       |                                 |       |   |   |   |   |   |   |   |   |   |   |
| Non-interest checking accounts |       | $                                    | 15,897     |   | 2.52 | % | $ | 21,936 |   | 2.99 | % | $ | 21,967 |   | 2.91 | % |
| Savings and checking accounts  |       | 57,075                               |       | 9.06 |   | 79,942 |   | 10.87 |   | 92,059 |   | 12.19 |   |
| Certificates of deposit        |       | 427,982                              |       | 67.91 |   | 511,797 |   | 69.61 |   | 499,292 |   | 66.11 |   |
| Money market accounts          |       | 129,244                              |       | 20.51 |   | 121,537 |   | 16.53 |   | 141,943 |   | 18.79 |   |
|                           |       |                                 |       |   |   |   |   |   |   |   |   |   |   |
| Total                          |       | $                                    | 630,198    |   | 100.00 | % | $ | 735,212 |   | 100.00 | % | $ | 755,261 |   | 100.00 | % |

 

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The average daily deposits for the years ended December 31, 2008,2007 and 2006, and the average rates paid on those deposits are summarized inthe following table.

 
| ** **                    | ** ** | **For Year Ended December 31,** | ** ** |
|-------------------------------|------------|-----------------------------------------------------|------------|
| ** **                    | ** ** | **2008**                                            | ** ** | **2007** | ** ** | **2006** | ** ** |
| ** **                    | ** ** | **Average Daily  Balance**                     | ** ** | **Average Rate  Paid** | ** ** | **Average Daily  Balance** | ** ** | **Average Rate  Paid** | ** ** | **Average Daily  Balance** | ** ** | **Average Rate  Paid** | ** ** |
| ** **                    | ** ** | **(Dollars in thousands)**                          | ** ** |
|                          |       |                                                |       |   |   |   |   |   |   |   |   |   |   |
| Non-interest checking         |       | $                                                   | 18,671     |   | 0.00 | % | $ | 22,394 |   | 0.00 | % | $ | 23,944 |   | 0.00 | % |
| Savings and checking accounts |       | 79,365                                              |       | 1.16 |   | 69,133 |   | 2.13 |   | 103,865 |   | 1.09 |   |
| Certificates of deposit       |       | 465,491                                             |       | 3.99 |   | 506,294 |   | 4.78 |   | 478,148 |   | 4.30 |   |
| Money market accounts         |       | 95,606                                              |       | 2.65 |   | 144,809 |   | 3.01 |   | 146,791 |   | 3.69 |   |
|                          |       |                                                |       |   |   |   |   |   |   |   |   |   |   |
| Total deposits                |       | $                                                   | 659,133    |   | 3.35 | % | $ | 742,630 |   | 4.04 | % | $ | 752,748 |   | 3.62 | % |

 

**Borrowings.**  Peoples may obtain advances from the FederalHome Loan Bank of Cincinnati upon the security of the common stock Peoples ownsin that bank and certain of its residential mortgage loans and mortgage-backedsecurities, provided certain standards related to creditworthiness have beenmet. These advances are made pursuant to several credit programs, each of whichhas its own interest rate and range of maturities. Federal Home Loan Bankadvances are generally available to meet seasonal and other withdrawals ofdeposit accounts and to permit increased lending.  As of December 31,2008, Peoples was permitted to borrow, subject to security pledge agreements,up to $360.5 million from the Federal Home Loan Bank of Cincinnati, subject tosecurity pledge agreements and acceptable collateral.  At such date,Peoples had $59.0 million of Federal Home Loan Bank advances. The Bank has usedFederal Home Loan Bank advances in order to complement deposits as a fundingsource for loans and investments.  Of the $59.0 million of advances at December 31,2008, $3.0 million mature in fiscal 2009.

 

TheCompany has a $17.5 million line of credit with Integra, secured by alloutstanding shares of the Bank’s stock. At December 31, 2008 and 2007, the outstanding principal balancewas $17.5 million and $16.5 million, respectively.  At December 31, 2007, the Company wasnot in compliance with certain loan covenants and the lender had the ability toaccelerate all outstanding amounts upon notice. The line of credit matured June 30, 2008.  Effective July 24, 2008, the Companyentered into a forbearance agreement to extend the repayment period and allowthe Company to structure a transaction which would result in repayment of theline of credit in full.  On December 31,2008, the Company and Integra extended the forbearance period to January 31,2009.  The forbearance period has expiredand the Company is in default on its line of credit with Integra.  This matter remains unresolved.

 

AtDecember 31, 2008, interest was calculated at the prime rate plus 300basis points. The effective interest rate at December 31, 2008 was6.25%.  During the forbearance period,interest was payable monthly at the prime rate (3.25% at December 31,2008); when the loan principal and initial interest is paid in full, under theforbearance terms, the remainder of the interest is due.  Interest accrued and not paid related to theline of credit totaled $264,000 at December 31, 2008 and is included inaccrued interest payable in the consolidated statement of financial condition.A loan fee of $175,000 was also due and is included in accounts payable in theconsolidated statement of financial condition. At December 31, 2007, interest was payable at daily LIBOR plus 200basis points or prime less 50 basis points based on the selection made by theCompany. The effective interest rate at December 31, 2007 was 7.24%.

 

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The following table shows certain information regarding the borrowingsof Peoples at or for the dates indicated:

 
| ** **                                                    | ** ** | **At or for the Year Ended December 31,** | ** ** |
|---------------------------------------------------------------|------------|------------------------------------------------|------------|
| ** **                                                    | ** ** | **2008**                                       | ** ** | **2007** | ** ** | **2006** | ** ** |
| ** **                                                    | ** ** | **(Dollars in thousands)**                     | ** ** |
| Federal Home Loan Bank advances:                              |       |                                           |       |   |   |   |   |
| Average balance outstanding                                   |       | $                                              | 59,307     |   | $ | 102,745 |   | $ | 172,073 |   |
| Maximum amount outstanding at any month-end during the period |       | $                                              | 61,115     |   | $ | 142,181 |   | $ | 203,148 |   |
| Balance outstanding at end of period                          |       | $                                              | 59,007     |   | $ | 61,128 |   | $ | 144,185 |   |
| Average interest rate during the period                       |       | 3.98                                           | %          | 4.08 | % | 4.10 | % |
| Weighted-average interest rate at end of period               |       | 3.90                                           | %          | 3.91 | % | 3.96 | % |
| Line of Credit:                                               |       |                                           |       |   |   |   |   |
| Average balance outstanding                                   |       | $                                              | 17,454     |   | $ | 14,705 |   | $ | 1,357 |   |
| Maximum amount outstanding at any month-end during the period |       | $                                              | 17,500     |   | $ | 16,500 |   | $ | 12,700 |   |
| Balance outstanding at end of period                          |       | $                                              | 17,500     |   | $ | 16,500 |   | $ | 12,700 |   |
| Average interest rate during the period                       |       | 6.12                                           | %          | 7.78 | % | 7.84 | % |
| Weighted-average interest rate at end of period               |       | 6.25                                           | %          | 7.24 | % | 7.37 | % |

 

**Employees**

** **

Peoples had 153full-time equivalent employees at December 31, 2008.  None of theseemployees are represented by a collective bargaining agent, and Peoplesbelieves that it enjoys good relations with its personnel.

 

**Competition**

** **

Peoples facessignificant competition both in attracting deposits and in making loans. Its most direct competition for deposits has come historically from commercialbanks, credit unions and other savings institutions located in its primarymarket area, including many large financial institutions which have greaterfinancial and marketing resources available to them. In addition, it facessignificant competition for investors’ funds from short-term money marketsecurities, mutual funds and other corporate and government securities. Peoples does not rely upon any individual group or entity for a materialportion of its deposits.  The ability of Peoples to attract and retaindeposits depends on its ability to generally provide a rate of return,liquidity and risk comparable to that offered by competing investmentopportunities.

 

Peoples’competition for loans comes principally from mortgage banking companies,commercial banks, other savings institutions and credit unions.  Itcompetes for loan originations primarily through the interest rates and loanfees it charges, and the efficiency and quality of services it providesborrowers.  Factors which affect competition include general and localeconomic conditions, current interest rate levels and volatility in themortgage markets.

 

**Regulation**

** **

The following is asummary of certain statutes and regulations affecting Peoples and theBank.  This summary is qualified in its entirety by such statutes andregulations.  A change in applicable laws or regulations may have amaterial effect on Peoples, the Bank and the business of Peoples and the Bank.

 

Financialinstitutions and their holding companies are extensively regulated underfederal and state law.  Consequently, the growth and earnings performanceof Peoples and the Bank can be affected not only by management decisions andgeneral economic conditions, but also by the statutes administered by, and theregulations and policies of, various governmental regulatory authorities. Those authorities include, but are not limited to, the SEC, the Office ofThrift Supervision, the Federal Reserve Board, the FDIC, the Internal Revenue 

 

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Service, and statetaxing authorities.  The effect of such statutes, regulations and policiescan be significant, and cannot be predicted with a high degree of certainty.

 

Federal and statelaws and regulations generally applicable to financial institutions and theirholding companies regulate, among other things, the scope of business,investments, reserves against deposits, capital levels relative to operations,lending activities and practices, the nature and amount of collateral forloans, the establishment of branches, mergers, consolidations anddividends.  The system of supervision and regulation applicable to Peoplesand the Bank establishes a comprehensive framework for their respectiveoperations and is intended primarily for the protection of the FDIC’s deposit insurancefunds, the depositors of the Bank and the public, rather than shareholders ofthe Bank or Peoples.

 

Federal law andregulations establish supervisory standards applicable to the lendingactivities of the Bank, including internal controls, credit underwriting, loandocumentation and loan-to-value ratios for loans secured by real property.

 

**The Company. **Peoples is a registered savings and loan holdingcompany within the meaning of Section 10 of the Home Owners’ Loan Act, andis subject to OTS examination and supervision as well as certain reportingrequirements.  Federal law generally prohibits a savings and loan holdingcompany, without prior OTS approval, from acquiring the ownership or control ofany other savings institution or savings and loan holding company, or all, orsubstantially all, of the assets or more than 5% of the voting sharesthereof.  These provisions also prohibit, among other things, any directoror officer of a savings and loan holding company, or any individual who owns orcontrols more than 25% of the voting shares of such holding company, fromacquiring control of any savings institution not a subsidiary of such savingsand loan holding company, unless the acquisition is approved by the OTS.

 

*HoldingCompany Activities.*  Peoplesoperates as a unitary savings and loan holding company.  The activities ofPeoples and its non-savings institution subsidiaries are restricted toactivities traditionally permitted to multiple savings and loan holdingcompanies and to financial holding companies under added provisions of the BankHolding Company Act. Multiple savings and loan holding companies may:

 

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

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

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

·                  engage in activities determined by theFederal Reserve to be closely related to banking and a proper incident theretoand engage in services and activities previously determined by the Federal HomeLoan Bank Board by regulation to be permissible for a multiple savings and loanholding company as of March 5, 1987.

·                  lend, exchange, transfer or invest forothers, or safeguard money or securities;

·                  insure, guarantee or indemnify others, issueannuities, and act as principal, agent or broker for purposes of the foregoing;

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

·                  issue or sell interests in pooled assets thata bank could hold directly; and

·                  underwrite, deal in or make a market insecurities and merchant banking activities.

 

If the OTSdetermines that there is reasonable cause to believe that the continuation by asavings and loan holding company of an activity constitutes a serious risk tothe financial safety, soundness or stability of its subsidiary savingsinstitution, the OTS may impose such restrictions as deemed necessary toaddress such risk. These restrictions include limiting the following:

 

·                  the payment of dividends by the savingsinstitution;

 

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·                  transactions between the savings institutionand its affiliates; and

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

 

TheCompany is subject to the restrictions and requirements of an Order issued bythe OTS.  The Order is summarized under “Business — Regulatory EnforcementActions” herein.  Every savingsinstitution subsidiary of a savings and loan holding company is required togive the OTS at least 30 days’ advance notice of any proposed dividends tobe made on its guaranty, permanent or other non-withdrawable stock, or elsesuch dividend will be invalid.

 

*Restrictionson Transactions With Affiliates.*  Transactions between a savings institutionand its “affiliates” are subject to quantitative and qualitative restrictionsunder Sections 23A and 23B of the Federal Reserve Act and OTS regulations. Affiliatesof a savings institution generally include, among other entities, the savingsinstitution’s holding company and companies that are controlled by or undercommon control with the savings institution.  However, most subsidiariesof savings institutions are not considered affiliates for the purposes of theserules.

 

In general, asavings institution or its subsidiaries may engage in certain “coveredtransactions” with affiliates up to certain limits. In addition, a savingsinstitution and its subsidiaries may engage in covered transactions and certainother transactions only on terms and under circumstances that are substantiallythe same, or at least as favorable to the savings institution or itssubsidiary, as those prevailing at the time for comparable transactions withnonaffiliated companies. A “covered transaction” is defined to include a loanor extension of credit to an affiliate; a purchase of investment securitiesissued by an affiliate; a purchase of assets from an affiliate, with certainexceptions; the acceptance of securities issued by an affiliate as collateralfor a loan or extension of credit to any party; or the issuance of a guarantee,acceptance or letter of credit on behalf of an affiliate. In addition, asavings institution may not:

 

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

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

·                  purchase a low-quality asset from anaffiliate; or

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

 

With certainexceptions, each loan or extension of credit by a savings institution to anaffiliate must be secured by collateral with a market value ranging from 100%to 130% (depending on the type of collateral) of the amount of the loan orextension of credit.

 

*Federal Securities Laws**.*  Peoples registered its common stock with theSecurities and Exchange Commission under Section 12(g) of theSecurities Exchange Act of 1934.  Peoples is subject to the proxy andtender offer rules, insider trading reporting requirements and restrictions,and certain other requirements under the Exchange Act.

 

*Sarbanes-Oxley Act of 2002.*  On July 30, 2002, the President signedinto law the Sarbanes-Oxley Act of 2002 implementing legislative reformsintended to address corporate and accounting fraud.  In addition to theestablishment of a new accounting oversight board which will enforce auditing,quality control and independence standards and will be funded by fees from allpublicly traded companies, the bill restricts provision of both auditing andconsulting services by accounting firms.  To ensure auditor independence,any non-audit services being provided to an audit client will requirepreapproval by the company’s audit committee members.  In addition, theaudit partners must be rotated.  The bill requires chief executiveofficers and chief financial officers, or their equivalent, to certify to theaccuracy of periodic reports filed with the SEC, subject to civil and criminalpenalties if they knowingly or willfully violate this certificationrequirement.  In addition, 

 

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under the Act, counsel willbe required to report evidence of a material violation of the securities lawsor a breach of fiduciary duty by a company to its chief executive officer orits chief legal officer, and, if such officer does not appropriately respond,to report such evidence to the audit committee or other similar committee ofthe board of directors or the board itself.

 

Longer prisonterms and increased penalties will also be applied to corporate executives whoviolate federal securities laws, the period during which certain types of suitscan be brought against a company or its officers has been extended, and bonusesissued to top executives prior to restatement of a company’s financialstatements are now subject to disgorgement if such restatement was due tocorporate misconduct.  Executives are also prohibited from insider tradingduring retirement plan “blackout” periods, and loans to company executives arerestricted.  In addition, a provision directs that civil penalties leviedby the SEC as a result of any judicial or administrative action under the Actbe deposited to a fund for the benefit of harmed investors.  The FederalAccounts for Investor Restitution (“FAIR”) provision also requires the SEC todevelop methods of improving collection rates.  The legislationaccelerates the time frame for disclosures by public companies, as they mustimmediately disclose any material changes in their financial condition oroperations.  Directors and executive officers must also provideinformation for most changes in ownership in a company’s securities within twobusiness days of the change.

 

The Act alsoincreases the oversight of, and codifies certain requirements relating to auditcommittees of public companies and how they interact with the company’s “registeredpublic accounting firm” (“RPAF”).  Audit committee members must beindependent and are barred from accepting consulting, advisory or othercompensatory fees from the issuer.  In addition, companies must disclosewhether at least one member of the committee is a “financial expert” (as suchterm will be defined by the SEC) and if not, why not.  Under the Act, aRPAF is prohibited from performing statutorily mandated audit services for acompany if such company’s chief executive officer, chief financial officer,comptroller, chief accounting officer or any person serving in equivalentpositions has been employed by such firm and participated in the audit of suchcompany during the one-year period preceding the audit initiation date. The Act also prohibits any officer or director of a company or any other personacting under their direction from taking any action to fraudulently influence,coerce, manipulate or mislead any independent public or certified accountantengaged in the audit of the company’s financial statements for the purpose ofrendering the financial statement’s materially misleading.  The Act alsorequires the SEC to prescribe rules requiring inclusion of an internalcontrol report and assessment by management in the annual report tostockholders.  The Act requires the RPAF that issues the audit report toattest to and report on management’s assessment of the company’s internalcontrols.  In addition, the Act requires that each financial reportrequired to be prepared in accordance with (or reconciled to) accountingprinciples generally accepted in the United States of America and filed withthe SEC reflect all material correcting adjustments that are identified by aRPAF in accordance with accounting principles generally accepted in the UnitedStates of America and the rules and regulations of the SEC.

 

**The Bank.**   The Bank is a federally chartered stocksavings bank.  The OTS is the chartering authority and primary federalregulator of the Bank. The OTS has extensive authority over the operations offederally chartered savings institutions.  As part of this authority,federally chartered savings institutions are required to file periodic reportswith the OTS and are subject to periodic examinations by the OTS and theFDIC.  The Bank also is subject to regulation and examination by the FDICand to requirements established by the Federal Reserve Board.  Theinvestment and lending authority of savings institutions are prescribed byfederal laws and regulations, and such institutions are prohibited fromengaging in any activities not permitted by such laws and regulations. Such regulation and supervision is primarily intended for the protection ofdepositors and the Deposit Insurance Fund (“DIF”).

 

TheOTS’ enforcement authority over all savings institutions and their holdingcompanies includes, among other things, the ability to assess civil moneypenalties, to issue cease and desist or removal orders and to initiateinjunctive actions.  In general, these enforcement actions may beinitiated for violations of laws and regulations and unsafe or unsound practices.Other actions or inactions may provide the basis for enforcement action, 

 

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includingmisleading or untimely reports filed with the OTS.  The Bank is subject to the restrictions andrequirements of an Order issued by the OTS. The Order is summarized under “Business — Regulatory Enforcement Actions” herein.

 

***Insurance of Accounts***.  The deposits of the Bank are insured to themaximum extent permitted by the DIF and are backed by the full faith and creditof the U.S. Government.  As insurer, theFDIC is authorized to conduct examinations of, and to require reporting by,insured institutions.  It also mayprohibit any insured institution from engaging in any activity determined byregulation or order to pose a serious threat to the FDIC.

 

Thedeposits of the Bank have historically been insured by the FDIC up to $100,000per insured depositor, except certain types of retirement accounts, which areinsured up to $250,000 per insured depositor. On October 3, 2008, the maximum amount insured under FDIC depositinsurance was temporarily increased from $100,000 to $250,000 per insureddepositor through December 31, 2009. After December 31, 2009, the standard insurance limit will returnto $100,000 for all deposit categories except retirement accounts, which willcontinue to be insured up to $250,000 per insured depositor.

 

EachFDIC insured institution is assigned to one of three capital groups which arebased solely on the level of an institution’s capital— “well capitalized,” “adequatelycapitalized,” and “undercapitalized.” These capital levels are defined in the same manner as under the promptcorrective action system discussed above. These three groups are then divided into three subgroups which reflectvarying levels of supervisory concern, from those which are considered to behealthy to those which are considered to be of substantial supervisoryconcern.  In 2007 and 2008, the annualinsurance premiums on bank deposits insured by the DIF varied between $.05 and$.43 per $100 of deposits.

 

Inaddition, all institutions with deposits insured by the FDIC are required topay assessments to fund interest payments on bonds issued by the FinancingCorporation, a mixed-ownership government corporation established torecapitalize the predecessor to the DIF. The annual assessment rate set for the fourth quarter of 2008 was 27.5basis points of insured deposits and is adjusted quarterly.  These assessments will continue until theFinancing Corporation bonds mature in 2019.

 

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

 

OnDecember 16, 2008, the FDIC approved the final rule to raise therisk-based deposit insurance assessment rates uniformly by seven basis pointsfor the first quarter of 2009 assessment period beginning on January 1,2009.  On February 26, 2009, theFDIC approved the final rule to raise the assessment rates for theassessment period beginning on April 1, 2009, and subsequent assessmentperiods.  The new assessment scheme willdifferentiate between risk profiles and will require riskier institutions topay higher assessment rates based on classification into one of four riskcategories.  Institutions that are ratedin the category with the lowest risk will see their initial base rates increaseto between 12 and 16 basis points.

 

OnFebruary 26, 2009, the FDIC adopted an interim rule, with request forcomment, to impose a one-time 20 basis point emergency assessment effective on June 30,2009 and to be collected on September 30, 2009.  The FDIC has indicated in recent pressreports that it may consider reducing the emergency special assessment by halfto 10 basis points if, among other factors, Congress enacts legislation toexpand the FDIC’s line of credit with the Department of Treasury to $100billion.

 

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OnFebruary 26, 2009, the FDIC adopted another interim rule, with request forcomment, to have the option to impose a further special assessment of up to 10basis points on an institution’s assessment base on the last day of anycalendar quarter after June 30, 2009 to be collected at the same time therisk-based assessment is collected.  Theassessment will be imposed if the FDIC determines the DIF reserve ratio willfall to a level that would adversely affect public confidence or to a levelclose to zero or negative, among other factors. The ultimate goal of the increase in assessment rates and the proposedspecial assessments is to restore the DIF ratio to a minimum of 1.15% withinthe next seven years.  However, theinterim rules are subject to change and may or may not be enacted.

 

Giventhe enacted and proposed increases in assessments for insured financialinstitutions in 2009, the Company anticipates that FDIC assessments on depositswill have a significantly greater impact on operating expenses in 2009 comparedto 2008 and could materially affect our reported earnings, liquidity andcapital.

 

*Regulatory Capital Requirements.*  Banking regulations require savingsinstitutions to satisfy several capital requirements.  Savings institutions must maintain “tangible”capital equal to at least 1.5% of adjusted total assets, “core” capital equalto at least 4.0% of adjusted total assets and “total” capital (a combination ofcore and “supplementary” capital) equal to at least 8.0% of “risk-weighted”assets.  Tangible capital generally equals common stockholders’ equity(including retained earnings) minus intangible assets, with only a limitedexception for purchased mortgage servicing rights. Core capital generallyconsists of tangible capital plus qualifying intangible assets.

 

In determiningcompliance with the risk-based capital requirement, a savings institution isallowed to include both core capital and supplementary capital in its totalcapital, provided that the amount of supplementary capital included does notexceed the savings institution’s core capital. Supplementary capital generallyconsists of general allowances for loan losses up to a maximum of 1.25% of risk-weightedassets, together with certain other items.  In determining the requiredamount of risk-based capital, total assets, including certain off-balance sheetitems, are multiplied by a risk weight based on the risks inherent in the typeof assets.  The risk weights range from 0% for cash and securities issuedby the U.S. Government or unconditionally backed by the full faith and creditof the U.S. Government to 100% for loans (other than qualifying residentialloans weighted at 50%) and repossessed assets.

 

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

 

At December 31,2008, the Bank did not meet two of its OTS capital requirements, with tangible,core and risk-based capital ratios of 2.2%, 2.2%, and 4.8% respectively.

 

A savingsinstitution that fails any of the capital requirements is subject to possibleenforcement actions by the OTS or the FDIC. Such actions could include acapital directive, a cease and desist order, civil money penalties, theestablishment of restrictions on the institution’s operations, termination offederal deposit insurance and the appointment of a conservator orreceiver.  Capital regulation providesthat such actions, through enforcement proceedings or otherwise, could requireone or more of a variety of corrective actions. The Company and the Bank are subject to Orders issued by the OTS.  In addition, the Bank is subject to anAmended Order.  The Orders and theAmended Order are summarized under “Business — Regulatory EnforcementActions” beginning onpage 2 herein.

 

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*Prompt Corrective Action.*  Application of theenforcement actions mentioned above are influenced by an institutions’ capitallevels under the regulatory framework for prompt corrective action.  The following table shows the amount ofcapital associated with the different capital categories set forth in theprompt corrective action regulations.

 
| ** **                      | ** ** | **Total  Risk-Based  Capital** | ** ** | **Tier 1  Risk-Based  Capital** | ** ** | **Tier 1  Leverage  Capital** |
|---------------------------------|------------|--------------------------------|------------|--------------------------------------|------------|------------------------------------|
|                            |       |                           |       |                                 |       |                               |
| Well  capitalized               |       | 10%  or more                   |       | 6%  or more                          |       | 5%  or more                        |
| Adequately  capitalized         |       | 8%  or more                    |       | 4%  or more                          |       | 4%  or more                        |
| Undercapitalized                |       | Less  than 8%                  |       | Less  than 4%                        |       | Less  than 4%                      |
| Significantly  undercapitalized |       | Less  than 6%                  |       | Less  than 3%                        |       | Less  than 3%                      |

 

In addition, an institution is “critically undercapitalized” if it hasa ratio of tangible equity to tangible assets that is equal to or less than2.0%. Under specified circumstances, a federal banking agency may reclassify awell capitalized institution as adequately capitalized and may require anadequately capitalized institution or an undercapitalized institution to complywith supervisory actions as if it were in the next lower category (except thatthe FDIC may not reclassify a significantly undercapitalized institution ascritically undercapitalized).

 

As of December 31, 2008, the Bank’s capital level would be definedas significantly undercapitalized for purposes of the above regulations.  As a result, on April 13, 2009, Peopleswas notified by the OTS of certain prompt corrective actions that Peoples isrequired to take.

 

On April 30, 2009, the Bank filed itsThrift Financial Report for the quarter ended March 31, 2009.  This report reflected the Bank’s capitalunder the framework for prompt corrective action at the “criticallyundercapitalized” level.  The Bank’stotal risk-based capital, Tier 1 risk-based capital and tier 1 leverage capitalwere 4.15%, 2.82% and 1.81%, respectively. The Bank’s ratio of tangible equity to tangible assets was 1.81%    As a result, the Bank is subject tonumerous operational restrictions and requirements, including the requirementthat the Bank file a capital restoration plan to demonstrate the ability of theBank to return to an adequately capitalized status by June 15, 2009.

 

The Company andthe Bank are currently in negotiations concerning a transaction to sell certainbranches of the Bank, the proposed results of which are the basis for the Bank’scapital restoration plan, as filed with the OTS on April 30, 2009.  The Bank intends to negotiate and enter intoa transaction to sell the branches in order to reduce assets and liabilities,generate a deposit premium and return the Bank to an adequately capitalizedstatus.  The Company cannot provideassurance that such transaction will be entered into or consummated or that theBank’s capital restoration plan will be acceptable to the OTS.  If the Bank’s capital plan is not approved bythe OTS or the Bank cannot enter into and consummate a transaction to returnthe Bank to an adequately capitalized status on a timely basis, the Companywill not be able to continue as a going concern.

 

For a furtherdiscussion of the Company’s and the Bank’s regulatory enforcement actions, see ‘RegulatoryEnforcement Actions” beginning on page 2 herein.

 

*Safety and Soundness Guidelines.*  The OTS and the other federal bankingagencies have established guidelines for safety and soundness, addressingoperational and managerial standards, as well as compensation matters forinsured financial institutions. Institutions failing to meet these standardsare required to submit compliance plans to their appropriate federal regulators.The Federal Reserve, the OTS, and the other agencies have also establishedguidelines regarding asset quality and earnings standards for insuredinstitutions.

 

*Capital Distributions.*  OTS regulations govern capital distributionsby savings institutions, which include cash dividends, stock repurchases andother transactions charged to the capital account of a savings institution tomake capital distributions. A savings institution must file an application forOTS approval of the capital distribution if either (1) the total capitaldistributions for the applicable calendar year exceed the sum of theinstitution’s retained net income for that year to date plus the institution’sretained net income for the preceding two years, (2) the institution wouldnot be at least adequately capitalized following the distribution, (3) thedistribution would violate any applicable statute, regulation, agreement orOTS-imposed condition, or (4) the institution is not eligible forexpedited treatment of its filings. If an application is not required to befiled, savings institutions which are a subsidiary of a holding company (aswell as certain other institutions) must still file a notice with the OTSat least 30 days before the board of directors declares a dividend orapproves a capital distribution.  The Bank is currently prohibited by theOrder issued by the OTS from declaring or making any capital distributionswithout the prior written approval of the OTS.

 

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*Community Reinvestment Act andthe Fair Lending Laws.*  Savingsinstitutions have a responsibility under the Community Reinvestment Act of 1977and related regulations of the OTS to help meet the credit needs of theircommunities, including low- and moderate-income neighborhoods. In addition, theEqual Credit Opportunity Act and the Fair Housing Act prohibit lenders fromdiscriminating in their lending practices on the basis of characteristicsspecified in those statutes. An institution’s failure to comply with theprovisions of the Community Reinvestment Act could, at a minimum, result inregulatory restrictions on its activities. Failure to comply with fair lendinglaws could result in enforcement actions by the OTS, as well as other federalregulatory agencies, and the Department of Justice.

 

*Qualified Thrift Lender Test.*  All savings institutions are required to meeta qualified thrift lender test to avoid certain restrictions on theiroperations. A savings institution can comply with the qualified thrift lendertest by either qualifying as a domestic building and loan association asdefined in the Internal Revenue Code or by maintaining at least 65% of itsportfolio assets in certain housing and consumer-related assets such as loansmade to purchase, refinance, construct, improve or repair domestic residentialhousing; home equity loans; most mortgage-backed securities; stock issued by aFederal Home Loan Bank; and direct or indirect obligations of the FDIC.

 

A savingsinstitution that does not meet the qualified thrift lender test must eitherconvert to a bank charter or comply with certain restrictions on itsoperations.  At December 31, 2008, the qualified thrift investmentsof the Bank were approximately 81.9% of its portfolio assets.

 

*Federal Home Loan Bank System.*  The Bank is a member of the Federal Home LoanBank of Cincinnati, which is one of 12 regional Federal Home Loan Banks thatadministers the home financing credit function of savings institutions. Each Federal Home Loan Bank serves as a reserve or central bank for its memberswithin its assigned region. It is funded primarily from proceeds derived fromthe sale of consolidated obligations of the Federal Home Loan Bank System. Itmakes loans to members (i.e., advances) in accordance with policies andprocedures established by the Board of Directors of the Federal Home Loan Bank.

 

As a member, theBank is required to purchase and maintain stock in the Federal Home Loan Bankof Cincinnati in an amount equal to at least 1% of its aggregate unpaidresidential mortgage loans or similar obligations at the beginning of eachyear. At December 31, 2008, the Bank had $13.5 million in Federal HomeLoan Bank of Cincinnati stock, which was in compliance with thisrequirement.   The Bank also had approximately $1.1 million inFederal Home Loan Bank of Indianapolis stock, which was obtained through theacquisition of American in June 2005 and Peoples Federal in December 2005.

 

The Federal HomeLoan Banks are required to provide funds for the resolution of troubled savingsinstitutions and to contribute to affordable housing programs through directloans or interest subsidies on advances targeted for community investment and low-and moderate-income housing projects. These contributions have adverselyaffected the level of Federal Home Loan Bank dividends paid in the past andcould do so in the future. These contributions also could have an adverseeffect on the value of Federal Home Loan Bank stock in the future.

 

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

 

**Taxation**

** **

**Federal Taxation.**  Peoples and the Bank are subject to thecorporate tax provisions of the Internal Revenue Code, and the Bank is subjectto certain additional provisions which apply to thrifts and other types offinancial 

 

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institutions. The followingdiscussion of federal taxation is intended only to summarize certain pertinentfederal income tax matters relevant to the taxation of Peoples and the Bank andis not a comprehensive discussion of the tax rules applicable to Peoplesand the Bank.

 

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

 

*Bad Debt Reserves.*  In 1996, legislation was enacted thatrepealed the reserve method of accounting (including the percentage of taxableincome method) previously used by many savings institutions to calculate theirbad debt reserve for federal income tax purposes. Savings institutions with$500 million or less in assets may, however, continue to use theexperience method.  The Bank recaptured that portion of its reserve whichexceeded the amount that could have been taken under the experience method forpost-1987 tax years.  The Bank’s post-1987 excess reserves amounted toapproximately $1.2 million.  The recapture has occurred over a six-yearperiod, which commenced in fiscal 1999. The legislation also requires savingsinstitutions to account for bad debts for federal income tax purposes on thesame basis as commercial banks for tax years beginning after December 31,1995. This change in accounting method and recapture of excess bad debtreserves is adequately provided for in the Bank’s deferred tax liability.

 

At December 31,2008, the federal income tax reserves of the Bank included $1.4 million forwhich no federal income tax has been provided.  Because of these federalincome tax reserves and the liquidation account established for the benefit ofcertain depositors of the Bank in connection with the stock conversion, theretained earnings of the Bank are substantially restricted.

 

*Distributions.*  If the Bank were to distribute cash orproperty to its stockholders, and the distribution was treated as being fromits accumulated bad debt reserves, the distribution would cause the Bank tohave additional taxable income.  A distribution is from accumulated baddebt reserves if (a) the reserves exceed the amount that would have beenaccumulated on the basis of actual loss experience, and (b) thedistribution is a “non-qualified distribution.”  A distribution withrespect to its stock is a non-qualified distribution to the extent that, forfederal income tax purposes, (1) it is in redemption of its shares, (2) itis pursuant to a liquidation of the institution, or (3) in the case of acurrent distribution, together with all other such distributions during thetaxable year, it exceeds the institution’s current and post-1951 accumulatedearnings and profits.  The amount of additional taxable income created bya non-qualified distribution is an amount that when reduced by the taxattributable to it is equal to the amount of the distribution.

 

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

 

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

 

*Other Matters.*  Federal legislation is introduced from timeto time that would limit the ability of individuals to deduct interest paid onmortgage loans. Individuals are currently not permitted to deduct interest onconsumer 

 

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loans. Significant increasesin tax rates or further restrictions on the deductibility of mortgage interestcould adversely affect Peoples.   Peoples’ federal income tax returnsfor the tax years ended 2008 and 2007 are open under the statute of limitationsand are subject to review by the IRS.  Various companies that the Bank hasacquired remain under the statute of limitations by the IRS for the years ended2005 through 2007.

 

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

 

In computingPeoples’ tax under the net worth method, 100% of the investment in the capitalstock of the Bank after the conversion may be excluded, as reflected on thebalance sheet, in computing taxable net worth as long as Peoples owns at least25% of the issued and outstanding capital stock of the Bank.  Thecalculation of the exclusion from net worth is based on the ratio of theexcludable investment (net of any appreciation or goodwill included in suchinvestment) to total assets multiplied by the net value of the stock.  Asa holding company, Peoples may be entitled to various other deductions incomputing taxable net worth that are not generally available to operatingcompanies.

 

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

 

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

 

**Indiana Taxation.** Peoples is subject to the Indiana financialinstitution tax, which is tax calculated at 8.5% of the adjusted gross incomeof the business conducted in the state of Indiana.  This financialinstitution tax is extended to both resident and nonresident financialinstitutions.

 

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

 

**Forward Looking Statements**

** **

This report maycontain “forward-looking statements” within the meaning of Section 27A ofthe Securities Act of 1933 and Section 21E of the Securities Exchange Actof 1934, and are made pursuant to the safe harbor provisions of the PrivateSecurities Litigation Reform Act of 1995. Such forward-looking statements andthe currently reported results are based upon our current expectations andbeliefs concerning future developments and their potential effects upon us.These statements and our results reported herein are not guarantees of futureperformance or results and there can be no assurance that actual developmentsand economic performance will be as anticipated by us. Actual developmentsand/or results may differ significantly and adversely from our expected orcurrently reported results as a result of significant risks, uncertainties andfactors, often beyond our control (as well as the various assumptions utilizedin determining our expectations), and which include, but are not limited to,the following:

 

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

·                  theimpact of the Orders on our ability to conduct our business;

·                  ourability to maintain sufficient cash flow to meet debt service and otherobligations;

 

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

·                  theimpact of competition and pricing environments on deposit products;

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

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

·                  the effect of certain determinations or actions taken by, or theinability to secure regulatory approvals from, the OTS on various matters;

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

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

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

 

We undertake noobligation to publicly update such forward-looking statements.

 

**Item 1A. Risk Factors**

 

*Youshould carefully consider the following risk factors, as well as otherinformation in this Form 10-K and the information contained in our otherfilings with the SEC.  You should carefullyconsider the following risks in light of our current operating environment andregulatory status. The occurrence of any of the events described below couldmaterially adversely affect our liquidity, results of operations and financialcondition and our ability to continue as a going concern. Additional risks notpresently known by us or that we currently deem immaterial may also have amaterial adverse impact.*

 

**Risks Relating to Our Liquidity**

 

***The Company does not on its own havesufficient resources to satisfy its obligations and, therefore, we havesubstantial doubt about our ability to continue as a going concern.***

 

Asa savings institution holding company, the Company has historically paid itsoperating expenses, interest expense, taxes and other obligations, includinginterest on its line of credit and junior subordinated debentures, from itscash on hand, investments, and inter-company tax payments.  Without anadditional capital infusion as well as possibly a restructuring of existing debtobligations, current cash flows and capital resources of the Company will beinsufficient to fund the Company’s operating expenses, to meet its debt serviceobligations on the junior subordinated debentures beginning in August, 2008 andto pay off the $17.5 million line of credit from Integra, which was due andpayable on June 30, 2008.  Since the Orders prohibit the Bank frompaying cash dividends without the prior written consent of the OTS, the Companywill be able to rely only upon a limited amount of****existing cash and cash equivalents****as the sources of its liquidity.  Without the ability torely on dividends from the Bank, the Company will require funds from othercapital sources to meet its obligations such as restructuring or replacing itsline of credit.  Any increase in the Company’s outstanding indebtednesswill also require OTS approval.

 

The Company does not havesufficient liquidity to pay its outstanding debt and to continue to pay itsoperating expenses.  The Bank’s inabilityto dividend funds to the Company effectively precludes the Company fromrepaying its outstanding obligations on its line of credit from Integra.  The forbearance agreement, dated July 24,2008, between the Company and Integra that extended the Company’s repaymentperiod has expired.  Therefore, Integrahas the right to initiate or prosecute any action in any court to collect theindebtedness.

 

The Company has beenactively evaluating various capital strategies to meet its obligations,including restructuring its outstanding debt and selling branch offices. The Company cannot provide assurance that it will succeed in accomplishing anyrestructuring of its existing debt or selling branches before its capitalresources 

 

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are depleted. Failure to restructure the Company’s debt obligations or to sell branches willfurther jeopardize the Company’s business, financial condition and ability tooperate as a going concern.  Currently, there is significant doubt whetherthe Company can continue as an ongoing business.  See “Report of Independent Registered PublicAccounting Firm.”

 

A successful transactionor other strategic alternative, if identified, evaluated and consummated, maynot provide a greater value to stockholders than that reflected in the currentstock price.  As a result, you may notrealize a return on your investment in the Company’s common stock.  Absent an extraordinary transaction, however,the Company may not be able to continue operations.  If the Company ceases business activities, itis likely that you will lose your investment.

 

***The Company is in default on its line ofcredit, which is secured by the Bank’s common stock.***

 

The Company’s primaryasset consists of the outstanding shares of common stock of the Bank.  TheCompany’s $17.5 million line of credit with Integra is secured by theoutstanding shares of common stock of the Bank.  The $17.5 millionprincipal balance currently outstanding under the line of credit became due andpayable on June 30, 2008.  EffectiveJuly 24, 2008, the Company entered into a forbearance agreement withIntegra, which extended the Company’s repayment period.  The forbearance agreement is no longer ineffect, however, and the forbearance period expired on January 31,2009.  Therefore, the Company iscurrently in default on its line of credit and, as a result, Integra has alegal claim to the outstanding shares of common stock of the Bank that were pledgedby the Company to secure the credit line.

 

***Effect of Independent Registered PublicAccounting Firm’s Report with disclosure of going concern issue.***

 

The reports of ourindependent Registered Public Accountants, which are included in our 2007 and2008 Annual Reports to Stockholders, contain explanatory paragraphs as to ourability to continue as a going concern. Among the factors cited by the accountants as raising substantial doubtas to our ability to continue as a going concern are the recurring losses, theagreements with the OTS and uncertainty about the Company’s ability to meetobligations that came due in 2008.  See Note P of Notes to Consolidated Financial Statements.  See also “Management’s Discussion andAnalysis of Financial Condition and Results of Operations — Discussions ofFinancial Condition Changes from December 31, 2007 to December 31, 2008” formanagement’s discussion of our financial condition at December 31, 2008.

 

**Risks Relating to Our Compliance with Applicable RegulatoryRequirements, Regulatory Enforcement Actions and****Developments**

 

***Compliance with applicable regulatory requirements may have a materialadverse effect on our business.***

 

TheBank is subject to supervision and regulation by the OTS.  As a regulated federal savings bank, the Bank’sgood standing with its regulators is of fundamental importance to thecontinuation of its business.  As morefully described in Item 1 — “Business — Regulatory Enforcement Actions,” on April 2,2008, the Company and the Bank both consented to the Orders issued by theOTS.  The Orders require the Company and the Bank to, among other things,file with the OTS an updated business plan and submit to the OTS, on aquarterly basis, variance reports related to the business plan.  The Orderissued to the Bank also substantially restricts the Bank’s lendingactivities.  We cannot predict thefurther impact of the Orders upon our business, financial condition or resultsof operations.

 

At December 31,2008, the Bank did not meet two of the three regulatory capital requirementsapplicable to the Bank.  In addition, atsuch date, the Bank was deemed a significantly undercapitalized institutionunder the regulatory framework for prompt corrective action.  Further, at March 31, 2009, the Bank wasdeemed a critically undercapitalized institution under the regulatory frameworkfor prompt corrective action.  As aresult, the Bank is subject to numerous operational restrictions andrequirements, including the requirement to file a capital restoration plan to returnto an adequately capitalized status.  TheCompany and the Bank are currently in negotiations concerning a transaction tosell certain branches of the Bank, the proposed results of which are the basisfor the Bank’s capital restoration plan, as filed with the OTS on April 30,2009.  The Bank 

 

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intends to negotiate andenter unto a transaction to sell certain branches in order to reduce assets andliabilities, generate a deposit premium and return the Bank to an adequatelycapitalized status.  The Company cannotprovide assurance that such a transaction will be entered into or consummatedor that the Bank’s capital restoration plan will be acceptable to the OTS.  If the Bank’s capital plan is not approved bythe OTS or the Bank cannot enter into and consummate a transaction to returnthe Bank to an adequately capitalized status on a timely basis, the Companywill not be able to continue as a going concern.

 

For a further discussionof the Company’s and the Bank’s regulatory enforcement actions, see “Business — Regulatory EnforcementActions” beginning onpage 2 herein.

 

**Other Risks Related toOur Business**

** **

***Lack of profitable operations in recentperiods could continue.***

 

The recessionary forcesin the local economy have impacted our operations and profitability and areexpected to continue to do so.  For the years ended December 31, 2008and 2007, the Company incurred losses of $68.5 million and $33.3 million,respectively.  As the Bank’s primary lending area is the southwest Ohioand southeast Indiana regions, the significant downturn in the real estatemarket in these regions significantly impacts the asset quality and provisionfor loan loss requirements of the Bank.  While the Bank’s managementcontinues to aggressively pursue the collection and resolution of alldelinquent and non-performing loans, future levels of charge offs andadjustments to the allowance could significantly affect future net earnings orlosses.

 

***Changes in interest rates could have amaterial adverse effect on our financial condition and results of operations.***

 

Our earnings dependsubstantially on the interest rate spread, which is the difference between therates we earn on loans, investment securities and other interest-earningassets, and the interest rates we pay on deposits and borrowings.  These rates are highly sensitive to many factors beyond our control, includinggeneral economic conditions and the policies of various governmental andregulatory authorities.  While we have taken measures intended to managethe risk of operating in a changing interest rate environment, there can be noassurance that such measures will be effective in avoiding undue interest raterisk.

 

***Difficult market conditions have adverselyaffected our industry.***

 

Peoples is particularlyexposed to downturns in the U.S. housing market.  Dramatic declines in the housing market overthe past year, with falling home prices and increasing foreclosures,unemployment and under-employment, have negatively impacted the creditperformance of mortgage loans and resulted in significant write-downs of assetvalues by financial institutions, including government-sponsored entities,major commercial and investment banks, and regional financial institutions suchas Peoples. Reflecting concern about the stability of the financial marketsgenerally and the strength of counterparties, many lenders and institutionalinvestors have reduced or ceased providing funding to borrowers, including toother financial institutions.  Thismarket turmoil and tightening of credit have led to an increased level ofcommercial and consumer delinquencies, lack of consumer confidence, increasedmarket volatility and widespread reduction of business activity generally. Theresulting economic pressure on consumers and lack of confidence in thefinancial markets have adversely affected our business, financial condition andresults of operations.  We do not expectthat the difficult conditions in the financial markets are likely to improve inthe near future.  A worsening of theseconditions would likely exacerbate the adverse effects of these difficultmarket conditions on us and others in the financial institutions industry.  In particular, we may face the followingrisks in connection with these events:

 

·                  Weexpect to face increased regulation of our industry.  Compliance with such regulation may increaseour costs and limit our ability to pursue business opportunities.

·                  Ourability to assess the creditworthiness of our customers may be impaired if themodels and approaches we use to select, manage and underwrite our customersbecome less predictive of future behaviors.

 

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·                  Theprocess we use to estimate losses inherent in our credit exposure requiresdifficult, subjective and complex judgments, including forecasts of economicconditions and how these economic predictions might impair the ability of ourborrowers to repay their loans, which may no longer be capable of accurateestimation which may, in turn, impact the reliability of the process.

·                  Competitionin our industry could intensify as a result of the increasing consolidation offinancial services companies in connection with current market conditions.

·                  Ourliquidity could be negatively impacted by an inability to access the capitalmarkets, unforeseen or extraordinary demands on cash, or regulatoryrestrictions, which could, among other things, materially and adversely affectour business prospects and financial condition.

 

***Regional economic changes in the Company’smarkets have had and may continue to adversely impact results from operations.***

 

Like all financialinstitutions, Peoples is subject to the effects of any economic downturn, andthe significant decline in home values, residential development and commercialproperties in our markets have had and will continue to have a negative effecton results of operations.  Our success depends primarily on the generaleconomic conditions in the counties in which we conduct business, and in thesouthwest Ohio and southeast Indiana area in general.  Unlike larger financial institutions that aremore geographically diversified, Peoples provides banking and financialservices to customers primarily in the southwest Ohio counties of Butler,Hamilton and Warren counties, as well as Dearborn and Ohio counties in Indiana. The local economic conditions in these market areas have a significant impacton our ability to originate loans, the ability of the borrowers to repay theseloans and the value of the collateral securing these loans.  Thesignificant declines in the general economic conditions caused by recession,unemployment and other factors beyond our control have had and will continue toadversely affect our financial condition and results of operations. Additionally, because we have a significant amount of loans secured bycommercial, multi-family, and non-owner occupied investment properties,decreases in tenant occupancy may also continue to have a negative effect onthe ability of many of our borrowers to make timely repayments of their loans,which would continue to have an adverse impact on our earnings.  Furtherdeclines in home values would likely lead to increased delinquencies anddefaults in both consumer and home equity loans and owner-occupied residentialreal estate loan portfolios and result in increased losses in the portfolios.

 

Over the last 18 months,there has been a significant downturn in the local economy, a softening in thereal estate market and an oversupply of lots, speculative homes and non-owneroccupied rental units, leading to cash flow issues faced by local propertyinvestors, builders, and developers.  These issues have had a materialadverse impact on the Bank’s nonaccrual loans.  At December 31, 2008,the Bank’s nonperforming loans amounted to $43.1 million, or 9.33% of total netloans.  The resolution of such nonperforming loans may substantiallyimpact our provision for loan losses and allowance for loan losses.

 

***There can be no assurance that enacted legislation or any proposedfederal programs will stabilize the U.S. financial system.***

 

Therehas been much legislative and regulatory action in response to the financialcrises affecting the banking system and financial markets and threats toinvestment banks and other financial institutions**.**There can be no assurance, however, as to the actual impactthat the legislation and its implementing regulations or any other governmentalprogram will have on the financial markets. The failure of the actions by the legislators, the regulatory bodies orthe U.S. government to stabilize the financial markets and a continuation orworsening of current financial market conditions could materially and adverselyaffect our business, financial condition, results of operations, and access tocredit or the trading price of our common shares.

 

***Our loan portfolio is predominantly secured by real estateand thus we have risk from a further downturn in our real estate markets.***

 

A further downturn in ourreal estate markets will hurt our business because many of our loans aresecured by real estate.  Real estate valuesand real estate markets are generally affected by changes in national, regionalor 

 

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local economic conditions,fluctuations in interest rates and the availability of loans to potentialpurchasers, and changes in tax laws and other governmental statutes,regulations and policies. Substantially all of our real estate collateral islocated in southwest Ohio and southeast Indiana.  If real estate values continue to furtherdecline, the value of real estate collateral securing our loans could besignificantly reduced.  Our ability torecover on defaulted loans by foreclosing and selling the real estatecollateral would then be diminished and we would be more likely to sufferlosses on defaulted loans.

 

***Losses on a few large loans or lendingrelationships can cause significant volatility in operations.***

 

Due to our limited size,individual loan values can be large relative to our operations for a particularperiod.  If a few relatively large loan relationships becomenon-performing in a period and Peoples is required to increase its lossreserves, or to write off principal or interest relative to such loans, theoperating results of that period could be significantly adverselyaffected.  The effect on results ofoperations for any given period from a change in the performance of arelatively small number of loan relationships may be disproportionately largerthan the impact of such loans on the quality of Peoples’ overall loanportfolio.  In both 2007 and 2008, we incurred losses on lendingrelationships that significantly impacted operating results for the relevantperiod.  As of December 31, 2008,the Bank’s nonperforming loans amounted to $43.1 million, with five borrowersrepresenting $14.4 million, or 33.4% of total nonperforming loans.

 

***New or revised tax, accounting and otherlaws, regulations, rules and standards could significantly impactstrategic initiatives, results of operations and financial condition.***

 

The financial servicesindustry is highly regulated and laws and regulations may sometimes imposesignificant limitations on operations.  These limitations, and sources orpotential liability for the violation of such laws and regulation, aredescribed in Item 1 of Part I of this report under the heading “Business —Regulation.”  These regulations, along with the currently existing tax andaccounting laws, regulations, rules and standards, control the methods bywhich financial institutions conduct business; implement strategic initiatives,as well as past, present, and contemplated tax planning; and govern financialdisclosures.  These laws, regulations, rules, and standards are constantlyevolving and may change significantly over time.  The nature, extent, andtiming of the adoption of significant new laws, changes in existing laws, orrepeal of existing laws may have a material impact on our results of operationsand financial condition, the effects of which are impossible to predict at thistime.

 

***Strong competition within our market areamay limit profitability.***

 

Peoples faces significantcompetition both in attracting deposits and in the origination of loans, asdescribed in Item 1 of Part I of this report under the heading “Business —Competition.”  Mortgage bankers, commercial banks, credit unions and othersavings institutions, which have offices in the Bank’s market area havehistorically provided most of our competition for deposits.  Manycompetitors have substantially greater financial and other resources than wedo.  Moreover, we may face increased competition in the origination ofloans if competing thrift institutions convert to stock form, because suchconverting thrifts would likely seek to invest their new capital intoloans.  Finally, credit unions do not pay federal or state income taxesand are subject to fewer regulatory constraints than savings banks and as aresult, they may enjoy a competitive advantage over us.  The Bank competesfor loans principally on the basis of the interest rates and loan fees itcharges, the types of loans it originates and the quality of services itprovides to borrowers.  This advantage places significant competitivepressure on the prices of loans and deposits.

 

**Risks Relating to OurCapital Stock**

** **

***We do not anticipate declaring dividendsfor the foreseeable future.***

 

The Company’s Board ofDirectors has not declared any dividends since the third quarter of 2007. The Orders prohibit the Bank from paying cash dividends to the Company, whichis its primary source for funding dividends to the Company’s shareholders,without the prior approval of the OTS.  We believe that the Company has noability to pay cash dividends in the foreseeable future, and are prohibited bythe Orders from doing so without the consent of the OTS.

 

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**Other RiskFactors.**

** **

The abovedescription of risk factors is not exhaustive.   Other risk factorsare described elsewhere herein as well as in other reports and documents thatwe file with or furnish to the SEC.  Other factors that could also causeresults to differ from our expectations may not be described in any such reportor document.  Each of these factors could by itself, or together with oneor more other factors, adversely affect our business, results of operationsand/or financial condition.

 

**Item 1B. Unresolved Staff Comments**

 

None.

 

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**Item 2. Properties**

 

At December 31,2008, Peoples conducted its business from its main office in West Chester, Ohioand eighteen branch offices in Hamilton and Warren counties in Ohio andDearborn and Ohio counties in Indiana.  The following table sets forth thenet book value (including leasehold improvement, furnishings and equipment) andcertain other information with respect to the offices and other properties ofPeoples at December 31, 2008.

 
| ** **                   | ** ** | ** **        | ** ** | **Lease**      | ** ** | **Net Book Value** | ** ** | **Deposits at**  | ** ** |
|------------------------------|------------|-------------------|------------|----------------|------------|------------------------------|------------|-----------------------|------------|
| ** **                   | ** ** | **Owned or** | ** ** | **Expiration** | ** ** | **December 31,**        | ** ** | **December 31,** | ** ** |
| **Address**                  | ** ** | **Leased**        | ** ** | **Date**       | ** ** | **2008**                     | ** ** | **2008**              | ** ** |
| ** **                   | ** ** | ** **        | ** ** | ** **     | ** ** | **(In thousands)**      | ** ** |
| 6100 West Chester Road       |       |              |       |           |       |                         |       |                  |       |
| West Chester, Ohio 45069     |       | Owned             |       | N/A            |       | $                            | 2,176      |                  | $          | 30,963 |   |
| 7615 Voice of America Drive  |       |              |       |           |       |                         |       |                  |       |
| West Chester, Ohio 45069     |       | Owned             |       | N/A            |       | 3,160                        |       | 14,054                |       |
| 11 South Broadway            |       |              |       |           |       |                         |       |                  |       |
| Lebanon, Ohio 45036          |       | Owned             |       | N/A            |       | 631                          |       | 42,667                |       |
| 4825 Marburg Avenue          |       |              |       |           |       |                         |       |                  |       |
| Cincinnati, Ohio 45209       |       | Owned             |       | N/A            |       | 1,465                        |       | 29,156                |       |
| 5712 Bridgetown Road         |       |              |       |           |       |                         |       |                  |       |
| Cincinnati, Ohio 45248       |       | Owned             |       | N/A            |       | 1,763                        |       | 71,974                |       |
| 6570 Harrison Avenue         |       |              |       |           |       |                         |       |                  |       |
| Cincinnati, Ohio 45247       |       | Owned             |       | N/A            |       | 1,146                        |       | 34,609                |       |
| 7522 Hamilton Avenue         |       |              |       |           |       |                         |       |                  |       |
| Cincinnati, Ohio 45231       |       | Owned             |       | N/A            |       | 1,179                        |       | 56,859                |       |
| 4100 State Route 128         |       |              |       |           |       |                         |       |                  |       |
| Cleves, Ohio 45002           |       | Owned             |       | N/A            |       | 791                          |       | 15,767                |       |
| 1101 Columbus Avenue         |       |              |       |           |       |                         |       |                  |       |
| Lebanon, Ohio 45036          |       | Owned             |       | N/A            |       | 1,287                        |       | 44,816                |       |
| 5797 South State Route 48    |       |              |       |           |       |                         |       |                  |       |
| Maineville, Ohio 45039       |       | Owned             |       | N/A            |       | 895                          |       | 20,479                |       |
| 8350 Arbor Square Drive      |       |              |       |           |       |                         |       |                  |       |
| Mason, Ohio 45040            |       | Owned             |       | N/A            |       | 1,296                        |       | 23,901                |       |
| 3530 Springdale Road         |       |              |       |           |       |                         |       |                  |       |
| Cincinnati, Ohio 45251       |       | Owned             |       | N/A            |       | 621                          |       | 29,148                |       |
| 7200 Blue Ash Road           |       |              |       |           |       |                         |       |                  |       |
| Cincinnati, Ohio 45236       |       | Owned             |       | N/A            |       | 2,334                        |       | 70,505                |       |
| 9360 Montgomery Road         |       |              |       |           |       |                         |       |                  |       |
| Cincinnati, Ohio 45242       |       | Owned             |       | N/A            |       | 1,822                        |       | 34,024                |       |
| 6945 South Liberty Drive     |       |              |       |           |       |                         |       |                  |       |
| Liberty Township, Ohio 45044 |       | Owned             |       | N/A            |       | 1,537                        |       | 5,206                 |       |
| 131 Walnut Street            |       |              |       |           |       |                         |       |                  |       |
| Lawrenceburg, Indiana 47025  |       | Leased            |       | 02/2013        |       | 44                           |       | 31,581                |       |
| 320 Importing Street         |       |              |       |           |       |                         |       |                  |       |
| Aurora, Indiana 47001        |       | Owned             |       | N/A            |       | 2,225                        |       | 51,677                |       |
| 24128 State Line Road        |       |              |       |           |       |                         |       |                  |       |
| Bright, Indiana 47025        |       | Owned             |       | N/A            |       | 297                          |       | 7,460                 |       |
| 204 Bridgeway Street         |       |              |       |           |       |                         |       |                  |       |
| Aurora, Indiana 47001        |       | Owned             |       | N/A            |       | 510                          |       | N/A                   |       |
| 330 Industrial Access Road   |       |              |       |           |       |                         |       |                  |       |
| Rising Sun, Indiana 47040    |       | Owned             |       | N/A            |       | 416                          |       | 15,352                |       |
|                              |            |                   |            |                |            |                              |            |                       |            |  |  |

 

Additionally,Peoples has purchased land in Warren County for $1.0 million for futureexpansion, and has approximately $586,000 invested in land in Butler Countyalso for future expansion.

 

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**Item 3. Legal Proceedings**

 

From time to time,the Bank and Company are involved as plaintiff or defended in various legalproceedings arising in the normal course of business.  It is the opinionof management that the resolution of these legal actions should not have amaterial effect on Peoples’ consolidated financial conditions or results ofoperations.

 

**Item 4. Submission of Matters to aVote of Security Holders**

 

None.

 

**PART II**

** **

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

 

(a)  Theinformation required herein is incorporated by reference to page 3 ofPeoples’ 2008 Annual Report to Stockholders filed as Exhibit 13 hereto (“2008Annual Report”) and to Part III, Item 12 hereof.

(b)  Notapplicable.

(c)  Not applicable.

 

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

#### ** **

The informationrequired herein is incorporated by reference to pages 4 and 5 of the 2008Annual Report.

 

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

 

The informationrequired herein is incorporated by reference to pages 6 to 18 of the 2008Annual Report.

 

**Item 7A. Quantitative andQualitative Disclosures About Market Risk**

 

The informationrequired herein is incorporated by reference to pages 23 and 24 of the2008 Annual Report.

 

**Item 8. Financial Statements andSupplementary Data**

 

The informationrequired herein is incorporated by reference to pages 27 to 70 of the 2008Annual Report.

 

**Item 9. Changes in andDisagreements With Accountants on Accounting and Financial Disclosure**

 

None.

 

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

 

**DisclosureControls and Procedures**

** **

Our managementevaluated, with the participation of our Chief Executive Officer and ChiefFinancial Officer, the effectiveness of our disclosure controls and procedures(as defined by Rules 13a-15(e) and 15d-15(e) under theSecurities Exchange Act of 1934) as of December 31, 2008.  Based onsuch evaluation, our Chief Executive Officer and Chief Financial Officer haveconcluded that, as a result of the material weaknesses in internal control overfinancial reporting discussed below, as of December 31, 2008 ourdisclosure controls and procedures were not effective to ensure thatinformation required to be disclosed by us in the reports that we file

 

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or submit underthe Securities Exchange Act of 1934 is recorded, processed, summarized andreported within the time periods specified in the SEC’s rules andregulations.

 

In connection withthe above evaluation of our disclosure controls and procedures, no change inour internal control over financial reporting was identified that occurredduring our fourth quarter of 2008 that has materially affected, or isreasonably likely to materially affect, our internal control over financialreporting. However, our management has taken remedial steps to address thematerial weaknesses described below in “Management’s Annual Report on InternalControl over Financial Reporting.”

 

**Management’sAnnual Report on Internal Control Over Financial Reporting**

** **

Management is responsible for establishing and maintaining adequateinternal control over financial reporting, as such term is defined underExchange Act Rule 13a-15(f).  Peoples’ internal control overfinancial reporting is designed to provide reasonable assurance to itsmanagement and board of directors regarding the preparation and fairpresentation of published financial statements.  Under the supervision andwith the participation of our management, including our principal executiveofficer and principal financial officer, we conducted an evaluation of theeffectiveness of our internal control over financial reporting based on theframework in *Internal Control-Integrated Framework*issued bythe Committee of Sponsoring Organizations of the Treadway Commission. Based on this evaluation, management has concluded that Peoples’ disclosurecontrols and procedures are not effective because of the identification ofseveral material weaknesses in our internal control over financial reportingwhich we view as an integral part of our disclosure controls andprocedures.  A material weakness is a deficiency, or a combination ofcontrol deficiencies, in internal control over financial reporting such thatthere is a reasonable possibility that a material misstatement of Peoples’annual or interim financial statements will not be prevented or detected on atimely basis.

 

During the courseof our external audit for 2008, we noted several adjustments identified by OTSexaminers and our external auditors related to the estimation of the allowancefor loan losses. These adjustments were due to information received by Peoplessubsequent to the intial year-end closing. While management has concluded thatPeoples did not maintain effective internal control over financial reporting asof December 31, 2008 due to this material weakness, this did not result ina material misstatement of any of Peoples’ financial statements, including theannual and interim financial statements for 2008.

 

This annual reportdoes not include an attestation by Peoples’ registered public accounting firmregarding internal controls over financial reporting.  The internalcontrol over financial reporting was not subject to attestation by Peoples’registered public accounting firm pursuant to temporary rules of theSecurities and Exchange Commission that permit Peoples to provide onlymanagement’s report in this annual report.

 

**Item 9B. Other Information**

 

None.

 

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**PART III**

** **

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

 

***Identification of Directors***

 

The following table setsforth the names and ages of our current directors and summarizes theiroccupation and business experience during the past five years.  Ages are reflected as of December 31,2008.

 

**Directors with a Three-Year TermExpiring in 2009**

 
| **Name**           | ** ** | **Age**    | ** ** | **Position with Peoples Community Bancorp and  Principal Occupation During the Past Five Years**                                                                                                                                                                                                           | ** ** | **Director  Since** | ** ** |
|--------------------|------------|------------|------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|---------------------|------------|
| ** **         | ** ** | ** ** | ** ** | ** **                                                                                                                                                                                                                                                                                                 | ** ** | ** **          | ** ** |
| Jerry D. Williams  |       | 59         |       | Director.  President and Chief Executive Officer of Peoples Community Bancorp and  Peoples Community Bank. Director of Columbia Bancorp, Inc., Cincinnati,  Ohio, a privately held bank holding company and its wholly-owned subsidiary,  The Columbia Savings Bank from 2005 to February 2008.* |       | 1980                |       |
|               |       |       |       |                                                                                                                                                                                                                                                                                                       |       |                |       |
| John L. Buchanan   |       | 60         |       | Director.  President of Buchanan’s Power Equipment Center, Inc., a John Deere  dealership located in Lebanon, Ohio which he has operated since 1971.                                                                                                                                             |       | 1996                |       |
|               |       |       |       |                                                                                                                                                                                                                                                                                                       |       |                |       |
| Nicholas N. Nelson |       | 62         |       | Director.  County Auditor for Warren County, Ohio, serving in such position since  March 1987.                                                                                                                                                                                                        |       | 1990                |       |

 

**Director with a Three-Year Term Expiring in 2010**

 
| **Name**         | ** ** | **Age**    | ** ** | **Position with Peoples Community Bancorp and  Principal Occupation During the Past Five Years**                                                                                                                                                                                   | ** ** | **Director  Since** | ** ** |
|------------------|------------|------------|------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|---------------------|------------|
| ** **       | ** ** | ** ** | ** ** | ** **                                                                                                                                                                                                                                                                         | ** ** | ** **          | ** ** |
| John E. Rathkamp |       | 66         |       | Director.  Retired December 2005 as Senior Vice President and Chief Lending Officer  of Peoples Community Bancorp and Peoples Community Bank where he served since  2000. Prior thereto, he was President of Harvest Home Savings Bank located in  Cheviot, Ohio, since 1991. |       | 2000                |       |
|             |       |       |       |                                                                                                                                                                                                                                                                               |       |                |       |
| Donald L. Hawke  |       | 76         |       | Director.  Retired business owner and pharmacist                                                                                                                                                                                                                                   |       | 1987                |       |

 

**Directors with a Three-Year TermExpiring in 2011**

 
| **Name**             | ** ** | **Age**    | ** ** | **Position with Peoples Community Bancorp and  Principal Occupation During the Past Five Years**                                               | ** ** | **Director  Since** | ** ** |
|----------------------|------------|------------|------------|------------------------------------------------------------------------------------------------------------------------------------------------|------------|---------------------|------------|
| ** **           | ** ** | ** ** | ** ** | ** **                                                                                                                                     | ** ** | ** **          | ** ** |
| James R.  VanDeGrift |       | 69         |       | Director.  Trustee of Turtlecreek Township in Lebanon, Ohio since 1992.  Retired athletic director and teacher from  Lebanon High School. |       | 1994                |       |

 

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| **Name**      | ** ** | **Age**    | ** ** | **Position with Peoples Community Bancorp and  Principal Occupation During the Past Five Years**                                                                                                                                                                                                                                                                                                                                                                                                                   | ** ** | **Director  Since** | ** ** |
|---------------|------------|------------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|---------------------|------------|
| ** **    | ** ** | ** ** | ** ** | ** **                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         | ** ** | ** **          | ** ** |
| Thomas J. Noe |       | 48         |       | Director.  Chief Financial Officer of Peoples  Community Bancorp and Peoples Community Bank since May 2008.  Executive Vice President and Treasurer of  Peoples Community Bancorp and Peoples Community Bank since 2002; previously,  Chief Financial Officer and Treasurer since 2000.  Former Director of Columbia Bancorp, Inc.,  Cincinnati, Ohio, a privately held bank holding company and its wholly-owned  subsidiary, The Columbia Savings Bank from 2005 to January 2007.* |       | 2000                |       |

 

----

*                 The Companyformerly owned approximately 38% of the outstanding shares of Columbia Bancorp, Inc.The Company sold its shares on December 29, 2006.

 

***Identification of Executive Officers Who Are Not Directors***

 

The following table setsforth the information with respect to the principal occupations during the lastfive years for the executive officers of Peoples Community Bancorp and PeoplesCommunity Bank who do not serve as directors of Peoples Community Bancorp.  Ages are reflected as of December 31,2008.

 
| **Name**            |   | **Age**    |   | **Principal  Occupation During the Past Five Years**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |   |
|---------------------|--------|------------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|
| ** **          |   | ** ** |   | ** **                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |   |
| Fred L.  Darlington |   | 52         |   | Currently serves  as Interim Chief Lending Officer since November 2008, Corporate  Secretary since December 2005 and Senior Vice President and General  Counsel of Peoples Community Bancorp and Peoples Community Bank since January 2005.  Previously, Mr. Darlington was President  of Kardol, LLC a distributor of masking paper and solvents since October 2004.  Prior thereto Mr. Darlington served as Vice President and Senior Counsel  of Provident Bank, Cincinnati, Ohio since August 1997. |   |
|                |   |       |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |   |
| Jerry L.  Gore      |   | 58         |   | Currently serves  as Senior Vice President and Director of Retail Banking of Peoples Community  Bank and Peoples Community Bancorp since July 2006.  Previously, Mr. Gore served as Senior  Vice President of Oak Hills Bank since June 2000.                                                                                                                                                                                                                                                                               |   |
|                |   |       |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |   |
| Lori M. Henn        |   | 46         |   | Currently  serves as Senior Vice President of Peoples Community Bancorp and Peoples  Community Bank, since June 2003, and as Compliance Officer of Peoples  Community Bank since 2000. Ms. Henn also served as Director of Internal  Audit in 2005.                                                                                                                                                                                                                                                                              |   |
|                |   |       |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |   |
| Rick W. Wade        |   | 53         |   | Currently  serves as Senior Vice President and Chief Operating Officer of Peoples  Community Bank since March 2006.   Previously, Mr. Wade served as Senior Vice President of Peoples  Community Bank since September 2005.   Prior thereto, Mr. Wade was Vice President of BISYS, Inc.  since July 2000.                                                                                                                                                                                               |   |

 

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***Section 16(a) Beneficial Ownership Reporting Compliance***

 

Section 16(a) ofthe Securities Exchange Act requires Peoples Community Bancorp’s officers anddirectors, and persons who own more than 10% of Peoples Community Bancorp’scommon stock, to file reports of ownership and changes in ownership with theSecurities and Exchange Commission. Officers, directors and greater than 10%stockholders are required by regulation to furnish Peoples Community Bancorpwith copies of all Section 16(a) forms they file.  Peoples Community Bancorp knows of no personwho owns 10% or more of Peoples Community Bancorp’s common stock.

 

Basedsolely on review of the copies of such forms furnished to Peoples CommunityBancorp, or written representations from its officers and directors, PeoplesCommunity Bancorp believes that during, and with respect to, the year ended December 31,2008, Peoples Community Bancorp’s officers and directors complied in allrespects with the reporting requirements promulgated under Section 16(a) ofthe Securities Exchange Act.

 

***Code of Ethics for Executive Officers***

 

Theboard of directors has adopted a code of ethics for the Company’s executiveofficers, including the chief executive officer, the chief operating officerand the chief financial officer.  These officers are expected to adhere atall times to this code of ethics. Failure to comply with this code of ethics isa serious offense and will result in appropriate disciplinary action.  Wehave posted this code of ethics on our website at www.pcbionline.com.

 

Wewill disclose on our website at www.pcbionline.com, to the extent and in themanner permitted by Item 5.05 of Form 8-K under Section 13 of theExchange Act, the nature of any amendment to this code of ethics (other thantechnical, administrative, or other non-substantive amendments), our approvalof any material departure from a provision of this code of ethics, and ourfailure to take action within a reasonable period of time regarding anymaterial departure from a provision of this code of ethics that has been madeknown to any of the executive officers noted above.

 

***Audit Committee***

 

TheBoard of Directors of Peoples Community Bancorp, jointly with Peoples CommunityBank, has established an Audit Committee.  The Audit Committee reviewswith management and the independent auditors the systems of internal control,reviews the annual financial statements, including the Form 10-K, reviewsthe quarterly Form 10-Qs and monitors Peoples Community Bancorp’sadherence in accounting and financial reporting to generally acceptedaccounting principles.  The Audit Committee currently consists of Messrs. Hawke,Nelson, VanDeGrift, Buchanan and Rathkamp.

 

Allof the members of the Audit Committee are independent as determined by theBoard of Directors and as defined in Nasdaq’s listing standards and rules andregulations of the Securities and Exchange Commission.

 

TheBoard of Directors has determined that Mr. Nelson, a member of the AuditCommittee, meets the requirements adopted by the Securities and ExchangeCommission for qualification as an Audit Committee financial expert.  AnAudit Committee financial expert is defined as a person who has the followingattributes:  (i) an understanding of generally accepted accountingprinciples and financial statements; (ii) the ability to assess thegeneral application of such principles in connection with the accounting forestimates, accruals and reserves; (iii) experience preparing, auditing,analyzing or evaluating financial statements that present a breadth and levelof complexity or accounting issues that are generally comparable to the breadthand complexity of issues that can reasonably be expected to be raised by theregistrant’s financial statements, or experience actively supervising one ormore persons engaged in such activities; (iv) an understanding of internalcontrols and procedures for financial reporting; and (v) an understandingof Audit Committee functions.

 

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**Item 11.  Executive Compensation**

 

**SummaryCompensation Table**

 

Thefollowing table sets forth a summary of certain information concerning thecompensation paid by Peoples Community Bank for services rendered in allcapacities during the calendar years ended December 31, 2007 and 2008 tothe President and Chief Executive Officer, the Chief Financial Officer and thenext highest paid officer of Peoples Community Bank.

 
| **Name and Principal Positions**                                   | ** ** | **Year**   | ** ** | **Salary**       | ** **       | **Stock  Awards (1)** | ** ** | **Option  Awards (2)** | ** ** | **Non-Equity Incentive Plan Compensation (3)** | ** **     | **Change in Pension Value  and  Nonqualified  Deferred  Compensation  Earnings (4)** | ** ** | **All  Other Compen-  sation (5)** | ** ** | **Total**        | ** **    |
|--------------------------------------------------------------------|------------|------------|------------|------------------|------------------|-----------------------|------------|------------------------|------------|------------------------------------------------|----------------|--------------------------------------------------------------------------------------|------------|------------------------------------|------------|------------------|---------------|
| Jerry D. Williams,  President & Chief Executive Officer   |       | 2008  2007 |       | $                | 187,950  179,000 |                  | $          | 10,721  15,063         |       | $                                              | 17,632  17,712 |                                                                                 | $          | —  —                     |       | $                | 8,286  27,953 |   | $ | 36,715  45,148 |   | $ | 261,304  284,876 |   |
| Thomas J. Noe, CFO,  Treasurer & Executive Vice President |       | 2008  2007 |       | 161,175  153,500 |             | 8,951  12,217         |       | 14,927  14,593         |       | —  —                                 |           | 5,470  18,754                                                                        |       | 39,241  47,019                     |       | 229,764  246,083 |          |
| Lori M. Henn, Senior Vice  President & Compliance Officer |       | 2008  2007 |       | 126,000  120,000 |             | 6,151  7,942          |       | 11,640  10,731         |       | —  —                                 |           | —  —                                                                       |       | 9,389  14,736                      |       | 153,180  153,409 |          |
|                                                                    |            |            |            |                  |                  |                       |            |                        |            |                                                |                |                                                                                      |            |                                    |            |                  |               |  |  |  |  |  |  |  |

 

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| (1)    |   | Reflects the dollar amounts recognized for  financial statement reporting purposes for the years ended December 31,  2007 and 2008, in accordance with FAS 123(R) of awards pursuant to the  2001 Recognition and Retention Plan. Such restricted stock awards vest at a  rate of 20% per year. Assumptions used in the calculation of these amounts  are included in Note A to the Company’s audited consolidated financial  statements for the years ended December 31, 2007 and 2008 included in  the Company’s Annual Report on Form 10-K filed with the Securities and  Exchange Commission on April 15, 2008 and as part of this report,  respectively.                                               |
|--------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
| (2)    |   | Reflects the dollar amount recognized for  financial statement reporting purposes for the fiscal years ended  December 31, 2007 and 2008 in accordance with FAS 123(R) of awards  pursuant to the Stock Option Program and thus includes amounts from awards  granted in and prior to 2008. Assumptions used in the calculation of this  amount for the years ended December 31, 2007 and 2008 are included in  Note A to the Company’s audited consolidated financial statements for the  years ended December 31, 2007 and 2008 included in the Company’s Annual  Report on Form 10-K filed with the Securities and Exchange Commission on  April 15, 2008 and as part of this report, respectively. |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
| (3)    |   | Determined pursuant to a review of the  individuals’ performance and the corporate performance goals and objectives.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
| (4)    |   | Represents, with respect to  Messrs. Williams and Noe, the increase in the present value of their  accumulated benefits under the Company’s directors’ retirement plan at the  relevant measurement date for financial reporting purposes for 2008 compared  to 2007.                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
| (5)    |   | Includes health insurance premiums paid by  the Bank, the distribution from the Employee Stock Ownership Plan, the 401K  Company match for 2008 and, with respect to Messrs. Williams and Noe,  directors’ fees amounting to $18,000, and auto expense with respect to  Mr. Williams.                                                                                                                                                                                                                                                                                                                                                                                                                                           |

 

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**EquityAwards**

 

**OutstandingEquity Awards at Fiscal Year-End. **The followingtable sets forth, with respect to the executive officers named in the SummaryCompensation Table, information with respect to the number of options andunvested shares of restricted stock held as of December 31, 2008 and thevalue with respect to the unvested shares of restricted stock.

 
| ** **        | ** ** | ** **                                                | ** ** | **Stock Awards**            | ** ** |
|-------------------|------------|-----------------------------------------------------------|------------|-----------------------------|------------|
| ** **        | ** ** | **Option Awards**                                         | ** ** | **Total Number  of Shares** | ** ** | **Market  Value of** | ** ** |
| ** **        | ** ** | **Number of  Securities Underlying  Unexercised Options** | ** ** | **Exercise**                | ** ** | **Option  Expiration** | ** ** | **or Units  of Stock  That Have** | ** ** | **Shares  of Stock That  Have Not** | ** ** |
| **Name**          | ** ** | **Exercisable**                                           | ** ** | **Unexercisable**           | ** ** | **Price** | ** ** | **Date** | ** ** | **Not Vested** | ** ** | **Vested (1)** | ** ** |
|              |       |                                                      |       |                        |       |   |   |   |   |   |   |   |   |   |   |
| Jerry D. Williams |       | 0                                                         |       | 7,608                       |       | $ | 2.24 |   | 06/30/2018 |   | 616 |   | $ | 123 |   |
|              |       | 1,250                                                     |       | 4,996                       |       | $ | 16.34 |   | 06/30/2017 |   |   |   |   |   |
|              |       | 2,499                                                     |       | 3,747                       |       | $ | 19.85 |   | 06/30/2016 |   |   |   |   |   |
|              |       | 1,479                                                     |       | 986                         |       | $ | 19.92 |   | 06/30/2015 |   |   |   |   |   |
|              |       | 1,784                                                     |       | 446                         |       | $ | 23.20 |   | 06/30/2014 |   |   |   |   |   |
|              |       | 2,043                                                     |       | 0                           |       | $ | 23.22 |   | 06/27/2013 |   |   |   |   |   |
|              |       | 2,638                                                     |       | 0                           |       | $ | 20.25 |   | 06/28/2012 |   |   |   |   |   |
|              |       | 3,119                                                     |       | 0                           |       | $ | 14.00 |   | 06/28/2011 |   |   |   |   |   |
|              |       |                                                      |       |                        |       |   |   |   |   |   |   |   |   |   |   |
| Thomas J. Noe     |       | 0                                                         |       | 6,714                       |       | $ | 2.24 |   | 06/30/2018 |   | 527 |   | $ | 105 |   |
|              |       | 1,071                                                     |       | 4,281                       |       | $ | 16.34 |   | 06/30/2017 |   |   |   |   |   |
|              |       | 2,142                                                     |       | 3,210                       |       | $ | 19.85 |   | 06/30/2016 |   |   |   |   |   |
|              |       | 1,268                                                     |       | 844                         |       | $ | 19.92 |   | 06/30/2015 |   |   |   |   |   |
|              |       | 1,529                                                     |       | 382                         |       | $ | 23.20 |   | 06/30/2014 |   |   |   |   |   |
|              |       | 1,532                                                     |       | 0                           |       | $ | 23.22 |   | 06/27/2013 |   |   |   |   |   |
|              |       | 1,978                                                     |       | 0                           |       | $ | 20.25 |   | 06/28/2012 |   |   |   |   |   |
|              |       | 2,339                                                     |       | 0                           |       | $ | 14.00 |   | 06/28/2011 |   |   |   |   |   |
|              |       |                                                      |       |                        |       |   |   |   |   |   |   |   |   |   |
| Lori M. Henn      |       | 0                                                         |       | 4,900                       |       | $ | 2.24 |   | 06/30/2018 |   | 393 |   | $ | 79 |   |
|              |       | 893                                                       |       | 3,569                       |       | $ | 16.34 |   | 06/30/2017 |   |   |   |   |   |
|              |       | 1,786                                                     |       | 2,676                       |       | $ | 19.85 |   | 06/30/2016 |   |   |   |   |   |
|              |       | 1,056                                                     |       | 704                         |       | $ | 19.92 |   | 06/30/2015 |   |   |   |   |   |
|              |       | 850                                                       |       | 212                         |       | $ | 23.20 |   | 06/30/2014 |   |   |   |   |   |
|              |       | 1,021                                                     |       | 0                           |       | $ | 23.22 |   | 06/27/2013 |   |   |   |   |   |
|              |       | 880                                                       |       | 0                           |       | $ | 20.25 |   | 06/28/2012 |   |   |   |   |   |
|              |       | 1,040                                                     |       | 0                           |       | $ | 14.00 |   | 06/28/2011 |   |   |   |   |   |

 

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(1)   Based on the fair market value of $ 0.20 pershare for the Company’s common stock as of December 31, 2008.

 

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**StockVested. **The following table setsforth certain information with respect to restricted stock awards vested forthe named executive officers during the year ended December 31, 2008. Noneof the Company’s named executive officers exercised any stock options duringthe fiscal year ended December 31, 2008.

 
| ** **        | ** ** | **Stock Awards**                               | ** ** |
|-------------------|------------|------------------------------------------------|------------|
| **Name**          | ** ** | **Number of  Shares Acquired  On Vesting (1)** | ** ** | **Value  Realized  On Vesting (2)** | ** ** |
|              |       |                                           |       |   |   |   |
| Jerry D. Williams |       | 580                                            |       | $ | 1,299 |   |
|              |       |                                           |       |   |   |
| Thomas J. Noe     |       | 477                                            |       | 1,068 |   |
|              |       |                                           |       |   |   |
| Lori M. Henn      |       | 331                                            |       | 741 |   |

 

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(1)          Reflects shares received onvesting from prior year grants under the Company’s Recognition and RetentionPlan.

 

(2)          Based on the fair marketvalue of $2.24 per share for the Corporation’s common stock as of June 30,2008, the date of vesting.

 

***Employment Agreements***

 

Peoples Community Bancorp and PeoplesCommunity Bank, as employers, have entered into employment agreements with eachof Jerry D. Williams and Thomas J. Noe. The executives’ compensation and expenses are paid by Peoples Community Bancorpand Peoples Community Bank in the same proportion as the time and servicesactually expended by the executives on behalf of each employer. The employmentagreements are reviewed annually. The term of the executives’ employmentagreements are extended each year for a successive additional one-year periodupon the approval of the Boards of Directors, unless either party elects, notless than sixty (60) days prior to the annual anniversary date, not to extendthe employment term.

 

Eachof the employment agreements is terminable with or without cause by theCompany. The executives have no right to compensation or other benefitspursuant to the employment agreements for any period after voluntarytermination or termination by the Company for cause, disability or retirement.The agreements provide for certain benefits in the event of the executive’sdeath.

 

Theexecutive will be entitled to a cash severance amount equal to three times hisor her average annual compensation for the last five calendar years (or suchshorter period that he has worked with the Bank), plus the continuation ofcertain miscellaneous fringe benefits, in the event that:

 

1)              the executive terminates hisemployment because the Company either fails to comply with any materialprovision of the employment agreement or changes the executive’s title orduties;

 

2)              the executive terminates hisemployment as a result of certain adverse actions which are taken with respectto the executive’s employment following a change in control of the Company; or

 

3)              the Company terminates theemployment agreement other than for cause, disability, retirement or death.

 

Compensationor other benefits pursuant to the employment agreements are subject toreduction pursuant to Section 280G of the Internal Revenue Code as setforth below in the event of a change in control.  A change in control is generally defined inthe employment agreements to include any change in control of the Companyrequired to be reported under the federal securities laws, as well as (1) theacquisition by any person of 20% or 

 

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moreof the Company’s outstanding voting securities and (2) a change in amajority of the directors of the Company during any three-year period withoutthe approval of at least two-thirds of the persons who were directors of theCompany at the beginning of such period.

 

Eachemployment agreement provides that, in the event any of the payments to be madethereunder or otherwise upon termination of employment are deemed to constitute“parachute payments” within the meaning of Section 280G of the InternalRevenue Code, then such payments and benefits shall be reduced by the minimumnecessary to result in the payments not exceeding three times the recipient’saverage annual compensation from the employers which was includable in therecipient’s gross income during the most recent five taxable years.  As a result, none of the severance paymentswill be subject to a 20% excise tax, and the employers will be able to deductsuch payments as compensation expense for federal income tax purposes.

 

TheCompany and the Bank have each consented to the Orders.  As a result, the Company and the Bank are notpermitted to make any golden parachute payments of the types described abovewithout the prior consent of the OTS.

 

***Directors Compensation***

 

Duringthe calendar year ended December 31, 2008, each member of the Board ofDirectors of the Bank was paid a retainer of $1,500 per month.  Board members were not paid separatecompensation for meetings of Peoples Community Bancorp or committee meetings.

 

TheBank maintains an unfunded, non-qualified, deferred compensation arrangement toprovide retirement benefits to its Board of Directors.  The benefits are based on years of serviceand director compensation during the year preceding retirement.  The plan also provides for death benefitpayments to a surviving spouse, beneficiaries or the estate of thedirector.  The Bank has elected not toestablish a trust for the holding or investing of assets.  Pension accruals for the plan are notdeductible for federal income tax purposes until benefits are paid.  Accruals are intended to provide not only forthe benefits attributed to service to date but also for those expected to beearned in the future.

 

Thefollowing table summarizes the 2008 compensation structure for eachnon-employee Director.  Directors did notreceive any restricted stock awards or option award grants in 2008.

 
| **Name**            | ** ** | **Fees  Earned  or  Paid  in  Cash** | ** ** | **Stock  Awards  (1)(3)** | ** ** | **Option  Awards (2)(3)** | ** ** | **Increase  (Decrease) in  Pension Value  and  Nonqualified  Deferred  Compensation  Earnings(4)** | ** ** | **Total** | ** ** |
|---------------------|------------|--------------------------------------|------------|---------------------------|------------|---------------------------|------------|----------------------------------------------------------------------------------------------------|------------|-----------|------------|
|                |       |                                 |       |                      |       |                      |       |                                                                                               |       |      |       |
| John L. Buchanan    |       | $                                    | 18,000     |                      | $          | —                    |       | $                                                                                                  | —     |      | $          | 9,300 |   | $ | 27,300 |   |
|                |       |                                 |       |                      |       |                      |       |                                                                                               |       |      |       |
| Donald L. Hawke     |       | 18,000                               |       | —                    |       | —                    |       | (538                                                                                               | )          | 17,462    |       |
|                |       |                                 |       |                      |       |                      |       |                                                                                               |       |      |       |
| Nicholas N. Nelson  |       | 18,000                               |       | —                    |       | —                    |       | 13,308                                                                                             |       | 31,308    |       |
|                |       |                                 |       |                      |       |                      |       |                                                                                               |       |      |       |
| James R. VanDeGrift |       | 18,000                               |       | —                    |       | —                    |       | (767                                                                                               | )          | 17,233    |       |
|                |       |                                 |       |                      |       |                      |       |                                                                                               |       |      |       |
| John E. Rathkamp(5) |       | 29,000                               |       | 7,717                     |       | 4,339                     |       | (451                                                                                               | )          | 40,605    |       |
|                     |            |                                      |            |                           |            |                           |            |                                                                                                    |            |           |            |  |  |  |  |  |

 

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(1)                                Reflects thedollar amounts recognized for financial statements reporting purposes for thefiscal year ended December 31, 2008 in accordance with FAS 123(R) ofawards issued in previous years pursuant to the 2001 Recognition and RetentionPlan.  Such restricted stock awards vestat a rate of 20% per year.

 

(2)                                Reflects thedollar amount recognized for financial statements reporting purposes for thefiscal year ended December 31, 2008 in accordance with FAS 123(R) ofawards issued in previous years pursuant to the Stock Option Program.

 

(3)                                At December 31,2008, each non-employee director held the following amount of unvested stockawards and/or outstanding options:

 
| **Name**            | ** ** | **Unvested Stock Awards** | ** ** | **Options** | ** ** |
|---------------------|------------|---------------------------|------------|-------------|------------|
|                |       |                      |       |        |       |
| John L. Buchanan    |       | —                    |       | 9,188       |       |
| Donald L. Hawke     |       | —                    |       | 9,188       |       |
| Nicholas N. Nelson  |       | —                    |       | 6,188       |       |
| James R. VanDeGrift |       | —                    |       | 9,188       |       |
| John E. Rathkamp    |       | 439                       |       | 8,422       |       |

 

(4)                                Reflects thechange in accrued benefit under the director’s retirement plan at December 31,2008 compared to December 31, 2007.

 

(5)                                Mr. Rathkampprovides certain administrative services to the Board and receives additionaldirector fees as compensation for performing additional services.

 

***Compensation and Benefits Committee Interlocks and InsiderParticipation***

 

Determinationsregarding compensation of the President and Chief Executive Officer, the seniormanagement and the employees are reviewed and approved by Peoples CommunityBank’s Compensation and Benefits Committee.In 2008, directors appointedto this committee were Messrs. Hawke, Nelson, VanDeGrift andBuchanan.  All the current members of the committee are independentmembers of the Board of Directors as defined in the NASDAQ’s listing standards.

 

Noperson who served as a member of the Compensation and Benefits Committee during2008 was a current or former officer or employee of Peoples Community Bancorpor Peoples Community Bank or engaged in certain transactions with PeoplesCommunity Bancorp or Peoples Community Bank required to be disclosed byregulations of the Securities and Exchange Commission.  Additionally, there were no Compensation andBenefits Committee “interlocks” during 2008, which generally means that noexecutive officer of Peoples Community Bancorp served as a director or memberof the Compensation and Benefits Committee of another entity, one of whoseexecutive officers served as a director of Peoples Community Bank or as amember of Peoples Community Bank’s Compensation and Benefits Committee.

 

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

 

Thefollowing table sets forth, as of March 31, 2009, certain information asto Peoples Community Bancorp common stock beneficially owned by each person orentity, including any “group” as that term is used in Section 13(d)(3) ofthe Securities Exchange Act of 1934, as amended, who or which was known to usto be the beneficial owner of more than 5% of the Company’s issued andoutstanding common stock, the Company’s directors and named executive officersand all of the Company’s directors and executive officers as a group.

 

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| **Name of Beneficial Owner or  Number of Persons in Group**                                                                                                                                          | ** ** | **Amount and Nature  of Beneficial Ownership as of  March 31, 2009(1)** | ** ** | **Percent of  common stock** | ** ** |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------------------------------------------------------------|------------|------------------------------|------------|
| Financial Stocks Capital Partners III L.P.,  Finstocks Capital Management, LLC,  Elbrook Holdings, LLC, John M. Stein and  Steven N. Stein  507 Carew Tower  441 Vine Street  Cincinnati, Ohio 45202 |       | 432,183                                                                      | (2)        | 8.92                         | %          |
|                                                                                                                                                                                                 |       |                                                                         |       |                         |       |
| Directors:                                                                                                                                                                                           |       |                                                                         |       |                         |       |
| Jerry D. Williams                                                                                                                                                                                    |       | 133,215                                                                      | (3)(4)     | 2.52                         | %          |
| John L. Buchanan                                                                                                                                                                                     |       | 48,643                                                                       | (3)(5)     | 1.00                         | %          |
| Donald L. Hawke                                                                                                                                                                                      |       | 30,643                                                                       | (3)        | *                            |       |
| Nicholas N. Nelson                                                                                                                                                                                   |       | 19,643                                                                       | (3)(6)     | *                            |       |
| James R. VanDeGrift                                                                                                                                                                                  |       | 40,243                                                                       | (3)(7)     | *                            |       |
| Thomas J. Noe                                                                                                                                                                                        |       | 478,247                                                                      | (3)(8)     | 9.87                         | %          |
| John E. Rathkamp                                                                                                                                                                                     |       | 42,956                                                                       | (3)(9)     | *                            |       |
|                                                                                                                                                                                                 |       |                                                                         |       |                         |       |
| Other Named Executive Officers:                                                                                                                                                                      |       |                                                                         |       |                         |       |
| Lori M. Henn                                                                                                                                                                                         |       | 26,386                                                                       |       | *                            |       |
|                                                                                                                                                                                                 |       |                                                                         |       |                         |       |
| All Directors and Executive Officers  as a group (11 persons)                                                                                                                                        |       | 819,976                                                                      | (3)        | 16.93                        | %          |

 

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*                                         Represents lessthan 1% of the outstanding common stock.

 

(1)                                 Based uponfilings made pursuant to the Securities Exchange Act and information providedby each of the individuals.  Shares ofthe Company’s common stock are deemed to be beneficially owned by a person ifhe or she directly or indirectly has or shares (i) voting power, whichincludes the power to vote or to direct the voting of the shares, or (ii) investmentpower, which includes the power to dispose or to direct the disposition of theshares.  Unless otherwise indicated, thenamed beneficial owner has sole voting and dispositive power with respect tothe shares.

 

(2)                                 Based on aSchedule 13G filed with the Securities and Exchange Commission on April 11,2005.  This Schedule 13G discloses thatFinancial Stocks Capital Partners III L.P. has shared voting and dispositivepower with respect to the 432,183 shares it beneficially owns.  The Schedule 13G discloses that FinstocksCapital Management, LLC is the general partner of Financial Stocks CapitalPartners III L.P. Finstocks Capital Management, LLC is controlled by ElbrookHoldings, LLC, which is in turn controlled by Steven N. Stein and John M.Stein. Finstocks Capital Management, LLC, Elbrook Holdings, LLC, Steve N. Steinand John M. Stein indirectly have the power to vote and dispose of the 432,183shares.

 

(3)                                 Includes optionsto acquire shares of the Company’s common stock that are exercisable on March 31,2009, or sixty (60) days thereafter, under the Company’s Stock Option Plans andshares allocated pursuant to the Company’s Employee Stock Ownership Plan thatare held in the associated trust, as follows:

 
| **Name**                                                      | ** ** | **Number of Shares  Underlying Options** | ** ** | **Number of Shares Held  in ESOP Trust** | ** ** |
|---------------------------------------------------------------|------------|------------------------------------------|------------|------------------------------------------|------------|
| Jerry D. Williams                                             |       | 22,420                                   |       | 7,769                                    |       |
| John L. Buchanan                                              |       | 9,188                                    |       | —                                   |       |
| Donald L. Hawke                                               |       | 9,188                                    |       | —                                   |       |
| Nicholas N. Nelson                                            |       | 6,188                                    |       | —                                   |       |
| James R. VanDeGrift                                           |       | 9,188                                    |       | —                                   |       |
| Thomas J. Noe                                                 |       | 18,573                                   |       | 6,396                                    |       |
| John E. Rathkamp                                              |       | 7,400                                    |       | 5,441                                    |       |
| All Directors and Executive Officers  as a group (11 persons) |       | 95,198                                   |       | 29,758                                   |       |

 

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(4)                                 Includes 34,800shares held in Mr. Williams’ individual retirement account, 4,000 sharesheld jointly with Mr. Williams’ daughters and 4,500 shares held by Mr. Williamsfor the benefit of his daughters.

 

(5)                                 Includes 5,400 sharesheld in Mr. Buchanan’s individual retirement account, 4,100 shares held byMr. Buchanan’s spouse in her individual retirement account, 20,500 sharesheld in the Buchanan Family Trust and 2,000 shares held by Buchanan’s PowerEquipment Center, Inc. a company of which Mr. Buchanan is thepresident.

 

(6)                                 Includes 9,500shares held jointly with Mr. Nelson’s spouse and 500 shares held jointlywith Mr. Nelson’s son.

 

(7)                                 Includes 25,000shares held jointly with Mr. VanDeGrift’s spouse and 100 shares held by Mr. VanDeGriftfor the benefit of his grandchildren.

 

(8)                                 Includes 73,145shares held in Mr. Noe’s individual retirement account, 7,825 shares heldby Mr. Noe’s spouse’s IRA and 39,024 shares held in five family trusts,for which Mr. Noe is trustee.  Mr. Noe’saddress is c/o Peoples Community Bank, P.O. Box 1130, West Chester, Ohio45071.

 

(9)                                 Includes 20,859shares held in Mr. Rathkamp’s individual retirement account, 4,652 sharesheld jointly with Mr. Rathkamp’s spouse and 1,800 shares held by Mr. Rathkamp’sspouse in her Individual Retirement Account.

 

***Equity Compensation PlanInformation***

 

The followingtable sets forth certain information for all equity compensation plans andindividual compensation arrangements (whether with employees or non-employees,such as directors), in effect as of December 31, 2008.

 
| **Plan Category**                                     | ** ** | **Number of Shares to  be issued upon the  Exercise of  Outstanding Options,  Warrants and Rights(1)** | ** ** | **Weighted-  Average Exercise  Price of  Outstanding  Options(1)** | ** ** | **Number of Shares  Remaining Available for  Future Issuance (Excluding  Shares Reflected in the First  Column)** | ** ** |
|------------------------------------------------------------|------------|----------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------------------------------------------------------------|------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|
|                                                       |       |                                                                                                                                                     |       |                                                                         |       |                                                                                                                                                                |       |
| Equity Compensation Plans Approved by Security Holders     |       | 156,586                                                                                                                                                  |       | $                                                                            | 17.68      |                                                                                                                                                                | 73,095     |   |
|                                                       |       |                                                                                                                                                     |       |                                                                         |       |                                                                                                                                                                |       |
| Equity Compensation Plans Not Approved by Security Holders |       | —                                                                                                                                                   |       | —                                                                       |       | —                                                                                                                                                              |       |
| Total                                                      |       | 156,586                                                                                                                                                  |       | $                                                                            | 17.68      |                                                                                                                                                                | 73,095     |   |

 

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(1)          Included in such number are101,744 shares which are subject to restricted stock grants which were notvested as of December 31, 2008.  The weighted average exercise priceexcludes restricted stock grants.

 

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

 

**Transactionswith Certain Related Persons**

 

PeoplesCommunity Bank offers mortgage loans to its directors, officers and employeesas well as members of their immediate families for the financing of theirprimary residences and certain other loans. These loans are generally made on substantially the same terms as thoseprevailing at the time for comparable transactions with a non-affiliatedperson.  It is the belief of managementthat these loans neither involve more than the normal risk of collectibilitynor present other unfavorable features to Peoples Community Bank.

 

Section 22(h) ofthe Federal Reserve Act generally provides that any credit extended by asavings institution, such as Peoples Community Bank, to its executive officers,directors and, to the extent otherwise permitted, principal stockholder(s), orany related interest of the foregoing, must be on substantially the same terms,including interest rates and collateral, as those prevailing at the time forcomparable transactions by the savings institution with non-affiliated parties;unless the loans are made pursuant to a benefit or compensation program that (i) iswidely available to employees of the institution and (ii) does not givepreference to any director, executive officer or principal stockholder, orcertain affiliated interests of either, over other employees of the 

 

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savingsinstitution, and must not involve more than the normal risk of repayment orpresent other unfavorable features.

 

**DirectorIndependence**

 

Amajority of the members of the Board of Directors are independent based on anassessment of each member’s qualifications by the Board, taking intoconsideration the NASDAQ National Market’s requirements for independence. The Board of Directors has concluded that Messrs. Buchanan, Hawke, Nelson,VanDeGrift and Rathkamp do not have any material relationships with Peoplesthat would impair their independence.

 

**Item 14.Principal Accounting Fees and Services**

 

TheAudit Committee of the Board of Directors of Peoples Community Bancorpappointed Plante & Moran, PLLC, as the independent registered publicaccounting firm, to perform the audit of Peoples Community Bancorp’s financialstatements for the year ending December 31, 2008.

 

PeoplesCommunity Bancorp has been advised by Plante & Moran, PLLC thatneither the firm nor any of its associates has any relationship with PeoplesCommunity Bancorp or its subsidiaries other than the usual relationship thatexists between an independent registered public accounting firm and itsclients.

 

Indetermining whether to appoint Plante & Moran, PLLC as PeoplesCommunity Bancorp’s independent registered public accounting firm, PeoplesCommunity Bancorp’s Audit Committee considered whether the provision ofservices, other than auditing services, by Plante & Moran, PLLC wascompatible with maintaining the independent registered public accounting firm’sindependence.  The Audit Committeebelieved that Plante & Moran, PLLC’s performance of these otherservices was compatible with maintaining their independence.

 

Thefollowing table sets forth the aggregate fees paid by the Company forprofessional services rendered in connection with the audit of PeoplesCommunity Bancorp’s consolidated financial statements for 2008 and 2007, aswell as the fees paid by us for audit-related services, tax services and allother services rendered to us during 2008 and 2007.

 
| ** **                  | ** ** | **Year Ended December 31,** | ** ** |
|-----------------------------|------------|----------------------------------|------------|
| **Description of Services** | ** ** | **2008**                         | ** ** | **2007** | ** ** |
| Audit fees (1)              |       | $                                | 326,550    |   | $ | 218,720 |   |
| Audit-related fees (2)      |       | —                           |       | 5,010 |   |
| Tax fees                    |       | 10,960                           |       | 19,245 |   |
| Total                       |       | $                                | 337,510    |   | $ | 242,975 |   |

 

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(1)         Audit fees consist of feesincurred in connection with the audit of the annual financial statements andthe review of the interim financial statements included in the quarterlyreports filed with the Securities and Exchange Commission, as well as workgenerally only the independent auditor can reasonably be expected to provide,such as statutory audits, consents and assistance with and review of documentsfiled with the Securities and Exchange Commission.

 

(2)         Audit-related fees primarilyconsist of fees incurred in connection with the examination of the internalcontrol structure of Peoples Community Bancorp.

 

TheAudit Committee selects the independent registered public accounting firms andpre-approves all audit services to be provided by it to Peoples CommunityBancorp.  The Audit Committee alsoreviews and pre-approves all audit-related and non-audit related servicesrendered by the independent registered public accounting firm in accordancewith the Audit Committee’s charter.  Inits review of these services and related fees and terms, the Audit Committeeconsiders, among other things, the possible effect of the performance of suchservices on the independence of the independent registered public accountingfirm.  The Audit Committee pre-approvescertain audit-related services and certain non-audit related tax services whichare specifically described by the Audit Committee on an annual basis andseparately approves other individual engagements as 

 

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necessary.  The Chair of the Audit Committee has beendelegated the authority to approve non-audit related services in lieu of thefull Audit Committee.  On a quarterlybasis, the Chair of the Audit Committee presents any previously-approvedengagements to the full Audit Committee. Each of the services was pre-approved by the Audit Committee.

 

Eachnew engagement of Plante & Moran, PLLC was approved in advance by theAudit Committee or its Chair, and none of those engagements made use of the *de minimis* exception to pre-approval contained in theSecurities and Exchange Commission’s rules.

 

**Reportof Audit Committee**

 

Theaudit committee has reviewed and discussed the audited financial statementswith management.  The audit committee hasdiscussed with the independent registered public accounting firm the mattersrequired to be discussed by Statement on Auditing Standards No. 61 “Communicationwith Audit Committees,” as may be modified or supplemented.  The audit committee has received the writtendisclosures and the letter from the independent registered public accountingfirm consistent with the applicable requirements of the Public CompanyAccounting Oversight Board regarding the independent accountant’scommunications with the audit committee concerning independence, and hasdiscussed with Plante & Moran, PLLC, the independent registered publicaccounting firm’s independence.  Based onthe review and discussions referred to above in this report, the auditcommittee recommended to the Board of Directors that the audited financialstatements be included in Peoples Community Bancorp’s Annual Report on Form 10-Kfor the last fiscal year for filing with the Securities and ExchangeCommission.

 

*Members of the Audit Committee*

 
| John  L. Buchanan    |   | Nicholas  N. Nelson |   | Donald  L. Hawke |
|----------------------|--------|---------------------|--------|------------------|
| James  R. VanDeGrift |   | John  E. Rathkamp   |   |             |

 

**Item 15. Exhibits and FinancialStatement Schedules**

 

(a) (1) The following documents are filed as part of this report and are incorporatedherein by reference to the Registrant’s 2008 Annual Report:

Report ofRegistered Independent Certified Public Accountants.

ConsolidatedStatements of Financial Condition as of December 31, 2008 and 2007.

Consolidated Statementsof Operations for the Years Ended December 31, 2008, 2007 and 2006.

ConsolidatedStatements of Comprehensive Income (Loss) for the Years Ended December 31,2008, 2007 and 2006.

ConsolidatedStatements of Stockholders’ Equity for the Years Ended December 31, 2008,2007 and 2006.

ConsolidatedStatements of Cash Flows for the Years Ended December 31, 2008, 2007 and2006

Notes toConsolidated Financial Statements.

 

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

 

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(b) Exhibits.

 

 The followingexhibits are filed as part of this Form 10-K, and this list includes the Exhibit Index:

 
| **No.** | ** ** | **Exhibits**                                                                                                                                                                       |
|---------|------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 3.1     |       | Articles of  Incorporation of Peoples Community Bancorp, Inc. (1)                                                                                                             |
| 3.2     |       | Bylaws of  Peoples Community Bancorp, Inc. (2)                                                                                                                                |
| 4       |       | Stock  Certificate of Peoples Community Bancorp, Inc. (3)                                                                                                                     |
| 10.1    |       | 2001 Stock  Option Plan (4)                                                                                                                                                        |
| 10.2    |       | 2001 Recognition  and Retention Plan (4)                                                                                                                                           |
| 10.3    |       | 2004 Stock  Option Plan (5)                                                                                                                                                        |
| 10.4    |       | 2004 Recognition  and Retention Plan (5)                                                                                                                                           |
| 10.5    |       | Employment  Agreements with each of Jerry D. Williams and Thomas J. Noe (3)                                                                                                        |
| 10.6    |       | OTS Order to  Cease and Desist with the Company dated April 3, 2008 (6)                                                                                                       |
| 10.7    |       | OTS Order to  Cease and Desist with the Bank, dated April 3, 2008 (6)                                                                                                         |
| 10.8    |       | OTS Amended  Order to Cease and Desist with the Bank, dated April 29, 2009                                                                                                    |
| 13.0    |       | Annual Report to  Stockholders for the Year Ended December 31, 2008                                                                                                           |
| 21.0    |       | List of  Subsidiaries (See “Item 1. Business - General” in this Form 10-K)                                                                                          |
| 23.1    |       | Consent of  Plante & Moran, PLLC                                                                                                                                          |
| 23.2    |       | Consent of BKD,  LLP                                                                                                                                                               |
| 31.1    |       | Certification of  Chief Executive Officer Pursuant to Rules 13a-14 and 15d-14 of the  Securities Exchange Act of 1934 and Section 302 of the Sarbanes-Oxley  Act of 2002 |
| 31.2    |       | Certification of  Chief Financial Officer Pursuant to Rules 13a-14 and 15d-14 of the  Securities Exchange Act of 1934 and Section 302 of the Sarbanes-Oxley  Act of 2002 |
| 32.1    |       | Certification of  Chief Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley  Act of 2002 (18 U.S.C. 1350)                                                         |
| 32.2    |       | Certification of  Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley  Act of 2002 (18 U.S.C. 1350)                                                         |

 

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

(2)  Incorporated herein by reference to Peoples’Current Report on Form 8-K filed with the SEC on December 6, 2007.

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

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

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

(6)  Incorporated herein by reference to People’sCurrent Report on Form 8-K filed with the SEC on April 3, 2008.

 

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**SIGNATURES**

** **

Pursuant to therequirements of Section 13 or 15(d) of the Securities Exchange Act of1934, the registrant has duly caused this report to be signed on its behalf bythe undersigned, thereunto duly authorized.

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

 

 

Pursuant to therequirements of the Securities Exchange Act of 1934, as amended, this reporthas been signed below by the following persons on behalf of the registrant andin the capacities and on the dates indicated.

 
| /s/Jerry  D. Williams                            |       | May  1, 2009 |
|--------------------------------------------------|------------|--------------|
| Jerry  D. Williams                               |       |         |
| President,  Chief Executive Officer and Director |       |         |
| (principal  executive officer)                   |       |         |
|                                             |       |         |
| /s/Thomas  J. Noe                                |       | May  1, 2009 |
| **Thomas J. Noe**                                | ** ** | ** **   |
| CFO,  Treasurer and Director                     |       |         |
| (principal  financial and accounting officer)    |       |         |
|                                             |       |         |
| /s/Donald  L. Hawke                              |       | May  1, 2009 |
| Donald  L. Hawke                                 |       |         |
| Director                                         |       |         |
|                                             |       |         |
| /s/John  E. Rathkamp                             |       | May  1, 2009 |
| John  E. Rathkamp                                |       |         |
| Director                                         |       |         |
|                                             |       |         |
| /s/John  L. Buchanan                             |       | May  1, 2009 |
| John  L. Buchanan                                |       |         |
| Director                                         |       |         |
|                                             |       |         |
| /s/James  R. VanDeGrift                          |       | May  1, 2009 |
| James  R. VanDeGrift                             |       |         |
| Director                                         |       |         |
|                                             |       |         |
| /s/Nicholas  N. Nelson                           |       | May  1, 2009 |
| Nicholas  N. Nelson                              |       |         |
| Chairman  of the Board and Director              |       |         |

 

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