10-K

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

(Mark One)

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

For the fiscal year ended December 31, 2007

OR

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

Commission File No.: 000-29949

PEOPLES COMMUNITY BANCORP, INC.

(Exact Name of Registrant as Specified in Its Charter)

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

(513) 870-3530

(Registrant’s Telephone Number, Including Area Code)

Securities registered 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)

Securities registered under Section 12(g) of the Exchange Act:

Not Applicable

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

Yes  o   No  x

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

Yes  o   No  x

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

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

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

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

(Do not check if a smaller reporting company)

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

Yes  o   No  x

As of June 30, 2007, the aggregate value of the 3,904,422 shares of Common Stock of the Registrant issued and outstanding on such date, which excludes 934,542 shares held directly or indirectly by all directors and executives officers of the Registrant and the Registrant’s Employee Stock Ownership Plan (“ESOP”) as a group, was approximately $63.8 million.  This figure is based on the closing sales price of $16.34 per share of the Registrant’s Common Stock on June 30, 2007.  Although directors and executive officers and the ESOP were assumed to be “affiliates” of the Registrant for purposes of this calculation, the classification is not to be interpreted as an admission of such status.

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

TABLE OF CONTENTS

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

2

PART I

Item 1. Business

General

Peoples Community Bancorp, Inc. (“Peoples” or the “Company”) was organized in December 1999 at the direction of the Board of Directors of The People’s Building, Loan and Savings Company, presently Peoples Community Bank (the “Bank”), for the purpose of holding all of the capital stock of the Bank and in order to facilitate the conversion of the Bank from an Ohio-chartered mutual savings and loan association to a federally-chartered stock savings bank.  (Unless the context otherwise requires, reference to Peoples includes the Bank).  People’s assets consist primarily of the outstanding shares of common stock of the Bank.  Peoples has no significant liabilities other than junior subordinated debentures issued in fiscal 2005 and $17.5 million of debt currently outstanding as of April 14, 2008 under a line of credit which is secured by the outstanding shares of common stock of the Bank.  The management of Peoples and the Bank are substantially identical and Peoples neither owns nor leases any property but instead uses the premises, equipment and furniture of the Bank.  At December 31, 2007, the Company had $887.4 million in total assets, $735.2 million in deposits, $77.6 million in borrowings (excluding subordinated debentures) and $53.6 million of stockholders’ equity.  The Company’s principal executive office is located at 6100 West Chester Road, West Chester, Ohio 45069.  The Company’s telephone number is (513) 870-3530.

The Bank is a federally-chartered stock savings bank that was originally organized in 1889.  The Bank conducts its business from nineteen full service offices in Hamilton, Warren and Butler counties in Southwest Ohio and Dearborn and Ohio Counties in Southeast Indiana.  The Bank is primarily engaged in attracting deposits from the general public and using those funds to originate loans and invest in securities.  The Bank’s primary lending emphasis has been, and continues to be, loans secured by first liens on single-family (one- to four-units) residential properties located in its local market.

As a result of acquisitions and internal growth, the Company grew from $416.0 million in total assets as of September 30, 2001 to a high of $1.0 billion in total assets as of December 31, 2005.  Between the completion of the public offering in March 2000 and December 31, 2005, the Company acquired five financial institutions with aggregate total assets as of the time of acquisition of $428.5 million.  Also, in September 2003, the Company purchased $32.8 million in loans and assumed $55.6 million in deposits in connection with the acquisition of two branch offices from another financial institution.  The Company supplemented this growth from acquisitions with loan generation secured primarily by real estate in its market area.  Total gross loans increased from $419.5 million at September 30, 2001 to $851.3 million at December 31, 2005.    In addition, since September 30, 2000, the Company expanded its franchise through the opening of six full service branch offices. These new branch offices, as well as acquired branch offices, have expanded the Company’s market presence.  The Company’s loan growth has been funded in part by deposits.  The Company has placed an emphasis on deposit generation both internally and through whole bank and branch acquisitions.  Deposits have increased from $233.1 million at September 30, 2001 to $735.2 million at December 31, 2007.

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

3

The actions taken by the Company during 2006 and 2007, discussed above, and the continued recessionary forces in the local economy have had a significant adverse impact on the Company’s financial condition and results of operations.  For 2006 and 2007, net losses amounted to $4.1 million and $33.3 million, respectively, and stockholders’ equity decreased from $86.0 million or 8.36% of total assets at December 31, 2005 to $53.6 million or 6.04% of total assets at December 31, 2007.  Further, the level of the Company’s non-performing assets has and will continue to negatively impact the Company’s interest rate spread, interest income, provision for losses on loans and net earnings or loss.  Non-performing assets totaled $32.8 million, $26.1 million and $18.9 million at December 31, 2007, 2006 and 2005, respectively.  While the Bank has devoted and will continue to devote substantial management resources toward the resolution of all delinquent and non-performing assets, no assurance can be made that management’s efforts will be successful.

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

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

The Order issued to 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 for land acquisition or development, speculative residential construction, commercial and multi-family construction, acquisition or retention of commercial property, and non-owner occupied one- to four-family residential property; (ii) engaging an independent consultant to conduct a loan portfolio review for the purpose of determining asset quality and the appropriateness of the Bank’s asset classification process related to loan relationships that equal or exceed $4.0 million; (iii) establishing a plan for reducing adversely classified assets; (iv) reviewing and, where appropriate, adjusting the Bank’s allowance for loan and lease losses methodology; (v) limiting asset growth during each calendar quarter to an amount not to exceed net interest credited on deposit liabilities; and (vi) establishing an Oversight Committee of the Bank’s Board of Directors comprised of independent outside directors.  In an effort to proactively address the downturn in the local real estate market, the Bank had previously curtailed or ceased the lending activities restricted in the Orders.

Management of the Company and the Bank is working diligently to resolve the issues associated with the Company’s nonperforming assets and to provide the information or take the actions required by the Orders.  Concurrently, management and the Board of Directors are considering all strategic alternatives available to the Company and the Bank.  As required, the Company and the Bank have filed a consolidated business plan with the OTS covering operations through 2010.  The Company’s business plan contemplates, among other things, a consolidation of the Company’s operations through branch sales and a reduction in adversely classified assets through loan resolutions, repayments, sales and charge-offs.  Branch sale transactions would decrease the Company’s assets and liabilities, generate additional capital, generate taxable income, and reduce general, administrative and other expense.  In addition, the Bank would dividend funds to the Company to provide liquidity to service the Company’s debt, provided that approval would be received from the OTS. The business plan was submitted by the Company to the OTS on April 7, 2008 and is subject to review and approval by the OTS.

4

The report of the Company’s independent registered accounting firm contains an explanatory paragraph as to the Company’s ability to continue as a going concern primarily due to the Company’s current lack of liquidity to repay its $17.5 million obligation under an outstanding line of credit due June 30, 2008.  The line of credit is secured by all outstanding shares of common stock of the Bank.  Although the Bank exceeds all of its capital requirements and is considered well capitalized at December 31, 2007, the Orders prohibit the Bank from paying cash dividends to the Company without the prior consent of the OTS and the Company will only be able to rely upon existing cash and cash equivalents as sources of its liquidity.  Without the ability to rely on dividends from the Bank, the Company will require funds from other capital sources to meet its obligations such as restructuring the current line of credit or replacing the current line of credit.  The Company was not in compliance with one of the loan covenants at December 31, 2007 and the lender has the ability to accelerate all outstanding amounts upon notice and the passage of 30 days. The Company is currently negotiating with the lender regarding a waiver of default, and a modification and/or extension of the line of credit.

In light of the matters discussed above, the Company established a $4.4 million valuation allowance of deferred federal income taxes, thus decreasing the tax benefit recorded during the year by the Company.  Generally, the losses incurred in 2006 and 2007 resulted in deferred federal income taxes or deferred tax assets which may be utilized against current period earnings, carried back against prior years’ earnings or utilized to the extent of management’s estimate of future taxable income.  The valuation allowance was established since the Company’s current liquidity position may impair the Company’s ability to generate future taxable income, and therefore, impair its ability to realize all benefits of the deferred tax asset.

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

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

As previously announced, the Board of Directors of the Company adopted an amendment to Article VI of 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 order to increase operational efficiency.  As a result, the consolidated statements of financial condition compares December 31, 2007 to December 31, 2006, while the consolidated statements of operations, the consolidated statements of comprehensive income (loss), and the consolidated statements of cash flow reflect, as applicable, the twelve month periods ended December 31, 2007 and December 31, 2006, the three month period ended December 31, 2005, and the twelve month period ended September 30, 2005.

Peoples Lending Activities

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

5

portfolio and nonresidential construction loans amounted to $12.4 million, or 1.8% of the gross loan portfolio as of December 31, 2007.  Further, commercial loans amounted to $20.0 million, or 2.8% of the gross loan portfolio at December 31, 2007 and consumer loans amounted to $16.8 million, or 2.4% of the gross loan portfolio at such time.  The Company curtailed its acquisition and development lending, one- to four-family residential investment lending, and unsecured commercial lending beginning in early 2007 due in large part to the downturn in the local housing market, the increase in the Bank’s nonaccrual loans and charge-offs, and to realign the portfolio due to loan concentrations.   Further, as discussed above, the Bank is currently prohibited from making any new loans or issuing new lines of credit for the following purposes:

·Land acquisition or development

·Speculative residential construction

·Commercial and multi-family construction

·Acquisition or retention of commercial property, and

·Non-owner occupied one- to four-family property.

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

6

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

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

7

Origination of Loans.  The lending activities of Peoples are subject to the written underwriting standards and loan origination procedures established by the Board of Directors and management.  Loan originations are obtained through a variety of sources, including referrals from real estate brokers, builders and existing customers. Written loan applications are taken by loan officers.  Loan processors obtain or procure credit reports, appraisals and other documentation involved with a loan.  Property valuations are performed by independent outside appraisers approved by the Board of Directors of Peoples.  The Bank’s underwriting standards primarily focuses on the borrower’s cash flow capacity to service the loan and to a lesser extent, the collateral value.  This represents a transition from underwriting standards primarily based on collateral value, which are generally used by thrifts, to underwriting standards more widely used by banks.

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

Peoples’ loan approval process is intended to assess the borrower’s ability to repay the loan, the viability of the loan and the adequacy of the value of the collateral that will secure the loan.  The Board of Directors has granted authority to approve secured loans as follows:  loans up to $500,000 must be approved by two senior executive officers; loans between $500,000 and $1.0 million must be approved by three senior officers and loans greater than $1.0 million must be approved by the Board of Directors or the executive committee of the Board of Directors.

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

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

	Year Ended December 31,						Three Months Ended December 31,			Year Ended September 30,
	2007			2006			2005			2005			2004			2003
	(In Thousands)
Total loans held at beginning of period	$	895,261		$	944,708		$	794,194		$	672,456		$	622,000		$	556,850
Originations of loans:
Mortgage loans:
Single-family residential	58,345			90,797			29,831			79,588			89,145			63,502
Multi-family residential	7,664			40,510			12,659			42,248			29,357			50,686
Construction	29,131			106,240			19,295			91,494			75,278			101,019
Nonresidential real estate and land	49,626			80,004			32,450			85,658			70,158			30,170
Commercial loans	15,012			18,995			8,899			34,768			23,051			25,852
Consumer loans	2,656			5,093			846			11,058			12,374			7,344
Total originations (1)	162,434			341,639			103,980			344,814			289,465			278,573
Increase due to Ameriana branch acquisition	—			—			—			—			—			32,769
Increase due to American State acquisition	—			—			—			38,358			—			—
Increase due to Peoples Federal acquisition	—			—			122,643			—			—			—
Increase due to Mercantile acquisition	—			38,030			—			—			—			—
Total increases	—			38,030			122,643			38,358			—			311,342
Transfers to real estate owned	(6,861		)	(1,008		)	—			(1,854		)	(513		)	(2,863		)
Charge-offs	(18,284		)	(13,103		)	(2,206		)	(1,081		)	(2,360		)	(2,122		)
Other increases (decreases) (2)	(59,147		)	(48,481		)	2,188			5,197			(9,641		)	5,879
Repayments	(269,363		)	(366,524		)	(76,091		)	(263,696		)	(236,398		)	(247,086		)
Net activity in loans	(191,221		)	(49,447		)	150,514			121,738			50,456			65,150
Gross loans held at end of period	$	704,040		$	895,261		$	944,708		$	794,194		$	672,456		$	622,000

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

8

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

The significant repayments of $269.4 million, $366.5 million, $263.7 million, $236.4 million and $247.1 million during fiscal 2007, 2006, 2005, 2004, and 2003 respectively, were primarily due to the repayment of short-term construction loans and land development loans as well as the refinancing activity related to adjustable-rate single-family residential loans that were set to reprice in the current year.

Charge-offs of $18.3 million during fiscal 2007 consisted primarily of $8.5 million in loans secured by one- to four-family residential real estate (including $7.4 million of non-owner occupied investment property), $4.7 million in loans secured by multi-family residential real estate, $844,000 in construction loans, $1.3 million in loans secured by commercial real estate and land, and $2.9 million in commercial and consumer loans.  The increase in charged-off loans was primarily due to both (i) real estate investors and developers experiencing cash flow difficulties and (ii) the downturn in the local economy.  See “Asset Quality.”

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

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

The loan-to-value ratio, maturity and other provisions of the loans made by Peoples generally have reflected Peoples’ policy of making less than the maximum loan permissible under 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 loans generally limit the loan-to-value ratio to 80% of the lesser of the appraised value or purchase price of the property. Residential mortgage loans are amortized on a monthly basis with principal and interest due each month. The loans generally include “due-on-sale” clauses.

The residential mortgage loans originated by Peoples consist of fixed rate and adjustable rate loans.  Presently, the single-family fixed-rate residential mortgage loans originated by Peoples have terms of up to 30 years.  In addition, Peoples originates adjustable-rate mortgage loans on which the interest rate adjusts every one, three or five years based upon the one-year or three-year rate on T-bills plus a specified margin.  During fiscal 2004, Peoples introduced a five year fixed rate balloon product and a five year fixed rate product which adjusts on an annual basis thereafter based on the one-year rate on the T-bill.  At December 31, 2007, $157.6 million, or 50.5% of our single-family residential loans were fixed rate and $154.4 million, or 49.5% were adjustable rate.  Most of Peoples’ single-family loans in 2007 were originated for its portfolio, and some of these loans did not conform to Fannie Mae and Freddie Mac requirements and therefore, could not be sold in the secondary market.

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

9

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

Nonresidential Real Estate and Land Loans.  Peoples’ nonresidential real estate and land loan portfolio primarily consists of loans secured by land for development purposes, professional offices, small retail centers, warehouses and building lots located within Peoples’ primary market area.  Nonresidential real estate and land loans amounted to $129.0 million, or 20.3% of the net loan portfolio at December 31, 2007.  This compares to $140.9 million, or 17.3% at December 31, 2006.   As previously stated, Peoples is currently prohibited from originating such loans.  See “Business – General.”

Nonresidential real estate loans originated by Peoples typically have a loan-to-value ratio of 75% or less and generally have higher interest rates than single-family residential mortgage loans with similar terms and structure. The maximum original term of Peoples’ nonresidential real estate loans is 25 years.  Decisions to lend are based on the economic viability of the property and the creditworthiness of the borrower.  Creditworthiness is determined by considering the character, experience, management and financial strength of the borrower, and the ability of the property to generate adequate funds to cover both operating expenses and debt services.  In evaluating whether to make a nonresidential real estate loan, Peoples places primary emphasis on the ratio of net cash flow to debt service on the property and 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 Peoples deems appropriate.

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

Nonresidential real estate lending is generally considered to involve a higher degree of risk than one- to four-family residential lending. Such lending typically involves large loan balances concentrated in a single borrower or groups of related borrowers for rental or business properties. In addition, the payment experience on loans secured by income-producing properties is typically dependent on the success of the operation of the related project and thus is typically affected by adverse conditions in the real estate market and in the economy. Peoples generally attempts to mitigate the risks associated with its nonresidential real estate lending by, among other things, lending primarily in its market area and using reasonable loan-to-value ratios in the underwriting process.

Land development and acquisition loans involve significant additional risks when compared with loans on existing residential properties. These loans may involve larger loan balances to single borrowers, and the payment experience may be dependent on the successful development of the land and the sale of the lots. These risks can be significantly impacted by supply and demand conditions as well as local economic conditions.  In early 2007, the Bank curtailed new origination of land development and acquisition loans based on the downturn in the local housing market, the increase in the Bank’s nonaccrual loans and charge-offs, and to realign the portfolio due to loan concentrations.  As previously stated, Peoples is currently prohibited from originating such loans.  See “Business – General.”

Construction Loans.  At December 31, 2007, Peoples had approximately $144.2 million, or 22.7% of the net loan portfolio, in construction loans, compared to $234.8 million, or 28.9% of the total loan portfolio at December 31, 2006.  Of this amount at December 31, 2007, $131.8 million, or 91.4%, consisted of residential construction loans and $12.4 million, or 8.6%, consisted of nonresidential construction loans.  The construction loans of Peoples have been comprised of loans made to builders on a pre-sold basis, as well as to builders for homes on an unsold or speculative basis.

10

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

Peoples has also originated loans for the construction of nonresidential real estate such as small office buildings and warehouses.  These loans are typically originated as construction/permanent loans with interest only payments during the construction period and converting to a permanent loan at the end of the construction period.  These loans are generally made with a construction term of 12 months.  The loan to value ratio is generally limited to 75% on these loans on an “as completed” basis.

Prior to making a commitment to fund a construction loan, Peoples requires an appraisal of the property.  Peoples also generally requires third party inspections of each project prior to disbursement of funds.  Loan proceeds are then disbursed based on a percentage of completion.

Construction lending is generally considered to involve a higher degree of risk of loss than long-term financing on improved, owner-occupied real estate because of the uncertainties of construction, including the possibility of costs exceeding the initial estimates and the need to obtain a tenant or purchaser if the property will not be owner-occupied.  Peoples generally attempts to mitigate the risks associated with construction lending by, among other things, primarily lending in its market area, using conservative underwriting guidelines, and monitoring the construction process.

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

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

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

Loan Origination and Other Fees.  In addition to interest earned on loans, Peoples receives loan origination fees or “points” for originating loans.  Loan points are a percentage of the principal amount of the mortgage loan and are charged to the borrower in connection with the origination of the loan.  In accordance with Statement of Financial Accounting Standards No. 91, loan origination fees and certain related direct loan origination costs are offset, and the resulting net amount is deferred and amortized as interest income over the contractual life of the related loans as an adjustment to the yield of such loans. Peoples had $1.5 million and $2.3 million of deferred loan fees at December 31, 2007 and December 31, 2006, respectively.

11

Contractual Principal Repayments and Interest Rates.  The following table sets forth scheduled contractual amortization of Peoples’ loans at December 31, 2007 as well as the dollar amount of such loans which are scheduled to mature after one year which have fixed or adjustable interest rates.  Demand loans, loans having no schedule of repayments and no stated maturity and overdraft loans are reported as due in one year or less.

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

(1) Of the $396.8 million of loan principal payments contractually due after December 31, 2008, $150.2 million have fixed rates of interest and $246.6 million have adjustable rates of interest.

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

Asset Quality

General.  Peoples mails delinquent notices to borrowers when a borrower fails to make a required payment within 15 days of the date due. Additional notices begin when a loan becomes 30 days past due. If a loan becomes 90 days past due, Peoples refers it to an attorney to commence foreclosure. In many cases, deficiencies are cured promptly. While Peoples generally prefers to work with borrowers to resolve such problems, Peoples will institute foreclosure or other collection proceedings when necessary to minimize any potential loss.

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

Real estate acquired by Peoples as a result of foreclosure or by deed-in-lieu of foreclosure is classified as real estate owned until sold.  Peoples had real estate owned of $6.9 million and $333,000 at December 31, 2007 and December 31, 2006, respectively.  At December 31, 2007, approximately $5.1 million of real estate owned consisted of a residential development for multi-family residences and condominiums in a northern Cincinnati suburb.

At December 31, 2007, the Company had $25.9 million of non-performing loans.  If the current downturn in the local economy continues and borrowers are not able to meet their debt service obligations, the Company may experience a continued migration of non-performing loans to real estate owned.

12

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

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

Non-Performing Assets.  The following table sets forth information with respect to non-performing assets identified by Peoples, including non-accrual loans and other real estate owned.

	At December 31,									At September 30,
	2007			2006			2005			2005			2004			2003
	(Dollars in Thousands)
Non-accrual loans:
Single-family residential	$	4,834		$	7,140		$	5,481		$	6,674		$	2,090		$	1,752
Multi-family residential	5,225			4,243			928			2,325			2,535			3,557
Nonresidential real estate and land	10,070			8,273			2,488			3,787			197			—
Construction loans	4,643			2,302			4,361			2,640			1,039			1,951
Commercial loans	537			2,028			4,759			3,220			165			—
Consumer loans	8			97			742			741			3			4
Total non-accrual loans	25,317			24,083			18,758			19,387			6,029			7,264
Loans 90 days past due and accruing	613			1,716			—			1,266			—			—
Total non-performing loans	25,930			25,799			18,758			20,653			6,029			7,264
Other real estate owned, net	6,916			333			188			207			301			1,293
Total non-performing assets	$	32,846		$	26,132		$	18,946		$	20,860		$	6,330		$	8,557
Non-performing assets to total assets	3.70		%	2.54		%	1.82		%	2.07		%	0.71		%	1.16		%
Non-performing loans to total loans-net	4.09		%	3.17		%	2.20		%	2.96		%	1.01		%	1.31		%

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

13

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

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

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

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

Classified Assets.  Federal regulations require that each insured savings institution classify its assets on a regular basis. In addition, in connection with examinations of insured institutions, federal examiners have authority to identify problem assets and, if appropriate, classify them. There are three classifications for problem assets: “substandard,” “doubtful” and “loss.” Substandard assets have one or more defined weaknesses and are characterized by the distinct possibility that the insured institution will sustain some loss if the deficiencies are not corrected. Doubtful assets have the weaknesses of substandard assets with the additional characteristic that the weaknesses make collection or liquidation in full on the basis of currently existing facts, conditions and values questionable, and there is a higher possibility of loss. An asset classified loss is considered uncollectible and of such little value that continuance as an asset of the institution is not warranted. Another category designated “special mention” also must be established and maintained for assets which do not currently expose an insured institution to a sufficient degree of risk to warrant classification as substandard, doubtful or loss.  Assets classified as substandard or doubtful may require the institution to establish general allowances for loan losses.  If an asset or portion thereof is classified loss, the insured institution must either establish specific allowances for loan losses in the amount of 100% of the portion of the asset classified loss, or charge-off such amount.  General loss allowances established to cover possible losses related to assets classified substandard or doubtful may be included in determining an institution’s regulatory capital, while specific valuation allowances for loan losses do not qualify as regulatory capital.  Federal examiners may disagree with an insured institution’s classifications and amounts reserved.

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

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

14

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

Approximately $43.1 million of loans were categorized as special mention by the Bank as of December 31, 2007, compared to $31.6 million at December 31, 2006.  Although these loans are not deemed classified, these loans have potential weaknesses that deserve management’s close attention.  If left uncorrected, these potential weaknesses may, at some future date, result in the deterioration of the repayment prospects for the credit or the Bank’s credit position.  Concerns may lie with cash flow, liquidity, leverage, collateral or industry conditions.  Over the past two years, the Bank has revised its methods of reviewing loans for potential weaknesses, which includes a strong emphasis on cash flow analysis. The Bank’s management believes that this proactive approach has resulted in earlier detection of loans with potential exposure.  The Bank’s management has also increased its monitoring of these loans and is working proactively with borrowers to remediate and mitigate risk associated with these loans.

Allowance for Loan Losses.  The allocation of the allowance for loan losses based on particular types of loans was as follows:

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

The allowance for loan losses is maintained by management at a level considered sufficient to cover estimated losses inherent in the existing portfolio based on prior loan loss experience, known risks in the portfolio, adverse situations that may affect the borrower’s ability to repay, the estimated value of any underlying collateral, general economic conditions, and other factors and estimates which are subject to change over time.

A quarterly analysis of the allowance for loan loss requirements includes general allocations based on the type of collateral securing the loan.  In the analysis, loans determined to have a higher risk, such as land development loans, non-owner occupied residential real estate loans, and unsecured commercial loans, will have higher allowance requirements.  Additional allowance requirements are allocated to criticized assets, based on the classified status of the loan.  For example, loans classified substandard require higher loan loss allowances as compared to loans classified special mention.  No special allowances are provided for concentration of loans to one borrower, unless management becomes aware of a potential problem with collectibility.  Allocations of the allowance may be made for specific loans, but the entire allowance is available for any loan that should be charged-off.

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

15

At the beginning of 2007, the Company curtailed its acquisition and development lending, one- to four-family residential investment lending, and unsecured commercial lending.  While management believes that it determines the size of the allowance based on the best information available at the time, the allowance will need to be adjusted as circumstances change and assumptions are updated.  Future adjustments to the allowance could significantly affect future net earnings.

The following table sets forth the activity in the allowance for loan losses during the periods indicated.

	Year Ended December 31,						Three Months Ended December 31,			Year Ended September 30,
	2007			2006			2005			2005			2004			2003
	(Dollars in Thousands)
Allowance at beginning of period	$	18,369		$	13,444		$	13,697		$	11,025		$	9,744		$	7,656
Increase due to Peoples Federal acquisition	—			—			907			—			—			—
Increase due to Mercantile acquisition	—			302			—			—			—			—
Provision for losses on loans	32,800			17,450			900			3,600			3,600			4,198
Charge-offs:
Single-family residential	(8,484		)	(4,053		)	(1,519		)	(103		)	(609		)	(97		)
Multi-family residential	(4,741		)	(2,369		)	(360		)	(940		)	(1,431		)	—
Nonresidential real estate and land	(1,274		)	(1,307		)	(204		)	—			(151		)	(1,097		)
Construction	(844		)	(1,601		)	—			(16		)	—			(62		)
Commercial	(2,887		)	(1,042		)	—			—			(145		)	(866		)
Consumer and other loans	(54		)	(2,731		)	(123		)	(22		)	_ (24		)	—
Total charge-offs	(18,284		)	(13,103		)	(2,206		)	(1,081		)	(2,360		)	(2,122		)
Recoveries:
Single-family residential	357			78			—			9			—			12
Multi-family residential	190			9			—			140			—			—
Nonresidential real estate and land	199			—			—			—			—			—
Construction	593			1			—			—			—			—
Commercial	158			73			142			—			21			—
Consumer and other loans	117			115			4			4			20			—
Total recoveries	1,614			276			146			153			41			12
Net loans charged-off to allowance for loan losses	(16,670		)	(12,827		)	(2,060		)	(928		)	(2,319		)	(2,110		)
Allowance at end of period	$	34,499		$	18,369		$	13,444		$	13,697		$	11,025		$	9,744
Allowance for loan losses to total nonperforming loans at end of period	133.0		%	71.20		%	71.67		%	66.32		%	182.87		%	134.15		%
Allowance for loan losses to total gross loans at end of period	4.90		%	2.05		%	1.42		%	1.72		%	1.64		%	1.57		%

16

Investment Securities

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

The investment policy of Peoples is designed to maintain adequate liquidity, manage investment assets in conjunction with interest rate risk and maximize stability through diversification.  Excess funds not utilized to meet loan demand are typically invested using the guidelines of the investment policy to seek the maximum return with minimal risk. All investments are approved to be held as “Available for sale” or “Held to maturity”.  Peoples does not maintain any investments as “Trading” or “Held to Maturity”.  Peoples transacts all investment activity through a select group of securities dealers approved by the Board of Directors.

The following table sets forth information regarding the carrying value and fair value of Peoples’ securities at the dates indicated.

	December 31,												September 30,
	2007				2006				2005				2005
	Amortized		Fair		Amortized		Fair		Amortized		Fair		Amortized		Fair
	Cost		Value		Cost		Value		Cost		Value		Cost		Value
	(In Thousands)
Available for sale:
Mortgage-backed securities	63,258		63,335		$	52,818	$	52,669	$	71,401	$	71,024	$	199,845	$	199,716
Mutual funds	1,251		1,210		1,199		1,146		1,149		1,101		1,136		1,096
US treasuries and agencies	1,974		1,993		1,966		1,965		1,242		1,211		5,549		5,535
Municipal securities	1,027		1,034		1,114		1,111		1,151		1,146		1,009		1,019
Other equity securities	—		—		7		8		—		—		—		—
Total	$	67,510	$	67,572	$	57,104	$	56,899	$	74,943	$	74,482	$	207,539	$	207,366
Required investment:
Federal Home Loan Bank stock	$	14,024	$	14,024	$	14,024	$	14,024	$	13,122	$	13,122	$	11,871	$	11,871

The following table sets forth the activity in Peoples’ aggregate securities portfolio during the periods indicated.

	Year Ended December 31,						Three Months Ended December 31,			Year Ended September 30,
	2007			2006			2005			2005
	(In Thousands)
Securities at beginning of period	$	70,923		$	87,604		$	219,237		$	239,995
Purchases (1)	29,854			721			177			88,667
Sales of available for sale securities	(8		)	(2,008		)	(110,272		)	(41,186		)
Amortization of premiums and discounts	(90		)	(628		)	(247		)	(1,768		)
Repayments, prepayments and maturities	(19,349		)	(22,425		)	(22,482		)	(76,502		)
Securities acquired through acquisition – net	—			7,407			1,480			9,699
Increase (decrease) in unrealized gains (losses) on  available-for-sale securities	266			252			(289		)	332
Securities at end of period (2)	$	81,596		$	70,923		$	87,604		$	219,237

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

17

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

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

	Contractually Maturing
			Weighted				Weighted				Weighted				Weighted
	Under 1		Average		1-5		Average		6-10		Average		Over 10		Average
	Year		Yield		Years		Yield		Years		Yield		Years		Yield
	(Dollars in Thousands)
Investment securities	$	23	5.40	%	$	1,150	4.79	%	$	638	4.85	%	$	1,216	5.32	%
Mortgage-backed securities	101		4.50		—		—		943		4.24		62,291		5.15
	$	124	4.67	%	$	1,150	4.79	%	$	1,581	4.49	%	$	63,507	5.15	%

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

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

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

Mortgage-backed securities generally yield less than the loans which underlie such securities because of their payment guarantees or credit enhancements which offer nominal credit risk. In addition, mortgage-backed securities are more liquid than individual mortgage loans and may be used to collateralize borrowings or other obligations of Peoples.  At December 31, 2007, Peoples had mortgage-backed securities with a fair value totaling $63.3 million.

Sources of Funds

General.  Deposits are the primary source of Peoples’ funds for lending and other investment purposes. In addition to deposits, principal and interest payments on loans and mortgage-backed securities are a source of funds. Loan repayments are a relatively stable source of funds, while deposit inflows and outflows are significantly influenced by general interest rates, competition from other financial entities, and money market conditions. Borrowings may also be used on a short-term basis to compensate for reductions in the availability of funds from other sources and on a longer-term basis for general business purposes.

18

Deposits.  Deposits are attracted by the Bank principally from within its primary market area. Deposit account terms vary, with the principal differences being the minimum balance required, the time periods the funds must remain on deposit and the interest rate. The Bank offers traditional passbook savings accounts, money market accounts, checking accounts and certificates of deposit.

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

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

The following table sets forth the activity in Peoples’ deposits during the periods indicated.

	Year Ended December 31,					Three Months Ended December 31,		Year Ended September 30,
	2007			2006		2005		2005
				(In Thousands)
Beginning balance	$	755,261		$	726,629	$	612,199	$	472,436
Net increase (decrease) before interest credited	(20,546		)	28,230		114,358		139,568
Interest credited	497			402		72		195
Net increase (decrease) in deposits (including acquisitions)	(20,049		)	28,632		114,430		139,763
Ending balance	$	735,212		$	755,261	$	726,629	$	612,199

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

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

19

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

	Six Months And Less		Over Six Months Through One Year		Over One Year Through Two Years		Over Two Years Through Three Years		Over Three Years
	(In Thousands)
0.00% to 2.99%	$	1,370	$	28	$	38	$	39	$	—
3.00% to 3.99%	17,420		13,097		11,011		239		—
4.00% to 4.99%	112,049		32,336		28,567		29,966		24,630
5.00% to 6.99%	211,087		18,613		4,761		3,244		3,297
7.00% to 8.99%	—		5		—		—		—
Total	$	341,926	$	64,079	$	44,377	$	33,488	$	27,927

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

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

The following table sets forth the dollar amount of deposits in various types of deposits offered by Peoples at the dates indicated.

	At December 31,												At September 30,
	2007				2006				2005				2005
	Amount		Percentage		Amount		Percentage		Amount		Percentage		Amount		Percentage
	(Dollars in thousands)
Non-interest checking accounts	$	21,936	2.99	%	$	21,967	2.91	%	$	24,125	3.32	%	$	20,150	3.29	%
Savings and checking accounts	182,414		24.81		213,139		28.22		242,593		33.39		210,590		34.40
Certificates of deposit	511,797		69.61		499,292		66.11		441,457		60.75		361,576		59.06
Money market accounts	19,065		2.59		20,863		2.76		18,454		2.54		19,883		3.25
Total	$	735,212	100.00	%	$	755,261	100.00	%	$	726,629	100.00	%	$	612,199	100.00	%

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

20

	For Year Ended December 31, 2007				For Year Ended December 31, 2006				For Year Ended September 30, 2005
	Average Daily Balance (000’s)		Average Rate Paid		Average Daily Balance (000’s)		Average Rate Paid		Average Daily Balance (000’s)		Average Rate Paid
Non-interest checking	$	22,394	0.00	%	$	23,944	0.00	%	$	15,668	0.00	%
Savings and checking accounts	193,845		2.80		230,353		2.65		190,901		2.23
Certificates of deposit	506,294		4.78		478,148		4.30		295,636		3.61
Money market accounts	20,097		1.97		20,303		1.92		25,019		1.22
Total deposits	$	742,630	4.04	%	$	752,748	3.59	%	$	527,224	2.89	%

Borrowings.  Peoples may obtain advances from the Federal Home Loan Bank of Cincinnati upon the security of the common stock Peoples owns in that bank and certain of its residential mortgage loans and mortgage-backed securities, provided certain standards related to creditworthiness have been met. These advances are made pursuant to several credit programs, each of which has its own interest rate and range of maturities. Federal Home Loan Bank advances are generally available to meet seasonal and other withdrawals of deposit accounts and to permit increased lending.  As of December 31, 2007, Peoples was permitted to borrow, subject to security pledge agreements, up to $450.6 million from the Federal Home Loan Bank of Cincinnati.  At such date, Peoples had $61.1 million of Federal Home Loan Bank advances. The Bank has used Federal Home Loan Bank advances in order to complement deposits as a funding source for loans and investments.  Of the $61.1 million of advances at December 31, 2007, $2.0 million mature in fiscal 2008.

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

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

	At or for the Year Ended December 31,						At or for the Three Months Ended December 31,			At or for the Year Ended September 30
	2007			2006			2005			2005
				(Dollars in thousands)
Federal Home Loan Bank advances:
Average balance outstanding	$	102,745		$	172,073		$	262,102		$	296,527
Maximum amount outstanding at any month-end during the period	$	142,181		$	203,148		$	260,564		$	320,474
Balance outstanding at end of period	$	61,128		$	144,185		$	193,132		$	273,569
Average interest rate during the period	4.08		%	4.10		%	3.94		%	3.35		%
Weighted-average interest rate at end of period	3.91		%	3.96		%	3.89		%	3.89		%
Line of Credit:
Average balance outstanding	$	14,705		$	1,357		$	—		$	—
Maximum amount outstanding at any month-end during the period	$	16,500		$	12,700		$	—		—
Balance outstanding at end of period	$	16,500		$	12,700		$	—		—
Average interest rate during the period	7.78		%	7.84		%	n/a			n/a
Weighted-average interest rate at end of period	7.24		%	7.37		%	n/a			n/a

21

Total Employees

Peoples had 183 full-time equivalent employees at December 31, 2007.  None of these employees are represented  by a collective bargaining agent, and Peoples believes that it enjoys good relations with its personnel.

Competition

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

Peoples’ competition for loans comes principally from mortgage banking companies, commercial banks, other savings institutions and credit unions.  It competes for loan originations primarily through the interest rates and loan fees it charges, and the efficiency and quality of services it provides borrowers.  Factors which affect competition include general and local economic conditions, current interest rate levels and volatility in the mortgage markets. Competition may increase as a result of the continuing reduction of restrictions on the interstate operations of financial institutions and the anticipated slowing of refinancing activity.

REGULATION

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

General

Financial institutions and their holding companies are extensively regulated under federal and state law.  Consequently, the growth and earnings performance of Peoples and the Bank can be affected not only by management decisions and general economic conditions, but also by the statutes administered by, and the regulations and policies of, various governmental regulatory authorities.  Those authorities include, but are not limited to, the Office of Thrift Supervision, the Federal Reserve Board, the FDIC, the Internal Revenue Service, and state taxing authorities.  The effect of such statutes, regulations and policies can be significant, and cannot be predicted with a high degree of certainty.

Federal and state laws and regulations generally applicable to financial institutions and their holding 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 for loans, the establishment of branches, mergers, consolidations and dividends.  The system of supervision and regulation applicable to Peoples and the Bank establishes a comprehensive framework for their respective operations and is intended primarily for the protection of the FDIC’s deposit insurance funds, the depositors of the Bank and the public, rather than shareholders of the Bank or Peoples.

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

22

Peoples Community Bancorp

Peoples is a registered savings and loan holding company within the meaning of Section 10 of the Home Owners’ Loan Act, and is subject to OTS examination and supervision as well as certain reporting requirements.  Federal law generally prohibits a savings and loan holding company, without prior OTS approval, from acquiring the ownership or control of any other savings institution or savings and loan holding company, or all, or substantially all, of the assets or more than 5% of the voting shares thereof.  These provisions also prohibit, among other things, any director or officer of a savings and loan holding company, or any individual who owns or controls more than 25% of the voting shares of such holding company, from acquiring control of any savings institution not a subsidiary of such savings and loan holding company, unless the acquisition is approved by the OTS.

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

·	furnish or perform management services for a savings association subsidiary of a savings and loan holding company;
·	hold, manage or liquidate assets owned or acquired from a savings association subsidiary of a savings and loan holding company;
·	hold or manage properties used or occupied by a savings association subsidiary of a savings and loan holding company;
·	engage in activities determined by the Federal Reserve to be closely related to banking and a proper incident thereto; and
·	engage in services and activities previously determined by the Federal Home Loan Bank Board by regulation to be permissible for a multiple savings and loan holding company as of March 5, 1987.
The activities financial holding companies may engage in include:
·	lending, exchanging, transferring or investing for others, or safeguarding money or securities;
·	insuring, guaranteeing or indemnifying others, issuing annuities, and acting as principal, agent or broker for purposes of the foregoing;
·	providing financial, investment or economic advisory services, including advising an investment company;
·	issuing or selling interests in pooled assets that a bank could hold directly;
·	underwriting, dealing in or making a market in securities; and
·	merchant banking activities.

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

· the payment of dividends by the savings institution;

· transactions between the savings institution and its affiliates; and

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

Every savings institution subsidiary of a savings and loan holding company is required to give OTS at least 30 days’ advance notice of any proposed dividends to be made on its guaranty, permanent or other non-withdrawable stock, or else such dividend will be invalid.  See “Peoples Community Bank - Capital Distributions.”

23

Restrictions on Transactions With Affiliates.  Transactions between a savings institution and its “affiliates” are subject to quantitative and qualitative restrictions under Sections 23A and 23B of the Federal Reserve Act and OTS regulations. Affiliates of a savings institution generally include, among other entities, the savings institution’s holding company and companies that are controlled by or under common control with the savings institution.  However, most subsidiaries of savings institutions are not considered affiliates for the purposes of these rules.

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

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

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

· purchase a low-quality asset from an affiliate; or

· engage in covered transactions and certain other transactions between a savings institution or its subsidiaries and an affiliate except on terms and conditions that are consistent with safe and sound banking practices.

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

Federal Securities Laws.  Peoples registered its common stock with the Securities and Exchange Commission under Section 12(g) of the Securities Exchange Act of 1934.  Peoples is subject to the proxy and tender 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 signed into law the Sarbanes-Oxley Act of 2002 implementing legislative reforms intended to address corporate and accounting fraud.  In addition to the establishment of a new accounting oversight board which will enforce auditing, quality control and independence standards and will be funded by fees from all publicly traded companies, the bill restricts provision of both auditing and consulting services by accounting firms.  To ensure auditor independence, any non-audit services being provided to an audit client will require preapproval by the company’s audit committee members.  In addition, the audit partners must be rotated.  The bill requires chief executive officers and chief financial officers, or their equivalent, to certify to the accuracy of periodic reports filed with the SEC, subject to civil and criminal penalties if they knowingly or willfully violate this certification requirement.  In addition, under the Act, counsel will be required to report evidence of a material violation of the securities laws or a breach of fiduciary duty by a company to its chief executive officer or its chief legal officer, and, if such officer does not appropriately respond, to report such evidence to the audit committee or other similar committee of the board of directors or the board itself.

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

24

The Act also increases the oversight of, and codifies certain requirements relating to audit committees of public companies and how they interact with the company’s “registered public accounting firm” (“RPAF”).  Audit committee members must be independent and are barred from accepting consulting, advisory or other compensatory fees from the issuer.  In addition, companies must disclose whether at least one member of the committee is a “financial expert” (as such term will be defined by the SEC) and if not, why not.  Under the Act, a RPAF is prohibited from performing statutorily mandated audit services for a company if such company’s chief executive officer, chief financial officer, comptroller, chief accounting officer or any person serving in equivalent positions has been employed by such firm and participated in the audit of such company during the one-year period preceding the audit initiation date.  The Act also prohibits any officer or director of a company or any other person acting under their direction from taking any action to fraudulently influence, coerce, manipulate or mislead any independent public or certified accountant engaged in the audit of the company’s financial statements for the purpose of rendering the financial statement’s materially misleading.  The Act also requires the SEC to prescribe rules requiring inclusion of an internal control report and assessment by management in the annual report to stockholders.  The Act requires the RPAF that issues the audit report to attest to and report on management’s assessment of the company’s internal controls.  In addition, the Act requires that each financial report required to be prepared in accordance with (or reconciled to) accounting principles generally accepted in the United States of America and filed with the SEC reflect all material correcting adjustments that are identified by a RPAF in accordance with accounting principles generally accepted in the United States of America and the rules and regulations of the SEC.

Peoples Community Bank

General.   The Bank is a federally chartered stock savings bank.  The OTS is the chartering authority and primary federal regulator of the Bank. The OTS has extensive authority over the operations of federally chartered savings institutions.  As part of this authority, federally chartered savings institutions are required to file periodic reports with the OTS and are subject to periodic examinations by the OTS and the FDIC.  The Bank also is subject to regulation and examination by the FDIC and to requirements established by the Federal Reserve Board.  The investment and lending authority of savings institutions are prescribed by federal laws and regulations, and such institutions are prohibited from engaging in any activities not permitted by such laws and regulations.  Such regulation and supervision is primarily intended for the protection of depositors and the Deposit Insurance Fund (“DIF”).

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

Insurance of Accounts.  On February 8, 2006, President Bush signed into law legislation that merges the Bank Insurance Fund (“BIF”) and the Savings Association Insurance Fund (“SAIF”), eliminates any disparities in bank and thrift risk-based premium assessments, reduces the administrative burden of maintaining and operating two separate funds and establishes certain new insurance coverage limits and a mechanism for possible periodic increases.  The legislation also gives the FDIC greater discretion to identify the relative risks all institutions present to the DIF and set risk-based premiums.

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

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

25

institutions that are financially sound with only a few minor weaknesses, includes approximately 95% of FDIC-insured institutions.  Risk Categories II, III, and IV present progressively greater risks to the DIF.  Effective January 1, 2007, Risk Category I Institutions pay quarterly assessments for deposit insurance at annual rates of five to seven basis points.  The rates for Risk Categories II, III, and IV are seven, 28, and 43 basis points, respectively.  Rates are subject to change with advance notice to insured institutions.  As a result of recent regulatory examinations and the imposition of  the Orders, the Bank’s quarterly assessment rate has recently been significantly increased.  This increase will significantly increase the Company’s other operating expense and negatively impact net earnings or loss.

Within Risk Category I, the precise rate for an individual institution with less than $10 billion in assets is generally determined by a formula using CAMELS ratings, which are assigned in regulatory examinations, and financial ratios.  A different method applies for larger institutions.  The rate for an individual institution is applied to its assessment base, which is generally its deposit liabilities subject to certain adjustments.  An institution insured by the FDIC on December 31, 1996 which had previously paid assessments (or its successor) is eligible for certain credit against deposit insurance assessments.

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

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

The FDIC may terminate the deposit insurance of any insured depository institution, including the Bank, if it determines after a hearing that the institution has engaged or is engaging in unsafe or unsound practices, is in an unsafe or unsound 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 insurance temporarily during the hearing process for the permanent termination of insurance, if the institution has no tangible capital.  If insurance of accounts is terminated, the accounts at the institution at the time of termination, less subsequent withdrawals, shall continue to be insured for a period of six months to two years, as determined by the FDIC.  Management is aware of no existing circumstances that would result in termination of the Bank’s deposit insurance.

Regulatory Capital Requirements.  Current OTS capital standards require savings institutions to satisfy three different capital requirements. Under these standards, savings institutions must maintain “tangible” capital equal to at least 1.5% of adjusted total assets, “core” capital equal to at least 4.0% of adjusted total assets and “total” capital (a combination of core 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 limited exception for purchased mortgage servicing rights. Core capital generally consists of tangible capital plus qualifying intangible assets.

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

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

26

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

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

Prompt Corrective Action.  The following table shows the amount of capital associated with the different OTS capital categories set forth in the prompt corrective action regulations.

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

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

An institution generally must file a written capital restoration plan which meets specified requirements within 45 days of the date that the institution receives notice or is deemed to have notice that it is undercapitalized, significantly undercapitalized or critically undercapitalized. A federal banking agency must provide the institution with written notice of approval or disapproval within 60 days after receiving a capital restoration plan, subject to extensions by the agency. An institution which is required to submit a capital restoration plan must concurrently submit a performance guaranty by each company that controls the institution. In addition, undercapitalized institutions are subject to various regulatory restrictions, and the appropriate federal banking agency also may take any number of discretionary supervisory actions.

At December 31, 2007, the Bank was deemed a well capitalized institution for purposes of the above regulations and as such is not subject to the above mentioned restrictions.

Safety and Soundness Guidelines.  The OTS and the other federal banking agencies have established guidelines for safety and soundness, addressing operational and managerial standards, as well as compensation matters for insured financial institutions. Institutions failing to meet these standards are required to submit compliance plans to their appropriate federal regulators. The Federal Reserve, the OTS, and the other agencies have also established guidelines regarding asset quality and earnings standards for insured institutions.

Capital Distributions.  OTS regulations govern capital distributions by savings institutions, which include cash dividends, stock repurchases and other transactions charged to the capital account of a savings institution to make capital distributions. A savings institution must file an application for OTS approval of the capital distribution if either (1) the total capital distributions for the applicable calendar year exceed the sum of the institution’s retained net income for that year to date plus the institution’s retained net income for the preceding two years, (2) the institution would not be at least adequately capitalized following the distribution, (3) the distribution would violate any applicable statute, regulation, agreement or OTS-imposed condition, or (4) the institution is not eligible for expedited treatment of its filings. If an application is not required to be filed, savings institutions which are a subsidiary of a holding company (as well as certain other institutions) must still file a notice with the OTS at least 30 days before the board of directors declares a dividend or

27

approves a capital distribution.  The Bank is currently prohibited by the Order issued by the OTS from declaring or making any capital distributions without the prior written approval of the OTS.

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

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

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

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

As a member, the Bank is required to purchase and maintain stock in the Federal Home Loan Bank of Cincinnati in an amount equal to at least 1% of its aggregate unpaid residential mortgage loans or similar obligations at the beginning of each year. At December 31, 2007, the Bank had $12.9 million in Federal Home Loan Bank of Cincinnati stock, which was in compliance with this requirement.   The Bank also had approximately $1.1 million in Federal Home Loan Bank of Indianapolis stock, which was obtained through the acquisition of American in June 2005 and Peoples Federal in December 2005.

The Federal Home Loan Banks are required to provide funds for the resolution of troubled savings institutions and to contribute to affordable housing programs through direct loans or interest subsidies on advances targeted for community investment and low- and moderate-income housing projects. These contributions have adversely affected the level of Federal Home Loan Bank dividends paid in the past and could do so in the future. These contributions also could have an adverse effect on the value of Federal Home Loan Bank stock in the future.

Federal Reserve System.  The Federal Reserve Board requires all depository 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 a noninterest-bearing account at a Federal Reserve Bank, the effect of this reserve requirement is to reduce an institution’s earning assets.

TAXATION

Federal Taxation

General.  Peoples and the Bank are subject to the corporate tax provisions of the Internal Revenue Code, and the Bank is subject to certain additional provisions which apply to thrifts and other types of financial institutions. The following discussion of federal taxation is intended only to summarize certain pertinent federal income tax matters relevant to the taxation of Peoples and the Bank and is not a comprehensive discussion of the tax rules applicable to Peoples and the Bank.

28

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

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

At December 31, 2007, the federal income tax reserves of the Bank included $1.4 million for which no federal income tax has been provided.  Because of these federal income tax reserves and the liquidation account established for the benefit of certain depositors of the Bank in connection with the recent conversion, the retained earnings of the Bank are substantially restricted.

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

Minimum Tax.  The Code imposes an alternative minimum tax at a rate of 20%. The alternative minimum tax generally applies to a base of regular taxable income plus certain tax preferences (“alternative minimum taxable income”) and is payable to the extent such alternative minimum taxable income is in excess of an exemption amount. Tax preference items include depreciation and 75% of the excess (if any) of  (1) alternative minimum taxable income determined without regard to this preference and prior to reduction by net operating losses, over (2) adjusted current earnings as defined in the Code.   Peoples has not been subject to the alternative minimum tax or had any such amounts available as credits for carry-over.

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

Other Matters.  Federal legislation is introduced from time to time that would limit the ability of individuals to deduct interest paid on mortgage loans. Individuals are currently not permitted to deduct interest on consumer loans. Significant increases in tax rates or further restrictions on the deductibility of mortgage interest could adversely affect Peoples.   Peoples’ federal income tax returns for the tax years ended 2007 and 2006 are open under the statute of limitations and are subject to review by the IRS.  Various companies that the Bank has acquired remain under the statute of limitations by the IRS for the years ended 2004 through 2007.

State Taxation

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

In computing Peoples’ tax under the net worth method, 100% of the investment in the capital stock of the Bank after the conversion may be excluded, as reflected on the balance sheet, in computing taxable net worth as long as Peoples

29

owns at least 25% of the issued and outstanding capital stock of the Bank.  The calculation of the exclusion from net worth is based on the ratio of the excludable investment (net of any appreciation or goodwill included in such investment) to total assets multiplied by the net value of the stock.  As a holding company, Peoples may be entitled to various other deductions in computing taxable net worth that are not generally available to operating companies.

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

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

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

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

30

Item 1A. Risk Factors

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

·our ability to adopt and implement a viable business plan that will permit us to operate profitably;

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

·our ability to maintain sufficient cash flow to meet debt serviceand other obligations;

·the variability of general and specific economic conditions and trends, and changes in, and the level of, interest rates;

·the impact of competition and pricing environments on deposit products;

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

·the impact of changes in the residential, construction and commercial real estate markets and changes in the fair values of our assets and loans, including the value of the underlying real estate collateral;

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

·the ability to maintain effective compliance with laws and regulations and control expenses;

·the ability to maintain an effective system of internal and financial disclosure controls, and to identify and remediate any control deficiencies; and

·other events, risks and uncertainties discussed elsewhere in this Form 10-K and from time to time in our other reports, press releases and filings with the Securities andExchange Commission.

We undertake no obligation to publicly update such forward-looking statements.

You should carefully consider the following risks in light of our current operating environment and regulatory status. The occurrence of any of the events described below could materially adversely affect our liquidity, results of operations and financial condition. Additional risks not presently known by us or that we currently deem immaterial may also have a materially adverse impact.

Risks Relating to Our Liquidity

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

As a savings institution holding company, the Company has historically paid its operating expenses, interest expense, taxes and other obligations, including interest on its line of credit and junior subordinated debentures, from its cash on hand, investments, and intercompany tax payments.  Without an additional capital infusion as well as possibly a restructuring of

31

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

The Company is actively 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 any restructuring of its existing debt or selling branches before its capital resources are depleted.  Failure to restructure the Company’s debt obligations or to sell branches will have a material adverse effect on, and impair, the Company’s business, financial condition and ability to operate as a going concern.  See “–Independent Registered Public Accounting Firm’s Report with Disclosure of Going Concern Issue.”

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

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

Effect of Independent Registered Public Accounting Firm’s Report With Disclosure Of Going Concern Issue.

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

Risks Relating to Our Compliance With Applicable Regulatory Requirements and Developments

The Bank is subject to supervision and regulation by the OTS. As a regulated federal savings bank, the Bank’s good standing with its regulators is of fundamental importance to the continuation of its business. As more fully described in Item 1 – “Business – General,” on April 2, 2008, the Company and the Bank both consented to the Orders issued by the OTS.  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 a quarterly basis, variance reports related to the business plan.  The Order issued to the Bank also substantially restricts the Bank’s lending activities. We cannot predict the further impact of the Orders upon our business, financial condition or results of operations. In addition, we cannot predict whether the OTS will take any further action with respect to the Bank or the Company, or, if any such further action were taken, whether such action, including the actions described in Item 1. “Business - General,” would have a material adverse effect on the Company or the Bank.

Other Risks Related to Our Business

Lack of profitable operations in recent periods could continue.

The recessionary forces in the local economy have impacted the Company’s operations and profitability and may continue to do so.  For the years ended December 31, 2007 and 2006, the Company incurred losses of $33.3 million and $4.1 million, respectively.  As the Bank’s primary lending area is the southwest Ohio and southeast Indiana regions, the significant downturn in the real estate market in these regions significantly impacts the asset quality and provision for loan loss requirements of the Bank.  While the Bank’s management continues to aggressively pursue the collection and resolution of all delinquent and non performing loans, future levels of charge offs and adjustments to the allowance could significantly affect future net earnings.

32

Changes in interest rates could have a material adverse effect on the Company’s financial condition and results of operations.

The earnings of the Company depend substantially on the interest rate spread, which is the difference between the rates the Company earns on loans, investment securities and other interest-earning assets, and the interest rates the Company pays on deposits and borrowings.   These rates are highly sensitive to many factors beyond the control of the Company, including general economic conditions and the policies of various governmental and regulatory authorities.  While the Company has taken measures intended to manage the risk of operating in a changing interest rate environment, there can be no assurance that such measures will be effective in avoiding undue interest rate risk.

Regional economic changes in the Company’s markets could adversely impact results from operations.

Like all banks, the Company is subject to the effects of any economic downturn, and the significant decline in home values, residential development and commercial properties in the Company’s markets have had and may continue to have a negative effect on results of operations.  The Company’s success depends primarily on the general economic conditions in the counties in which the Company conducts business, and in the southwest Ohio and southeast Indiana area in general. Unlike larger banks that are more geographically diversified, the Company provides banking and financial services 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 impact on the Company’s ability to originate loans, the ability of the borrowers to repay these loans and the value of the collateral securing these loans.  A significant decline in the general economic conditions caused by inflation, recession, unemployment or other factors beyond the Company’s control could continue to adversely affect the Company’s financial condition and results of operations.  Additionally, because the Company has a significant amount of loans secured by commercial, multi-family, and non-owner occupied investment properties, decreases in tenant occupancy may also continue to have a negative effect on the ability of many of the Company’s borrowers to make timely repayments of their loans, which would continue to have an adverse impact on the Company’s earnings.  A significant decline in home values would likely lead to increased delinquencies and defaults in both consumer and home equity loans and owner-occupied residential real estate loan portfolios and result in increased losses in the portfolios.  Recently, there has been a significant downturn in the local economy, a softening in the real estate market and a oversupply of lots, speculative homes and non-owner occupied rental units, leading to cash flow issues faced by local property investors, builders, and developers.  These issues have had a material adverse impact on the Bank’s nonaccrual loans.  At December 31, 2007, the Bank’s nonperforming loans amounted to $25.9 million, or 4.1% of total net loans.  The resolution of such nonperforming loans may substantially impact the Company’s provision for loan losses and allowance for loan losses.

Losses on a few large loans or lending relationships can cause significant volatility in earnings.

Due to the Company’s limited size, individual loan values can be large relative to the Company’s earnings for a particular period.  If a few relatively large loan relationships become non-performing in a period and the Company is required to increase its loss reserves, or to write off principal or interest relative to such loans, the operating results of that period could be significantly adversely affected. The effect on results of operations for any given period from a change in the performance of a relatively small number of loan relationships may be disproportionately larger than the impact of such loans on the quality of the Company’s overall loan portfolio.  In each of the third and fourth quarters of 2006 and all of 2007, the Company incurred losses on lending relationships that significantly impacted operating results for the relevant period. As of December 31, 2007, the Bank’s nonperforming loans amounted to $25.9 million, with eight borrowers owing $14.6 million, or 56.3% of the total nonperforming loans.   In addition, nonresidential real estate secured non-accrual loans totaled $10.7 million at December 31, 2007, or 41.1% of the total nonperforming loans.

33

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

Under current accounting standards, goodwill and certain other intangible assets with indeterminate lives are no longer amortized but, instead, are assessed for impairment periodically or when impairment indicators are present.  Assessment of goodwill and such other intangible assets could result in circumstances where the applicable intangible asset is deemed to be impaired for accounting purposes.  Under such circumstances, the intangible asset’s impairment would be reflected as a charge to earnings in the period during which such impairment is identified.

The Bank recorded goodwill totaling $23.9 million in conjunction with acquisitions of other financial institutions over the past five years.  Following an updated valuation in the fourth quarter of 2007 by an independent third party, the Bank incurred a non-cash impairment charge of $11.4 million for the writedown of goodwill.   This impairment is primarily attributable to lower market valuations for financial institutions in the latter part of 2007, the weakening of the credit market in the second half of 2007, the decline in real estate values, particularly in the Cincinnati region, and the net losses recorded by the Bank and Company for the past six quarters.

Additional valuation allowance of deferred tax asset would negatively impact net earnings or loss.

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

New or revised tax, accounting and other laws, regulations, rules and standards could significantly impact strategic initiatives, results of operations and financial condition.

The financial services industry is highly regulated and laws and regulations may sometimes impose significant limitations on operations.  These limitations, and sources or potential liability for the violation of such laws and regulation, are described in Item 1 of Part I of this report under the heading “Business – Regulation.”  These regulations, along with the currently existing tax and accounting laws, regulations, rules and standards, control the methods by which financial institutions conduct business; implement strategic initiatives, as well as past, present, and contemplated tax planning; and govern financial disclosures.  These laws, regulations, rules, and standards are constantly evolving and may change significantly over time.  The nature, extent, and timing of the adoption of significant new laws, changes in existing laws, or repeal of existing laws may have a material impact on the Company’s results of operations and financial condition, the effects of which are impossible to predict at this time.

Strong competition within the Company’s market area may limit profitability.

The Company faces significant competition both in attracting deposits and in the origination of loans, as described in Item 1 of Part I of this report under the heading “Business – Competition.”  Mortgage bankers, commercial banks, credit unions and other savings institutions, which have offices in the Bank’s market area have historically provided most of the Company’s competition for deposits.  Many competitors have substantially greater financial and other resources than the Company.  Moreover, the Company may face increased competition in the origination of loans if competing thrift institutions convert to stock form, because such converting thrifts would likely seek to invest their new capital into loans.  Finally, credit unions do not pay federal or state income taxes and are subject to fewer regulatory constraints than savings banks and as a result, they may enjoy a competitive advantage over the Company.  The Bank competes for loans principally on the basis of the interest rates and loan fees it charges, the types of loans it originates and the quality of services it provides to borrowers.  This advantage places significant competitive pressure on the prices of loans and deposits.

The extended disruption of vital infrastructure could negatively impact the Company’s results of operations and financial condition.

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

34

Risks Relating to Our Capital Stock

We do not anticipate declaring dividends for the foreseeable future.

The Company’s Board of Directors has not declared any dividends since the third quarter of 2007.  The Orders prohibit the Bank from paying cash dividends to the Company, which is its primary source for funding dividends to the Company’s shareholders, without the prior approval of the OTS.  The Company believes it has very limited or no ability to pay cash dividends in the foreseeable future, and is prohibited by the Orders from doing so without the consent of the OTS.

Other risk factors.

The above description of risk factors is not exhaustive.   Other risk factors are described elsewhere herein as well as in other reports and documents that we file with or furnish to the SEC.  Other factors that could also cause results to differ from our expectations may not be described in any such report or document.  Each of these factors could by itself, or together with one or more other factors, adversely affect our business, results of operations and/or financial condition.

Item 1B. Unresolved Staff Comments

                Not applicable.

35

Item 2. Properties

At December 31, 2007, Peoples conducted its business from its main office in West Chester, Ohio and eighteen other branch offices in Hamilton and Warren counties in Ohio and Dearborn and Ohio Counties in Indiana.  The following table sets forth the net book value (including leasehold improvement, furnishings and equipment) and certain other information with respect to the offices and other properties of Peoples at December 31, 2007.

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

Additionally, the Company has purchased land in Warren County for $1.0 million for future expansion, and has approximately $586,000 invested in land in Butler County also for future expansion.

36

Item 3. Legal Proceedings

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

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

Not applicable

PART II

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

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

(b)  Not applicable.

(c)  Not applicable.

Item 6. Selected Financial Data

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

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

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

Item 7A. Quantitative and Qualitative Disclosures About Market Risk

The information required herein is incorporated from pages 23 and 24 of the 2007 Annual Report.

Item 8. Financial Statements and Supplementary Data

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

37

Report of Independent Registered Public Accounting Firm

Audit Committee, Board of Directors and Stockholders

Peoples Community Bancorp, Inc.

West Chester, Ohio

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

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

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

The accompanying financial statements have been prepared assuming the Company will continue as a going concern. As discussed in Note P, the Company has suffered recurring losses from operations and will operate under restrictions set forth by the formal agreements with the Company’s and Bank’s federal regulators, which result in uncertainty about the Company’s ability to meet obligations coming due in 2008. These factors raise substantial doubt about its ability to continue as a going concern. Management’s plans in regards to these matters are also described in Note P. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.

BKD, LLP

Cincinnati, Ohio

April 15, 2008

	312 Walnut Street, Suite 3000   Cincinnati, OH 45202-4025   513 621-8300   Fax 513 621-8345
bkd.com

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

Not applicable.

Item 9A(T). Controls and Procedures

Disclosure Controls and Procedures

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

In connection with the above evaluation of our disclosure controls and procedures, no change in our internal control over financial reporting was identified that occurred during our fourth quarter of 2007 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. However, our management has taken remedial steps to address the material weaknesses described below in “Management’s Annual Report on Internal Control Over Financial Reporting.”

Management’s Annual Report on Internal Control Over Financial Reporting

Management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined under Exchange Act Rule 13a-15(f).  The Company’s internal control over financial reporting is designed to provide reasonable assurance to its management and board of directors regarding the preparation and fair presentation of published financial statements.  Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission .  Based on this evaluation, management has concluded that the Company’s disclosure controls and procedures are not effective because of the identification of several material weaknesses in our internal control over financial reporting which we view as an integral part of our disclosure controls and procedures.  A material weakness is a deficiency, or a combination of control deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of the Company’s annual or interim financial statements will not be prevented or detected on a timely basis.

38

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

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

Item 9B. Other Information

Not applicable.

39

PART III

Item 10. Directors, Executive Officers and Corporate Governance

Code of Ethics for Executive Officers

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

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

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

Item 11. Executive Compensation

The information required herein is incorporated by reference from the Proxy Statement.

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

Equity Compensation Plan Information

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

Plan Category	Number of Shares to be issued upon the Exercise of Outstanding Options, Warrants and Rights(1)	Weighted- Average Exercise Price of Outstanding Options(1)		Number of Shares Remaining Available for Future Issuance (Excluding Shares Reflected in the First Column)
Equity Compensation Plans Approved by Security Holders	252,161	$	18.08	79,264
Equity Compensation Plans Not Approved by Security Holders	—	—		—
Total	252,161	$	18.08	79,264

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

40

Item 13. Certain Relationships and Related Transactions and Director Independence

The information required herein is incorporated by reference from the Proxy Statement.

Item 14. Principal Accounting Fees and Services

The information required herein is incorporated by reference from the Proxy Statement.

Item 15. Exhibits, Financial Statement Schedules

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

Report of Registered Independent Certified Public Accountants.

Consolidated Statements of Financial Condition as of December 31, 2007 and 2006.

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

Consolidated Statements of Comprehensive Income (Loss) for the Years Ended December 31, 2007 and 2006, the Three Month Period Ended December 31, 2005, and the Year Ended September 30, 2005.

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

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

Notes to Consolidated Financial Statements.

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

(b)  Exhibits.

The following exhibits 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, Thomas J. Noe, and Teresa A. O’Quinn (3)
10.6	Employment Agreement with Stephen P. Wood (6)
10.7	Change in Control Agreement with Rick W. Wade (6)
10.8	Change in Control Agreement with Lori M. Henn (7)
10.9	Change in Control Agreement with Fred L. Darlington (7)
10.10	Change in Control Agreement with Jerry L. Gore (8)
13.0	Annual Report to Stockholders for the Year Ended December 31, 2007
21.0	List of Subsidiaries (See “Item I. Business - Subsidiaries” in this Form 10-K)
23.1	Consent of BKD LLP
31.1	Certification of Chief Executive Officer Pursuant to Rules 13a-14 and 15d-14 of the Securities Exchange Act of 1934 and Section 302 of the Sarbanes-Oxley Act of 2002

41

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

(1)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 Peoples’ Current Report on Form 8-K filed with the SEC on April 27, 2006.

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

(8)Incorporated herein by reference to Peoples’ Current Report on Form 8-K filed with the SEC on December 20, 2006.

42

SIGNATURES

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

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

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

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

43

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

44

EX-13

Exhibit 13

2007 ANNUAL REPORT

TO STOCKHOLDERS

TABLE OF CONTENTS

	Page
President’s Letter to Stockholders	1
Business of Peoples Community Bancorp, Inc	2
Market Price of Peoples Community Bancorp Common Shares and Related Stockholder Matters	3
Selected Consolidated Financial and Other Data	4
Management’s Discussion and Analysis of Financial Condition and Results of Operations	6
Consolidated Financial Statements:
Report of Independent Registered Public Accounting Firm	26
Consolidated Statements of Financial Condition	27
Consolidated Statements of Operations	28
Consolidated Statements of Comprehensive Income (Loss)	29
Consolidated Statements of Stockholders’ Equity	30
Consolidated Statements of Cash Flows	32
Notes to Consolidated Financial Statements	34
Directors and Executive Officers	71
Banking Locations and Stockholder Information	72

Dear Fellow Shareholders:

This past year presented a challenging national banking environment and proved even more difficult in our greater Cincinnati market area.  Our operations were significantly impacted by the recessionary forces in the local economy, the decrease in real estate values and the associated cash flow difficulties faced by many of our real estate investor and developer customers.  Although we believe we have been proactive in, among other things, curtailing or ceasing all aspects of our lending operations and tightening our credit standards, the level of our nonperforming assets and related loan charge-offs and provisions for losses on loans were the primary factors in our net losses of $4.1 million and $33.3 million for 2006 and 2007, respectively.  We are very disappointed with these results and are working diligently to resolve the issues associated with our nonperforming assets and return the Company to profitability. Despite the issues confronting the Company over the last two years, at December 31, 2007, its wholly-owned subsidiary, Peoples Community Bank, continued to exceed all of the regulatory capital requirements applicable to it and was also deemed a well capitalized institution.

This annual report to stockholders includes a detailed discussion of our financial condition and the impact of our nonperforming assets and recent losses on our results of operations.  We strongly urge you to read this annual report in its entirety to fully understand the challenges faced by Peoples Community Bancorp and the commitment of management to devote all of its resources to resolving these issues.

Our directors and many of our employees have aligned their interest with yours by investing in Peoples Community Bancorp, Inc.  We are committed to maximizing shareholder value and will not preclude any feasible strategic alternative to do so.  We appreciate your support and patience as we work through these challenging times.

Sincerely,

/s/ Jerry D. Williams

Jerry D. Williams

President and Chief Executive Officer

1

BUSINESS OF PEOPLES COMMUNITY BANCORP, INC.

Peoples Community Bancorp, Inc., a Maryland corporation (the “Company”), is a registered savings and loan holding company which owns all of the outstanding common shares of Peoples Community Bank (“Peoples” or the “Bank”), a federally chartered savings bank.  The Company was formed in December 1999 in connection with the mutual to stock conversion of the Bank, and the sale of 1,190,000 shares of common stock to depositors and members of the community.  The Bank conducts its business from nineteen full service offices in Hamilton, Warren and Butler counties in Southwest Ohio and Dearborn  and Ohio Counties in Southeast Indiana.  The funds for the Bank’s lending and investment activities are primarily provided by deposits and borrowings.  At December 31, 2007, the Company had $887.4 million in total assets, $735.2 million in deposits, $77.6 million in borrowings (excluding subordinated debentures) and $53.6 million of stockholders’ equity.  The Company’s principal executive office is located at 6100 West Chester Road, P.O. Box 1130, West Chester, Ohio 45071-1130.  The Company’s telephone number is (513) 870-3530.

The Company is subject to regulation, supervision and examination by the Office of Thrift Supervision (the “OTS”).  Peoples is subject to regulation, supervision and examination by the OTS as its primary federal regulator and the Federal Deposit Insurance Corporation (the “FDIC”), which administers the Deposit Insurance Fund. The FDIC insures deposits in Peoples up to applicable limits.

2

MARKET PRICE OF PEOPLES COMMUNITY BANCORP COMMON SHARES

AND RELATED STOCKHOLDER MATTERS

The Company’s common shares are currently listed on the Nasdaq Global Market (“Nasdaq”) under the symbol “PCBI.”  Presented below are the high and low trading prices for the Company’s common shares for the three years ended December 31, 2007.  Such prices do not include retail financial markups, markdowns or commissions.  Information relating to prices has been obtained from Nasdaq.  The Company suspended the payment of a quarterly cash dividend effective for the quarter ended December 31, 2007.  No assurance can be given as to if or when the Company may resume such payments.

Fiscal 2007	High		Low		Dividends
Quarter ended:
December 31, 2007	$	18.00	$	13.52	$	—
September 30, 2007	18.38		14.71		.15
June 30, 2007	16.93		14.47		.15
March 31, 2007	18.43		16.80		.15

Fiscal 2006	High		Low		Dividends
Quarter ended:
December 31, 2006	$	19.60	$	16.35	$	.15
September 30, 2006	19.85		17.25		.15
June 30, 2006	20.95		18.50		.15
March 31, 2006	21.83		19.91		.15

As of April 7, 2008, the Company had 4,838,964 common shares outstanding held of record by approximately 1,030 stockholders.  The number of stockholders does not reflect the number of persons or entities who may hold stock in nominee or “street” name through brokerage firms or others.

3

PEOPLES COMMUNITY BANCORP, INC.

SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA

The following selected consolidated financial and other data does not purport to be complete and is qualified in its entirety by reference to the more detailed financial information, including the Consolidated Financial Statements and related notes, appearing elsewhere herein.

Selected Consolidated Financial	At December 31,						At September 30,
Condition Data: (1)	2007		2006		2005		2005		2004		2003
					(In thousands)
Total assets	$	887,426	$	1,028,079	$	1,040,912	$	1,006,654	$	889,121	$	738,683
Cash and cash equivalents	86,614		57,459		21,558		17,061		14,430		10,244
Investment securities available for sale	4,237		4,230		3,458		7,650		1,069		2,156
Mortgage-backed securities available for sale	63,335		52,669		71,024		199,716		228,085		133,828
Loans receivable, net	634,421		812,578		851,270		704,714		599,466		554,351
Deposits	735,212		755,261		726,629		612,199		472,436		455,900
Advances from the Federal Home Loan Bank and other borrowed money	77,628		156,885		221,483		301,920		324,500		232,400
Stockholders’ equity (2)	53,565		87,616		86,047		86,700		75,775		46,699

							Three Months
	Year Ended						Ended
Selected Consolidated Operating	December 31,						December 31,			Year Ended September 30,
Data: (1)	2007			2006			2005			2005		2004		2003
	(In thousands, except per share data)
Interest income	$	60,233		$	65,475		$	14,402		$	47,748	$	40,171	$	37,169
Interest expense	36,460			36,485			8,155			26,204		19,813		18,072
Net interest income	23,773			28,990			6,247			21,544		20,358		19,097
Provision for losses on loans	32,800			17,450			900			3,600		3,600		4,198
Net interest income after provision for losses on loans	(9,027		)	11,540			5,347			17,944		16,758		14,899
Other income	3,932			3,213			(764		)	2,114		1,181		1,251
Goodwill impairment	11,397			—			—			—		—		—
General, administrative and other expense	21,774			21,122			4,530			15,827		13,750		10,504
Earnings (loss) before income taxes	(38,266		)	(6,369		)	53			4,231		4,189		5,646
Federal income taxes (benefits)	(4,933		)	(2,308		)	(34		)	1,375		1,320		1,922
Net earnings (loss)	$	(33,333	)	$	(4,061	)	$	87		$	2,856	$	2,869	$	3,724
Earnings (loss) per share
Basic	$	(6.97	)	$	(0.88	)	$	0.02		$	0.73	$	0.92	$	1.51
Diluted	$	(6.97	)	$	(0.88	)	$	0.02		$	0.72	$	0.91	$	1.48

(See footnotes on next page)

4

					At or for the
	At or for the				Three Months
	Year Ended				Ended		At or for the
	December 31,				December 31,		year ended September 30,
Key Operating Ratios: (1)	2007		2006		2005		2005		2004		2003
Performance Ratios: (1)
Return on average assets	(3.44	)%	(0.38	)%	.03	%	.30	%	.34	%	.59	%
Return on average equity	(38.32	)	(4.48	)	.40		3.65		4.97		8.28
Average interest-earning assets to average interest-bearing liabilities	103.71		104.02		104.00		106.63		104.82		105.83
Interest rate spread (2)	2.53		2.84		2.49		2.25		2.40		2.96
Net interest margin (2)	2.68		3.00		2.63		2.45		2.52		3.13
General, administrative and other expense to average assets	3.42		1.99		1.78		1.69		1.61		1.65
Dividend payout ratio	n/a		n/a		750.00		82.19		32.61		n/a
Asset Quality Ratios:
Nonperforming assets to total assets at end of period (3)	3.70	%	2.54	%	1.82	%	2.07	%	.71	%	1.16	%
Allowance for loan losses to nonperforming loans at end of period	133.05		71.20		71.67		66.32		182.87		134.15
Allowance for loan losses to total loans at end of period	4.90		2.05		1.42		1.72		1.64		1.57
Capital and Other Ratios:
Average stockholders’ equity to average assets	8.97	%	8.54	%	8.55	%	8.35	%	6.77	%	7.07	%
Tangible stockholders’ equity to tangible assets	5.48		7.12		8.07		9.75		8.38		7.51
Tier 1 capital to risk-weighted assets (4)	10.06		11.32		10.86		13.37		12.52		10.85

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

(2)Interest rate spread represents the difference between the weighted-average yield on interest-earning assets and the weighted-average cost of interest-bearing liabilities.  Net interest margin represents net interest income as a percentage of average interest-earning assets.

(3)Nonperforming assets consist of non-accrual loans, loans past due 90 days or more and still accruing interest and real estate acquired through foreclosure or by deed-in-lieu thereof.

(4)This regulatory capital ratio represents the capital ratio of the Bank.

5

PEOPLES COMMUNITY BANCORP, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATION

Overview and Recent Regulatory Matters

As a result of acquisitions and internal growth, the Company grew from $416.0 million in total assets as of September 30, 2001 to a high of $1.0 billion in total assets as of December 31, 2005.  Between the completion of the public offering in March 2000 and December 31, 2005, the Company acquired five financial institutions with aggregate total assets as of the time of acquisition of $428.5 million.  Also, in September 2003, the Company purchased $32.8 million in loans and assumed $55.6 million in deposits in connection with the acquisition of two branch offices from another financial institution.  The Company supplemented this growth from acquisitions with loan generation secured primarily by real estate in its market area.  Total gross loans increased from $419.5 million at September 30, 2001 to $851.3 million at December 31, 2005.    In addition, since September 30, 2000, the Company expanded its franchise through the opening of six full service branch offices. These new branch offices, as well as acquired branch offices, have expanded the Company’s market presence.  The Company’s loan growth has been funded in part by deposits.  The Company has placed an emphasis on deposit generation both internally and through whole bank and branch acquisitions.  Deposits have increased from $233.1 million at September 30, 2001 to $735.2 million at December 31, 2007.

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

The actions taken by the Company during 2006 and 2007, discussed above, and the continued recessionary forces in the local economy have had a significant adverse impact on the Company’s financial condition and results of operations.  For 2006 and 2007, net losses amounted to $4.1 million and $33.3 million, respectively, and stockholders’ equity decreased from $86.0 million or 8.36% of total assets at December 31, 2005 to $53.6 million or 6.04% of total assets at December 31, 2007.  Further, the level of the Company’s non-performing assets has and will continue to negatively impact the Company’s interest rate spread, interest income, provision for losses on loans and net earnings or loss.  Non-performing assets totaled $32.8 million, $26.1 million and $18.9 million at December 31, 2007, 2006 and 2005, respectively.  While the Bank has devoted and will continue to devote substantial management resources toward the resolution of all delinquent and non-performing assets, no assurance can be made that management’s efforts will be successful.

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

The Orders require the Company and the Bank to, among other things, file with the OTS within proscribed time periods updated business plans, which specifically incorporate the requirements set forth in the Orders and comments contained in the most recently completed examinations of the Company and the Bank. On a quarterly basis, the Bank

6

and the Company will be required to compare the projected operating results from the business plans with the actual results. The results of this variance analysis are to be submitted to the OTS within the proscribed time periods. In addition, the Orders require that the Company and the Bank receive the permission of the OTS prior to (i) making or declaring any dividends or payments on their outstanding securities; (ii) adding or replacing a director or hiring a senior executive officer; and (iii) making any golden parachute payments to any institution-affiliated party. Pursuant to the Order issued to the Company, the Company must also receive the permission of the OTS prior to increasing its debt position and before any repurchase of its securities.

The Order issued to 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 for land acquisition or development, speculative residential construction, commercial and multi-family construction, acquisition or retention of commercial property, and non-owner occupied one- to four-family residential property; (ii) engaging an independent consultant to conduct a loan portfolio review for the purpose of determining asset quality and the appropriateness of the Bank’s asset classification process related to loan relationships that equal or exceed $4.0 million; (iii) establishing a plan for reducing adversely classified assets; (iv) reviewing and, where appropriate, adjusting the Bank’s allowance for loan and lease losses methodology; (v) limiting asset growth during each calendar quarter to an amount not to exceed net interest credited on deposit liabilities; and (vi) establishing an Oversight Committee of the Bank’s Board of Directors comprised of independent outside directors.  In an effort to proactively address the downturn in the local real estate market, the Bank had previously curtailed or ceased the lending activities restricted in the Orders.

Management of the Company and the Bank is working diligently to resolve the issues associated with the Company’s nonperforming assets and to provide the information or take the actions required by the Orders.  Concurrently, management and the Board of Directors are considering all strategic alternatives available to the Company and the Bank.  As required, the Company and the Bank have filed a consolidated business plan with the OTS covering operations through 2010.  The Company’s business plan contemplates, among other things, a consolidation of the Company’s operations through branch sales and a reduction in adversely classified assets through loan resolutions, repayments, sales and charge-offs.  Branch sale transactions would decrease the Company’s assets and liabilities, improve capital ratios, generate taxable income, and reduce general, administrative and other expense.  In addition, the Bank would dividend funds to the Company to provide liquidity to service the Company’s debt, provided that approval would be received from the OTS. The business plan was submitted by the Company to the OTS on April 7, 2008 and is subject to review and approval by the OTS.

The report of the Company’s independent registered public accounting firm contains an explanatory paragraph as to the Company’s ability to continue as a going concern primarily due to the Company’s current lack of liquidity to repay its $17.5 million obligation under an outstanding line of credit due June 30, 2008.  The line of credit is secured by all outstanding shares of common stock of the Bank.  Although the Bank exceeds all of its capital requirements and is considered well capitalized at December 31, 2007, the Orders prohibit the Bank from paying cash dividends to the Company without the prior consent of the OTS and the Company will only be able to rely upon existing cash and cash equivalents as sources of its liquidity.  Without the ability to rely on dividends from the Bank, the Company will require funds from other capital sources to meet its obligations such as restructuring the current line of credit or replacing the current line of credit.  The Company was not in compliance with one of the loan covenants at December 31, 2007 and the lender has the ability to accelerate all outstanding amounts upon notice and the passage of 30 days. The Company is currently negotiating with the lender regarding a waiver of default, and a modification and/or extension of the line of credit.

7

Overview and Recent Regulatory Matters (continued)

In light of the matters discussed on the previous page, the Company established a $4.4 million valuation allowance of deferred federal income taxes, thus decreasing the tax benefit recorded during the year by the Company.  Generally, the losses incurred in 2006 and 2007 resulted in deferred federal income taxes or deferred tax assets which may be utilized against current period earnings, carried back against prior years’ earnings or utilized to the extent of management’s estimate of future taxable income.  The valuation allowance was established since the Company’s current liquidity position may impair the Company’s ability to generate future taxable income, and therefore, impair its ability to realize all benefits of the deferred tax asset.

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

The Bank is subject to examination and comprehensive regulation by the OTS, which is the Bank’s chartering authority and primary federal regulator.  The Bank is also regulated by the FDIC, administrator of the Deposit Insurance Fund.  The Bank is a member of the Federal Home Loan Bank (the “FHLB”) of Cincinnati, which is one of the 12 regional banks comprising the FHLB System.

8

PEOPLES COMMUNITY BANCORP, INC.

General

The Company’s profitability depends primarily on net interest income, which is the difference between interest and dividend income on interest-earning assets, principally loans, mortgage-backed securities, investment securities and interest-earning deposits in other financial institutions, and interest expense, principally on interest-bearing deposits and borrowings from the Federal Home Loan Bank.  Net interest income is dependent upon the level of interest rates and the extent to which such rates are changing.  The Company’s profitability also depends, to a lesser extent, on the level of other income, the provision for losses on loans, general, administrative and other expenses and federal income taxes.  The Company’s operations and profitability are subject to changes in interest rates, applicable statutes and regulations and general economic conditions, as well as other factors beyond management’s control.

As previously announced, the Board of Directors of the Company adopted an amendment to Article VI of 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 order to increase operational efficiency.  As a result, the consolidated statements of financial condition compares December 31, 2007 to December 31, 2006, while the consolidated statements of operations, the consolidated statements of comprehensive income (loss), and the consolidated statements of cash flow reflect, as applicable, the twelve month period ended December 31, 2007, the twelve month period ended December 31, 2006, the three month period ended December 31, 2005, and the twelve month period ended September 30, 2005. Further, for purposes of this section, the discussion of changes in financial condition compares December 31, 2007 to December 31, 2006 and the discussion of results of operations compares the year ended December 31, 2007 to the year ended December 31, 2006 as well as the year ended December 31, 2006 to the year ended September 30, 2005.

Critical Accounting Policies

The “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” as well as disclosures found elsewhere in this annual report, are based upon the Company’s consolidated financial statements, which are prepared in accordance with generally accepted accounting principles in the United States (“US GAAP”).  The preparation of these financial statements requires management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses.  Several factors are considered in determining whether or not a policy is critical in the preparation of financial statements.  These factors include, among other things, whether the estimates are significant to the financial statements, the nature of the estimates, the ability to readily validate the estimates with other information, including third parties or available prices,  sensitivity of the estimates to changes in economic conditions, and whether alternative accounting methods may be utilized under US GAAP.  Material estimates that are particularly susceptible to significant change in the near term relate to the determination of the allowance for loan losses, valuation allowance of deferred income taxes, and goodwill impairment.  Actual results could differ from those estimates.

Allowance for Loan Losses.  The procedures for assessing the adequacy of the allowance for loan losses reflect management’s evaluation of credit risk after consideration of all information available.  In developing this assessment, management must rely on estimates and exercise judgment regarding matters where the ultimate outcome is unknown, such as economic factors, developments affecting companies in specific industries and issues with respect to single borrowers.  Depending on changes in circumstances, future assessments of credit risk may yield materially different results, which may require an increase or a decrease in the allowance for loan losses.

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

9

Valuation Allowance of Deferred Income Taxes.  The Company accounts for federal income taxes in accordance with the provisions of SFAS No. 109, “Accounting for Income Taxes.”  Pursuant to the provisions of SFAS No. 109, a deferred tax liability or deferred tax asset is computed by applying the current statutory tax rates to net taxable or deductible differences between the tax basis of an asset or liability and its reported amount in the consolidated financial statements that will result in taxable or deductible amounts in future periods.  Deferred tax assets are recorded only to the extent that the amount of net deductible temporary differences or carryforward attributes may be utilized against current period earnings, carried back against prior years’ earnings, offset against taxable temporary differences reversing in future periods, or utilized to the extent of management’s estimate of future taxable income.  A valuation allowance is provided for deferred tax assets to the extent that the value of net deductible temporary differences and carryforward attributes exceeds management’s estimates of taxes payable on future taxable income.  Deferred tax liabilities are provided on the total amount of net temporary differences taxable in the future.

Goodwill.  The Company has developed procedures to test goodwill for impairment on an annual basis using September 30 financial data.  The evaluation of possible impairment is outsourced to a third party.  This evaluation is based on the analysis set forth below.

The test involves assigning tangible assets and liabilities, identified intangible assets and goodwill of the Bank (which is the Company’s reporting unit as defined under SFAS No. 142) and comparing the fair value of this reporting unit to its carrying value including goodwill.  The value is determined assuming a freely negotiated transaction between a willing buyer and a willing seller, neither being under any compulsion to buy or sell and both having reasonable knowledge of relevant facts.  The third party selected by management utilizes the following common approaches to valuing business combination transactions involving financial institutions to derive the fair value of the reporting unit: (1) the comparable transactions approach which is specifically based on earnings, book value, assets and deposit premium multiples received in recent sales of comparable bank franchises; (2) the discounted cash flow approach and (3) the trading price method. The application of the valuation techniques takes into account the reporting unit’s operating history, the current market environment and future prospects.  As of the most recent evaluation, the only reporting unit carrying goodwill is the Bank.

If the fair value of a reporting unit exceeds its carrying amount, goodwill of the reporting unit is considered not impaired and no second step is required.  If the fair value does not exceed the carrying amount, a second test is required to measure the amount of goodwill impairment.  The second test of the overall goodwill impairment compares the implied fair value of the reporting unit goodwill with the carrying amount of the goodwill.  The impairment loss shall equal the excess of carrying value over fair value.  Any impairment loss would require an immediate charge to earnings.  The Bank recorded goodwill totaling $23.9 million in conjunction with acquisitions of other financial institutions over the past five years.  Following an updated valuation in the fourth quarter of 2007 by an independent third party, the Bank incurred a non-cash impairment charge of $11.4 million for the writedown of goodwill.   This impairment is primarily attributable to lower market valuations for financial institutions in the latter part of 2007, the weakening of the credit market in the second half of 2007, the decline in real estate values, particularly in the Cincinnati region, and the net losses recorded by the Bank and Company for the past six quarters.

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

10

Forward-Looking Statements Are Subject to Change

Certain statements are made in this document as to what management expects may happen in the future.  These statements usually contain the words “believe,” “estimate,” “project,” “expect,” “anticipate,” “intend” or similar expressions.  Because these statements look to the future, they are based on management’s current expectations and beliefs.  Actual results or events may differ materially from those reflected in the forward-looking statements.

Management’s current expectations and beliefs as to future events are subject to change at any time, and no assurances can be provided that the future events will actually occur.  All forward-looking statements in this document are based on information available to us on the date this document is filed.  We do not intend to, and assume no responsibility for, updating any forward-looking statements that may be made by us or on our behalf in this document or otherwise.

11

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

The following table presents for the periods indicated the total dollar amount of interest income from average interest-earning assets and the resultant yields, as well as interest expense on average interest-bearing liabilities, expressed both in dollars and rates, and the net interest margin.

	Year ended
	December 31, 2007							December 31, 2006							September 30, 2005
	Average			Interest				Average			Interest				Average			Interest
	outstanding			earned/		Yield/		outstanding			earned/		Yield/		outstanding			earned/		Yield/
	balance			paid		rate		balance			paid		rate		balance			paid		rate
	(Dollars in thousands)
Interest-earning assets:
Loans receivable (1)	$	751,917		53,390		7.10	%	$	870,327		61,096		7.02	%	$	655,256		$	41,628	6.35	%
Mortgage-backed securities	49,427			2,394		4.84		60,474			2,467		4.08		204,500			5,292		2.59
Investment securities (2)	18,150			1,100		6.06		17,473			951		5.44		13,992			664		4.75
Interest-earning deposits	64,965			3,349		5.16		18,206			961		5.28		5,327			164		3.08
Total interest-earning assets	884,459			60,233		6.81		966,480			65,475		6.77		879,075			47,748		5.43
Non-interest-earning assets	85,652							93,635							57,477
Total assets	$	970,111						$	1,060,115						$	936,552
Interest-bearing liabilities:
Savings and checking accounts	$		193,845	5,430		2.80		$		230,353	6,162		2.65		$		190,901	4,250		2.23
Money market deposit accounts	20,097			396		1.97		20,303			395		1.92		25,019			306		1.22
Certificates of deposit	506,294			24,202		4.78		478,148			20,682		4.30		295,636			10,671		3.61
FHLB advances and other borrowings	117,546			5,341		4.54		173,622			7,163		4.13		296,527			9,934		3.35
Subordinated debentures	15,000			1,091		7.27		26,740			2,083		7.79		16,299			1,043		6.40
Total interest-bearing liabilities	852,782			36,460		4.28		929,166			36,485		3.93		824,382			26,204		3.18
Non-interest-bearing liabilities	30,346							40,384							33,933
Total liabilities	883,128							969,550							858,315
Stockholders’ equity	86,983							90,565							78,237
Total liabilities and stockholders’ equity	$	970,111						$	1,060,115						$	936,552
Net interest income				$	23,733						$	28,990						$	21,544
Interest rate spread						2.53	%						2.84	%						2.25	%
Net interest margin (3)						2.69	%						3.00	%						2.45	%
Average interest-earning assets to average interest-bearing liabilities						103.71	%						104.02	%						106.63	%

(1)Includes non-accruing loans.

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

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

12

Rate/Volume Analysis

The following table shows the extent to which changes in interest rates and changes in volume of interest-related assets and liabilities affected the Company’s interest income and expense during the periods indicated.  For each category of interest-earning assets and interest-bearing liabilities, information is provided on changes attributable to (i) changes in volume (change in volume multiplied by prior year rate), and (ii) changes in rate (change in rate multiplied by prior year volume).  The combined effect of changes in both rate and volume has been allocated proportionately to the change due to rate and the change due to volume.

	December 31, 2006 to									December 31, 2005 to
	December 31, 2007									December 31, 2006
	Increase (Decrease)									Increase (Decrease)
	Due to Changes In									Due to Changes In
	Rate			Volume			Total			Rate		Volume			Total
	(In thousands)
Interest-earning assets:
Loans receivable	$	705		$	(8,411	)	$	(7,706	)	$	4,698	$	14,770		$	19,468
Mortgage-backed securities	(3,776		)	3,703			(73		)	12,599		(15,424		)	(2,825		)
Investment securities (1)	111			38			149			105		182			287
Interest-earning deposits	(21		)	2,409			2,388			182		615			797
Total interest-earning assets	(2,981		)	(2,261		)	(5,242		)	17,584		143			17,727
Interest-bearing liabilities:
Savings and checking accounts	407			(1,139		)	(732		)	912		1,000			1,912
Money market deposit accounts	2			(1		)	1			133		(44		)	89
Certificates of deposit	2,305			1,215			3,520			2,367		7,644			10,011
FHLB advances and other borrowings	809			(2,631		)	(1,822		)	3,552		(6,323		)	(2,771		)
Subordinated debentures	(150		)	(842		)	(992		)	152		888			1,040
Total interest-bearing liabilities	3,373			(3,398		)	(25		)	7,116		3,165			10,281
Increase in net interest income	$	(6,354	)	$	1,137		$	(5,217	)	$	10,468	$	(3,022	)	$	7,446

(1)           Includes FHLB stock and certificates of deposit at other institutions.

13

Discussion of Financial Condition Changes from December 31, 2006 to December 31, 2007

At December 31, 2007, the Company’s total assets amounted to $887.4 million, a decrease of $140.7 million, or 13.7%, compared to total assets at December 31, 2006.  The decrease in assets was comprised primarily of a $178.2 million net decrease in loans receivable and a decrease in goodwill of $11.4 million, partially offset by an increase of $29.2 million in cash and cash equivalents, an increase in real estate acquired by foreclosure of $6.6 million, and an increase of $5.7 million in deferred federal income tax.

Liquid assets (i.e. cash and interest-bearing deposits) totaled $86.6 million at December 31, 2007, an increase of $29.2 million, or 50.7%, compared to the amount at December 31, 2006.  The increase in liquid assets as of December 31, 2007 was primarily due to curtailed lending and the low yield on alternative investments.  Approximately $67.0 million was invested in fed funds with a yield of 3.03% on December 31, 2007.

Investment securities totaled $67.6 million at December 31, 2007, an increase of $10.7 million, or 18.8%, from the amount at December 31, 2006.  The increase was comprised primarily of $29.8 million in purchases, partially offset by  $19.3 million of sales and repayments during the period.

Loans receivable totaled $634.4 million at December 31, 2007, a decrease of $178.2 million, or 21.9%, over December 31, 2006 levels. Loan disbursements amounted to $162.4 million during fiscal 2007, which were offset by principal repayments of $269.4 million and loans and participations sold totaling $32.0 million.  Between 2001 and 2005, the Bank placed an increasing emphasis on multi-family residential loans, nonresidential real estate and land loans, construction loans, unsecured commercial loans and consumer loans.  However, due in large part to the downturn in the local economy, and, in particular, values of residential and residential development properties, as well as a significant increase in total non-performing loans, the Company, beginning in late 2006, began to reduce all aspects of its lending exposure.  In addition, as discussed below, in an attempt to address such slowdown in the local economy and the resulting decrease in the value of its collateral, the Company charged-off $13.1 million and $18.3 million of loans in 2006 and 2007, respectively.

The allowance for loan losses totaled $34.5 million at December 31, 2007, an increase of $16.1 million, or 87.8% compared to the allowance at December 31, 2006.  Due primarily to the significant downturn in the local real estate market, an increase in internally classified loans, significant charge-offs during the year, and the relative credit risk of the loan portfolio, $32.8 million was added to the allowance through the provision for losses on loans during fiscal 2007.   Approximately $18.3 million of loans were charged-off during the year.  The charged-off loans were comprised of $8.5 million in loans secured by one- to four-family residential real estate (including $7.4 million of non-owner occupied investment property), $4.7 million in loans secured by multi-family residential real estate, $844,000 in construction loans, $1.3 million in loans secured by commercial real estate and land, and $2.9 million in commercial and consumer loans.  The increase in charged-off loans was primarily due to real estate investors and developers experiencing cash flow difficulties and the downturn in the local economy.

The allowance for loan losses represented 4.9% and 2.1% of total loans at December 31, 2007 and 2006, respectively.  The allowance for loan losses represented 133.0% and 71.2% of nonperforming loans at December 31, 2007 and 2006, respectively.  Nonperforming assets totaled $32.8 million and $26.1 million at December 31, 2007 and 2006, respectively.  Nonperforming assets at December 31, 2007 consisted of $4.8 million of loans secured by one- to four-family residential real estate, $5.2 million of  loans secured  by  multi-family residential real estate, $10.6 million of loans secured by nonresidential real estate and land, $4.7 million in construction loans, $563,000 in commercial and consumer loans, and $6.9 million in foreclosed real estate.  The Bank’s management continues to aggressively pursue the collection and resolution of all delinquent and nonperforming loans.

14

Discussion of Financial Condition Changes From December 31, 2006 to December 31, 2007 (continued)

At December 31, 2007, non-accrual loans secured by one- to four-family residential real estate consisted of $1.9 million in owner-occupied residences with an average balance of $69,000, and $2.9 million in non-owner occupied residences with an average balance of $71,000.  Three borrowers represented $1.9 million of the non-owner occupied one- to four-family residential non-accrual loans.

Non-accrual loans secured by multi-family residential real estate amounted to $5.2 million at December 31, 2007, with an average balance of $435,000.  Two borrowers represented $3.9 million of this total, with the largest borrower owing $2.8 million.    Commercial real estate and land secured non-accrual loans totaled $10.1 million at December 31, 2007.  The average balance of these 25 loans was $403,000.  Three borrowers represented $6.3 million of the non-accrual loans secured by commercial real estate and land, with the largest borrower owing $3.8 million.

Non-accrual construction loans totaled $4.6 million at December 31, 2007, with an average balance of $244,000.  Approximately $3.8 million of these construction loans are secured by one- to four-family residential real estate.  Commercial and consumer non-accrual loans totaled $546,000, with $512,000 of these loans being unsecured.

Management has considered these loan concentrations as a part of its overall evaluation of the adequacy of the Bank’s allowance for loan losses.  Although management believes that its allowance for loan losses at December 31, 2007 was appropriate based upon the available facts and circumstances at such time, there can be no assurance that additions to such allowance will not be necessary in future periods, which would adversely affect the Bank’s results of operations.

Goodwill decreased from $23.9 million at December 31, 2006 to $12.5 million at December 31, 2007, a decrease of $11.4 million, or 47.7%.  The Bank recorded a goodwill impairment of $11.4 million as of December 31, 2007, primarily due to lower market valuations for financial institutions in the latter part of 2007, the weakening of the credit market in the second half of 2007, the decline in real estate values, particularly in the Cincinnati region, and the net losses recorded by the Bank and the Company for the past six quarters.

Deposits totaled $735.2 million at December 31, 2007, a decrease of $20.0 million, or 2.7%, over the total at December 31, 2006.  Total demand, transaction and savings deposits decreased by $32.6 million, or 12.7%, to $223.4 million at December 31, 2007, while total certificates of deposit increased by $12.5 million, or 2.5%, to $511.8 million at December 31, 2007.  During the first three quarters of fiscal year 2007, the Bank utilized competitive pricing strategies on certificates of deposits, which included advertised specials rates.  In late 2007, due to the cost of funds and the Bank’s interest margin compression, management continued itsconcentration on growing demand and savings deposits.

Advances from the Federal Home Loan Bank and other borrowings totaled $77.6 million at December 31, 2007, a decrease of $79.3 million, or 50.5%, compared to December 31, 2006 totals.  During fiscal year 2007, $100.0 million in fixed-rate convertible FHLB advances were paid in full on their conversion date with no penalty through the use of available cash and proceeds from both mortgage-backed security repayments and loan sales and payments.  In the fourth quarter of 2007, the Bank took advantage of a fixed rate advance special with FHLB for $25.0 million.  This special offering provides a fixed rate of interest of 3.45% for a minimum of 3 months and a maximum of 10 years.  After the first three months and quarterly thereafter, the FHLB has the option to require the borrower to prepay the advance without a fee or allow the advance to remain at the original contracted fixed rate.

Stockholders’ equity totaled $53.6 million at December 31, 2007, a decrease of $34.1 million, or 38.9%, compared to the amount at December 31, 2006.  The decrease resulted primarily from net losses of $33.3 million, which included $11.4 million in goodwill impairment, and dividends paid on common stock totaling $2.1 million, which were partially offset by the amortization of stock benefit plans totaling $1.1 million, a $176,000 increase in net unrealized gains on available for sale securities, and $180,000 adjustment due to the implementation of FIN 48 on January 1, 2007.

15

Comparison of Results of Operations for the Fiscal Years Ended December 31, 2007 and December 31, 2006

General

The Company recorded a net loss of $33.3 million for the fiscal year ended December 31, 2007, compared to a net loss of $4.1 million for the fiscal year ended December 31, 2006.  The higher net loss was primarily due to an increase of $15.4 million, or 88.0% in provision for loan losses and goodwill impairment of $11.4 million.  In addition, the Company recorded a $5.2 million, or 18.0%, decrease in net interest income, partially offset by an increase of $720,000, or 22.4%, in other income and a $2.6 million increase in tax benefits.

Net Interest Income

Total interest income amounted to $60.2 million for the fiscal year ended December 31, 2007, a $5.2 million, or 8.0%, decrease over the fiscal year ended December 31, 2006.  The decrease was due to an $82.0 million, or 8.5%, decrease in average interest-earning assets, partially offset by a four basis point increase in the average yield for the year ended December 31, 2007 compared to the year ended December 31, 2006.

Interest income on loans totaled $53.4 million for the fiscal year ended December 31, 2007, a decrease of $7.7 million, or 12.6%, from the year ended December 31, 2006.  This decrease was primarily due to a $118.4 million, or 13.6%, decrease in the average portfolio balance outstanding for the year ended December 31, 2007 compared to the year ended December 31, 2006, partially offset by an eight basis point increase in the weighted-average yield to 7.10% for fiscal 2007. The decrease in the average balance was primarily due to loan sales of $32.0 million, and loan repayments totaling $269.4 million, partially offset by loan disbursements of $162.4 million.  As previously stated, the Bank, beginning in late 2006, began to reduce all aspects of its lending exposure in response to the downturn in the local real estate market.  The increase in the Bank’s yield reflects a moderate upward shift in market rates and the corresponding impact on adjustable-rate loans, primarily in the first two quarters of the fiscal year.

Interest income on mortgage-backed securities totaled $2.4 million for fiscal 2007, a decrease of $73,000, or 3.0%, compared to the year ended December 31, 2006, due to a $11.0 million, or 18.3%, decrease in the average balance outstanding for the year ended December 31, 2007 compared to the year ended December 31, 2006, partially offset by a 76 basis point increase in the weighted-average yield. The decrease in the average balance of the mortgage-backed securities portfolio was primarily due to approximately $19.3 million in repayments, partially offset by a purchase in the fourth quarter of approximately $29.8 million.  Interest income on investment securities and interest-bearing deposits totaled $4.4 million, an increase of $2.5 million, due primarily to a $47.4 million increase in the average balance of the related assets for the year ended December 31, 2007 compared to the year ended December 31, 2006.  The increase in interest-bearing deposits was primarily due to curtailed lending and the low yield on alternative investments. At December 31, 2007, federal funds sold totaled $67.0 million, compared to $25.0 million at December 31, 2006.

Interest expense on deposits totaled $30.0 million for the fiscal year ended December 31, 2007, an increase of $2.8 million, or 10.2%, over the $27.2 million recorded for the year ended December 31, 2006.  The increase was due primarily to an increase in the weighted-average cost of deposits of 43 basis points, to 4.17% for fiscal 2007, partially offset by a decrease of $8.6 million, or 1.2%, in the average balance of deposits outstanding for the year ended December 31, 2007 compared to the year ended December 31, 2006.  The increase in the average cost of deposits was primarily due to the increase in market interest rates, as well as advertised special rates on certificates of deposits throughout the year.  The decrease in the average balance of deposits was primarily due to the strongly competitive Cincinnati market place.

Interest expense on borrowings totaled $6.4 million for fiscal 2007, a decrease of $2.8 million, or 30.4%, compared to the year ended December 31, 2006, due primarily to a $67.8 million, or 33.8%, decrease in the average balance of borrowings outstanding, partially offset by a 24 basis point increase in the average cost of borrowings for fiscal 2007.  During fiscal year 2007, $100.0 million in fixed-rate convertible FHLB advances were paid in full on their conversion date with no penalty through the use of available cash and proceeds from both mortgage-backed security repayments and loan sales and payments.

16

Comparison of Results of Operations for the Fiscal Years Ended December 31, 2007 and December 31, 2006 (continued)

Net Interest Income (continued)

As a result of the foregoing changes in interest income and interest expense, net interest income decreased by $5.2 million, or 18.0%, during the fiscal year ended December 31, 2007, compared to fiscal year ended December 31, 2006.  The interest rate spread amounted to 2.53% for fiscal 2007 compared to 2.84% for the year ended December 31, 2006.  The net interest margin totaled 2.69% and 3.00% for the fiscal years ended December 31, 2007 and 2006, respectively.

Provision for Losses on Loans

A provision for losses on loans is charged to earnings to bring the total allowance for loan losses to a level considered appropriate by management based on historical loss experience, the volume and type of lending conducted by the Bank, the status of past due principal and interest payments, general economic conditions, particularly as such conditions relate to the Bank’s market area, and other factors related to the collectibility of the Bank’s loan portfolio.  After considering the above factors, management recorded a provision for losses on loans of $24.5 million in the fourth quarter of 2007, resulting in a total of $32.8 million for the fiscal year ended December 31, 2007, compared to $17.5 million for the fiscal year ended December 31, 2006.  The large provision in the fourth quarter of 2007 reflects higher probable credit losses on primarily non-owner occupied residential loans and land development loans.  Nonperforming assets at September 30, 2007 totaled $20.4 million, compared to $32.8 million at December 31, 2007, while classified assets increased from $31.3 million at September 30, 2007 to $40.6 million at December 31, 2007.

The provisions recorded during the fiscal 2007 and 2006 periods were predicated on higher non-performing, classified and criticized assets for the years, as well as significant charge-offs during both fiscal years.  The increase in such loans is primarily due to delinquent loans in the Bank’s non-owner occupied (investment property) residential loan portfolio and its acquisition, development, and construction loan portfolio.  The delinquencies in these portfolios are due primarily to the residual effects of the deterioration in the local real estate market and resultant cash flow issues faced by local property investors and developers.  The downturn in the local economy has also resulted in deterioration in other sectors of the portfolio, including multi-family residential loans and commercial loans. There can be no assurance that the allowance for loan losses will be sufficient to cover losses on nonperforming loans in the future.

Other Income

Other income totaled $3.9 million for the fiscal year ended December 31, 2007, an increase of $719,000, or 22.4%, compared to the year ended December 31, 2006.  The increase was due primarily to a $428,000, or 17.2%, increase in other operating income, an increase of $33,000, or 4.8%, in income from bank-owned life insurance, and a $247,000 net gain on sale of loans recorded during fiscal year 2007 compared to a net loss of $59,000 recorded during fiscal year 2006 on the sale of loans and real estate.  The increase in other operating income resulted primarily from an increase of approximately $289,000 in deposit fees.  These increases were partially offset by a decrease in the gain on sale of securities of $47,000 during fiscal year 2007.

General, Administrative and Other Expense

General, administrative and other expense totaled $33.2 million for the fiscal year ended December 31, 2007, an increase of $12.0 million, or 57.0%, compared to the fiscal year ended December 31, 2006.  This increase resulted primarily from a goodwill non-cash impairment charge of $11.4 million recorded in the fourth quarter of 2007 by the Bank following an updated valuation by an independent third party.  This impairment is primarily attributable to lower market valuations for financial institutions in the latter part of 2007, the weakening of the credit market in the second half of 2007, the decline in real estate values, particularly in the Cincinnati region, and the net losses recorded by the Bank and Company for the past six quarters.

17

Comparison of Results of Operations for the Fiscal Years Ended December 31, 2007 and December 31, 2006 (continued)

General, Administrative and Other Expense (continued)

Excluding the goodwill impairment, general, administrative and other expense increased $652,000, or 3.1%. The Company recorded a $277,000, or 7.0%, increase in other operating expense, a $45,000, or 4.6%, increase in franchise tax, a $205,000, or 12.6%, increase in amortization of intangibles, and a $213,000, or 21.2%, increase in data processing expense.  Employee compensation and benefits expense and occupancy and equipment expense remained relatively constant compared to the fiscal year ended December 31, 2006.  During the fourth quarter of 2007, the Company recorded approximately $508,000 in ESOP expense for the release of approximately 32,383 ESOP shares for employee allocation.  This occurred in conjunction with the decision to terminate the ESOP by September 30, 2008 and record associated expenses in 2008 to release all remaining unallocated shares.

The increase in other operating expenses was due primarily to an increase in legal and collection fees recorded during the year ended December 31, 2007.  Data processing expenses increased primarily due to an increase in services utilized by customers and an overall price increase.

Federal Income Taxes

The Company recorded a credit provision for federal income taxes totaling $4.9 million for the fiscal year ended December 31, 2007 compared to a credit provision of $2.3 million for the fiscal year ended December 31, 2006.  The income tax benefit for both years was due to net losses incurred in 2006 and 2007.  A valuation allowance against deferred tax assets of approximately $4.4 million was recorded in the fourth quarter of 2007.

Comparison of Results of Operations for the Fiscal Years Ended December 31, 2006 and September 30, 2005

General

The inclusion of the accounts of American State Bank, Peoples Federal Savings Bank, and Mercantile Savings Bank, which the Company acquired in June 2005, December 2005, and June 2006, respectively, in transactions accounted for using the purchase method of accounting, contributed to the increases in the level of income and expense during the fiscal year ended December 31, 2006, compared to the year ended September 30, 2005.  In accordance with the purchase method of accounting, the consolidated statement of earnings for the fiscal year ended September 30, 2005 was not restated for the acquisition.

The Company recorded a net loss of $4.1 million for the fiscal year ended December 31, 2006, compared to net earnings of $2.9 million for the fiscal year ended September 30, 2005.  The net loss was primarily due to an increase in the provision for losses on loans of $13.9 million, and an increase of $5.3 million, or 33.5%,  in general, administrative and other expense, partially offset by a $7.4 million, or 34.6%, increase in net interest income, an increase of $1.1 million, or 52.0%, in other income, and a $3.7 million decrease in provision for federal income taxes.

Net Interest Income

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

Interest income on loans totaled $61.1 million for the fiscal year ended December 31, 2006, an increase of $19.5 million, or 46.8%, from the year ended September 30, 2005.  This increase was primarily due to a $215.1 million, or 32.8%, increase in the average portfolio balance outstanding for the year ended December 31, 2006 compared to the

18

Comparison of Results of Operations for the Fiscal Years Ended December 31, 2006 and September 30, 2005 (continued)

Net Interest Income (continued)

year ended September 30, 2005, coupled with a 67 basis point increase in the weighted-average yield to 7.02% for fiscal 2006.  The increase in the average balance was primarily due to $122.6 million and $38.0 million in loans obtained in the acquisition of Peoples Federal and Mercantile, respectively, in fiscal 2006, coupled with continued strong loan origination activity, particularly with respect to single-family residential loans, construction loans, and nonresidential real estate and land loans.  The increase in the Bank’s yield reflects a moderate upward shift in market rates and the corresponding impact on adjustable-rate loans as well as new originations in higher yielding loan products.

Interest income on mortgage-backed securities totaled $2.5 million for fiscal 2006, a decrease of $2.8 million, or 53.4%, compared to the year ended September 30, 2005, due to a $144.0 million, or 70.4%, decrease in the average balance outstanding for the year ended December 31, 2006 compared to the year ended September 30, 2005, partially offset by a 149 basis point increase in the weighted-average yield. The decrease in the average balances of the mortgage-backed securities was primarily due to approximately $108.9 million of securities sold in the three months ended December 31, 2005, in order to restructure a portion of the securities portfolio, repay higher rate short-term advances and manage balance sheet growth.  Interest income on investment securities and interest-bearing deposits totaled $1.9 million, an increase of $1.1 million, or 130.9%, due primarily to a $16.4 million, or 84.7%, increase in the average balance of  the related assets,  in conjunction with a 107 basis point increase in the weighted-average yield for the year ended December 31, 2006 compared to the year ended September 30, 2005.  The increase in interest-bearing deposits is primarily due to future cash flow requirements and the current favorable interest rate environment for short-term investments.   The increase in the weighted-average yields of the mortgage-backed securities, investment securities and interest-bearing deposits was due to an increase in market rates and the repricing of adjustable-rate securities held in the portfolio.

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

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

As a result of the foregoing changes in interest income and interest expense, net interest income increased by $7.4 million, or 34.6%, during the fiscal year ended December 31, 2006, compared to fiscal year ended September 30, 2005.  The interest rate spread amounted to 2.84% for fiscal 2006 compared to 2.25% for the year ended September 30, 2005.  The net interest margin totaled 3.00% and 2.45% for the fiscal years ended December 31, 2006 and September 30, 2005, respectively.

19

Comparison of Results of Operations for the Fiscal Years Ended December 31, 2006 and September 30, 2005 (continued)

Provision for Losses on Loans

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

Other Income

Other income totaled $3.2 million for the fiscal year ended December 31, 2006, an increase of $1.1 million, or 52.0%, compared to the year ended September 30, 2005.  The increase was due primarily to a $1.2 million, or 95.4%, increase in other operating income, and an increase of $527,000 in income from bank-owned life insurance.  In fiscal 2006, the Company recognized twelve months of income from bank-owned life insurance which it acquired at the end of June 2005, compared to three months of income recognized during the twelve months ended September 30, 2005.  The increase in other operating income resulted primarily from an increase of approximately $652,000 in fees generated from the growth in deposit accounts and $111,000 in loan servicing fees relating to the loan servicing portfolio obtained in the acquisition of Mercantile in June 2006.  These increases were partially offset by a decrease in the gain on sale of securities of $641,000, or 86.5%.

General, Administrative and Other Expense

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

The Bank employed approximately 217 and 169 full-time employees as of December 31, 2006 and September 30, 2005, respectively.  A total of 23 full-time employees were added in conjunction with the acquisitions of Peoples Federal in December 2005 and Mercantile in June 2006.  The increase in employee compensation and benefits was also due to the increase in staffing levels to support growth in the overall infrastructure of the Company, as well as normal merit increases and increases in other employee benefit costs.

The increase in occupancy and equipment expense primarily reflects increased depreciation and maintenance costs associated with the three offices in Southeast Indiana acquired with the purchase of American State Bank in June 2005, the three offices in Southeast Indiana acquired with the purchase of Peoples Federal Savings Bank in December 2005 and the one office in Cincinnati acquired with the purchase of Mercantile Savings Bank in June 2006. The increase in franchise taxes reflects the continued growth of the equity in the Bank.  The increase in amortization of intangibles was due to the additional core deposit intangibles recorded in conjunction with the acquisitions of American State in June 2005, Peoples Federal in December 2005 and Mercantile in June 2006.  The increase in other

20

Comparison of Results of Operations for the Fiscal Years Ended December 31, 2006 and September 30, 2005 (continued)

General, Administrative and Other Expense (continued)

operating expense was primarily due to increased loan collection expenses of approximately $310,000, and an increase in other operating costs associated with the Bank’s overall growth for the year ended December 31, 2006 compared to the year ended September 30, 2005.

Federal Income Taxes

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

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

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

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

Exposure to Changes in Interest Rates

The Company’s ability to maintain net interest income depends upon its ability to earn a higher yield on interest-earning assets than the rates paid on deposits and borrowings.  The Bank’s ability to maintain a positive spread between the interest earned on assets and the interest paid on deposits and borrowings can be adversely affected when market rates of interest fluctuate.  Historically, long-term, fixed-rate mortgage loans made up a significant portion of Peoples’ interest-earning assets.  A predominance of long-term fixed-rate loans would make Peoples particularly susceptible to the risk of changing interest rates, particularly in a rising rate environment.  However, during fiscal 2000, the Bank began to emphasize the origination of adjustable-rate mortgage (“ARM”) loans and shorter-term loans such as non-residential real estate loans, construction loans, commercial loans and consumer loans, in an effort to improve its interest rate risk position.  As a result, at December 31, 2007, approximately $288.9 million, or 41.0%, of the Company’s loan portfolio consisted of loans with fixed-rates of interest and approximately $415.1 million, or 59.0%, had adjustable-rates of interest.  Further, nonresidential real estate and land loans, construction loans, commercial loans and consumer loans totaled $309.9 million or 44.0% of the total loan portfolio at December 31, 2007 compared to $203.6 million or 36.6% of the total loan portfolio at September 30, 2002.  These loans typically have higher rates and/or shorter terms to maturity compared to single-family residential mortgage loans.

21

Fourth Quarter Review

Net loss for the fourth quarter of 2007 was $31.5 million, or $6.57 loss per share, compared to a net loss for the third quarter of 2007 of $1.4 million and $2.3 million for the fourth quarter of 2006.  Net interest income for the  fourth quarter of 2007 decreased $1.1 million, or 18.4%, compared to the third quarter of 2007, primarily due to a decrease of 40 basis points in the net interest margin to 2.17% for the fourth quarter of 2007.

Management recorded a provision for losses on loans of $24.5 million in the fourth quarter of 2007, compared to $4.1 million in the third quarter of 2007.  The larger provision in the fourth quarter reflects higher probable credit losses on primarily non-owner occupied residential loans and land development loans, as a result of continuing forces in the local economy and a significant downturn in the real estate market.  Nonperforming assets at September 30, 2007 totaled $20.4 million, compared to $32.8 million at December 31, 2007, while classified assets increased from $31.3 million at September 30, 2007 to $40.6 million at December 31, 2007.

Other income totaled approximately $1.2 million for the fourth quarter of 2007, compared to $749,000 for the third quarter of 2007.  The increase was primarily attributed to approximately $100,000 in recoveries received on loans charged-off by a financial institution prior to its acquisition by the Company, $100,000 received as a property improvement easement, and increases in other deposit and loan fee income.

General, administrative and other expenses recorded during the fourth quarter of 2007 totaled $5.3 million, an increase of $277,000, or 5.5%, compared to the third quarter of 2007, and a decrease of $418,000, or 7.3%, and a decrease of $325,000, or 5.8%, from the first and second quarter of 2007, respectively.  In December 2007, the Bank recorded approximately $508,000 in compensation expense for the release of approximately 32,383 ESOP shares for employee allocation.  This occurred in conjunction with the decision to terminate the ESOP by September 30, 2008 and record associated expenses in 2008 to release all unallocated shares.

The Bank recorded goodwill totaling $23.9 million in conjunction with acquisitions of other financial institutions over the past five years.  Following an updated valuation in the fourth quarter of 2007 by an independent third party, the Bank incurred a non-cash impairment charge of $11.4 million for the writedown of goodwill.   This impairment is primarily attributable to lower market valuations for financial institutions in the latter part of 2007, the weakening of the credit market in the second half of 2007, the decline in real estate values, particularly in the Cincinnati region, and the net losses recorded by the Bank and Company for the past six quarters.

In the fourth quarter of 2007, the Company recorded a valuation allowance of deferred income tax in the amount of  $4.4 million based principally on uncertainty about the Company’s ability to generate sufficient future taxable income to realize all of the related temporary differences.  The Company believes that it will realize the remaining net deferred tax assets through taxable income resulting from planned profitable sale of branches of the Bank within the next twelve months.  The expense for recording the valuation allowance is a non-cash item, and the recording of this expense does not imply that the Company owes additional income taxes.  This resulted in a total tax benefit of $3.7 million for the fourth quarter of 2007.

22

Quantitative Analysis

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

The following tables present the Bank’s net portfolio value as of December 31, 2007 and December 31, 2006, as calculated by the OTS, based on information provided to the OTS by the Bank.

December 31, 2007
										Change in
Change in								Net Portfolio		Net Portfolio
Interest Rates								Value as a% of		Value as a% of
In Basis Points			Net Portfolio					Portfolio Value		Portfolio Value
(Rate Shock)	Amount		Value $ Change			% Change		of Assets		of Assets
	(Dollars in thousands)
300bp	$	74,391	$	(20,246	)	(21	)%	8.54	%	(199	)bp
200	83,308		(11,329		)	(12	)	9.45		(108	)
100	90,606		(4,030		)	(4	)	10.17		(37	)
0	94,637		—			—		10.53		—
(100)	95,789		1,153			1		10.59		6
(200)	94,408		(228		)	—		10.39		(14	)

December 31, 2006
										Change in
Change in								Net Portfolio		Net Portfolio
Interest Rates								Value as a% of		Value as a% of
In Basis Points			Net Portfolio					Portfolio Value		Portfolio Value
(Rate Shock)	Amount		Value $ Change			% Change		of Assets		of Assets
	(Dollars in thousands)
300bp	$	93,611	$	(26,697	)	(22	)%	9.46	%	(231	)bp
200	104,620		(15,688		)	(13	)	10.44		(133	)
100	113,622		(6,685		)	(6	)	11.22		(55	)
0	120,308		—			—		11.77		—
(100)	123,615		3,307			3		12.00		23
(200)	122,663		2,355			2		11.82		5

As shown by the 2007 table above, a 100 basis point increase in interest rates would result in a decrease in the Bank’s net portfolio value based on OTS calculations as of December 31, 2007.  A 200 and 300 basis point increase would result in larger decreases in net portfolio value. Conversely, the 2007 table indicates an increase in net portfolio value at a 100 basis point decrease in interest rates, and a slight decrease in net portfolio value at a 200 basis point decrease in interest rates.  The instantaneous shock as indicated in the tables is subject to periodic interest rate adjustments and caps as dictated by the underlying notes.

23

Quantitative Analysis (continued)

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

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

(2)Originating home equity lines of credit with interest rates that adjust monthly based on an index;

(3)Purchasing adjustable-rate mortgage-backed securities;

(4)Utilizing fixed-rate longer-term advances offered by the Federal Home Loan Bank; and

(5)Developing a strong core deposit base.

Liquidity and Capital Resources

Peoples, like other financial institutions, is required under applicable federal regulations to maintain sufficient funds to meet deposit withdrawals, loan commitments and expenses.  Liquid assets consist of cash and interest-bearing deposits in other financial institutions, investments and mortgage-backed securities.  Management monitors and assesses liquidity needs daily in order to meet deposit withdrawals, loan commitments and expenses.

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

Liquid assets as of December 31, 2007, included cash and deposits in other financial institutions totaling $86.6 million, in addition to investment securities and mortgage-backed securities available for sale at a total market value of $67.6 million.  These liquid assets as well as the ability to borrow funds, sell loan participations and attract deposits through local pricing or through brokers will allow the Bank to meet its obligations and commitments as indicated in the table below.  Any future excess liquidity generated via operations will be utilized to repay borrowings or purchase investment and mortgage-backed securities.

The Company is a thrift holding company and its sources of funds are limited.  Cash available to pay dividends to stockholders of the Company and to service the debt of the Company is largely dependent on the receipt of dividends from the Bank.  Without an additional capital infusion as well as possibly a restructuring of existing debt obligations, current cash flows and capital resources of the Company will be insufficient to fund the Company’s operating expenses and to meet its debt service obligations on the junior subordinated debentures beginning in August, 2008 or, more importantly, to pay off the $17.5 million line of credit which is due on June 30, 2008.  Since the Orders prohibit the Bank from paying cash dividends without the prior written consent of the OTS, the Company will only be able to rely upon existing cash and cash equivalents as the sources of its liquidity.  Without the ability to rely on dividends from the Bank, the Company will require funds from other funding sources to meet its obligations such as restructuring the current line of credit or replacing the current line of credit.  Any increase in the Company’s outstanding indebtedness will also require OTS approval.

24

Liquidity and Capital Resources (continued)

The Company is actively evaluating various funding 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 any restructuring of its existing debt or selling branches before its capital resources are depleted.  Failure to restructure the Company’s debt obligations or to sell branches will have a material adverse effect on, and impair, the Company’s business, financial condition and ability to operate as a going concern.

The following table sets forth information regarding the Company’s obligations and commitments to make future payments under contract as of December 31, 2007.

	Payments due by period
	Less						More
	than		1-3		3-5		than
	1 year		years		years		5 years		Total
	(In thousands)
Contractual obligations:
Operating lease obligations	$	38	$	77	$	77	$	6	$	198
Advances from the Federal Home Loan Bank and other borrowings	18,497		2,938		1,964		54,229		77,628
Subordinated debentures	—		—		—		15,464		15,464
Certificates of deposit	406,005		77,865		27,925		2		511,797
Amount of commitments expiring per period
Commitments to originate loans:
Consumer lines of credit	29,538		—		—		—		29,538
Commercial lines of credit	2,393		—		—		—		2,393
One-to-four family and multi-family loans	143		—		—		—		143
Commitments to fund commercial or other:
Letters of credit	5,868		—		—		—		5,868
Total contractual obligations	$	462,482	$	80,880	$	29,966	$	69,695	$	643,039

The Bank is required to maintain regulatory capital sufficient to meet tangible, core and risk-based capital ratios of at least 1.5%, 4.0% and 8.0%, respectively.  At December 31, 2007, the Bank exceeded each of the capital requirements with tangible, core and risk-based capital ratios of 7.0%, 7.0% and 11.4%, respectively.

Impact of Inflation and Changing Prices

The consolidated financial statements and related financial data presented herein regarding the Company have been prepared in accordance with accounting principles generally accepted in the United States of America, which generally require the measurement of financial position and operating results in terms of historical dollars, without considering changes in relative purchasing power over time due to inflation.  Unlike most industrial companies, virtually all of the Company’s assets and liabilities are monetary in nature.  As a result, interest rates generally have a more significant impact on the Company’s performance than does the effect of inflation.  Interest rates do not necessarily move in the same direction or in the same magnitude as the prices of goods and services, since such prices are affected by inflation to a larger extent than interest rates.

25

Report of Independent Registered Public Accounting Firm

Audit Committee, Board of Directors and Stockholders

Peoples Community Bancorp, Inc.

West Chester, Ohio

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

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

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

The accompanying financial statements have been prepared assuming the Company will continue as a going concern. As discussed in Note P, the Company has suffered recurring losses from operations and will operate under restrictions set forth by the formal agreements with the Company’s and Bank’s federal regulators, which result in uncertainty about the Company’s ability to meet obligations coming due in 2008. These factors raise substantial doubt about its ability to continue as a going concern. Management’s plans in regards to these matters are also described in Note P. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.

Cincinnati, Ohio

April 15, 2008

	312 Walnut Street, Suite 3000   Cincinnati, OH 45202-4025   513 621-8300   Fax 513 621-8345
bkd.com

26

PEOPLES COMMUNITY BANCORP, INC.

CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION

December 31, 2007 and 2006

(In thousands, except share data)

	2007			2006
ASSETS
Cash and due from banks	$	16,117		$	26,272
Federal funds sold	67,000			25,000
Interest-bearing deposits in other financial institutions	3,497			6,187
Cash and cash equivalents	86,614			57,459
Securities designated as available for sale	67,572			56,899
Loans receivable - net	634,421			812,578
Office premises and equipment	27,795			27,879
Real estate held for sale	510			—
Real estate acquired through foreclosure	6,915			333
Federal Home Loan Bank stock	14,024			14,024
Accrued interest receivable	4,295			5,461
Bank-owned life insurance	17,812			17,093
Prepaid expenses and other assets	1,906			3,404
Goodwill	12,514			23,911
Intangible assets	4,232			5,903
Deferred federal income taxes	8,816			3,135
Total assets	$	887,426		$	1,028,079
LIABILITIES AND STOCKHOLDERS’ EQUITY
Deposits	$	735,212		$	755,261
Advances from the Federal Home Loan Bank and other borrowings	77,628			156,885
Subordinated debentures	15,464			15,464
Accrued interest payable	382			577
Other liabilities	5,175			12,276
Total liabilities	833,861			940,463
Commitments and contingent liabilities	—			—
Stockholders’ equity
Common stock - 15,000,000 shares of $.01 par value authorized; 4,838,964 and 4,829,699 shares issued at December 31, 2007 and 2006, respectively	48			48
Additional paid-in capital	71,136			70,987
Retained earnings (deficit)	(17,364		)	17,929
Shares acquired by stock benefit plan	(295		)	(1,212		)
Accumulated comprehensive income (loss)	40			(136		)
Total stockholders’ equity	53,565			87,616
Total liabilities and stockholders’ equity	$	887,426		$	1,028,079

The accompanying notes are an integral part of these statements.

27

PEOPLES COMMUNITY BANCORP, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

 (In thousands, except share data)

	For Years						For Three Months			For Year
	Ended						Ended			Ended
	December 31,						December 31,			September 30,
	2007			2006			2005			2005
Interest income
Loans	$	53,390		$	61,096		$	12,620		$	41,628
Mortgage-backed securities	2,394			2,467			1,463			5,292
Investment securities	1,100			951			245			664
Interest-bearing deposits and other	3,349			961			74			164
Total interest income	60,233			65,475			14,402			47,748
Interest expense
Deposits	30,028			27,239			5,111			15,226
Borrowings	6,432			9,246			3,044			10,978
Total interest expense	36,460			36,485			8,155			26,204
Net interest income	23,773			28,990			6,247			21,544
Provision for losses on loans	32,800			17,450			900			3,600
Net interest income after provision for losses on loans	(9,027		)	11,540			5,347			17,944
Other income
Gain (loss) on sale of investment securities	53			100			(1,407		)	741
Gain (loss) on sale of branch premises and equipment	—			(21		)	4			(58		)
Gain on sale of loans	326			9			—			—
Loss on sale of foreclosed real estate	(81		)	(47		)	(19		)	—
Income from bank-owned life insurance	719			685			162			158
Other operating	2,915			2,487			496			1,273
Total other income	3,932			3,213			(764		)	2,114
General, administrative and other expense
Employee compensation and benefits	9,988			10,058			2,343			8,235
Occupancy and equipment	3,487			3,505			728			2,579
Franchise taxes	1,020			975			240			873
Data processing	1,217			1,004			201			916
Amortization of intangibles	1,838			1,633			116			116
Goodwill impairment	11,397			—			—			—
Other operating	4,224			3,947			902			3,108
Total general, administrative and other expense	33,171			21,122			4,530			15,827
Earnings (loss) before income taxes	(38,266		)	(6,369		)	53			4,231
Federal income taxes (benefits)
Current	774			(817		)	493			1,945
Deferred	(5,707		)	(1,491		)	(527		)	(570		)
Total federal income taxes (benefits)	(4,933		)	(2,308		)	(34		)	1,375
Net earnings (loss)	$	(33,333	)	$	(4,061	)	$	87		$	2,856
Earnings (Loss) per share
Basic	$	(6.97	)	$	(.88	)	$	.02		$	.73
Diluted	$	(6.97	)	$	(.88	)	$	.02		$	.72

The accompanying notes are an integral part of these statements.

28

PEOPLES COMMUNITY BANCORP, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(In thousands)

	For Years						For Three Months			For Year
	Ended						Ended			Ended
	December 31,						December 31,			September 30,
	2007			2006			2005			2005
Net earnings (loss)	$	(33,333	)	$	(4,061	)	$	87		$	2,856
Other comprehensive income (loss), net of tax:
Unrealized holding gains (losses) on securities during the period, net of tax effects (benefits) of $109, $120, $(576), and $365 in fiscal years ended December 31, 2007, and December 31, 2006, three months ended December 31, 2005, and fiscal year ended September 30, 2005, respectively	211			234			(1,119		)	708
Reclassification adjustment for realized losses (gains) included in earnings, net of tax (effects) benefits of $(18), $(34), $478, and $(252) in fiscal years ended December 31, 2007 and December 31, 2006, three months ended December 31, 2005, and fiscal year ended September 30, 2005, respectively	(35		)	(66		)	929			(489		)
Comprehensive income (loss)	$	(33,157	)	$	(3,893	)	$	(103	)	$	3,075
Accumulated comprehensive income (loss)	$	40		$	(136	)	$	(304	)	$	(114	)

29

PEOPLES COMMUNITY BANCORP, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(In thousands)

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

The accompanying notes are an integral part of these statements.

30

											Unrealized
								Shares			gains (losses)
								acquired			on securities
			Additional		Retained			by stock			designated
	Common		paid-in		earnings			benefit			as available
	stock		capital		(deficit)			plan			for sale			Total
Balance at December 31, 2006 (balance brought forward)	$	48	$	70,987	$	17,929		$	(1,212	)	$	(136	)	$	87,616
Amortization expense of stock benefit plans	—		5		—			917			—			922
Compensation expense relating to vested stock options	—		137		—			—			—			137
Adjustment related to FIN 48	—		—		180			—			—			180
Exercise of stock options	—		7		—			—			—			7
Net losses for the year ended December 31, 2007	—		—		(33,333		)	—			—			(33,933		)
Dividends paid of $.45 per common share	—		—		(2,140		)	—			—			(2,140		)
Unrealized gains on securities designated as available for sale, net of related tax effects	—		—		—			—			176			176
Balance at December 31, 2007	$	48	$	71,136	$	(17,364	)	$	(295	)	$	40		$	53,565

The accompanying notes are an integral part of these statements.

31

PEOPLES COMMUNITY BANCORP, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

	For Years						For Three Months			For Year
	Ended						Ended			Ended
	December 31,						December 31,			September 30,
	2007			2006			2005			2005
Cash flows provided by (used in) operating activities:
Net earnings (loss) for the year	$	(33,333	)	$	(4,061	)	$	87		$	2,856
Adjustments to reconcile net earnings to net cash provided by (used in) operating activities:
Amortization of premiums and discounts on securities	90			628			247			1,768
Amortization of deferred loan origination fees & premiums	(131		)	(948		)	(413		)	(1,630		)
Amortization of premiums and discounts on deposits	(16		)	(424		)	—			—
Amortization of premiums and discounts on borrowings	104			159			(404		)	—
Expense of stock benefit plans	1,059			616			94			797
Amortization of other intangible assets	1,671			1,633			116			116
Amortization of mortgage servicing rights	165			101			—			—
Goodwill impairment	11,397			—			—			—
Depreciation	1,348			1,407			340			1,116
Provision for losses on loans	32,800			17,450			900			3,600
Investment securities dividends	(52		)	(57		)	(12		)	(46		)
Federal Home Loan Bank stock dividends	—			(664		)	(165		)	(510		)
Income from bank-owned life insurance	(719		)	(685		)	(162		)	(158		)
Undistributed income from investment in Columbia	—			(172		)	(48		)	(95		)
Loss (gain) on sale of securities	(53		)	(100		)	1,407			(741		)
Loss (gain) on sale of branch premises and equipment	—			21			(4		)	58
Gain on sale of loans	(326		)	(9		)	—			(93		)
Gain on sale of real estate	(32		)	(9		)	—			—
Loss on sale of foreclosed real estate	113			56			18			33
Proceeds from sale of loans in the secondary market	1,688			831			—			6,714
Loans originated for sale in the secondary market	(1,663		)	(822		)	—			(6,543		)
Increase (decrease) in cash, due to changes in:
Accrued interest receivable	1,166			(56		)	(7		)	(882		)
Prepaid expenses and other assets	(3,235		)	(770		)	3,170			580
Accrued interest payable and other liabilities	(8,288		)	4,981			(967		)	2,062
Net cash provided by operating activities	3,753			19,106			4,197			9,002
Cash flows provided by (used in) investing activities:
Purchase of investment in Columbia	—			—			—			(2,524		)
Sale of investment in Columbia	—			2,856			—			—
Purchase of bank-owned life insurance	—			—			—			(15,000		)
Purchases of investment securities and mortgage-backed securities	(29,801		)	—						(88,111		)
Proceeds from sale of investment securities and mortgage-backed securities designated as available for sale	61			1,635			108,865			41,919
Principal repayments on investment securities and mortgage-backed securities	19,349			22,425			22,482			76,510
Proceeds from sale of loans and loan participations	32,000			34,635			3,490			1,055
Principal repayments (disbursements) on loans – net	106,929			24,885			(27,889		)	(73,387		)
Purchase of office premises and equipment	(1,774		)	(4,035		)	(640		)	(6,880		)
Proceeds from sale of branch premises and equipment	—			15			4			565
Redemption of Federal Home Loan Bank stock	—			473			—			—
Proceeds from sale of real estate acquired through foreclosure	165			830			—			880
Cash received in acquisition of Mercantile Financial Corporation.- net	—			11,123			—			—
Cash paid in acquisition of PFS Bancorp, Inc. – net	—			—			(30,008		)	—
Cash received in acquisition of American State Corporation – net	—			—			—			8,349
Net cash provided by (used in) investing activities	126,929			_94,842			76,304			(56,624		)
Net cash provided by (used in) operating and investing activities (balance carried forward)	$	130,682		$	113,948		$	80,501		$	(47,622	)

The accompanying notes are an integral part of these statements.

32

	For Years						For Three Months			For Year
	Ended						Ended			Ended
	December 31,						December 31,			September 30,
	2007			2006			2005			2005
Net cash provided by (used in) operating and investing activities (balance brought forward)	$	130,682		$	113,948		$	80,501		$	(47,622	)
Cash flows provided by (used in) financing activities:
Net increase (decrease) in deposit accounts	(20,033		)	(19,627		)	25,740			81,768
Proceeds from Federal Home Loan Bank advances and other borrowings	29,550			97,500			49,900			213,000
Repayment of Federal Home Loan Bank advances and other borrowings	(108,911		)	(140,284		)	(151,000		)	(267,032		)
Proceeds from issuance of subordinated debentures	—			—			—			15,464
Redemption of subordinated debentures	—			(12,887		)	—			—
Proceeds from issuance of common stock	—			—			—			10,250
Dividends paid on common stock	(2,140		)	(2,795		)	(664		)	(2,385		)
Proceeds from exercise of stock options	7			46			20			150
Shares acquired by ESOP	—			—			—			(962		)
Net cash provided by (used in) financing activities	(101,527		)	(78,047		)	(76,004		)	50,253
Net increase in cash and cash equivalents	29,155			35,901			4,497			2,631
Cash and cash equivalents at beginning of period	57,459			21,558			17,061			14,430
Cash and cash equivalents at end of period	$	86,614		$	57,459		$	21,558		$	17,061
Supplemental disclosure of cash flow information:
Cash paid during the year for:
Federal income taxes	$	—		$	380		$	500		$	1,200
Interest on deposits and borrowings	$	36,655		$	36,608		$	8,300		$	25,587
Supplemental disclosure of noncash investing activities:
Transfers from loans to real estate acquired through foreclosure	$	6,860		$	1,008		$	—		$	1,854
Loans disbursed to facilitate sale of real estate acquired through foreclosure	$	—		$	—		$	—		$	1,276
Loans disbursed to facilitate sale of real estate	$	—		$	308		$	—		$	—
Common stock issued in acquisition of Mercantile Financial Corp.	$	—		$	7,595		$	—		$	—

The accompanying notes are an integral part of these statements.

33

PEOPLES COMMUNITY BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Peoples Community Bancorp, Inc. (“the Company”) is a registered savings and loan holding company whose activities are primarily limited to holding the stock of Peoples Community Bank (“Peoples” or the “Bank”).  The Company conducts a general banking business in southwestern Ohio and southeastern Indiana which consists of attracting deposits from the general public and primarily applying those funds to the origination of loans for residential, consumer and nonresidential purposes.  The Company’s profitability is significantly dependent on net interest income, which is the difference between interest income generated from interest-earning assets (i.e. loans and investments) and the interest expense paid on interest-bearing liabilities (i.e. customer deposits and borrowed funds).  Net interest income is affected by the relative amount of interest-earning assets and interest-bearing liabilities and the interest received or paid on these balances.  The level of interest rates paid or received by the Company can be significantly influenced by a number of factors, such as governmental monetary policy, that are outside of management’s control.

The Company has entered into a number of acquisitions, divestitures and other material financial transactions during the years covered by these financial statements.

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

On June 10, 2005, the Company acquired American State Corporation, the parent company of American State Bank (“American”) with three branch offices in the Southeast Indiana communities of Lawrenceburg, Aurora and Bright.  The Bank paid $4.79 in cash for each of the 1,469,062 outstanding common shares of American.  American’s outstanding preferred stock was redeemed for cash at par value, totaling $700,000.   The expansion in this Southeast Indiana community further enhanced Peoples Community Bank’s ability to increase its market share and scale of operations, as well as expand its distribution network within the greater Cincinnati area.

On August 11, 2005, the Company completed a private placement of 500,000 shares of its common stock with certain institutional investors and directors and officers. The net proceeds of $10.3 million were utilized to supplement the Company’s capital and also served as an additional source to fund the Company’s growth strategy and for general corporate purposes.

On December 16, 2005, the Company acquired PFS Bancorp, Inc. (“PFS”), the parent company of Peoples Federal Savings Bank (“Peoples Federal”).  Peoples Federal operated three offices in the Southeast Indiana communities of Aurora, Rising Sun, and Vevay.  The Company paid $23.00 in cash for each of the outstanding 1,473,728 shares of PFS, resulting in aggregate merger consideration of approximately $32.8 million.  The acquisition was accounted for using the purchase method of accounting.

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

34

PEOPLES COMMUNITY BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

$9.3 million, including acquisition costs.  This acquisition complemented the Bank’s market area, and increased its market share.

On August 25, 2006, the Board of Directors approved a change of the Company’s and the Bank’s fiscal year end from September 30 to December 31, retroactive to January 1, 2006, in order to increase operational efficiency.

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

The consolidated financial information presented herein has been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) and general accounting practices within the financial services industry.  In preparing consolidated financial statements in accordance with U.S. GAAP, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and revenues and expenses during the reporting period.  Actual results could differ from such estimates.

The following is a summary of the Company’s significant accounting policies which have been consistently applied in the preparation of the accompanying consolidated financial statements.

1.  Principles of Consolidation

The accompanying consolidated financial statements include the accounts of the Company and the Bank, it’s wholly-owned subsidiary, and American State Advisory Group Corp., a wholly-owned subsidiary of the Bank.  All significant inter-company items have been eliminated.  American State Advisory Group Corp. was established as an operating subsidiary of the Bank to hold title, manage, and sell a portion of the Bank’s other real etate owned.  At December 31, 2007, American State Advisory Group Corp. held $6.4 million in real estate acquired through foreclosure.  In December 2003, FASB issued a revision to FIN 46 to clarify certain provisions that affected the accounting for trust preferred securities.  As a result of the provisions in FIN 46, Peoples Bancorp Capital Trust I was deconsolidated as of June 30, 2004, with the Company accounting for its investment in Peoples Community Bancorp Capital Trust I as an asset, its subordinated debentures as debt, and the interest paid thereon as interest expense.  The Company had previously classified the trust preferred securities as debt, but eliminated its common stock investment.  The subordinated debentures issued by Peoples Bancorp Capital Trust I were redeemed on December 8, 2006, resulting in Peoples Bancorp Capital Trust I being dissolved.  The investment in Peoples Community Bancorp Capital Trust II is accounted for using provisions of FIN 46 as revised by the FASB.

2.  Investment Securities and Mortgage-Backed Securities

The Company accounts for investments in debt and equity securities as held-to-maturity, trading, or available for sale.  Securities classified as held-to-maturity are carried at cost only if the Company has the positive intent and ability to hold these securities to maturity. Securities designated as available for sale are carried at fair value with resulting unrealized gains or losses recorded to stockholders’ equity.

35

PEOPLES COMMUNITY BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

2.  Investment Securities and Mortgage-Backed Securities (continued)

Realized gains and losses on sales of securities are recognized using the specific identification method.  Amortization of premiums and accretion of discounts are recorded on a principal pay-down method based on the estimated duration of the underlying security.

3.  Loans Receivable

Loans receivable are stated at the principal amount outstanding, adjusted for deferred loan origination fees and the allowance for loan losses.  Interest is accrued as earned unless the collectibility of the loan is in doubt.  Uncollectible interest on loans that are contractually past due is charged off, or an allowance is established based on management’s periodic evaluation.  The allowance is established by a charge to interest income equal to all interest previously accrued.  Income is subsequently recognized only to the extent that cash payments are received until, in management’s judgment, the borrower’s ability to make periodic interest and principal payments has returned to normal.  In this case the loan is returned to accrual status.  If the ultimate collectibility of principal is in doubt, in whole or in part, all payments received on nonaccrual loans are applied to reduce principal until such doubt is eliminated.

Loans originated and intended for sale in the secondary market are carried at the lower of cost or fair value.  Mortgage loans held-in-porfolio are recorded at their cost, adjusted for the amortization of net deferred costs and for credit losses inherent in the portfolio.  When the Bank decides to sell loans not previously classified as held for sale, such loans are transferred into a held-for-sale classification, and the recorded loan values are adjusted to the lower of cost or fair value.

The Company recognizes as separate assets, rights to service mortgage loans for others, regardless of how those servicing rights are acquired.  An institution that acquires mortgage servicing rights through either the purchase or origination of mortgage loans and sells those loans with servicing rights retained must allocate some of the cost of the loans to mortgage servicing rights.

The Company assesses the impairment of the capitalized mortgage servicing rights based on fair value.  Changes in fair value are included in earnings in the period the change occurs.  The mortgage servicing rights recorded by Peoples were segregated into pools for valuation purposes, using as pooling criteria the loan term and coupon rate.  Once pooled, each grouping of loans was evaluated on a discounted earnings basis to determine the present value of future earnings that a purchaser could expect to realize from each portfolio.  Earnings were projected from a variety of sources, including loan servicing fees, interest earned on float, net interest earned on escrows, miscellaneous income, and costs to service the loans.  The present value of future earnings is the “economic” value for the pool, i.e., the net realizable present value to an acquirer of the acquired servicing.

4.  Loan Origination Fees

Peoples’ accounts for loan origination fees received from loans, net of direct origination costs, as deferred items, and amortizes such amounts to interest income using the level-yield method, giving effect to actual loan prepayments.  Loan origination costs are limited to the direct costs of originating a loan, i.e., principally direct personnel costs.  Fees received for loan commitments that are expected to be drawn upon, based on Peoples’ experience with similar commitments, are deferred and amortized over the life of the loan using the level-yield method.  Fees for other loan commitments are deferred and amortized over the loan commitment period on a straight-line basis.

36

PEOPLES COMMUNITY BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

5.  Allowance for Loan Losses

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

Peoples’ accounts for impaired loans based upon the present value of expected future cash flows discounted at the loan’s effective interest rate or, as an alternative, at the loan’s observable market price or fair value of the collateral.  Peoples’ current procedures for evaluating impaired loans result in carrying such loans at the lower of cost or fair value.

A loan is defined as impaired when, based on current information and events, it is probable that a creditor will be unable to collect all amounts due according to the contractual terms of the loan agreement.  The Bank considers its investment in one-to-four family residential loans and consumer loans to be homogeneous and therefore excluded from separate identification for evaluation of impairment.  With respect to Peoples’ investment in multi-family, nonresidential real estate and land loans, and its evaluation of impairment thereof, such loans are collateral dependent, and as a result, are carried as a practical expedient at the lower of cost or fair value.  With respect to the Bank’s investment in unsecured commercial lines of credit, impairment is measured based upon the present value of expected future cash flows.

It is Peoples’ policy to charge off consumer unsecured credits that are more than ninety days delinquent.  Similarly, collateral dependent loans which are more than ninety days delinquent are considered to constitute more than a minimum delay in repayment and are evaluated for impairment at that time.

6.  Office Premises and Equipment

Office premises and equipment are originally recorded at cost and include expenditures which extend the useful lives of existing assets.  Maintenance, repairs and minor renewals are expensed as incurred.  For financial reporting, depreciation and amortization are provided on the straight-line and accelerated methods over the useful lives of the assets, estimated to be forty to fifty years for buildings, ten to fifty years for building improvements, and three to ten years for furniture and equipment.  An accelerated method is used for tax reporting purposes.

7.  Real Estate Acquired Through Foreclosure

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

37

PEOPLES COMMUNITY BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

8.  Investment in Columbia Bancorp, Inc.

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

9.  Goodwill

Goodwill is tested annually for impairment,  if the implied fair value of goodwill is lower than its carrying amount, a goodwill impairment is indicated and goodwill is written down to its implied fair value.  Subsequent increases in goodwill value are not recognized in the financial statements.  The Bank selected an independent third party to evaluate the unamortized goodwill balance as of December 31, 2007, and subsequently recorded an impairment of $11.4 million, which reduced the goodwill balance on its books to $12.5 million from $23.9 million.   The impairment of goodwill is primarily attributable to lower market valuations for financial institutions in the latter part of 2007, the weakening of the credit market in the second half of 2007, the decline in real estate values, particularly in the Cincinnati region, and the net losses recorded by the Bank and Company for the past six quarters.

The goodwill impairment charge was computed by determining the fair value of the Bank on a controlling interest basis.  The fair value of the Bank was considered to be the amount at which the Bank could be sold in a current transaction between willing parties, that is, other than a forced liquidation sale.  Both the comparable transaction and the trading price methods were utilized to determine the fair value of the Bank.  Because the Bank has several characteristics of a commercial bank, including a significant commercial real estate and commercial business loan portfolio, both thrift and bank transactions were utilized for the comparable transaction method.  Each of the two methods were given a 50% weighting to determine the fair value of the Bank.  The computed fair value of the Bank was found to be less than its carrying value.  As a result, management computed the amount of the goodwill impairment charge needed to reduce the carrying value of the Bank to its fair value.

In June 2005, December 2005, and June 2006, the Bank acquired American, Peoples Federal and Mercantile resulting in goodwill of approximately $3.9 million, $9.9 million, and $4.0 million, respectively.  The changes in the carrying amount of goodwill for the years ended December 31, 2007 and December 31, 2006, the three-month period ended December 31, 2005 and the year ended September 30, 2005 are summarized below.

							For Three Months
	For Years Ended						Ended		For Year Ended
	December 31,						December 31,		September 30,
	2007			2006			2005		2005
	(In thousands)
Balance at beginning of period	$	23,911		$	20,282		$	10,028	$	6,089
Purchase of American	—			—			—		3,939
Purchase of Peoples Federal and final adjustment	—			(334		)	10,254		—
Purchase of Mercantile	—			3,963			—		—
Impairment	(11,397		)	—			—		—
Balance at end of period	$	12,514		$	23,911		$	20,282	$	10,028

38

PEOPLES COMMUNITY BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

10.  Other Intangible Assets

In June 2005, the Bank recorded $1.9 million of core deposit intangibles in conjunction with the acquisition of American. In December 2005, the Bank recorded $3.7 million in core deposit intangibles in conjunction with the acquisition of PFS., and recorded $2.2 million in core deposit intangibles in conjunction with the acquisition of Mercantile in June 2006.

The core deposit intangibles are being amortized on an accelerated basis over an original period of seven years.  The carrying basis and accumulated amortization of core deposit intangibles at December 31, 2007 and 2006 were:

	2007		2006
	(in thousands)
Core deposits
Gross carrying amount	$	7,768	$	7,768
Accumulated amortization	3,536		1,865

Amortization expense for the years ended December 31, 2007 and December 31, 2006, the three-month period ending December 31, 2005 and the year ended September 30, 2005 was $1.7 million, $1.6 million, $116,000 and $116,000, respectively.  The following table summarizes the Bank’s current estimates for future amortization expense of the core deposit intangible

	(In thousands)
2008	$	1,393
2009	$	1,116
2010	$	839
2011	$	561
2012 and thereafter	$	323

11.  Loan Servicing

In conjunction with its acquisition of Mercantile, the Company obtained approximately $86.7 million of residential mortgage loans serviced for Freddie Mac and Fannie Mae.  Mortgage loans serviced for others are not included in the accompanying consolidated balance sheets.  The unpaid principal balance of mortgage loans serviced for others was $72.1 and $81.1 million at December 31, 2007 and December 31, 2006, respectively.

In conjunction with its acquisition of Mercantile, the Bank acquired $926,000 in mortgage servicing rights. The balance and fair value of mortgage servicing rights as of December 31, 2007 was $659,000.  The Bank recorded amortization related to mortgage servicing rights totaling $167,000 and $101,000 for the fiscal years ended December 31, 2007 and December 31, 2006, respectively.

39

PEOPLES COMMUNITY BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

12.  Federal Income Taxes

The Company accounts for federal income taxes in accordance with the provisions of SFAS No. 109, “Accounting for Income Taxes.”  Pursuant to the provisions of SFAS No. 109, a deferred tax liability or deferred tax asset is computed by applying the current statutory tax rates to net taxable or deductible differences between the tax basis of an asset or liability and its reported amount in the consolidated financial statements that will result in taxable or deductible amounts in future periods.  Deferred tax assets are recorded only to the extent that the amount of net deductible temporary differences or carryforward attributes may be utilized against current period earnings, carried back against prior years’ earnings, offset against taxable temporary differences reversing in future periods, or utilized to the extent of management’s estimate of future taxable income.  A valuation allowance is provided for deferred tax assets to the extent that the value of net deductible temporary differences and carryforward attributes exceeds management’s estimates of taxes payable on future taxable income.  Deferred tax liabilities are provided on the total amount of net temporary differences taxable in the future.

13.  Unrecognized Tax Benefits

The Company adopted FIN 48 at the beginning of fiscal year 2007 which resulted in a reclassification of $1.3 million in deferred tax liability and the establishment of a $1.1 million unrecognized tax liability related to federal income tax matters.  The following table reflects the change in the balance of the unrecognized tax liability for the fiscal year ended December 31, 2007.

	(in thousands)
Balance at January 1, 2007	$	1,112
Decrease based on position taken during the current period	(87		)
Balance at December 31, 2007	$	1,025

Peoples’ federal income tax returns for the tax years ended 2007 and 2006 are open under the statute of limitations and are subject to review by the IRS.  Various companies that the Bank has acquired remain under the statute of limitations by the IRS for the years ended 2004 through 2007.

14.  Benefit Plans

Peoples’ has a noncontributory unfunded retirement plan that covers all members of its Board of Directors.  Peoples’ policy is to maintain an accrued liability equal to the present value of benefits computed using a predetermined annual benefit amount at retirement.  The plan provides for immediate and total vesting for all participants.  The balance of the accrued liability was $1.7 million and $1.4 million, as of December 31, 2007 and 2006, respectively.  The provision for director’s retirement expense totaled $504,000, $94,000, and $19,000 for the fiscal years ended December 31, 2007, December 31, 2006, and September 30, 2005, respectively.  There was no provision recorded for the three months ended December 31, 2005.  A higher provision was recorded in fiscal year 2007 due to a decrease in the discount rate, which is utilized in calculating the present value of the benefits.

40

PEOPLES COMMUNITY BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

14.  Benefit Plans (continued)

The Bank has an Employee Stock Ownership Plan (“ESOP”) which provides retirement benefits for substantially all full-time employees who have completed one year of service. The Bank makes annual contributions to the ESOP equal to the ESOP’s debt service less dividends received by the ESOP on unallocated shares.  Shares in the ESOP were acquired using funds provided by a loan from the Company and accordingly the cost of those shares is shown as a reduction of stockholders’ equity.  Shares are released to participants proportionately as the loan is repaid. Dividends on allocated shares are recorded as dividends and charged to retained earnings.  Dividends on unallocated shares are used to repay the loan and are treated as compensation expense.  Compensation expense is recorded equal to the fair market value of the stock for shares committed to be released. The Bank accounts for the ESOP in accordance with Statement of Position (“SOP”) 93-6, “Employers’ Accounting for Employee Stock Ownership Plans.”  SOP 93-6 requires that compensation expense recorded by employers equal the fair value of ESOP shares allocated to participants during a given fiscal year.  In April 2004, the Bank added 35,000 shares to the ESOP plan in connection with its secondary stock offering at a total value of $700,000.  In March 2005, an additional 40,000 shares were acquired and added to the ESOP plan at a total value of approximately $962,000.  Expense recognized related to the ESOP totaled $656,000, $207,000, $43,000, and  $261,000 for the fiscal years ended December 31, 2007 and December 31, 2006, the three-month period ended December 31, 2005 and the fiscal year ended September 30, 2005, respectively.  In December 2007, the Bank recorded approximately $508,000 in compensation expense for the release of approximately 32,383 ESOP shares for employee allocation.  This occurred in conjunction with the decision to terminate the ESOP by September 30, 2008 and record associated expenses in 2008 to release all unallocated shares.

					For Three Months
	For Years Ended				Ended		For Year Ended
	December 31,				December 31,		September 30,
	2007		2006		2005		2005
Allocated shares	101,954		96,542		98,921		99,013
Shares committed to be released	34,258		1,875		1,875		—
Unearned shares	12,297		54,211		63,754		65,629
Total ESOP shares	148,509		152,628		164,550		164,642
Fair value of unearned shares at end of period (expressed in thousands)	$	172	$	976	$	1,288	$	1,401

41

PEOPLES COMMUNITY BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

15.  Share-Based Compensation Plans

Effective October 1, 2005, the Company adopted the fair value recognition provisions of Statement of Financial Accounting Standards (SFAS) No. 123R, Share-Based Payment.  The adoption of this Statement had no material impact on the Company’s financial statement as the Company was previously accounting for stock compensation under Statement of Financial Accounting Standards No. 123.  Both Statements utilize the fair value method at grant date for stock compensation and expense such cost against additional paid-in capital in its Consolidated Statement of Financial Condition.

The Bank has two share-based compensation plans, which are described below.  The compensation cost that has been charged against income for those plans was $276,000, $341,000, $138,000, and $507,000 for the fiscal years ended December 31, 2007 and December 31, 2006, the three months ended December 31, 2005 and for the fiscal year ended September 30, 2005, respectively.  The total income tax benefit recognized in the income statement for share-based compensation arrangements was $94,000, $70,000 $47,000, and $172,000 for the fiscal years ended December 31, 2007 and December 31, 2006, the three months ended December 31, 2005, and for the fiscal year ended September 30, 2005, respectively.

During fiscal 2001, the Board of Directors adopted the Peoples Community Bancorp, Inc. Stock Option and Incentive Plan (the “2001 Plan”) that provides for the issuance of 197,773 of authorized but unissued shares of common stock at fair value at the date of grant.  Through December 31, 2007, the Company had granted all options under the 2001 Plan.  The 2004 Stock Option and Incentive Plan (the “2004 Plan”), as approved by stockholders, provides for the issuance of 150,000 of authorized but unissued shares of common stock at fair value at the date of grant.  As of December 31, 2007, 88,910 options, net of forfeitures, had been granted under the 2004 Plan.  All option awards are granted with an exercise price equal to the market price of the Company’s stock at the date of grant. Options under both plans have a 10-year term.

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

The Bank accounts for the plans using a fair value-based method for valuing stock-based compensation, which measures compensation cost at the grant date based on the fair value of the award.  Compensation is then recognized over the service period, which is usually the vesting period.

The fair value of the option grants are estimated on the date of grant using the modified Black-Scholes options-pricing model that uses the assumptions noted in the following table. The objective of the measurement process is to estimate the fair value of options based on the stock price at the grant date, to which employees will become entitled when they have rendered the requisite service and satisfy all other conditions necessary to earn the right to benefit from the options. In deriving the fair value of the stock options through the Black-Scholes model, the stock price at the grant date is reduced by the value of any dividends to be paid during the life of the option, since the options do not give holders the benefit of dividends paid before exercise. The expected life of all options is 10 years. The risk-free rate for the expected term of the option is the constant maturity yield on a U.S. Government obligation, with a term equal to the expected life of the options at the grant date.

42

PEOPLES COMMUNITY BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

15.  Share-Based Compensation Plans (continued)

	2007		2006		2005
Expected volatility	24.8	%	17.3	%	19.5	%
Weighted average volatility	24.8	%	17.3	%	19.5	%
Expected dividends	3.0	%	3.0	%	3.0	%
Expected term (in years)	10		10		10
Risk-free rate	5.0	%	5.2	%	4.0	%

A summary of the status of the Plan as of and for the fiscal year ended December 31, 2007 is presented below:

		Weighted-Average		Weighted-Average	Aggregate
	Shares	Exercise Price		Remaining Contractual	Intrinsic Value
				Term (in years)	($000)
Outstanding at January 1, 2007	228,723	$	18.63
Granted	43,722	16.34
Exercised	520	14.00
Forfeited & expired	19,764	20.77
Outstanding at December 31, 2007	252,161	$	18.08	6.46	$	3
Options exercisable at December 31, 2007	142,317	$	17.54	4.85	$	3
Weighted-average fair value of options granted during period		$	4.05

The weighted-average grant-date fair value of options granted during the years ended December 31, 2007, December 31, 2006, and September 30, 2005 was $4.05, $4.52, and $4.17, respectively.  There were no options granted during the three-month period ended December 31, 2005.  The total intrinsic value of options exercised during the years ended December 31, 2007, December 31, 2006 and September 30, 2005 was $1,000, $19,000 and $82,000, respectively.  There were no options exercised during the three months ended December 31, 2005.

43

PEOPLES COMMUNITY BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

15.  Share-Based Compensation Plans (continued)

The Company also has a 2001 Management Recognition Plan (“2001 MRP”) which provides for awards of up to 79,109 shares of the Company’s common stock to members of the Board of Directors, management and employees.  As of December 31, 2007, 73,650 shares have been awarded, net of forfeitures, from the 2001 MRP to members of the Board of Directors, management and employees.  Common shares awarded to outside members of the Board of Directors were fully expensed when granted, while shares awarded to members of management and employees have vested or will vest over a five year period beginning with the date of the award.  Shares awarded under the MRP are distributed from previously authorized but unissued shares.

In 2004, the stockholders approved a 2004 Management Recognition Plan (“2004 MRP”) which provides for awards of an additional 60,000 shares of the Company’s common stock to management and employees.  As of December 31, 2007, 3,568 shares have been awarded, net of forfeitures, from the 2004 MRP.  Total shares vested and distributed to recipients through December 31, 2007 under both plans totaled 62,734 shares.

		Weighted-Average
		Grant Date
	Shares	Fair Value
Nonvested at January 31, 2007	31,564	$	20.90
Granted	—	—
Vested	8,714	21.19
Forfeited	7,199	20.73
Nonvested at December 31, 2007	15,651	$	20.81

As of December 31, 2007, there was $575,000 of total unrecognized compensation cost related to the share-based compensation plans.  The cost is expected to be recognized over a weighted-average period of 1.95 years.   The total fair value of shares vested during the years ended December 31, 2007, December 31, 2006, and September 30, 2005 was $330,000, $268,000, and $267,000, respectively.   There were no shares vested during the three-month period ended December 31, 2005.

44

PEOPLES COMMUNITY BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

16.  Earnings Per Share

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

			For Three Months
	For Years Ended		Ended	For Year Ended
	December 31,		December 31,	September 30,
	2007	2006	2005	2005
Weighted-average common shares outstanding (basic)	4,783,610	4,591,802	4,358,840	3,920,398
Dilutive effect of assumed exercise of stock options	—	—	27,257	38,741
Weighted-average common shares outstanding (diluted)	4,783,610	4,591,802	4,386,097	3,959,139

Basic earnings per share for each period presented is based upon the weighted-average shares outstanding during the year less unallocated ESOP shares. Options to purchase shares of common stock and MRP awards were excluded from the computation of diluted earnings per share for the years ended December 31, 2007 and 2006 due to the net loss recorded for these periods.  Options to purchase 46,417 and 48,746 shares of common stock and MRP awards of 13,543 and 14,486 shares at a weighted-average price of $23.21 were outstanding at December 31, 2005 and September 30, 2005, respectively, but were excluded from the computation of diluted earnings per share for the period because the exercise price was greater than the average market price of the common shares.

17.  Fair Value of Financial Instruments

SFAS No. 107, “Disclosures About Fair Value of Financial Instruments,” requires disclosure of the fair value of financial instruments, both assets and liabilities whether or not recognized in the consolidated statement of financial condition, for which it is practicable to estimate that value.  For financial instruments where quoted market prices are not available, fair values are based on estimates using present value and other valuation methods.

The methods used are greatly affected by the assumptions applied, including the discount rate and estimates of future cash flows.  Therefore, the fair values presented may not represent amounts that could be realized in an exchange for certain financial instruments.

The following methods and assumptions were used by the Company in estimating its fair value disclosures for financial instruments at December 31, 2007 and 2006:

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

45

PEOPLES COMMUNITY BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

17.  Fair Value of Financial Instruments (continued)

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

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

Loans held for sale:  Loans originated and intended for sale in the secondary market are carried at the lower of cost or fair value.  When the Bank decides to sell loans not previously classified as held for sale, such loans are transferred into a held-for-sale classification, and the recorded loan values are adjusted to the lower of cost or fair value.

Federal Home Loan Bank stock:  The carrying amount presented in the consolidated statements of financial condition is deemed to approximate fair value.

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

Advances from the Federal Home Loan Bank:  The fair value of these advances is estimated using the rates currently offered for similar advances of similar remaining maturities.

Other borrowed money:  The fair value of other borrowed money is estimated using the rates currently offered for similar borrowings of similar remaining maturities.

Subordinated debentures:  The fair value of the Company’s subordinated debentures has been estimated using discounted cash flow analysis, based on the interest rates currently offered for instruments of similar remaining maturities.

Commitments to extend credit:  For fixed-rate and adjustable-rate loan commitments, the fair value estimate considers the difference between current levels of interest rates and committed rates.  At December 31, 2007 and 2006, the difference between the fair value and notional amount of loan commitments was not material.

Accrued Interest:   The carrying amount presented in the consolidated statements of financial condition is deemed to approximate fair value.

46

PEOPLES COMMUNITY BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

17.  Fair Value of Financial Instruments (continued)

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

	2007				2006
	Carrying		Fair		Carrying		Fair
	value		value		value		value
	(In thousands)
Financial assets
Cash and cash equivalents	$	86,614	$	86,614	$	57,459	$	57,459
Investment securities	4,237		4,237		4,230		4,230
Mortgage-backed securities	63,335		63,335		52,669		52,669
Loans receivable	634,421		638,128		812,578		815,357
Accrued interest receivable	4,295		4,295		5,461		5,461
Federal Home Loan Bank stock	14,024		14,024		14,024		14,024
Financial liabilities
Deposits	$	735,212	$	740,184	$	755,261	$	753,745
Advances from the Federal Home Loan Bank and other borrowings	77,628		79,182		156,885		155,609
Accrued interest payable	382		382		577		577
Subordinated debentures	15,464		15,464		15,464		15,464

18.  Capitalization

The Company’s authorized capital stock includes 1,000,000 shares of $.01 per share par value voting preferred stock.  No preferred shares were issued at December 31, 2007 and 2006.

19.  Cash and Cash Equivalents

For purposes of reporting cash flows, cash and cash equivalents include cash and due from banks and interest-bearing deposits in other financial institutions with original maturities of three months or less.

20.  Restriction on Cash and Due From Banks

The Bank is required to maintain reserve funds in cash or in deposits with Federal Reserve Bank or Federal Home Loan Bank.  The reserve required at December 31, 2007 was $2.3 million.

21.   Reclassifications

Certain prior year amounts have been reclassified to conform to the 2007 consolidated financial statement presentation.

47

PEOPLES COMMUNITY BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

22.    Effects of Recent Accounting Pronouncements

In March 2006, the FASB issued Statement of Financial Accounting Standards No. 156, Accounting for Servicing of Financial Assets: an amendment of FASB Statement No. 140 (FAS 140 and FAS 156).  FAS 140 establishes, among other things, the accounting for all separately recognized servicing assets and servicing liabilities.  This Statement amends FAS 140 to require that all separately recognized servicing assets and servicing liabilities be initially measured at fair value, if practicable.  This Statement permits, but does not require, the subsequent measurement of separately recognized servicing assets and servicing liabilities at fair value.  Under this Statement, an entity can elect subsequent fair value measurement to account for its separately recognized servicing assets and servicing liabilities.  Adoption of this Statement is required as of the beginning of the first fiscal year that begins after September 15, 2006.  The Company’s adoption of FAS 156 effective January 1, 2007 did not have a material impact on the financial position and results of operations of the Company.

In July 2006, the FASB issued FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes – an interpretation of FASB Statement No. 109 (FIN 48), which clarifies the accounting for uncertainty in tax positions.  This Interpretation requires that the Company recognize in the financial statements, the impact of a tax position, if that position is more likely than not of being sustained on audit, based on the technical merits of the position.  The adoption of FIN 48 at the beginning of the 2007 fiscal year resulted in reclassification of $1.3 million in deferred tax liabilities and the establishment of a $1.1 million unrecognized tax liability related to federal income tax matters, resulting in a $180,000 increase to the beginning balance of retained earnings as of January 1, 2007. There was no impact on the results of operations of the Company. The unrecognized tax liability decreased $87,000 during the twelve months ended December 31, 2007 based on a change in the position taken by the Company. The Company has not accrued any interest and penalties related to these uncertain tax positions. During 2007 the Internal Revenue Service (IRS) completed audits on the Company’s tax years ended December 31, 2004 and 2005, while the year ending December 31, 2006 is currently open to audit under the statute of limitations. Various companies that the Bank has acquired remain under the statute of limitations by the IRS for the years ending December 31, 2004 through 2007.

In September 2006, the Emerging Issues Tax Force (EITF) reached a consensus on Issue No. 06-4, Accounting for Deferred Compensation and Postretirement Benefit Aspects of Endorsement of Split-Dollar Life Insurance Arrangements. The consensus requires the recognition of a liability related to the postretirement benefits covered by an endorsement split-dollar life insurance arrangement. If the policy holder has agreed to maintain the insurance policy in force for the employee’s benefit during his or her retirement, then the liability recognized during the employee’s active service period should be based on the future cost of insurance to be incurred during the employee’s retirement.  Alternatively, if the policyholder has agreed to provide the employee with a death benefit, then the liability for the future death benefit should be recognized by following the guidance in Statement 106 or Option 12, as appropriate. This approach requires the policyholder to gain a clear understanding of the benefit being provided by the policyholder to its employee given that it is this benefit that is being recognized as a liability. This consensus is applicable in fiscal years beginning after December 15, 2007.  The Company has determined that the adoption of Issue No. 06-4 will have an immaterial impact on the finanacial position of the Company.

48

PEOPLES COMMUNITY BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

22.  Effects of Recent Accounting Pronouncements  (continued)

In September 2006, the FASB issued Statement of Financial Accounting Standard No. 157, Fair Value Measurement (FAS 157).  The Statement enhances existing guidance for measuring assets and liabilities using fair value.  Prior to the issuance of this Statement, guidance for applying fair value was incorporated in several accounting pronouncements.  FAS 157 provides a single definition of fair value, together with a framework for measuring it, and requires additional disclosure about the use of fair value to measure assets and liabilities.  The Statement also emphasizes that fair value is a market-based measurement, not an entity-specific measurement, and sets out a fair value hierarchy with the highest priority being quoted prices in active markets.  Under the Statement, fair value measurements are disclosed by level within that hierarchy.  While FAS 157 does not add any new fair value measurements, it does change current practice.  Changes to practice include: (1) a requirement for an entity to include its own credit standing in the measurement of its liabilities; (2) a modification of the transaction price presumption; (3) a prohibition on the use of block discounts when valuing large blocks of securities for broker-dealers and investment companies; and (4) a requirement to adjust the value of restricted stock for the effect of the restriction even if the restriction lapses within one year.  This Statement is effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim period within those fiscal years.  The Company believes the impact of adopting FAS 157 on its financial statements will be minimal.

In February 2007, the FASB issued Statement No. 159, The Fair Value Option for Financial Assets and Financial Liabilities – Including an amendment of FASB Statement No. 115 (“SFAS 159”).  SFAS 159 permits entities to choose to measure many financial instructions and certain other items at fair value.  Unrealized gains and losses on items for which the fair value option has been elected will be recognized in earnings at each subsequent reporting date.  SFAS 159 is effective as of the beginning of an entity’s first fiscal year that begins after November 15, 2007 and is not expected to have a material impact on the Company’s financial condition or results of operations.

In December 2007, the FASB issued Statement No. 141 (R) Business Combinations.  This Statement establishes principals and requirements for how the acquirer of a business recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, and any noncontrolling interest in the acquirer.  The Statement also provides guidance for recognizing and measuring the goodwill acquired in the business combination and determines what information to disclose to enable users of the financial statements to evaluate the nature and financial effects of the business combination.  The guidance will become effective as of the beginning of a company’s fiscal year beginning after December 15, 2008.  Early adoption is prohibited.

In December 2007, the FASB issued Statement No. 160, Noncontrolling Interests in Consolidated Financial Statements – an amendment of ARB No. 51.  This Statement amends ARB No. 51 to establish accounting and reporting standards for the noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary.  It clarifies that a noncontrolling interest in a subsidiary is an ownership interest in the consolidated entity and is reported as equity in the consolidated financial statements.  This Statement applies to all for profit entities that prepare consolidated financial statements, but affects only those entities that have an outstanding noncontrolling interest in subsidiaries or that deconsolidate a subsidiary.  Since the Company has no noncontrolling interests in subsidiaries, the impact of adopting SFAS No. 160 on January 1, 2009 is not anticipated to have a material impact on the Company’s financial statements.

49

PEOPLES COMMUNITY BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE B - INVESTMENTS AND MORTGAGE-BACKED SECURITIES

The amortized cost, gross unrealized gains, gross unrealized losses and estimated fair values of securities at December 31, 2007 and 2006, are summarized as follows:

	2007
			Gross		Gross		Estimated
	Amortized		Unrealized		Unrealized		Fair
	Cost		Gains		Losses		Value
	(In thousands)
Available for sale:
US Government agency obligations	$	1,974	$	19	$	—	$	1,993
Municipal securities	1,027		14		7		1,034
Mutual funds	1,251		—		41		1,210
Mortgage-backed securities	63,258		196		119		63,335
	$	67,510	$	229	$	167	$	67,572

	2006
			Gross		Gross		Estimated
	Amortized		Unrealized		Unrealized		Fair
	Cost		Gains		Losses		Value
	(In thousands)
Available for sale:
US Government agency obligations	$	1,966	$	11	$	12	$	1,965
Municipal securities	1,114		11		14		1,111
Mutual funds	1,199		—		53		1,146
Mortgage-backed securities	52,818		134		283		52,669
Other securities	7		1		—		8
	$	57,104	$	157	$	362	$	56,899

The amortized cost and fair value of available-for-sale securities at December 31, 2007, by contractual maturity, are shown below.  There were no held-to-maturity securities at December 31, 2007.  Expected maturities will differ from contractual maturities because issuers may have the right to call or prepay obligations with or without call or prepayment penalties.

	Available-for-sale
	Amortized		Fair
	Cost		Value
	(In Thousands)
Within one year	$	24	$	23
One to five years	1,131		1,150
Five to ten years	627		638
After ten years	1,219		1,216
	3,001		3,027
Mortgage-backed securities	63,258		63,335
Mutual funds	1,251		1,210
Totals	$	67,510	$	67,572

50

PEOPLES COMMUNITY BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE B - INVESTMENTS AND MORTGAGE-BACKED SECURITIES (continued)

Proceeds from the sale of investment securities during fiscal year 2007 amounted to $61,000, with gains of $53,000 and a related tax effect of $18,000.  In conjunction with the purchase of Mercantile in June 2006, the Company acquired $7.4 million in investment securities which were designated as available for sale.  Proceeds from the sale of investment securities during fiscal year 2006 amounted to $1.6 million, with gross gains of $126,000 and gross losses of $26,000, for a net realized gain totaling $100,000 and a related tax effect of $34,000.  During the three-month period ended December 31, 2005, the Bank sold $108.9 million in investment securities and recorded gross losses of $1.4 million and a related tax effect of $478,000.  During the year ended September 30, 2005, the Bank sold $41.9 million of investment securities with gross gains of $741,000 and a related tax effect of $252,000.

At December 31, 2007, People’s had $10.0 million of mortgage-backed securities pledged to secure public deposits and $13.1 million of mortgage-backed securities pledged to secure advances from the Federal Home Loan Bank.  At December 31, 2006, People’s had $10.7 million of mortgage-backed securities pledged to secure public deposits, and $35.7 million of mortgage-backed securities pledged to secure advances from the Federal Home Loan Bank.

Certain investments in debt and marketable equity securities are reported in the financial statements at an amount less than their historical cost.  As indicated in the following tables, the total fair value of these investments at December 31, 2007 and 2006, was $20.6 million and $31.1 million, respectively, which approximated 30.4% and 54.8% of the Company’s investment portfolio.  These declines primarily resulted from recent increases in market rates.  Based on an evaluation of the available evidence, including recent changes in market rates, credit rating information and information obtained from regulatory filings, management believes the declines in fair value for these securities are temporary.

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

The following tables reflect the investments’ gross unrealized loses and fair value, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position at December 31, 2007 and 2006.

	2007
	Less than 12 months					12 Months or Longer					Total
Description	Number of	Fair		Unrealized		Number of	Fair		Unrealized		Fair		Unrealized
of Securities	Investments	Value		Losses		Investments	Value		Losses		Value		Losses
	(In Thousands)
US Government agency obligations	—	$	—	$	—	—	$	—	$	—	$	—	$	—
Municipal securities	—	—		—		3	410		7		410		7
Mutual funds	—	—		—		2	1,210		41		1,210		41
Mortgage-backed securities	8	18,647		97		1	296		22		18,943		119
Total temporarily impaired securities	8	$	18,647	$	97	6	$	1,916	$	70	$	20,563	$	167

51

PEOPLES COMMUNITY BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE B - INVESTMENTS AND MORTGAGE-BACKED SECURITIES (continued)

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

On January 24, 2008, the Bank sold approximately $28.9 million in mortgage-backed securities due to the favorable market conditions.  In conjunction with the sale, the Bank recorded a $483,000 gain on sale and a related tax effect of approximately $164,000.

NOTE C - LOANS RECEIVABLE

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

	2007		2006
	(In thousands)
Residential real estate
One-to four-family	$	311,968	$	343,346
Multifamily	82,176		122,221
Construction	131,777		104,764
Nonresidential real estate and land	128,955		140,909
Nonresidential real estate construction	12,394		130,066
Commercial	20,012		30,933
Consumer and other	16,758		23,022
Total loans receivable	704,040		895,261
Less:
Undisbursed portion of loans in process	33,661		62,042
Deferred loan origination fees	1,459		2,272
Allowance for loan losses	34,499		18,369
Loans receivable – net	$	634,421	$	812,578

52

PEOPLES COMMUNITY BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE C - LOANS RECEIVABLE (continued)

In the ordinary course of business, Peoples has granted loans to some of its directors, officers and their related business interests.  All loans to related parties have been made on substantially the same terms as those prevailing at the time for unrelated third parties.  The aggregate dollar amount of loans to executive officers and directors was approximately $725,000 and $886,000 at December 31, 2007 and 2006, respectively.  During the fiscal year ended December 31, 2007, there was one loan renewed to executive officers and directors for $200,000.  During the fiscal year ended December 31, 2006, there was one loan originated to executive officers and directors for $275,000.   During the fiscal years ended December 31, 2007 and December 31, 2006, principal repayments of approximately $361,000 and $92,000, respectively, were received from executive officers and directors

NOTE D - ALLOWANCE FOR LOAN LOSSES

The activity in the allowance for loan losses is summarized as follows the fiscal years ended December 31, 2007 and 2006, the three-month period ended December 31, 2005 and the fiscal year ended September 30, 2005:

							For Three Months
	For Years Ended						Ended			For Year Ended
	December 31,						December 31,			September 30,
	2007			2006			2005			2005
	(In thousands)
Balance at beginning of period	$	18,369		$	13,444		$	13,697		$	11,025
Increase from Peoples Federal acquisition	—			—			907			—
Increase from Mercantile acquisition	—			302			—			—
Provision for losses on loans	32,800			17,450			900			3,600
Charge-off of loans	(18,284		)	(13,103		)	(2,206		)	(1,081		)
Recoveries	1,614			276			146			153
Balance at end of period	$	34,499		$	18,369		$	13,444		$	13,697

At December 31, 2007, December 31, 2006, December 31, 2005, and September 30, 2005 non-accruing loans amounted to $25.3 million, $24.1 million, $18.8 million, and $19.4 million, respectively.  At December 31, 2007, loans greater than 90 days delinquent and still accruing totaled $613,000 and were deemed to be in process of collection of both principal and interest.  At December 31, 2006 loans greater than 90 days delinquent and still accruing totaled $1.7 million and were deemed to be in process of collection of both principal and interest. There were no loans greater than 90 days delinquent and still accruing at December 31, 2005.  Interest income which would have been recognized if such non-accruing loans had performed pursuant to contractual terms totaled approximately $1.8 million, $1.4 million, $161,000, and $1.1 million for the fiscal years ended December 31, 2007 and 2006, the three-month period ended December 31, 2005 and the fiscal year ended September 30, 2005, respectively.

53

PEOPLES COMMUNITY BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE D - ALLOWANCE FOR LOAN LOSSES (continued)

Information with respect to the Bank’s impaired loans at and for the years ended December 31, 2007 and 2006 is as follows:

	2007		2006
	(In thousands)
Impaired loans with related allowance	$	23,368	$	15,327
Impaired loans with no related allowance	—		5,201
Total impaired loans	$	23,368	$	20,528
Allowance for losses on impaired loans	$	5,777	$	2,115
Average recorded investment in impaired loans	$	16,530	$	16,297
Interest income recognized on impaired loans	$	913	$	861
Interest income recognized on a cash basis on impaired loans	$	910	$	847

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

NOTE E - OFFICE PREMISES AND EQUIPMENT

Office premises and equipment are comprised of the following at December 31:

	2007		2006
	(In thousands)
Land and improvements	$	9,862	$	9,855
Office buildings and improvements	17,991		15,323
Construction in progress	586		1,957
Furniture, fixtures and equipment	6,883		6,414
	35,322		33,549
Less accumulated depreciation	7,017		5,670
	$	28,305	$	27,879

Included above is approximately $510,000 of real estate held for sale.  Construction was completed on a new branch office in Montgomery in February, 2007, at a total cost of $1.2 million.  Construction was also completed on the rebuilding of a branch office on Importing Street in Aurora, Indiana at a total cost of approximately $1.8 million.  Capitalized interest on construction during fiscal year 2007 was approximately $76,000.

54

PEOPLES COMMUNITY BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE F - DEPOSITS

Deposits consist of the following major classifications at December 31:

	2007		2006
	(In thousands)
Non-interest bearing checking accounts	$	21,936	$	21,967
Checking accounts	50,686		55,114
Savings accounts	131,728		158,025
Money market demand deposit	19,065		20,863
Total demand, transaction and passbook deposits	223,415		255,969
Certificates of deposit:
Original maturities of:
Less than 12 months	272,986		227,290
12 months to 36 months	85,174		99,998
More than 36 months	66,676		83,507
Individual retirement accounts	86,961		88,497
Total certificates of deposit	511,797		499,292
Total deposits	$	735,212	$	755,261

At December 31, 2007 and 2006, Peoples had certificate of deposit accounts with balances greater than $100,000 totaling $152.4 million and $131.9 million, respectively.

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

	2007
	(In thousands)
One year or less	$	406,005
One to two years	44,377
Two to three years	33,488
Three to four years	15,111
Four to five years	12,814
Five to six years	2
	$	511,797

55

PEOPLES COMMUNITY BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE G - ADVANCES FROM THE FEDERAL HOME LOAN BANK

Advances from the Federal Home Loan Bank, collateralized at December 31, 2007 by pledges of certain residential mortgage loans totaling $283.7 million, certain mortgage backed securities totaling $13.1 million, and Peoples’ investment in Federal Home Loan Bank stock, are summarized as follows:

	Maturing Fiscal
Interest Rate	Year Ending in	(Dollars in thousands)
4.30%	2008	$	1,997
3.73%	2009	2,938
7.65%	2011	2
4.53%	2012	1,962
4.78%	2015	1,959
4.07%	2016	25,000
3.45%	2017	25,000
5.60%	2018	66
5.60% - 6.61%	2019	2,204
		$	61,128
Weighted-average interest rate		3.91		%

NOTE H - OTHER BORROWED MONEY

The Company has a $17.5 million line of credit with another financial institution, with interest payable at daily LIBOR plus 200 basis points or prime less 50 basis points based on the selection made by the Company.  The Company had a balance of $16.5 million at December 31, 2007 at a rate of 7.24%.  This line of credit expires in the second quarter of fiscal 2008.  The loan is secured by the outstanding shares of the Bank.  The loan agreement contains certain financial covenants which, if not complied with, could allow the lender to accelerate repayment of the loan.   As of December 31, 2007, the Company was not in compliance with one of the loan covenants and the lender has the ability to accelerate all outstanding amounts upon notice and the passage of 30 days. The Company is currently negotiating with the lender regarding a waiver of default, and a modification and/or extension of the line of credit.

NOTE I - GUARANTEED PREFFERED BENEFICIAL INTERESTS IN JUNIOR SUBORDINATED DEBENTURES

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

56

PEOPLES COMMUNITY BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE I - GUARANTEED PREFFERED BENEFICIAL INTERESTS IN JUNIOR SUBORDINATED DEBENTURES  (continued)

In June 2005, the Company formed a second wholly owned trust (the “Trust II”), which issued $15.0 million of mandatorily redeemable debt securities. These debt securities are included as a component of Tier I capital for regulatory capital purposes.  The subordinated debentures are the sole assets of the Trust II, and the Company owns all of the common securities of the Trust II.  Interest payments on the debt securities are made quarterly at an annual variable interest rate equal to the three-month LIBOR rate plus 175 basis points, or equal to 7.11% at December 31, 2006 and 6.74% at December 31, 2007, and are reported as a component of interest expense on borrowings.   The net proceeds received by the Company from the sale of the debt securities were used for general corporate purposes.  The subordinated debentures mature in 2035, but can be redeemed through prior approval by the OTS in any June, September, December or March beginning in 2010.

NOTE J - COMMITMENTS

Peoples’ is a party to financial instruments with off-balance-sheet risk in the normal course of business to meet the financing needs of its customers, including commitments to extend credit.  Such commitments involve, to varying degrees, elements of credit and interest-rate risk in excess of the amount recognized in the consolidated statement of financial condition.  The contract or notional amounts of the commitments reflect the extent of Peoples’ involvement in such financial instruments.

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

At December 31, 2007, Peoples had commitments to originate fixed rate loans totaling $143,000. Additionally, Peoples had adjustable-rate commitments for unused lines of credit under home equity loans totaling $29.0 million, adjustable-rate commitments for unused commercial lines of credit totaling $2.4 million, and fixed-rate commitments for unused consumer overdraft protection lines totaling $537,000.  Management believes that such loan commitments are able to be funded through normal cash flow from operations.  Additionally, Peoples had standby letters of credit for customers totaling $5.9 million at December 31, 2007.  From time to time balances with correspondent banks may exceed the FDIC $100,000 insurable limit.

At December 31, 2006, Peoples had commitments to originate loans totaling $5.0 million of which $716,000 were fixed rate and $4.3 million were adjustable rate. Additionally, Peoples had adjustable-rate commitments for unused lines of credit under home equity loans totaling $25.2 million, adjustable-rate commitments for unused commercial lines of credit totaling $5.1 million, and fixed-rate commitments for unused consumer overdraft protection lines totaling $504,000.  Additionally, Peoples had fixed-rate standby letters of credit for customers totaling $5.8 million at December 31, 2006.

57

PEOPLES COMMUNITY BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE J — COMMITMENTS (continued)

Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract.  Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee.  Since many of the commitments may expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements.  Peoples evaluates each customer’s creditworthiness on a case-by-case basis.  The amount of collateral obtained, if it is deemed necessary by Peoples upon extension of credit, is based on management’s credit evaluation of the counterparty.  Collateral on loans may vary but the preponderance of loans granted generally include a mortgage interest in real estate as security.

Peoples has also entered into lease agreements for office premises under operating leases which expire at various dates through 2013. Rent expense totaled $68,000, $128,000, $16,000 and $37,000 for the fiscal years ended December 31, 2007 and 2006, the three-month period ended December 31, 2005 and the fiscal year ended September 30, 2005, respectively. The following table summarizes minimum payments due under lease agreements by year.

Year ending
December 31,	(Dollars in thousands)
2008	$	38
2009	38
2010	38
2011	38
2012	38
2013	6
	$	196

NOTE K - FEDERAL INCOME TAXES

Federal income taxes differ from the amounts computed at the statutory corporate tax rate for the fiscal years ended December 31, 2007 and 2006, the three-month period ended December 31, 2005 and fiscal year ended September 30, 2005 as follows:

							For Three Months
	Years Ended						Ended			For Year Ended
	December 31,						December 31,			September 30,
	2007			2006			2005			2005
	(In thousands)
Federal income taxes at statutory rate	$	(13,010	)	$	(2,165	)	$	18		$	1,439
Increase (decrease)in taxes resulting from:
Goodwill impairment	3,875			—			—			—
Bank owned life insurance undistributed earnings	(244		)	(233		)	(55		)	(54		)
Tax exempt interest on municipal securities	(15		)	(15		)	(4		)	(5		)
Valuation allowance	(4,400		)	—			—			—
Other	61			105			7			(5		)
Federal income taxes per consolidated financial statements	$	(4,933	)	$	(2,308	)	$	(34	)	$	1,375
Effective tax rate	n/a			n/a			n/a			32.4		%

58

PEOPLES COMMUNITY BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE K - FEDERAL INCOME TAXES (continued)

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

	2007			2006
	(In thousands)
Taxes (payable) refundable on temporary
differences at estimated corporate tax rate:
Deferred tax assets:
General loan loss allowance	$	11,730		$	6,245
Deferred compensation	576			476
Charitable contributions	60			37
Stock benefit plans	32			252
Deferred loan origination fees	496			772
Net operating loss carryforwards	3,859			1,188
Nonaccrual interest	190			293
Unrealized losses on securities designated as available for sale	—			70
Other	962			—
Total deferred tax assets	17,905			9,333
Deferred tax liabilities:
Federal Home Loan Bank stock dividends	(1,919		)	(1,919		)
Unrealized losses on securities designated as available for sale	(21		)	—
Book/tax depreciation differences	(113		)	(398		)
Mortgage servicing rights	(224		)	(281		)
Core deposit intangible and other purchase accounting adjustments	(2,199		)	(3,255		)
Other	(213		)	_(345		)
Total deferred tax liabilities	(4,689		)	(6,198		)
Valuation allowance	(4,400		)	—
Net deferred tax asset	$	8,816		$	3,135

During 2007, the Company recorded a valuation allowance of $4.4 million based principally on uncertainty about the Company’s ability to generate sufficient future taxable income to realize all of the related temporary differences.  The Company believes that it will realize the remaining net deferred tax assets through taxable income resulting from the planned profitable sale of branches of the Bank within the next twelve months.  The expense for recording the valuation allowance is a non-cash item, and the recording of this expense does not imply that the Company owes additional income taxes.  Management will continue to review the tax criteria related to the recognition of deferred tax assets.

As of December 31, 2007, the Company had approximately $11.4 million of net operating loss carry forward available to offset future federal taxable income.  The net operating loss carry forward expires in 2025.

59

PEOPLES COMMUNITY BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE K - FEDERAL INCOME TAXES (continued)

Prior to fiscal 1997, Peoples was allowed a special bad debt deduction based on a percentage of earnings, generally limited to 8% of otherwise taxable income and subject to certain limitations based on aggregate loans and savings account balances at the end of the year.  This deduction totaled approximately $4.9 million as of December 31, 2007.  If the amounts that qualified as deductions for federal income tax purposes are later used for purposes other than for bad debt losses, including distributions in liquidation, such distributions will be subject to federal income taxes at the then current corporate income tax rate.  The approximate amount of the unrecognized deferred tax liability relating to the cumulative bad debt deduction is $1.4 million.

NOTE L - CAPITAL REQUIREMENTS AND REGULATORY MATTERS

The Bank is subject to various regulatory capital requirements administered by the federal banking agencies.  Failure to meet minimum capital requirements can initiate certain mandatory – and possibly additional discretionary – actions by regulators that, if undertaken, could have a direct material effect on the Bank’s financial statements.   Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank must meet specific capital guidelines that involve quantitative measures of the bank’s assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices.  The Bank’s capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors.

Quantitative measures established by regulation to ensure capital adequacy require the Bank to maintain minimum amounts and ratios (set forth in the table below) of total and Tier 1 capital (as defined in the regulation) to risk-weighted assets (as defined), and of Tier 1 capital (as defined) to adjusted total assets (as defined).  During fiscal 2007, the Bank was notified by the OTS that it was categorized as “well-capitalized” under the regulatory framework for prompt corrective action.  To be categorized as “well-capitalized” the Bank must maintain minimum capital ratios as set forth in the following tables.  There are no conditions or events since that notification that management believes have changed the Bank’s category.

Peoples Community Bancorp, as a savings institution holding company at December 31, 2007 and 2006, is not subject to regulatory capital requirements separate from those of the Bank.

	As of December 31, 2007
					Adequately			Well
	Actual				Capitalized			Capitalized
Peoples Community Bank	Amount		Ratio		Amount	Ratio		Amount	Ratio
	(Dollars in thousands)
Total Capital
(to Risk Weighted Assets):	$	68,335	11.4	%	³$48,102	³8.0	%	³$60,127	³10.0	%
Tier 1 Capital
(to Risk-Weighted Assets):	$	60,486	10.1	%	³$24,051	³4.0	%	³$36,076	³ 6.0	%
Tier 1 Capital
(to Adjusted Total Assets):	$	60,486	7.0	%	³$34,500	³4.0	%	³$43,125	³ 5.0	%

60

PEOPLES COMMUNITY BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE L - CAPITAL REQUIREMENTS AND REGULATORY MATTERS (continued)

	As of December 31, 2006
					Adequately			Well
	Actual				Capitalized			Capitalized
Peoples Community Bank	Amount		Ratio		Amount	Ratio		Amount	Ratio
	(Dollars in thousands)
Total Capital
(to Risk Weighted Assets):	$	94,390	12.6	%	³$59,983	³8.0	%	³$74,979	³10.0	%
Tier 1 Capital
(to Risk-Weighted Assets):	$	84,906	11.3	%	³$29,991	³4.0	%	³$44,987	³ 6.0	%
Tier 1 Capital
(to Adjusted Total Assets):	$	84,906	8.5	%	³$39,949	³4.0	%	³$49,936	³ 5.0	%

The recessionary forces in the local economy have continued to impact the Company’s operations and have resulted in the imposition of certain restrictions on such operations by the Bank’s primary federal regulator, the OTS.  On April 2, 2008, the Company and the Bank each consented to the terms of Cease and Desist Orders issued by the OTS (the “Orders”).  The Company attached copies of the Orders to a Current Report on Form 8-K filed with the Securities and Exchange Commission on April 3, 2008.

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

The Order issued to 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 for land acquisition or development, speculative residential construction, commercial and multi-family construction, acquisition or retention of commercial property, and non-owner occupied one- to four-family residential property; (ii) engaging an independent consultant to conduct a loan portfolio review for the purpose of determining asset quality and the appropriateness of the Bank’s asset classification process related to loan relationships that equal or exceed $4.0 million; (iii) establishing a plan for reducing adversely classified assets; (iv) reviewing and, where appropriate, adjusting the Bank’s allowance for loan and lease losses methodology; (v) limiting asset growth during each calendar quarter to an amount not to exceed net interest credited on deposit liabilities; and (vi) establishing an Oversight Committee of the Bank’s Board of Directors comprised of independent outside directors.  In an effort to proactively address the downturn in the local real estate market, the Bank had previously curtailed or ceased the lending activities restricted in the Orders.

61

PEOPLES COMMUNITY BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE M - CONDENSED FINANCIAL STATEMENTS OF PEOPLES COMMUNITY BANCORP, INC.

The following condensed financial statements summarize the financial position of Peoples Community Bancorp, Inc. as of December 31, 2007 and 2006, and the results of its operations and its cash flows for the fiscal years ended December 31, 2007 and 2006, the three-month period ended December 31, 2005 and the fiscal year ended September 30, 2005.

PEOPLES COMMUNITY BANCORP, INC.

STATEMENTS OF FINANCIAL CONDITION

December 31, 2007 and 2006

(In thousands)

	2007			2006
ASSETS
Cash and cash equivalents	$	145		$	191
Loan receivable from Bank	1,001			1,212
Investment in Peoples Community Bank	85,091			114,617
Prepaid and deferred federal income taxes and other assets	464			1,156
Total assets	$	86,701		$	117,176
LIABILITIES AND STOCKHOLDERS’ EQUITY
Loan payable	$	16,500		$	12,700
Accrued expenses and other liabilities	146			122
Accounts payable to subsidiary	1,026			1,274
Subordinated debentures	15,464			15,464
Total liabilities	33,136			29,560
Stockholders’ equity
Common stock and additional paid-in capital	70,889			69,823
Retained earnings (deficit)	(17,364		)	17,929
Unrealized gains (losses) on securities designated as available for sale, net of tax effects	40			(136		)
Total stockholders’ equity	53,565			87,616
Total liabilities and stockholders’ equity	$	86,701		$	117,176

62

PEOPLES COMMUNITY BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE M - CONDENSED FINANCIAL STATEMENTS OF PEOPLES COMMUNITY BANCORP, INC. (continued)

PEOPLES COMMUNITY BANCORP, INC.

STATEMENTS OF OPERATIONS

	For Years						For Three Months			For Year
	Ended						Ended			Ended
	December 31,						December 31,			September 30,
	2007			2006			2005			2005
				(In thousands)
Income
Dividends from subsidiaries	$	—		$	—		$	—		$	—
Other income	56			73			39			55
Total income	56			73			39			55
Expenses
Interest expense	2,236			2,186			463			1,043
Other expenses	178			252			73			270
Total expenses	2,414			2,438			536			1,313
Loss before income tax and equity in undistributed income of subsidiaries	(2,358		)	(2,365		)	(497		)	(1,258		)
Income tax benefit	—			(693		)	(146		)	(408		)
Loss before equity in undistributed income of subsidiaries	(2,358		)	(1,672		)	(351		)	(850		)
Equity in undistributed income (loss) of subsidiaries	(30,975		)	(2,389		)	438			3,706
Net income (loss)	$	(33,333	)	$	(4,061	)	$	87		$	2,856

63

PEOPLES COMMUNITY BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE M - CONDENSED FINANCIAL STATEMENTS OF PEOPLES COMMUNITY BANCORP, INC. (continued)

PEOPLES COMMUNITY BANCORP, INC.

STATEMENTS OF CASH FLOWS

 (In thousands)

	For Years						For Three Months			For Year
	Ended						Ended			Ended
	December 31,						December 31,			September 30,
	2007			2006			2005			2005
Operating Activies
Net earnings (losses)	$	(33,333	)	$	(4,061	)	$	87		$	2,856
Items not requiring (providing) cash
Undistributed losses (earnings) of Peoples Community Bank	30,975			2,561			(373		)	(3,691		)
Undistributed earnings of Columbia	—			(172		)	(65		)	(95		)
Gain on sale of securities	—			(6		)	—			—
Increase (decrease) in cash due to changes in:
Other assets	110			1,229			(146		)	(793		)
Other liabilities	324			(214		)	(258		)	143
Net cash used in operating activities	(1,924		)	(663		)	(755		)	(1,580		)
Investing Activities
Proceeds from repayment of loan to ESOP	211			211			41			221
Proceeds from sale of investment securities	—			126
Purchase of interest in Columbia	—			—			—			(2,524		)
Sale of interest in Columbia	—			2,856			—			—
Loan disbursed to ESOP	—			—			—			(962		)
Cash paid in acquisition of Mercantile - net	—			(364		)	—			—
Contribution to Peoples Community Bank	—			—			—			(25,250		)
Net cash provided by (used in) investing activities	211			2,829			41			(28,515		)
Financing Activities
Proceeds from borrowings	4,550			16,500			—			—
Repayment of borrowings	(750		)	(3,800		)	—			—
Dividends paid on common stock	(2,140		)	(2,795		)	(664		)	(2,419		)
Proceeds from issuance of common stock-net	—			—			—			10,250
Proceeds from exercise of stock options	7			46			20			150
Proceeds from issuance of subordinated debentures	—			—			—			15,464
Redemption of subordinated debentures	—			(12,887		)	—			—
Net cash provided by (used in) financing activities	1,667			(2,936		)	(644		)	23,445
Net decrease in cash and cash equivalents	(46		)	(770		)	(1,358		)	(6,650		)
Cash and cash equivalents at beginning of year	191			961			2,319			8,969
Cash and cash equivalents at end of year	$	145		$	191		$	961		$	2,319

64

PEOPLES COMMUNITY BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE M - CONDENSED FINANCIAL STATEMENTS OF PEOPLES COMMUNITY BANCORP, INC. (continued)

The Bank is subject to regulations imposed by the OTS regarding the amount of capital distributions payable by the Bank to the Company.  Generally, the Bank’s payment of dividends is limited, without prior OTS approval, to net earnings for the current calendar year plus the two preceding calendar years, less capital distributions paid over the comparable time period.  Insured institutions are required to file an application with the OTS for capital distributions in excess of this limitation. The Orders specifically prohibit the Bank from paying dividends to the Company without the prior approval of the OTS.

NOTE N - BUSINESS COMBINATIONS

On June 10, 2005, the Company acquired American, included $38.4 million in loans receivable, $1.3 million in fixed assets, and $58.0 million in deposits. Goodwill and other intangible assets of approximately $5.8 million was recorded in the acquisition.

On December 16, 2005, the Company acquired PFS, which included $122.6 million in loans receivable, $1.0 million in fixed assets, and $88.7 million in deposits.  Goodwill and other intangible assets of approximately $14.0 million was recorded in this acquisition.

On June 9, 2006, the Company acquired Mercantile and the Bank acquired Mercantile Savings Bank which operated one branch office in Cincinnati, Ohio.  The acquisition included $38.0 million in loans receivable and $48.7 million in deposits.  Goodwill and other intangible assets of approximately $6.2 million were recorded in the acquisition.

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

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

65

PEOPLES COMMUNITY BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE N - BUSINESS COMBINATIONS (continued)

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

Presented below are pro-forma condensed consolidated statements of earnings which have been prepared as if the American State transaction had been consummated as of the beginning of the fiscal year ended September 30, 2005; the PFS Bancorp transaction had been consummated at the beginning of the fiscal year ended September 30, 2005 and the three-month period ended December 31, 2005; and the Mercantile transaction had  been consummated at the beginning of the fiscal year ended September 30, 2005 and the three-month period ended December 31, 2005 and the fiscal year ended December 31, 2006.

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

66

PEOPLES COMMUNITY BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE O - QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)

The following table summarizes the Company’s quarterly results for the fiscal years ended December 31, 2007 and December 31, 2006.  Certain amounts, as previously reported, have been reclassified to conform to the 2007 presentation.

	Three Months Ended
	March 31,			June 30,			September 30,			December 31,
	(In thousands, except per share data)
2007:
Total interest income	$	16,089		$	15,943		$	14,935		$	13,266
Total interest expense	9,288			9,591			9,091			8,490
Net interest income	6,801			6,352			5,844			4,776
Provision for losses on loans	2,100			2,100			4,100			24,500
Gain (loss) on sale of assets	(4		)	(45		)	301			46
Other income	785			917			749			1,183
General, administrative and other expense	5,745			5,652			5,050			5,327
Goodwill impairment	—			—			—			11,397
Loss before income taxes	(263		)	(528		)	(2,256		)	(35,219		)
Federal income tax benefit	(137		)	(233		)	(817		)	(3,746		)
Net loss	$	(126	)	$	(295	)	$	(1,439	)	$	(31,473	)
Loss per share
Basic	$	(.03	)	$	(.06	)	$	(.30	)	$	(6.57	)
Diluted	$	(.03	)	$	(.06	)	$	(.30	)	$	(6.57	)

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

67

PEOPLES COMMUNITY BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE O - QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)  (continued)

Net loss for the fourth quarter of 2007 was $31.5 million, or $6.57 loss per share, compared to a net loss for the third quarter of 2007 of $1.4 million and $2.3 million for the fourth quarter of 2006.  Net interest income for the quarter decreased $1.1 million, or 18.4%, compared to the third quarter of 2007, primarily due to a decrease of 40 basis points in the net interest margin to 2.17% for the fourth quarter of 2007.

Management recorded a provision for losses on loans of $24.5 million in the fourth quarter of 2007, compared to $4.1 million in the third quarter of 2007.  The larger provision in the fourth quarter reflects higher probable credit losses on primarily non-owner occupied residential loans and land development loans, as a result of continuing recessionary forces in the local economy and a significant downturn in the real estate market.  Nonperforming assets at September 30, 2007 totaled $20.4 million, compared to $32.8 million at December 31, 2007, while classified assets increased from $31.3 million at September 30, 2007 to $40.6 million at December 31, 2007.

Other income totaled approximately $1.2 million for the fourth quarter of 2007, compared to $749,000 for the third quarter of 2007.  The increase was primarily attributed to approximately $100,000 in recoveries received on loans charged-off by a financial institution prior to its acquisition by the Company, $100,000 received as a property improvement easement, and increases in other deposit and loan fee income.

General, administrative and other expenses recorded during the fourth quarter of 2007 totaled $5.3 million, an increase of $277,000, or 5.5%, compared to the third quarter of 2007, and a decrease of $418,000, or 7.3%, and a decrease of $325,000, or 5.8%, from the first and second quarter of 2007, respectively.  In December 2007, the Bank recorded approximately $508,000 in compensation expense for the release of approximately 32,383 ESOP shares for employee allocation.  This occurred in conjunction with the decision to terminate the ESOP by September 30, 2008 and record associated expenses in 2008 to release all unallocated shares.

The Bank recorded goodwill totaling $23.9 million in conjunction with acquisitions of other financial institutions over the past five years.  Following an updated valuation in the fourth quarter of 2007 by an independent third party, the Bank incurred a non-cash impairment charge of $11.4 million for the writedown of goodwill.   This impairment is primarily attributable to lower market valuations for financial institutions in the latter part of 2007, the weakening of the credit market in the second half of 2007, the decline in real estate values, particularly in the Cincinnati region, and the net losses recorded by the Bank and Company for the past six quarters.

In the fourth quarter of 2007, the Company recorded a valuation allowance of deferred income tax in the amount of  $4.4 million based principally on uncertainty about the Company’s ability to generate sufficient future taxable income to realize all of the related temporary differences.  The Company believes that it will realize the remaining net deferred tax assets through taxable income resulting from the planned profitable sale of branches of the Bank within the next twelve months.  The expense for recording the valuation allowance is a non-cash item, and the recording of this expense does not imply that the Company owes additional income taxes.  This resulted in a total tax benefit of $3.7 million for the fourth quarter of 2007.

68

PEOPLES COMMUNITY BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE P – OPERATING AND LIQUIDITY MATTERS

Beginning in early 2007, the Company began to reduce all aspects of its lending exposure due in large part to the downturn in the local economy, and, in particular, values of residential and residential development properties. Further, beginning in 2006, the Company revised its underwriting standards to place an increased focus on cash flow analysis, tightened its credit standards and provided additional resources to the resolution of its classified assets.  Actions taken by the Company during 2006 and 2007,  including significant charge-offs and provisions for loan losses, as well as the continued recessionary forces in the local economy have had a significant adverse impact on the Company’s financial condition and results of operations.  For 2006 and 2007, net losses recorded by the Company amounted to $4.1 million and $33.3 million, respectively.

The Bank’s primary federal regulator, the OTS has, in light of the Company’s recent losses and levels of nonperforming assets, imposed certain operations restrictions on the Company and the Bank, many of which had previously been taken by the Company and the Bank.  On April 2, 2008, the Company and the Bank each consented to the terms of the Orders.  The Orders require the Company and the Bank to, among other things, file with the OTS within proscribed time periods updated business plans, which specifically incorporate the requirements set forth in the Orders and comments contained in the most recently completed examinations of the Company and the Bank. In addition, the Orders require that the Company and the Bank receive the permission of the OTS prior to (i) making or declaring any dividends or payments on their outstanding securities; (ii) adding or replacing a director or hiring a senior executive officer; and (iii) making any golden parachute payments to any institution-affiliated party. Pursuant to the Order issued to the Company, the Company must also receive the permission of the OTS prior to increasing its debt position and before any repurchase of its securities.

The Company currently lacks liquidity to continue as a going concern primarily due to the Company’s current lack of liquidity to repay its $17.5 million obligation under an outstanding line of credit due June 30, 2008.  The line of credit is secured by all outstanding shares of common stock of the Bank.  Although the Bank exceeds all of its capital requirements and is considered well capitalized at December 31, 2007, the Orders prohibit the Bank from paying cash dividends to the Company without the prior consent of the OTS and the Company will only be able to rely upon existing cash and cash equivalents as sources of its liquidity.  Without the ability to rely on dividends from the Bank, the Company will require funds from other funding sources to meet its obligations such as restructuring the current line of credit or replacing the current line of credit.  The Company was not in compliance with one of the loan covenants at December 31, 2007 and the lender has the ability to accelerate all outstanding amounts upon notice and the passage of 30 days. The Company is currently negotiating with the lender regarding a waiver of default, and a modification and/or extension of the line of credit.

Management of the Company and the Bank is working diligently to resolve the issues associated with the Company’s nonperforming assets and to provide the information or take the actions required by the Orders.  Concurrently, management and the Board of Directors are considering all strategic alternatives available to the Company and the Bank. As required, the Company and the Bank have filed a consolidated business plan with the OTS covering operations through 2010.  The Company’s business plan contemplates, among other things, a consolidation of the Company’s operations through branch sales and a reduction in adversely classified assets through loan resolutions, repayments, sales and charge-offs.  Branch sale transactions would decrease the Company’s assets and liabilities, improve capital ratios, generate taxable income, and reduce general, administrative and other expense.  In addition, the Bank would dividend funds to the Company to provide liquidity to service the Company’s debt, provided that approval would be received from the OTS. The business plan was submitted by the Company to the OTS on April 7, 2008 and is subject to review and approval by the OTS.

69

PEOPLES COMMUNITY BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE P – OPERATING AND LIQUIDITY MATTERS  (continued)

There are no assurances that the measures set forth in the 3-year business plan will successfully improve the condition of the Company and result in the termination of the Orders from the OTS.  The economic factors of the greater Cincinnati area and the duration of the downturn in the local real estate market will have a significant impact on the implementation of the business plan.  In addition, while these measures are designed to improve the condition of the Company, there are no assurances that such measures will successfully enable the Company to continue as a going concern.  Although not currently planned, the realization of assets in other than the ordinary course of business in order to meet liquidity needs could incur losses not reflected in these financial statements.

70

PEOPLES COMMUNITY BANCORP, INC.

DIRECTORS AND EXECUTIVE OFFICERS

PEOPLES COMMUNITY BANCORP, INC. AND PEOPLES COMMUNITY BANK

DIRECTORS

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

EXECUTIVE OFFICERS

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

71

PEOPLES COMMUNITY BANCORP, INC.

BANKING LOCATIONS AND STOCKHOLDER INFORMATION

BANKING LOCATIONS

Peoples Community Bancorp, Inc. is a Maryland-incorporated savings and loan holding company conducting business through its wholly-owned subsidiary, Peoples Community Bank.  Peoples Community Bank is a federally-chartered, DIF-insured stock savings bank operating through nineteen offices in Hamilton, Warren, and Butler counties in southwest Ohio and Dearborn and Ohio Counties in southeast Indiana.

	Main Office
	6100 West Chester Road West Chester, Ohio 45069
	Branch Offices in Ohio
7615 Voice of America Drive West Chester, Ohio 45069	11 South Broadway Lebanon, Ohio 45036	4825 Marburg Avenue Cincinnati, Ohio 45209
5712 Bridgetown Road Cincinnati, Ohio 45248	6570 Harrison Avenue Cincinnati, Ohio 45247	7522 Hamilton Avenue Cincinnati, Ohio 45231
4100 State Route 128 Cleves, Ohio 45002	1101 Columbus Avenue Lebanon, Ohio 45036	5797 South State Route 48 Maineville, Ohio 45039
8350 Arbor Square Drive Mason, Ohio 45040	3530 Springdale Road Cincinnati, Ohio 45251	7200 Blue Ash Road Cincinnati, Ohio 45236
9360 Montgomery Road Cincinnati, Ohio 45242		6945 South Liberty Drive Liberty Township, Ohio 45044
	Branch Offices in Indiana
131 Walnut Street Lawrenceburg, Indiana 47025	3200 Importing Street Aurora, Indiana 47001	24128 State Line Road Bright, Indiana 47025
	330 Industrial Access Road Rising Sun, Indiana 47040

ANNUAL MEETING

The Annual Meeting of Stockholders of Peoples Community Bancorp will be held on May 28, 2008 at 10:00 a.m., Eastern Time, at the Company’s Voice of America location, 7615 Voice of America Centre Drive, West Chester, Ohio  45069.

TRANSFER AGENT/REGISTRAR

Registrar and Transfer Company

10 Commerce Drive

Cranford, New Jersey 07016

(908) 272-8511

STOCKHOLDER REQUESTS

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

72

EX-23.1

EXHIBIT 23.1

CONSENT OF REGISTERED INDEPENDENT PUBLIC ACCOUNTING FIRM

We consent to the incorporation by reference in the Registration Statement No. 333-91578 of Peoples Community Bancorp, Inc. on Form S-8 of our report dated April 15, 2008 on our audits of the consolidated financial statements of Peoples Community Bancorp, Inc. as of December 31, 2007 and 2006 and for each of the two years in the period ended December 31, 2007 and three month period ended December 31, 2005 and for the year ended September 30, 2005, incorporated by reference in this Annual Report on Form 10-K of Peoples Community Bancorp, Inc., for the year ended December 31, 2007.

/s/ BKD, LLP

Cincinnati, Ohio

April 15, 2008

EX-31.1

EXHIBIT 31.1

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

CERTIFICATION OF THE CHIEF EXECUTIVE OFFICER

I, Jerry D. Williams, certify that:

1.I have reviewed this annual report on Form 10-K of Peoples Community Bancorp, Inc. (the “Registrant”);

2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the Registrant as of, and for, the periods presented in this report;

4.The Registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the Registrant and have:

(a)Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the Registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b)Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c)Evaluated the effectiveness of the Registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d)Disclosed in this report any change in the Registrant’s internal control over financial reporting that occurred during the Registrant’s most recent fiscal quarter (the Registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the Registrant’s internal control over financial reporting.

5.The Registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the Registrant’s auditors and the audit committee of Registrant’s board of directors (or persons performing the equivalent functions):

(a)All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the Registrant’s ability to record, process, summarize and report financial information; and

(b)Any fraud, whether or not material, that involves management or other employees who have a significant role in the Registrant’s internal control over financial reporting.

Date: April 15, 2008	/s/Jerry D. Williams
	Jerry D. Williams
	Chief Executive Officer

EX-31.2

EXHIBIT 31.2

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

CERTIFICATION OF THE CHIEF FINANCIAL OFFICER

I, Teresa A. O’Quinn, certify that:

1.I have reviewed this annual report on Form 10-K of Peoples Community Bancorp, Inc. (the “Registrant”);

2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the Registrant as of, and for, the periods presented in this report;

4.The Registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the Registrant and have:

(a)Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the Registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b)Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c)Evaluated the effectiveness of the Registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d)Disclosed in this report any change in the Registrant’s internal control over financial reporting that occurred during the Registrant’s most recent fiscal quarter (the Registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the Registrant’s internal control over financial reporting.

5.The Registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the Registrant’s auditors and the audit committee of Registrant’s board of directors (or persons performing the equivalent functions):

(a)All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the Registrant’s ability to record, process, summarize and report financial information; and

(b)Any fraud, whether or not material, that involves management or other employees who have a significant role in the Registrant’s internal control over financial reporting.

Date: April 15, 2008	/s/Teresa A. O’Quinn
	Teresa A. O’Quinn
	Chief Financial Officer

EX-32.1

EXHIBIT 32.1

CERTIFICATION OF CHIEF EXECUTIVE OFFICER

Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. 1350)

The undersigned executive officer of Peoples Community Bancorp, Inc. (the “Registrant”) hereby certifies that the Registrant’s Form 10-K for the fiscal year ended December 31, 2007 fully complies with the requirements of Section 13(a) of the Securities Exchange Act of 1934 and that the information contained therein fairly presents, in all material respects, the financial condition and results of operations of the Registrant.

	/s/Jerry D. Williams
	Name: Jerry D. Williams
	Title: President and Chief Executive Officer
Date: April 15, 2008

A signed original of this written statement required by Section 906 has been provided to Peoples Community Bancorp, Inc. and will be retained by Peoples Community Bancorp, Inc. and furnished to the Securities and Exchange Commission or its staff upon request.

EX-32.2

EXHIBIT 32.2

CERTIFICATION OF CHIEF FINANCIAL OFFICER

Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. 1350)

The undersigned executive officer of Peoples Community Bancorp, Inc. (the “Registrant”) hereby certifies that the Registrant’s Form 10-K for the fiscal year ended December 31, 2007 fully complies with the requirements of Section 13(a) of the Securities Exchange Act of 1934 and that the information contained therein fairly presents, in all material respects, the financial condition and results of operations of the Registrant.

	/s/ Teresa A. O’Quinn
	Name: Teresa A. O’Quinn
	Title: Chief Financial Officer
Date: April 15, 2008

A signed original of this written statement required by Section 906 has been provided to Peoples Community Bancorp, Inc. and will be retained by Peoples Community Bancorp, Inc. and furnished to the Securities and Exchange Commission or its staff upon request.