10-K

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

(Mark One)

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

For the fiscal year ended December 31, 2008

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:

None

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 whether the Registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the Registrant was required to submit and post such files).    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, 2008, the aggregate value of the 3,904,422 shares of Common Stock of the Registrant issued and outstanding on such date, which excludes 940,067 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 $8.7 million.  This figure is based on the closing sales price of $2.24 per share of the Registrant’s Common Stock on June 30, 2008.  Although directors and executive officers and the ESOP were 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 30, 2009: 4,844,489

TABLE OF CONTENTS

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

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 principal plus accrued interest and fees currently outstanding as of April 30, 2009 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, 2008, Peoples had $712.4 million in total assets, $630.2 million in deposits, $76.5 million in borrowings (excluding subordinated debentures) and $14.8 million of stockholders’ deficit.  Peoples’ principal executive office is located at 6100 West Chester Road, West Chester, Ohio 45069.  Peoples’ 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 real estate located in its local market.

The Bank is subject to examination and comprehensive regulation by the Office of Thrift Supervision (“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.

The Board of Directors of the Bank adopted an amendment to Article II of the Bank’s Bylaws to eliminate the shareholders’ ability to take action by consent without a formal meeting.  The amendment was effective July 10, 2008.

Operations

As a result of acquisitions and internal growth, Peoples grew from $416.0 million in total assets as of September 30, 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, Peoples acquired five financial institutions with aggregate total assets as of the time of acquisition of $428.5 million.  Also, in September 2003, Peoples purchased $32.8 million in loans and assumed $55.6 million in deposits in connection with the acquisition of

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two branch offices from another financial institution.  Peoples supplemented this growth due to 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 $944.7 million at December 31, 2005.  In addition, since September 30, 2000, Peoples expanded its franchise through the opening of six full service branch offices. These new branch offices, as well as acquired branch offices, have expanded Peoples’ market presence.  Peoples’ loan growth was funded in part by deposits.  Peoples placed an emphasis on deposit generation both internally and through whole bank and branch acquisitions.  Deposits increased from $233.1 million at September 30, 2001 to $755.3 million at December 31, 2006.

Beginning in early 2007, however, Peoples began to reduce all aspects of its lending exposure due in large part to the downturn in the local economy and, in particular, values of residential and residential development properties. At December 31, 2008, total gross loans amounted to $531.4 million, a decrease of $413.3 million or 43.8% compared to $944.7 million of loans at December 31, 2005.  In addition, to address such slowdown and the resulting decrease in the value of its collateral, Peoples charged off $18.3 million of loans in 2007 and $47.8 million of loans in 2008, and provided $32.8 million and $41.5 million during 2007 and 2008, respectively, to the allowance for loan losses.  As a result, the allowance for loan losses to total gross loans at December 31, 2008 amounted to 5.4%.  Further, beginning in 2006, Peoples 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.

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

Regulatory Enforcement Actions

The OTS is the primary federal regulator of Peoples Community Bank.  In light of Peoples’ losses in 2007 and 2006 and levels of nonperforming assets, the OTS has 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 prescribed 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 Company and the Bank are 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 prescribed 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 an 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

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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.

During 2008, management of Peoples worked diligently to resolve the issues associated with the Bank’s nonperforming assets and to provide the information or take the actions required by the Orders.  Concurrently, management and the Board of Directors considered all strategic alternatives available to the Company and the Bank.  As required, Peoples has filed a consolidated business plan with the OTS covering operations through 2010.  Peoples’ business plan contemplates, among other things, a consolidation of its operations through branch sales and a reduction in adversely classified assets through loan resolutions, repayments, sales and charge-offs.  Branch sale transactions would decrease Peoples’ assets and liabilities, improve capital ratios, generate income, and reduce general, administrative and other expense.  Despite management’s efforts, the extremely difficult economic conditions have continued to negatively impact real estate values and the ability of borrowers to service or repay their loans.  As a result, Peoples has continued to incur significant losses which has severely impacted stockholders’ equity and the related regulatory capital of the Bank.

Banking regulations require savings institutions to satisfy several capital requirements.  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.  A savings institution that fails any of these 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 capital regulations provide that such actions, through enforcement proceedings or otherwise, could require one or more of a variety of corrective actions.  Application of these corrective actions are influenced by an institution’s capital levels under the regulatory framework for prompt corrective action.  This framework defines the following five levels of capital:  well capitalized; adequately capitalized; undercapitalized; significantly undercapitalized; and critically undercapitalized.  For additional details, refer to “Business — Regulation - The Bank - Regulatory Capital Requirements” contained herein.

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

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

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

On April 30, 2009, the Bank filed its Thrift Financial Report for the quarter ended March 31, 2009 .  This report reflected the Bank’s capital under the framework for prompt corrective action at the “critically undercapitalized” level.

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

·Extend credit for any highly leveraged transaction;

·Amend its charter or bylaws, except to the extent necessary to carry out any other requirement of any law, regulation, or order;

·Make any material change in accounting methods;

·Engage in any covered transaction;

·Pay excessive compensation or bonuses; or

·Make payments on subordinated debt.

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

Report of Independent Registered Public Accounting Firm

The report of the Company’s independent registered public accounting firm for the year ended December 31, 2007, contained 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 obligation under an outstanding line of credit with Integra Bank, N.A. (“Integra”).  The line of credit is secured by all outstanding shares of common stock of the Bank. The Orders prohibit the Bank from paying cash dividends to the Company without the prior consent of the OTS and the Company will be able to rely upon only a limited amount of existing cash and cash equivalents for 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 or replacing the line of credit.  Peoples is actively evaluating various funding strategies to meet its obligations, including restructuring its outstanding debt and selling branch offices.  Any increase in the Company’s outstanding indebtedness will also require OTS approval.  The Company cannot provide assurance that it will succeed in obtaining funds to meet its financial obligations.  Failure to do so will have a material adverse effect on, and impair the Company’s business, financial condition and ability to operate as a going concern.

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

Default on Line of Credit and Termination of Strategic Transaction

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

4

negotiated in order to extend the repayment period and allow the Company to structure a transaction which would result in repayment of the $17.5 million line of credit.

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

On December 31, 2008, the Company and the third party entered into the First Amendment (“Amendment”) to the Agreement to extend the Company’s and third party’s obligations under the Agreement to January 31, 2009.  The Company and the third party reaffirmed their respective representations and warranties and acknowledged that the third party will require another financial institution acceptable to the Office of Thrift Supervision to perform its or their obligations under the Agreement.  No agreement was reached by January 31, 2009.

On December 31, 2008, the Company and Integra extended the forbearance period to January 31, 2009.  The forbearance period has expired and the Company is in default on its line of credit with Integra.  This matter remains unresolved.

Establishment of Valuation Allowance

In light of the matters discussed above, the Company established a valuation allowance of deferred federal income taxes of approximately $4.4 million in 2007.  As of December 31, 2008 the allowance had been increased to $27.2 million.  Generally, the losses incurred in 2006, 2007 and 2008 resulted in deferred federal income taxes or deferred tax assets which may be applied against current period earnings, carried back against prior years’ earnings or used to the extent of management’s estimate of future taxable income.  The valuation allowance was established since the Company’s current circumstances might impair the Company’s ability to generate future taxable income and therefore impair its ability to realize all benefits of the deferred tax asset.

Peoples Lending Activities

At December 31, 2008, the net loan portfolio of Peoples totaled $461.9 million, representing approximately 64.8% 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, 2008, residential loans (including construction loans secured by residential real estate) amounted to $425.8 million, or 80.1% of the gross loan portfolio.  Nonresidential real estate and land loans totaled $75.3 million, or 14.2% of the gross loan portfolio and nonresidential construction loans amounted to $9.3 million, or 1.7% of the gross loan portfolio as of December 31, 2008.  Further, commercial loans amounted to $8.1 million, or 1.5% of the gross loan portfolio at December 31, 2008 and consumer loans amounted to $13.0 million, or 2.5% of the gross loan portfolio at such time.  Peoples curtailed its 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 non-accrual 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.

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A savings institution generally may not make loans to one borrower and related entities, if not fully secured, 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.   The Bank’s decrease in unimpaired capital and surplus as of December 31, 2008 has lowered the regulatory limit on loans to one borrower to $6.6 million.  As of December 31, 2008, there were 10 borrowers with loans from the Bank totaling over the $6.6 million limit; the largest being $11.9 million.  Because these total amounts were within the Bank’s regulatory limit at the time the loans were made, they are not considered a violation of the loans to one borrower regulation.  However, they are considered non-conforming loans.

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

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

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Origination of Loans.  In addition to the Orders and applicable banking laws and regulations, 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 relationship managers and branch personnel.  Credit reports, appraisals and other documentation involved with a loan are obtained as necessary.  Property valuations are performed by independent outside appraisers approved by the Board of directors of Peoples.  The Bank’s underwriting standards primarily focus 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 commercial banks.

Under the real estate lending policy of Peoples, title insurance 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 property or project and the adequacy of the value of the collateral that will secure the loan.  The board of directors has granted loan approval authority of up to $1 million to any two senior officers or the Loan Committee.  The Loan Committee, which is chaired by the Chief Lending Officer, may also approve loans being renewed or refinanced for any amount provided that no additional funds are advanced.

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

8

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

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

The significant repayments of $143.8 million, $269.4 million, $366.5 million, $76.1 million, $263.7 million, and $236.4 million during 2008, 2007, 2006, the three months ended December 31, 2005, fiscal 2005 and fiscal 2004, 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 one-to-four-family residential loans that were set to reprice in the current year.

Charge offs of $47.8 million during fiscal 2008 consisted primarily of $6.7 million in loans secured by one-to-four-family residential real estate, $9.3 million in loans secured by multi-family residential real estate, $8.8 million in construction loans, $18.9 million in loans secured by nonresidential real estate and land, and $4.0 million in commercial and consumer loans.  The increase in charged-off loans was primarily due to both real estate investors and developers experiencing cash flow difficulties and 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, the Bank 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, the Bank is permitted to invest without limitation in residential mortgage loans and up to 400% of its capital in uninsured or unguaranteed loans secured by non-residential real estate.  The Bank 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, the Bank may invest up to 10% of its total assets in secured and unsecured loans for commercial, corporate, business or agricultural purposes.  At December 31, 2008, the Bank was within each of the above lending limits.  Notwithstanding the foregoing, Peoples’ lending activities are significantly restricted due to the requirements of the Orders.  See “Business — Regulatory Enforcement Actions.”

One-to-Four-Family Residential Real Estate Loans.  The primary real estate lending activity of Peoples continues to be the origination of loans secured by residential real estate.  At December 31, 2008, $300.3 million, or 65.0% of the loan portfolio of Peoples consisted of conventional one-to-four-family residential loans, compared to $312.0 million, or 49.2% at December 31, 2007 and $343.3 million or 42.3% of the loan portfolio at December 31, 2006. 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 one-to-four-family fixed-rate residential mortgage loans originated by Peoples have terms of up to 30 years.

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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 T-bill rates 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, 2008, $177.8 million, or 59.2% of our one-to-four-family residential loans were fixed rate and $122.5 million, or 40.8% were adjustable rate.  Most of Peoples’ one-to-four-family loans in 2008 were originated for its portfolio, and some of these loans did not conform to Fannie Mae or Freddie Mac requirements and therefore, could not be readily sold in the secondary market.

Peoples’ non-owner occupied residential mortgage loans have been originated primarily to investors and builders.  These loans are generally made at higher interest rates and fees than owner occupied residential real estate loans.  In 2008, Peoples 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 — Regulatory Enforcement Actions.”

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, 2008, Peoples had $55.5 million in multi-family residential mortgage loans, which amounted to 12.0% of Peoples’ loan portfolio, compared to $82.2 million, or 12.9% of Peoples’ loan portfolio at December 31, 2007.  As previously stated, Peoples is currently prohibited from originating such loans.  See “Business — Regulatory Enforcement Actions.”

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 $75.3 million, or 16.3% of the net loan portfolio at December 31, 2008.  This compares to $129.0 million, or 20.3% at December 31, 2007.   As previously stated, Peoples is currently prohibited from originating such loans.  See “Business — Regulatory Enforcement Actions.”

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 one-to-four-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 service.  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 unimproved land, land which is being developed into lots, or lots which have been developed for single-family homes.   Unimproved land loans generally have a loan-to-value ratio of up to 65%, require monthly payments of interest only, and mature within one year.  Development loans generally have a loan-to-value ratio of up to 75%, require monthly payments of interest only, and mature within one or two years.    Lot loans generally have a loan-to-value ratio of up to 80%, require monthly payments of interest only, and mature within one year.

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 larger loan balances concentrated in a single borrower or groups of related borrowers for rental or business properties. In addition, the payment experience on

10

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 — Regulatory Enforcement Actions.”

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

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 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 — Regulatory Enforcement Actions.”

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, 2008, commercial loans amounted to $8.0 million, or 1.7% of Peoples’ net loan portfolio, compared to $20.0 million, or 3.2% of the net loan portfolio at December 31, 2007.  In early

11

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 — Regulatory Enforcement Actions.”

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

Loan Origination and Other Fees.  In addition to interest earned on loans, Peoples receives loan origination fees or “points” for originating some of its 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 $752,000 and $1.5 million of deferred loan fees at December 31, 2008 and December 31, 2007, respectively.  The drop in deferred loan fees is primarily due to the selling of loans and the decline in loan originations in 2008.

Contractual Principal Repayments and Interest Rates.  The following table sets forth scheduled contractual amortization of Peoples’ loans at December 31, 2008 as well as the dollar amount of such loans which are scheduled to mature after one year according to 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 for the Years Ending December 31,
															Total at
							2012-		2014-		2019-		There-		December 31,
	2009		2010		2011		2013		2018		2023		after		2008
	(In thousands)
Mortgage loans:
One-to-four-family	$	89,193	$	18,051	$	10,618	$	17,576	$	47,696	$	36,072	$	76,846	$	296,052
Multi-family	17,394		6,266		2,925		4,035		7,149		4,893		14,530		57,192
Nonresidential real estate and land	32,607		5,876		4,001		5,170		11,328		9,559		9,181		77,722
Construction loans	78,962		—		—		—		—		—		—		78,962
Commercial loans	7,633		788		231		47		7		—		—		8,706
Consumer loans	9,579		455		433		851		1,476		—		—		12,794
Total (1)	$	235,368	$	31,436	$	18,208	$	27,679	$	67,656	$	50,524	$	100,557	$	531,428

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

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Asset Quality

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.

At December 31, 2008, Peoples had $43.1 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, Peoples may experience a continued migration of non-performing loans to real estate owned.  The level of non-performing loans has had and will continue to have a significant adverse impact on the Company’s financial condition and results of operations.  Further, the level of the Company’s non-performing assets has and will continue to negatively impact People’s interest rate spread, interest income, provision for losses on loans and net loss.  While the Company has devoted and will continue to devote substantial resources toward the resolution of all delinquent and non-performing assets, no assurance can be made that management’s efforts will be successful.

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 $10.2 million and $6.9 million at December 31, 2008 and December 31, 2007, respectively.  At December 31, 2008, approximately $5.1 million of real estate owned consisted of a residential land development for multi-family residences and condominiums in a northern Cincinnati suburb.  Another property consisting of land and single-family housing lots is valued at $3.1 million.

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

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

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

Nonperforming assets totaled $53.3 million, $32.8 million, and $26.1 million at December 31, 2008, 2007 and 2006, respectively.  Nonperforming assets at December 31, 2008 consisted of $6.6 million of loans secured by one-to-four-family residential real estate, $7.1 million of loans secured by multi-family residential real estate, $25.2 million of loans secured by nonresidential real estate and land, $3.9 million in construction loans, $380,000 of commercial and consumer loans, and $10.2 million in foreclosed real estate.  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.

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

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

Non-accrual construction loans totaled $3.9 million at December 31, 2008, with an average balance of $241,000.  Approximately $2.3 million of these construction loans are secured by one-to-four-family residential real estate.  Commercial and consumer non-accrual loans totaled $381,000, with $3,000 of these loans being unsecured.

14

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

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

Peoples’ total classified assets at December 31, 2008, net of full or partial charge offs, amounted to $82.8 million, with no assets classified doubtful or loss.  It was management’s opinion that as of December 31, 2008, no loans exhibited characteristics to warrant a doubtful classification, while loan amounts classified loss were charged off.   The largest classified loan at December 31, 2008 was a $7.6 million loan secured by an apartment complex.  The remaining $75.3 million of classified assets at December 31, 2008 consisted of approximately $7.3 million secured by one-to-four-family real estate, $5.6 million secured by multi-family residential real estate, $9.5 million in residential construction loans, $33.5 million in loans secured by nonresidential real estate and land, $9.4 million of commercial and consumer loans, and $10.2 million of foreclosed real estate.  The real estate owned consisted of $8.6 million of land and land development, $838,000 of one-to-four-family residential real estate, and $707,000 of construction projects.

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Approximately $21.1 million of loans were categorized as special mention by the Bank as of December 31, 2008, compared to $43.1 million at December 31, 2007.  Although 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,
	2008				2007				2006
Loan Types	Balance		Percent of Total		Balance		Percent of Total		Balance		Percent of Total
	(Dollars in thousands)
One-to-four-family	$	8,916	31.1	%	$	13,217	38.3	%	$	4,615	25.2	%
Multi-family	5,452		19.0		6,599		19.1		4,084		22.2
Nonresidential real estate and land	9,389		32.7		6,154		17.8		2,904		15.8
Construction	3,185		11.1		4,893		14.2		2,027		11.0
Commercial	1,432		5.0		3,475		10.1		4,551		24.8
Consumer	331		1.2		161		0.5		188		1.0
Total	$	28,705	100.0	%	$	34,499	100.0	%	$	18,369	100.0	%

The allowance for 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 any of the above loan types, but the entire allowance is available for any loan that should be charged off.

Peoples increased its allowance for loan losses by recording a $41.5 million provision for losses on loans for 2008 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.

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

Investment Securities

Peoples 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,

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

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

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

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

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

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

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

Mortgage-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, is 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, 2008, Peoples had mortgage-backed securities with a fair value totaling $23.0 million.

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

Sources of Funds

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.

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

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

The decrease in deposits was primarily due to pricing by the Bank at levels intended to provide controlled runoff throughout 2008.

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

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

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

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

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

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

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

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

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

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

Borrowings.  Peoples may obtain advances from the 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, 2008, Peoples was permitted to borrow, subject to security pledge agreements, up to $360.5 million from the Federal Home Loan Bank of Cincinnati, subject to security pledge agreements and acceptable collateral.  At such date, Peoples had $59.0 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 $59.0 million of advances at December 31, 2008, $3.0 million mature in fiscal 2009.

The Company has a $17.5 million line of credit with Integra, secured by all outstanding shares of the Bank’s stock.  At December 31, 2008 and 2007, the outstanding principal balance was $17.5 million and $16.5 million, respectively.  At December 31, 2007, the Company was not in compliance with certain loan covenants and the lender had the ability to accelerate all outstanding amounts upon notice.  The line of credit matured June 30, 2008.  Effective July 24, 2008, the Company entered into a forbearance agreement to extend the repayment period and allow the Company to structure a transaction which would result in repayment of the line of credit in full.  On December 31, 2008, the Company and Integra extended the forbearance period to January 31, 2009.  The forbearance period has expired and the Company is in default on its line of credit with Integra.  This matter remains unresolved.

At December 31, 2008, interest was calculated at the prime rate plus 300 basis points. The effective interest rate at December 31, 2008 was 6.25%.  During the forbearance period, interest was payable monthly at the prime rate (3.25% at December 31, 2008); when the loan principal and initial interest is paid in full, under the forbearance terms, the remainder of the interest is due.  Interest accrued and not paid related to the line of credit totaled $264,000 at December 31, 2008 and is included in accrued interest payable in the consolidated statement of financial condition. A loan fee of $175,000 was also due and is included in accounts payable in the consolidated statement of financial condition.  At December 31, 2007, interest was payable at daily LIBOR plus 200 basis points or prime less 50 basis points based on the selection made by the Company. The effective interest rate at December 31, 2007 was 7.24%.

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

Employees

Peoples had 153 full-time equivalent employees at December 31, 2008.  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.

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.

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 SEC, the Office of Thrift Supervision, the Federal Reserve Board, the FDIC, the Internal Revenue

23

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.

The Company.  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.

·lend, exchange, transfer or invest for others, or safeguard money or securities;

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

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

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

·underwrite, deal in or make 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;

24

·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.

The Company is subject to the restrictions and requirements of an Order issued by the OTS.  The Order is summarized under “Business — Regulatory Enforcement Actions” herein.  Every savings institution subsidiary of a savings and loan holding company is required to give the 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.

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,

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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.

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.

The Bank.   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’ 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,

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

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

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

Each FDIC insured institution is assigned to one of three capital groups which are based solely on the level of an institution’s capital— “well capitalized,” “adequately capitalized,” and “undercapitalized.”  These capital levels are defined in the same manner as under the prompt corrective action system discussed above.  These three groups are then divided into three subgroups which reflect varying levels of supervisory concern, from those which are considered to be healthy to those which are considered to be of substantial supervisory concern.  In 2007 and 2008, the annual insurance premiums on bank deposits insured by the DIF varied between $.05 and $.43 per $100 of deposits.

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

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 the 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 which would result in termination of the Bank’s deposit insurance.

On December 16, 2008, the FDIC approved the final rule to raise the risk-based deposit insurance assessment rates uniformly by seven basis points for the first quarter of 2009 assessment period beginning on January 1, 2009.  On February 26, 2009, the FDIC approved the final rule to raise the assessment rates for the assessment period beginning on April 1, 2009, and subsequent assessment periods.  The new assessment scheme will differentiate between risk profiles and will require riskier institutions to pay higher assessment rates based on classification into one of four risk categories.  Institutions that are rated in the category with the lowest risk will see their initial base rates increase to between 12 and 16 basis points.

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

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

Given the enacted and proposed increases in assessments for insured financial institutions in 2009, the Company anticipates that FDIC assessments on deposits will have a significantly greater impact on operating expenses in 2009 compared to 2008 and could materially affect our reported earnings, liquidity and capital.

Regulatory Capital Requirements.  Banking regulations require savings institutions to satisfy several capital requirements.  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.

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

A 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.  Capital regulation provides that such actions, through enforcement proceedings or otherwise, could require one or more of a variety of corrective actions.  The Company and the Bank are subject to Orders issued by the OTS.  In addition, the Bank is subject to an Amended Order.  The Orders and the Amended Order are summarized under “Business — Regulatory Enforcement Actions” beginning on page 2 herein.

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

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

In addition, an institution is “critically undercapitalized” if it has a ratio of tangible equity to tangible 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).

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

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

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

For a further discussion of the Company’s and the Bank’s regulatory enforcement actions, see ‘Regulatory Enforcement Actions” beginning on page 2 herein.

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 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.

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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, 2008, the qualified thrift investments of the Bank were approximately 81.9% 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, 2008, the Bank had $13.5 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.  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

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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.

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 recaptured that portion of its reserve which exceeded 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, 2008, 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 stock 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

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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 2008 and 2007 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 2005 through 2007.

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 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 8.5% 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.

Forward Looking Statements

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 service and other obligations;

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·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 and Exchange Commission.

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

Item 1A. Risk Factors

You should carefully consider the following risk factors, as well as other information in this Form 10-K and the information contained in our other filings with the SEC.  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 and our ability to continue as a going concern. Additional risks not presently known by us or that we currently deem immaterial may also have a material adverse impact.

Risks Relating to Our Liquidity

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

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 inter-company tax payments.  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, to meet its debt service obligations on the junior subordinated debentures beginning in August, 2008 and to pay off the $17.5 million line of credit from Integra, which was due and payable 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 be able to rely only upon a limited amount of 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 or replacing its line of credit.  Any increase in the Company’s outstanding indebtedness will also require OTS approval.

The Company does not have sufficient liquidity to pay its outstanding debt and to continue to pay its operating expenses.  The Bank’s inability to dividend funds to the Company effectively precludes the Company from repaying its outstanding obligations on its line of credit from Integra.  The forbearance agreement, dated July 24, 2008, between the Company and Integra that extended the Company’s repayment period has expired.  Therefore, Integra has the right to initiate or prosecute any action in any court to collect the indebtedness.

The Company has been 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

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

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

The Company is in default on its line of credit, which 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 with Integra is secured by the outstanding shares of common stock of the Bank.  The $17.5 million principal balance currently outstanding under the line of credit became due and payable on June 30, 2008.  Effective July 24, 2008, the Company entered into a forbearance agreement with Integra, which extended the Company’s repayment period.  The forbearance agreement is no longer in effect, however, and the forbearance period expired on January 31, 2009.  Therefore, the Company is currently in default on its line of credit and, as a result, Integra has a legal claim to the outstanding shares of common stock of the Bank that were pledged by the Company to secure the credit line.

Effect of Independent Registered Public Accounting Firm’s Report with disclosure of going concern issue.

The reports of our independent Registered Public Accountants, which are included in our 2007 and 2008 Annual Reports to Stockholders, contain explanatory paragraphs 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 that came 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 — Discussions of Financial Condition Changes from December 31, 2007 to December 31, 2008” for management’s discussion of our financial condition at December 31, 2008.

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

Compliance with applicable regulatory requirements may have a material adverse effect on our business.

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 — Regulatory Enforcement Actions,” 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.

At December 31, 2008, the Bank did not meet two of the three regulatory capital requirements applicable to the Bank.  In addition, at such date, the Bank was deemed a significantly undercapitalized institution under the regulatory framework for prompt corrective action.  Further, at March 31, 2009, the Bank was deemed a critically undercapitalized institution under the regulatory framework for prompt corrective action.  As a result, the Bank is subject to numerous operational restrictions and requirements, including the requirement to file a capital restoration plan to return to an adequately capitalized status.  The Company and the Bank are currently in negotiations concerning a transaction to sell certain branches of the Bank, the proposed results of which are the basis for the Bank’s capital restoration plan, as filed with the OTS on April 30, 2009.  The Bank

34

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

For a further discussion of the Company’s and the Bank’s regulatory enforcement actions, see “Business — Regulatory Enforcement Actions” beginning on page 2 herein.

Other Risks Related to Our Business

Lack of profitable operations in recent periods could continue.

The recessionary forces in the local economy have impacted our operations and profitability and are expected to continue to do so.  For the years ended December 31, 2008 and 2007, the Company incurred losses of $68.5 million and $33.3 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 or losses.

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

Our earnings depend substantially on the interest rate spread, which is the difference between the rates we earn on loans, investment securities and other interest-earning assets, and the interest rates we pay on deposits and borrowings.   These rates are highly sensitive to many factors beyond our control, including general economic conditions and the policies of various governmental and regulatory authorities.  While we have 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.

Difficult market conditions have adversely affected our industry.

Peoples is particularly exposed to downturns in the U.S. housing market.  Dramatic declines in the housing market over the past year, with falling home prices and increasing foreclosures, unemployment and under-employment, have negatively impacted the credit performance of mortgage loans and resulted in significant write-downs of asset values by financial institutions, including government-sponsored entities, major commercial and investment banks, and regional financial institutions such as Peoples. Reflecting concern about the stability of the financial markets generally and the strength of counterparties, many lenders and institutional investors have reduced or ceased providing funding to borrowers, including to other financial institutions.  This market turmoil and tightening of credit have led to an increased level of commercial and consumer delinquencies, lack of consumer confidence, increased market volatility and widespread reduction of business activity generally. The resulting economic pressure on consumers and lack of confidence in the financial markets have adversely affected our business, financial condition and results of operations.  We do not expect that the difficult conditions in the financial markets are likely to improve in the near future.  A worsening of these conditions would likely exacerbate the adverse effects of these difficult market conditions on us and others in the financial institutions industry.  In particular, we may face the following risks in connection with these events:

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

·Our ability to assess the creditworthiness of our customers may be impaired if the models and approaches we use to select, manage and underwrite our customers become less predictive of future behaviors.

35

·The process we use to estimate losses inherent in our credit exposure requires difficult, subjective and complex judgments, including forecasts of economic conditions and how these economic predictions might impair the ability of our borrowers to repay their loans, which may no longer be capable of accurate estimation which may, in turn, impact the reliability of the process.

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

·Our liquidity could be negatively impacted by an inability to access the capital markets, unforeseen or extraordinary demands on cash, or regulatory restrictions, which could, among other things, materially and adversely affect our business prospects and financial condition.

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

Like all financial institutions, Peoples is subject to the effects of any economic downturn, and the significant decline in home values, residential development and commercial properties in our markets have had and will continue to have a negative effect on results of operations.  Our success depends primarily on the general economic conditions in the counties in which we conduct business, and in the southwest Ohio and southeast Indiana area in general.  Unlike larger financial institutions that are more geographically diversified, Peoples 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 our ability to originate loans, the ability of the borrowers to repay these loans and the value of the collateral securing these loans.  The significant declines in the general economic conditions caused by recession, unemployment and other factors beyond our control have had and will continue to adversely affect our financial condition and results of operations.  Additionally, because we have 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 our borrowers to make timely repayments of their loans, which would continue to have an adverse impact on our earnings.  Further declines 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.

Over the last 18 months, there has been a significant downturn in the local economy, a softening in the real estate market and an 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, 2008, the Bank’s nonperforming loans amounted to $43.1 million, or 9.33% of total net loans.  The resolution of such nonperforming loans may substantially impact our provision for loan losses and allowance for loan losses.

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

There has been much legislative and regulatory action in response to the financial crises affecting the banking system and financial markets and threats to investment banks and other financial institutions. There can be no assurance, however, as to the actual impact that the legislation and its implementing regulations or any other governmental program will have on the financial markets.  The failure of the actions by the legislators, the regulatory bodies or the U.S. government to stabilize the financial markets and a continuation or worsening of current financial market conditions could materially and adversely affect our business, financial condition, results of operations, and access to credit or the trading price of our common shares.

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

A further downturn in our real estate markets will hurt our business because many of our loans are secured by real estate.  Real estate values and real estate markets are generally affected by changes in national, regional or

36

local economic conditions, fluctuations in interest rates and the availability of loans to potential purchasers, and changes in tax laws and other governmental statutes, regulations and policies. Substantially all of our real estate collateral is located in southwest Ohio and southeast Indiana.  If real estate values continue to further decline, the value of real estate collateral securing our loans could be significantly reduced.  Our ability to recover on defaulted loans by foreclosing and selling the real estate collateral would then be diminished and we would be more likely to suffer losses on defaulted loans.

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

Due to our limited size, individual loan values can be large relative to our operations for a particular period.  If a few relatively large loan relationships become non-performing in a period and Peoples 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 Peoples’ overall loan portfolio.  In both 2007 and 2008, we incurred losses on lending relationships that significantly impacted operating results for the relevant period.  As of December 31, 2008, the Bank’s nonperforming loans amounted to $43.1 million, with five borrowers representing $14.4 million, or 33.4% of total nonperforming loans.

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 our results of operations and financial condition, the effects of which are impossible to predict at this time.

Strong competition within our market area may limit profitability.

Peoples 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 our competition for deposits.  Many competitors have substantially greater financial and other resources than we do.  Moreover, we 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 us.  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.

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.  We believe that the Company has no ability to pay cash dividends in the foreseeable future, and are prohibited by the Orders from doing so without the consent of the OTS.

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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

None.

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Item 2. Properties

At December 31, 2008, Peoples conducted its business from its main office in West Chester, Ohio and eighteen 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, 2008.

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

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

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Item 3. Legal Proceedings

From time to time, the Bank and Company are involved as plaintiff or defended in various 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 Peoples’ consolidated financial conditions or results of operations.

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

None.

PART II

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

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

(b)  Not applicable.

(c)  Not applicable.

Item 6. Selected Financial Data

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

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

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

Item 7A. Quantitative and Qualitative Disclosures About Market Risk

The information required herein is incorporated by reference to pages 23 and 24 of the 2008 Annual Report.

Item 8. Financial Statements and Supplementary Data

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

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

None.

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, 2008.  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, 2008 our disclosure controls and procedures were not effective to ensure that information required to be disclosed by us in the reports that we file

40

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 2008 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).  Peoples’ 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 Peoples’ 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 Peoples’ annual or interim financial statements will not be prevented or detected on a timely basis.

During the course of our external audit for 2008, we noted several adjustments identified by OTS examiners and our external auditors related to the estimation of the allowance for loan losses. These adjustments were due to information received by Peoples subsequent to the intial year-end closing. While management has concluded that Peoples did not maintain effective internal control over financial reporting as of December 31, 2008 due to this material weakness, this did not result in a material misstatement of any of Peoples’ financial statements, including the annual and interim financial statements for 2008.

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

Item 9B. Other Information

None.

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PART III

Item 10.  Directors, Executive Officers and Corporate Governance

Identification of Directors

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

Directors with a Three-Year Term Expiring in 2009

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

Director with a Three-Year Term Expiring in 2010

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

Directors with a Three-Year Term Expiring in 2011

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

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

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

Identification of Executive Officers Who Are Not Directors

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

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

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Section 16(a) Beneficial Ownership Reporting Compliance

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

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

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.

Audit Committee

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

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

The Board of Directors has determined that Mr. Nelson, a member of the Audit Committee, meets the requirements adopted by the Securities and Exchange Commission for qualification as an Audit Committee financial expert.  An Audit Committee financial expert is defined as a person who has the following attributes:  (i) an understanding of generally accepted accounting principles and financial statements; (ii) the ability to assess the general application of such principles in connection with the accounting for estimates, accruals and reserves; (iii) experience preparing, auditing, analyzing or evaluating financial statements that present a breadth and level of complexity or accounting issues that are generally comparable to the breadth and complexity of issues that can reasonably be expected to be raised by the registrant’s financial statements, or experience actively supervising one or more persons engaged in such activities; (iv) an understanding of internal controls and procedures for financial reporting; and (v) an understanding of Audit Committee functions.

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Item 11.  Executive Compensation

Summary Compensation Table

The following table sets forth a summary of certain information concerning the compensation paid by Peoples Community Bank for services rendered in all capacities during the calendar years ended December 31, 2007 and 2008 to the President and Chief Executive Officer, the Chief Financial Officer and the next highest paid officer of Peoples Community Bank.

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

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

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Equity Awards

Outstanding Equity Awards at Fiscal Year-End.  The following table sets forth, with respect to the executive officers named in the Summary Compensation Table, information with respect to the number of options and unvested shares of restricted stock held as of December 31, 2008 and the value with respect to the unvested shares of restricted stock.

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

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

46

Stock Vested.  The following table sets forth certain information with respect to restricted stock awards vested for the named executive officers during the year ended December 31, 2008. None of the Company’s named executive officers exercised any stock options during the fiscal year ended December 31, 2008.

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

(1)Reflects shares received on vesting from prior year grants under the Company’s Recognition and Retention Plan.

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

Employment Agreements

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

Each of the employment agreements is terminable with or without cause by the Company. The executives have no right to compensation or other benefits pursuant to the employment agreements for any period after voluntary termination or termination by the Company for cause, disability or retirement. The agreements provide for certain benefits in the event of the executive’s death.

The executive will be entitled to a cash severance amount equal to three times his or her average annual compensation for the last five calendar years (or such shorter period that he has worked with the Bank), plus the continuation of certain miscellaneous fringe benefits, in the event that:

1)the executive terminates his employment because the Company either fails to comply with any material provision of the employment agreement or changes the executive’s title or duties;

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

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

Compensation or other benefits pursuant to the employment agreements are subject to reduction pursuant to Section 280G of the Internal Revenue Code as set forth below in the event of a change in control.  A change in control is generally defined in the employment agreements to include any change in control of the Company required to be reported under the federal securities laws, as well as (1) the acquisition by any person of 20% or

47

more of the Company’s outstanding voting securities and (2) a change in a majority of the directors of the Company during any three-year period without the approval of at least two-thirds of the persons who were directors of the Company at the beginning of such period.

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

The Company and the Bank have each consented to the Orders.  As a result, the Company and the Bank are not permitted to make any golden parachute payments of the types described above without the prior consent of the OTS.

Directors Compensation

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

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

The following table summarizes the 2008 compensation structure for each non-employee Director.  Directors did not receive any restricted stock awards or option award grants in 2008.

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

48

(1)Reflects the dollar amounts recognized for financial statements reporting purposes for the fiscal year ended December 31, 2008 in accordance with FAS 123(R) of awards issued in previous years pursuant to the 2001 Recognition and Retention Plan.  Such restricted stock awards vest at a rate of 20% per year.

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

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

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

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

(5)Mr. Rathkamp provides certain administrative services to the Board and receives additional director fees as compensation for performing additional services.

Compensation and Benefits Committee Interlocks and Insider Participation

Determinations regarding compensation of the President and Chief Executive Officer, the senior management and the employees are reviewed and approved by Peoples Community Bank’s Compensation and Benefits Committee.In 2008, directors appointed to this committee were Messrs. Hawke, Nelson, VanDeGrift and Buchanan.  All the current members of the committee are independent members of the Board of Directors as defined in the NASDAQ’s listing standards.

No person who served as a member of the Compensation and Benefits Committee during 2008 was a current or former officer or employee of Peoples Community Bancorp or Peoples Community Bank or engaged in certain transactions with Peoples Community Bancorp or Peoples Community Bank required to be disclosed by regulations of the Securities and Exchange Commission.  Additionally, there were no Compensation and Benefits Committee “interlocks” during 2008, which generally means that no executive officer of Peoples Community Bancorp served as a director or member of the Compensation and Benefits Committee of another entity, one of whose executive officers served as a director of Peoples Community Bank or as a member of Peoples Community Bank’s Compensation and Benefits Committee.

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

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

49

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

*Represents less than 1% of the outstanding common stock.

(1)Based upon filings made pursuant to the Securities Exchange Act and information provided by each of the individuals.  Shares of the Company’s common stock are deemed to be beneficially owned by a person if he or she directly or indirectly has or shares (i) voting power, which includes the power to vote or to direct the voting of the shares, or (ii) investment power, which includes the power to dispose or to direct the disposition of the shares.  Unless otherwise indicated, the named beneficial owner has sole voting and dispositive power with respect to the shares.

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

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

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

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

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

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

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

(8)Includes 73,145 shares held in Mr. Noe’s individual retirement account, 7,825 shares held by Mr. Noe’s spouse’s IRA and 39,024 shares held in five family trusts, for which Mr. Noe is trustee.  Mr. Noe’s address is c/o Peoples Community Bank, P.O. Box 1130, West Chester, Ohio 45071.

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

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, 2008.

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

(1)Included in such number are 101,744 shares which are subject to restricted stock grants which were not vested as of December 31, 2008.  The weighted average exercise price excludes restricted stock grants.

Item 13. Certain Relationships and Related Transactions and Director Independence

Transactions with Certain Related Persons

Peoples Community Bank offers mortgage loans to its directors, officers and employees as well as members of their immediate families for the financing of their primary residences and certain other loans.  These loans are generally made on substantially the same terms as those prevailing at the time for comparable transactions with a non-affiliated person.  It is the belief of management that these loans neither involve more than the normal risk of collectibility nor present other unfavorable features to Peoples Community Bank.

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

51

savings institution, and must not involve more than the normal risk of repayment or present other unfavorable features.

Director Independence

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

Item 14. Principal Accounting Fees and Services

The Audit Committee of the Board of Directors of Peoples Community Bancorp appointed Plante & Moran, PLLC, as the independent registered public accounting firm, to perform the audit of Peoples Community Bancorp’s financial statements for the year ending December 31, 2008.

Peoples Community Bancorp has been advised by Plante & Moran, PLLC that neither the firm nor any of its associates has any relationship with Peoples Community Bancorp or its subsidiaries other than the usual relationship that exists between an independent registered public accounting firm and its clients.

In determining whether to appoint Plante & Moran, PLLC as Peoples Community Bancorp’s independent registered public accounting firm, Peoples Community Bancorp’s Audit Committee considered whether the provision of services, other than auditing services, by Plante & Moran, PLLC was compatible with maintaining the independent registered public accounting firm’s independence.  The Audit Committee believed that Plante & Moran, PLLC’s performance of these other services was compatible with maintaining their independence.

The following table sets forth the aggregate fees paid by the Company for professional services rendered in connection with the audit of Peoples Community Bancorp’s consolidated financial statements for 2008 and 2007, as well as the fees paid by us for audit-related services, tax services and all other services rendered to us during 2008 and 2007.

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

(1)Audit fees consist of fees incurred in connection with the audit of the annual financial statements and the review of the interim financial statements included in the quarterly reports filed with the Securities and Exchange Commission, as well as work generally only the independent auditor can reasonably be expected to provide, such as statutory audits, consents and assistance with and review of documents filed with the Securities and Exchange Commission.

(2)Audit-related fees primarily consist of fees incurred in connection with the examination of the internal control structure of Peoples Community Bancorp.

The Audit Committee selects the independent registered public accounting firms and pre-approves all audit services to be provided by it to Peoples Community Bancorp.  The Audit Committee also reviews and pre-approves all audit-related and non-audit related services rendered by the independent registered public accounting firm in accordance with the Audit Committee’s charter.  In its review of these services and related fees and terms, the Audit Committee considers, among other things, the possible effect of the performance of such services on the independence of the independent registered public accounting firm.  The Audit Committee pre-approves certain audit-related services and certain non-audit related tax services which are specifically described by the Audit Committee on an annual basis and separately approves other individual engagements as

52

necessary.  The Chair of the Audit Committee has been delegated the authority to approve non-audit related services in lieu of the full Audit Committee.  On a quarterly basis, the Chair of the Audit Committee presents any previously-approved engagements to the full Audit Committee.  Each of the services was pre-approved by the Audit Committee.

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

Report of Audit Committee

The audit committee has reviewed and discussed the audited financial statements with management.  The audit committee has discussed with the independent registered public accounting firm the matters required to be discussed by Statement on Auditing Standards No. 61 “Communication with Audit Committees,” as may be modified or supplemented.  The audit committee has received the written disclosures and the letter from the independent registered public accounting firm consistent with the applicable requirements of the Public Company Accounting Oversight Board regarding the independent accountant’s communications with the audit committee concerning independence, and has discussed with Plante & Moran, PLLC, the independent registered public accounting firm’s independence.  Based on the review and discussions referred to above in this report, the audit committee recommended to the Board of Directors that the audited financial statements be included in Peoples Community Bancorp’s Annual Report on Form 10-K for the last fiscal year for filing with the Securities and Exchange Commission.

Members of the Audit Committee

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

Item 15. Exhibits and Financial Statement Schedules

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

Report of Registered Independent Certified Public Accountants.

Consolidated Statements of Financial Condition as of December 31, 2008 and 2007.

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

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

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

Consolidated Statements of Cash Flows for the Years Ended December 31, 2008, 2007 and 2006

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.

53

(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 and Thomas J. Noe (3)
10.6	OTS Order to Cease and Desist with the Company dated April 3, 2008 (6)
10.7	OTS Order to Cease and Desist with the Bank, dated April 3, 2008 (6)
10.8	OTS Amended Order to Cease and Desist with the Bank, dated April 29, 2009
13.0	Annual Report to Stockholders for the Year Ended December 31, 2008
21.0	List of Subsidiaries (See “Item 1. Business - General” in this Form 10-K)
23.1	Consent of Plante & Moran, PLLC
23.2	Consent of BKD, LLP
31.1	Certification of Chief Executive Officer Pursuant to Rules 13a-14 and 15d-14 of the Securities Exchange Act of 1934 and Section 302 of the Sarbanes-Oxley Act of 2002
31.2	Certification of Chief Financial Officer Pursuant to Rules 13a-14 and 15d-14 of the Securities Exchange Act of 1934 and Section 302 of the Sarbanes-Oxley Act of 2002
32.1	Certification of Chief Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. 1350)
32.2	Certification of Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. 1350)

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

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

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

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

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

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

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

EX-10.8

Exhibit 10.8

UNITED STATES OF AMERICA
Before the
OFFICE OF THRIFT SUPERVISION

	)
In the Matter of	)	Order No.: CN 09-12
	)
	)
PEOPLES COMMUNITY BANK	)	Effective Date: April 29, 2009
	)
West Chester, Ohio	)
OTS Docket No. 08097	)
	)

AMENDED ORDER TO CEASE AND DESIST

WHEREAS, PEOPLES COMMUNITY BANK, West Chester, Ohio, OTS Docket No. 08097 (Association), by and through its Board of Directors (Board) has executed a Stipulation and Consent to Issuance of Amended Order to Cease and Desist (Stipulation); and

WHEREAS, the Association, by executing the Stipulation, has consented and agreed to the issuance of this Amended Order to Cease and Desist (Amended Order) by the Office of Thrift Supervision (OTS) pursuant to 12 U.S.C. § 1818(b); and

WHEREAS, pursuant to delegated authority, the OTS Regional Director for the Central Region (Regional Director), is authorized to issue amended orders to cease and desist where a savings association has consented to the issuance of an amended order.

NOW, THEREFORE, IT IS ORDERED that:

Compliance with Laws, Rules, and Regulations

1. The Association and its institution-affiliated parties, as that term is defined in

12 U.S.C. § 1813(u), and its successors and assigns shall cease and desist from all unsafe or unsound practices, including: operating with inadequate capital in relation to the kind and quality of assets held by the Association; operating with an inadequate loan valuation reserve; operating with a large volume of poor quality loans; and operating in such a manner as to produce low earnings.

Amendment of Existing Order

2. This Amended Order supplements and amends OTS Order No. CN 08-06, previously issued by the OTS against the Association on April 2, 2008, and which remains in full force and effect. OTS Order No. CN 08-06 is amended by the addition of the following subheading and paragraphs:

Increase and Maintain Capital

17.    (a) Within seventy-five (75) days of the Effective Date of the Amended Order, the Association shall achieve and maintain: (i) a Tier 1 (Core) Capital Ratio of at least eight percent (8%); and (ii) a Total Risk-Based Capital Ratio of at least twelve percent (12 %).

(b) Within fourteen (14) days of the Effective Date of the Amended Order, the Association shall, pursuant to Board authorization, submit to the Regional Director a written contingency plan acceptable to the Regional Director that will be implemented by the Association in the event the Association becomes critically undercapitalized as defined in 12 C.F.R. § 565.4(a)(5) (Contingency Plan). The Contingency Plan shall detail the actions to be taken within specific time frames to achieve one of the following results: (i) merger with or acquisition by another federally insured institution or holding company thereof, or (ii) voluntary liquidation by, among other things, filing the appropriate applications with OTS in conformity with federal laws and regulations. The Contingency Plan shall be implemented immediately if the Association

2

becomes critically undercapitalized or upon notification by the Regional Director of the requirement to implement the Contingency Plan. Once implemented, the Association shall submit to the Regional Director written status reports detailing the Association’s actions taken and progress in implementing the Contingency Plan no later than the 1st and 15th days of each month.

18.Effective immediately, Association shall comply with the requirements of 12 C.F.R. § 337.6(b)(3) and shall not: (i) accept, renew or roll over any brokered deposit, as that term is defined at 12 C.F.R. § 337.6(a)(2); (ii) act as a deposit broker, as that term is defined at 12 C.F.R. § 337.6(a)(5); or (iii) solicit deposits by offering an effective yield on insured deposits that exceeds the limitations set forth in 12 C.F.R. § 337.6(b)(3)(ii).

Effective Date of Amended Order, Incorporation of Stipulation

3.This Amended Order is effective on the Effective Date as shown on the first page. The Stipulation is made a part hereof and is incorporated herein by this reference.

IT IS SO ORDERED.

OFFICE OF THRIFT SUPERVISION
By:	/s/ Daniel T. McKee
	Daniel T. McKee
	Acting Regional Director, Central Region
Date: See Effective Date on page 1

3

UNITED STATES OF AMERICA
Before the

OFFICE OF THRIFT SUPERVISION

	)
In the Matter of	)	Order No.: CN 09-12
	)
	)
PEOPLES COMMUNITY BANK	)	Effective Date: April 29, 2009
	)
West Chester, Ohio	)
OTS Docket No. 08097	)
	)

STIPULATION AND CONSENT TO ISSUANCE OF
MODIFIED ORDER TO CEASE AND DESIST

WHEREAS, the Office of Thrift Supervision (OTS), acting by and through its Regional Director for the Central Region (Regional Director) issued an Order to Cease and Desist (OTS Order No. CN 08-06) (Order) against Peoples Community Bank, West Chester, Ohio, OTS Docket No. 08097 (Association) pursuant to 12 U.S.C. § 1818(b) that became effective on April 2, 2008 (Order);

WHEREAS, the Regional Director, pursuant to delegated authority, is authorized to modify the Order where the Association has consented to the issuance of an modified order to cease and desist; and

WHEREAS, the Association desires to cooperate with OTS to avoid the time and expense of an administrative cease and desist proceedings by entering into this Stipulation and Consent to Issuance of Modified Order to Cease and Desist (Stipulation) and, without admitting or denying that such grounds exist, but only admitting the statements and conclusions in Paragraph 1 below concerning Jurisdiction, hereby stipulates and agrees to the following terms:

1.Jurisdiction.

(a)The Association is a “savings association” within the meaning of 12 U.S.C. § 1813(b) and 12 U.S.C. § 1462(4). Accordingly, the Association is “an insured depository institution” as that term is defined in 12 U.S.C. § 1813(c); and

(b)Pursuant to 12 U.S.C. § 1813(q), the Director of OTS is the “appropriate Federal banking agency” with jurisdiction to maintain an administrative enforcement proceeding against a savings association. Therefore, the Association is subject to the authority of OTS to initiate and maintain an administrative cease-and-desist proceeding against it pursuant to 12 U.S.C. § 1818(b).

2.OTS Findings of Fact.

Based upon the April 9, 2009 limited examination of the Association, the OTS finds the Association is currently engaged in unsafe and unsound practices, including operating with inadequate capital in relation to the kind and quality of assets held by the Association; operating with an inadequate loan valuation reserve; operating with a large volume of poor quality loans; and operating in such a manner as to produce low earnings.

3.Consent.

The Association consents to the issuance by OTS of the accompanying Modified Order to Cease and Desist (Modified Order). The Association further agrees to comply with the terms of the Modified Order upon the Effective Date of the Modified Order and stipulates that the Modified Order complies with all requirements of law.

4.Finality.

The Modified Order is issued by OTS under 12 U.S.C. § 1818(b) and upon the Effective

2

Date it shall be a final order, effective and fully enforceable by OTS under the provisions of 12 U.S.C. § 1818(i).

5.Waivers.

The Association waives the following:

(a)The right to be served with a written notice of OTS’s charges against it as provided by 12 U.S.C. § 1818(b) and 12 C.F.R. Part 509;

(b)The right to an administrative hearing of OTS’s charges as provided by 12 U.S.C. § 1818(b) and 12 C.F.R. Part 509;

(c)The right to seek judicial review of the Modified Order, including, without limitation, any such right provided by 12 U.S.C. § 1818(h), or otherwise to challenge the validity of the Modified Order; and

(d)Any and all claims against OTS, including its employees and agents, and any other governmental entity for the award of fees, costs, or expenses related to this OTS enforcement matter and/or the Modified Order, whether arising under common law, federal statutes or otherwise.

6.OTS Authority Not Affected.

Nothing in this Stipulation or accompanying Modified Order shall inhibit, estop, bar or otherwise prevent OTS from taking any other action affecting the Association if at any time OTS deems it appropriate to do so to fulfill the responsibilities placed upon OTS by law.

7.Other Governmental Actions Not Affected.

The Association acknowledges and agrees that its consent to the issuance of the Modified Order is solely for the purpose of resolving the matters addressed herein, consistent with Paragraph 6 above, and does not otherwise release, discharge, compromise, settle, dismiss,

3

resolve, or in any way affect any actions, charges against, or liability of the Association that arise pursuant to this action or otherwise, and that may be or have been brought by any governmental entity other than OTS.

8.Miscellaneous.

(a)The laws of the United States of America shall govern the construction and validity of this Stipulation and of the Modified Order;

(b)If any provision of this Stipulation and/or the Modified Order is ruled to be invalid, illegal, or unenforceable by the decision of any Court of competent jurisdiction, the validity, legality, and enforceability of the remaining provisions hereof shall not in any way be affected or impaired thereby, unless the Regional Director in his or her sole discretion determines otherwise;

(c)All references to OTS in this Stipulation and the Modified Order shall also mean any of the OTS’s predecessors, successors, and assigns;

(d)The section and paragraph headings in this Stipulation and the Modified Order are for convenience only and shall not affect the interpretation of this Stipulation or the Modified Order;

(e)The terms of this Stipulation and of the Modified Order represent the final agreement of the parties with respect to the subject matters thereof, and constitute the sole agreement of the parties with respect to such subject matters; and

(f)The Stipulation and Modified Order shall remain in effect until terminated, modified, or suspended in writing by OTS, acting through its Regional Director or other authorized representative.

9.Signature of Directors/Board Resolution.

Each Director signing this Stipulation attests that he or she voted in favor of a Board

4

Resolution authorizing the consent of the Association to the issuance of the Modified Order and the execution of the Stipulation. This Stipulation may be executed in counterparts by the directors after approval of execution of the Stipulation at a duly called board meeting.

WHEREFORE, the Association, by its directors, executes this Stipulation.

PEOPLES COMMUNITY BANK	OFFICE OF THRIFT SUPERVISION
West Chester, Ohio
/s/ Donald L. Hawke	By:	/s/ Daniel T. McKee
Donald L. Hawke, Director		Daniel T. McKee
		Acting Regional Director
		Central Region
/s/ John L. Buchanan
John L. Buchanan, Director	Date: See Effective Date on page 1
/s/ Nicholas N. Nelson
Nicholas N. Nelson, Director/Chairman
/s/ Thomas J. Noe
Thomas J. Noe, Director
/s/ John E. Rathkamp
John E. Rathkamp, Director
/s/ James R. Van DeGrift
James R. Van DeGrift, Director
/s/ Jerry D. Williams
Jerry D. Williams, Director

5

RESOLUTIONS OF THE
BOARD OF DIRECTORS OF
PEOPLES COMMUNITY BANK

AMENDED OREDER TO CEASE AND DESIST

Dated April 28, 2009

I, Fred L. Darlington, being the duly qualified Secretary of Peoples Community Bank (the “Bank”), hereby certify that the following is a true, correct and complete copy of the resolutions duly and validly adopted by the Board of Directors of the Bank (the “Board”) at a meeting duly called and held on April 28, 2009, that at said meeting a quorum was present and that the resolutions have not been rescinded or modified and are now in full force and effect:

WHEREAS, the Board has received an Amended Order to Cease and Desist that primarily addressed the capital deterioration and asset quality of the Bank; and

WHEREAS, the Stipulation and Consent to issuance of the Modified Order to Cease and Desist was reviewed and deemed acceptable as presented by the Office of Thrift Supervision (“OTS”).

NOW, THEREFORE, BE IT RESOLVED, that the Board hereby agrees to the Stipulation and Consent to the Issuance of the Modified Order to Cease and Desist and authorizes the Bank’s consent and execution to the issuance of the Modified Order and the Stipulation in the form presented; and

BE IT FURTHER RESOLVED, that the executive officers of the Bank are hereby directed to take such necessary corrective measures as set forth in the Stipulation and Modified Order and to do and perform all such acts and things as they deem necessary or appropriate in order to carryout the requirements under the Stipulation and Modified Order.

IN WITNESS WHEREOF, I Fred L. Darlington, Secretary, hereby set my hand this 28thday of April 2009.

/s/ Fred L. Darlington

Fred L. Darlington

Secretary

[SEAL]

Office of Thrift Supervision
Department of the Treasury 1 South Wacker Drive, Suite 2000, Chicago, IL 60606 Telephone: (312) 917-5000 · Fax: (312) 917-5001 Central Region

VIA FAXSIMILE AND OVERNIGHT MAIL

April 29, 2009

OTS Docket No. 8097

Board of Directors

Peoples Community Bank

6100 West Chester Road

West Chester, OH 45071

Dear Members of the Board,

Enclosed is a copy of the executed Order to Cease and Desist (Order) and corresponding Stipulation and Consent to Issuance of Order to Cease and Desist (Stipulation) entered into with the Office of Thrift Supervision. The Order and Stipulation is effective as of April 29, 2009.

If you have questions, please contact me at (312) 917-5084.

Sincerely,

/s/ James G. Price

James G. Price

Assistant Director

Enclosures

EX-13

2008 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, Inc. 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:
Reports of Registered Independent Public Accounting Firms	25
Consolidated Statements of Financial Condition	27
Consolidated Statements of Operations	28
Consolidated Statements of Comprehensive Income (Loss)	29
Consolidated Statements of Stockholders’ Equity (Deficit)	30
Consolidated Statements of Cash Flows	31
Notes to Consolidated Financial Statements	33
Directors and Executive Officers	66
Banking Locations and Stockholder Information	67

Dear Fellow Stockholders:

The extremely difficult banking environment and troubling economic atmosphere in 2007 deepened considerably in 2008. The weakening economy negatively impacted real estate values, job retention and the ability of homeowners and other borrowers to make payments on their loans.  Management is acutely aware of the severe conditions as the Company suffered a loss of $68.5 million for 2008.  This loss was primarily due to provisions for loan losses of $41.5 million goodwill impairment of $12.5 million and adverse tax consequences of $6.9 million.  Although we began to curtail our lending activity in early 2007 and have worked diligently with our borrowers to modify or restructure their debt obligations, asset quality continued to deteriorate nationally and, to a greater extent, locally.

In order to combat these recessionary forces we have significantly downsized and sought out strategic transactions to preserve stockholder value.  Due in large part to the reduction of our loan portfolio, total assets have decreased from $887.4 million at December 31, 2007 to $712.4 million at December 31, 2008. In addition, we will continue to pursue the sale of branch offices to reduce assets and liabilities, generate a deposit premium and increase capital.

This annual report to stockholders includes a detailed discussion of our financial condition, the impact of these troubling economic times on our results of operations and our increased regulatory oversight and restrictions.  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 very disappointed with our recent losses and the loss in value to all of us as stockholders.  We are aware of the very difficult struggle before us and remain committed to meeting this challenge.

Sincerely,

Jerry D. Williams

President and Chief Executive Officer

1

PEOPLES COMMUNITY BANCORP, INC.

BUSINESS OF PEOPLES COMMUNITY BANCORP, INC.

Peoples Community Bancorp, Inc., a Maryland corporation (“Peoples” or the “Company”), is a registered savings and loan holding company which owns all of the outstanding common shares of Peoples Community Bank (the “Bank”), a federally chartered savings bank.  Unless the context otherwise requires, reference to Peoples includes the Bank.Peoples 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, 2008, Peoples had $712.4 million in total assets, $630.2 million in deposits, $76.5 million in borrowings (excluding subordinated debentures) and $14.8 million in stockholders’ deficit.  Peoples’ principal executive office is located at 6100 West Chester Road, West Chester, Ohio 45069.  Peoples’ telephone number is (513) 870-3530.

Peoples is subject to regulation, supervision and examination by the Office of Thrift Supervision (the “OTS”).  The Bank 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 the Bank up to applicable limits.  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.

2

PEOPLES COMMUNITY BANCORP, INC.

MARKET PRICE OF PEOPLES COMMUNITY BANCORP, INC. COMMON SHARES AND RELATED STOCKHOLDER MATTERS

The Company’s common shares are currently listed on the Nasdaq Global Market (“Nasdaq”) under the symbol “PCBI.”  However, by letter dated April 17, 2009, Nasdaq informed the Company that it no longer complies with Nasdaq’s listing rules since it did not timely file its Form 10-K for the year ended December 31, 2008.  Under the listing rules, the Company has 60 calendar days to submit a plan to regain compliance, which typically consists of filing the delinquent report.  Although the Company submitted the Form 10-K for the year ended December 31, 2008 within such 60 day period, no assurances may be given that Nasdaq will accept such plan or that the Company’s common stock will continue to be listed on Nasdaq.

Presented below are the high and low trading prices for the Company’s common shares for the three years ended December 31, 2008.  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.  In addition, the Company does not have any current intention or ability to pay dividends.

2008	High		Low		Dividends
Quarter ended:
December 31, 2008	$	1.45	$	0.18	$	—
September 30, 2008	2.28		0.90		—
June 30, 2008	4.40		2.00		—
March 31, 2008	15.19		3.87		—

2007	High		Low		Dividends
Quarter ended:
December 31, 2007	$	18.00	$	13.52	$	—
September 30, 2007	18.38		14.71		0.15
June 30, 2007	16.93		14.47		0.15
March 31, 2007	18.43		16.80		0.15

2006	High		Low		Dividends
Quarter ended:
December 31, 2006	$	19.60	$	16.35	$	0.15
September 30, 2006	19.85		17.25		0.15
June 30, 2006	20.95		18.50		0.15
March 31, 2006	21.83		19.91		0.15

As of April 15, 2009, the Company had 4,844,489 common shares outstanding held of record by approximately 1,010 stockholders.  The number of stockholders does not reflect the number of persons or entities who may hold stock in nominee or “street” names 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.  Peoples changed its fiscal year end from September 30 to December 31 effective January 1, 2006.

Selected Consolidated Financial	At December 31,							At September 30,
Condition Data:	2008			2007		2006		2005		2005		2004
	(in thousands)
Total assets	$	712,415		$	887,426	$	1,028,079	$	1,040,912	$	1,006,654	$	889,121
Cash and cash equivalents	72,015			86,614		57,459		21,558		17,061		14,430
Securities available for sale	100,952			67,572		56,899		74,482		207,366		229,154
Loans receivable, net	461,861			634,421		812,578		851,270		704,714		599,466
Deposits	630,198			735,212		755,261		726,629		612,199		472,436
Advances from the Federal Home Loan Bank and other borrowed money	76,507			77,628		156,885		221,483		301,920		324,500
Stockholders’ equity (deficit)	(14,845		)	53,565		87,616		86,047		86,700		75,775

										Three Months
	Year Ended									Ended			Year Ended
Selected Consolidated Operating	December 31,									December 31,			September 30,
Data: (1)	2008			2007			2006			2005			2005		2004
	(In thousands, except per share data)
Interest income	$	40,237		$	60,233		$	65,475		$	14,402		$	47,748	$	40,171
Interest expense	26,237			36,460			36,485			8,155			26,204		19,813
Net interest income	14,000			23,773			28,990			6,247			21,544		20,358
Provision for losses on loans	41,477			32,800			17,450			900			3,600		3,600
Net interest income (loss) after provision for losses on loans	(27,477		)	(9,027		)	11,540			5,347			17,944		16,758
Other income (loss)	(286		)	3,932			3,213			(764		)	2,114		1,181
Goodwill impairment	12,514			11,397			—			—			—		—
General, administrative and other expense	21,333			21,774			21,122			4,530			15,827		13,750
Earnings (loss) before income taxes	(61,610		)	(38,266		)	(6,369		)	53			4,231		4,189
Federal income taxes (benefits)	6,905			(4,933		)	(2,308		)	(34		)	1,375		1,320
Net earnings (loss)	$	(68,515	)	$	(33,333	)	$	(4,061	)	$	87		$	2,856	$	2,869
Earnings (loss) per share
Basic	$	(14.17	)	$	(6.97	)	$	(0.88	)	$	0.02		$	0.73	$	0.92
Diluted	$	(14.17	)	$	(6.97	)	$	(0.88	)	$	0.02		$	0.72	$	0.91

(See footnotes on next page)

4

							At or for the
	At or for the						Three Months		At or for the
	Year Ended						Ended		Year Ended
	December 31,						December 31,		September 30,
Key Operating Ratios: (1)	2008		2007		2006		2005		2005		2004
Performance Ratios: (1)
Return on average assets	(8.62	)%	(3.44	)%	(0.38	)%	0.03	%	0.30	%	0.34	%
Return on average equity	(183.59	)	(38.32	)	(4.48	)	0.40		3.65		4.97
Average interest-earning assets to average interest-bearing liabilities	101.75		103.71		104.02		104.00		106.63		104.82
Interest rate spread (2)	1.82		2.53		2.84		2.49		2.25		2.40
Net interest margin (2)	1.88		2.68		3.00		2.63		2.45		2.52
General, administrative and other expense to average assets	4.26		3.42		1.99		1.78		1.69		1.61
Dividend payout ratio	n/a		n/a		n/a		750.00		82.19		32.61
Asset Quality Ratios:
Nonperforming assets to total assets at end of period (3)	7.48	%	3.70	%	2.54	%	1.82	%	2.07	%	0.71	%
Allowance for loan losses to nonperforming loans at end of period	66.59		133.05		71.20		71.67		66.32		182.87
Allowance for loan losses to total loans at end of period	5.40		4.90		2.05		1.42		1.72		1.64
Capital and Other Ratios:
Average stockholders’ equity to average assets	4.70	%	8.97	%	8.54	%	8.55	%	8.35	%	6.77	%
Tangible stockholders’ equity to tangible assets	(0.23	)	5.48		7.12		8.07		9.75		8.38
Tier 1 capital to risk-weighted assets (4)	3.50		10.06		11.32		10.86		13.37		12.52

(1)All ratios are based on average monthly balances for the fiscal year ended September 30, 2004.  With respect to the fiscal years ended September 30, 2005 or 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.  At December 31, 2008, the Bank did not meet two of the three capital requirements imposed by the OTS.  In addition, at such date, the Bank was deemed a significantly undercapitalized institution under the regulatory framework for prompt corrective action.  For further explanation of the Bank’s capital requirements and related consequences of its classification as significantly undercapitalized, see “Overview and Recent Regulatory Matters” herein.

5

PEOPLES COMMUNITY BANCORP, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS

Overview and Recent Regulatory Matters

Operations.  As a result of acquisitions and internal growth, Peoples 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, Peoples acquired five financial institutions with aggregate total assets as of the time of acquisition of $428.5 million.  Also, in September 2003, Peoples purchased $32.8 million in loans and assumed $55.6 million in deposits in connection with the acquisition of two branch offices from another financial institution.  Peoples supplemented this growth due to 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 $944.7 million at December 31, 2005.  In addition, since September 30, 2000, Peoples expanded its franchise through the opening of six full service branch offices. These new branch offices, as well as acquired branch offices, have expanded Peoples’ market presence.  Peoples’ loan growth was funded in part by deposits.  Peoples placed an emphasis on deposit generation both internally and through whole bank and branch acquisitions.  Deposits increased from $233.1 million at September 30, 2001 to $755.3 million at December 31, 2006.

Beginning in early 2007, however, Peoples began to reduce all aspects of its lending exposure due in large part to the downturn in the local economy and, in particular, values of residential and residential development properties. At December 31, 2008, total gross loans amounted to $531.4 million, a decrease of $413.3 million or 43.8% compared to $944.7 million of loans at December 31, 2005.  In addition, to address such slowdown and the resulting decrease in the value of its collateral, Peoples charged off $18.3 million of loans in 2007 and $47.8 million of loans in 2008, and provided $32.8 million and $41.5 million during 2007 and 2008, respectively, to the allowance for loan losses.  As a result, the allowance for loan losses to total gross loans at December 31, 2008 amounted to 5.4%.  Further, beginning in 2006, Peoples 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.

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

Regulatory Enforcement Actions.  The OTS is the primary federal regulator of Peoples Community Bank.  In light of Peoples’ losses in 2007 and 2006 and levels of nonperforming assets, the OTS has 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 prescribed 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 Company and the Bank are 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 prescribed 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 an executive officer; and (iii) making any golden parachute payments to any institution-affiliated party. Pursuant to the

6

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.

During 2008, management of Peoples worked diligently to resolve the issues associated with the Bank’s nonperforming assets and to provide the information or take the actions required by the Orders.  Concurrently, management and the Board of Directors considered all strategic alternatives available to the Company and the Bank.  As required, Peoples has filed a consolidated business plan with the OTS covering operations through 2010.  Peoples’ business plan contemplates, among other things, a consolidation of its operations through branch sales and a reduction in adversely classified assets through loan resolutions, repayments, sales and charge-offs.  Branch sale transactions would decrease Peoples’ assets and liabilities, improve capital ratios, generate income, and reduce general, administrative and other expense.  Despite management’s efforts, the extremely difficult economic conditions have continued to negatively impact real estate values and the ability of borrowers to service or repay their loans.  As a result, Peoples has continued to incur significant losses which has severely impacted stockholders’ equity and the related regulatory capital of the Bank.

Banking regulations require savings institutions to satisfy several 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.  Due to continued losses during 2008, at December 31, 2008, the Bank did not meet two of these capital requirements, with tangible, core and risk-based capital ratios of 2.2%, 2.2% and 4.8%, respectively.  Further, at such date, the Bank was deemed a significantly undercapitalized institution under the regulatory framework for prompt corrective action.  As a result, the Bank was notified by the OTS by letter dated April 13, 2009 (the “Notice”), that it is subject to certain restrictions and requirements, including the requirement to file a capital restoration plan by April 30, 2009 to demonstrate the ability of the Bank to return to an adequately capitalized status by June 15, 2009 (the “Capital Plan”).

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

7

On April 30, 2009, the Bank filed its Thrift Financial Report for the quarter ended March 31, 2009.  This report reflected the Bank’s capital under the framework for prompt corrective action at the “critically undercapitalized” level.  The Bank’s total risk-based capital, Tier 1 risk-based capital and tier 1 leverage capital were 4.15%, 2.82% and 1.81%, respectively.  The Bank’s ratio of tangible equity to tangible assets was 1.81%.  As a result, the Bank is subject to numerous operational restrictions and requirements.

In addition to the other operational restrictions imposed by the Orders, the Bank may not, without the prior written consent of the FDIC:

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

·Extend credit for any highly leveraged transaction;

·Amend its charter or bylaws, except to the extent necessary to carry out any other requirement of any law, regulation, or order;

·Make any material change in accounting methods;

·Engage in any covered transaction;

·Pay excessive compensation or bonuses; or

·Make payments on subordinated debt.

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

Report of Independent Registered Public Accounting Firm.  The report of the Company’s independent registered public accounting firm for the year ended December 31, 2007, contained 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 obligation under an outstanding line of credit with Integra Bank, N.A. (“Integra”).  The line of credit is secured by all outstanding shares of common stock of the Bank. The Orders prohibit the Bank from paying cash dividends to the Company without the prior consent of the OTS and the Company will be able to rely upon only a limited amount of existing cash and cash equivalents for 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 or replacing the line of credit.  Peoples is actively evaluating various funding strategies to meet its obligations, including restructuring its outstanding debt and selling branch offices.  Any increase in the Company’s outstanding indebtedness will also require OTS approval.  The Company cannot provide assurance that it will succeed in obtaining funds to meet its financial obligations.  Failure to do so will have a material adverse effect on, and impair the Company’s business, financial condition and ability to operate as a going concern.

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

Default on Line of Credit and Termination of Strategic Transaction.  As of December 31, 2007, the Company was not in compliance with certain covenants of its line of credit with Integra.  On June 30, 2008, the loan matured and was due in full.  Effective July 24, 2008, the Company entered into a forbearance agreement with Integra

8

regarding its $17.5 million line of credit. The forbearance was negotiated in order to extend the repayment period and allow the Company to structure a transaction which would result in repayment of the $17.5 million line of credit.

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

On December 31, 2008, the Company and the third party entered into the First Amendment (“Amendment”) to the Agreement to extend the Company’s and third party’s obligations under the Agreement to January 31, 2009.  The Company and the third party reaffirmed their respective representations and warranties and acknowledged that the third party will require another financial institution acceptable to the Office of Thrift Supervision to perform its or their obligations under the Agreement.  No agreement was reached by January 31, 2009.

On December 31, 2008, the Company and Integra extended the forbearance period to January 31, 2009.  The forbearance period has expired and the Company is in default on its line of credit with Integra.  This matter remains unresolved.

Establishment of Valuation Allowance.  In light of the matters discussed above, the Company established a valuation allowance of deferred federal income taxes of approximately $4.4 million in 2007.  As of December 31, 2008 the allowance had been increased to $27.2 million.  Generally, the losses incurred in 2006, 2007 and 2008 resulted in deferred federal income taxes or deferred tax assets which may be applied against current period earnings, carried back against prior years’ earnings or used to the extent of management’s estimate of future taxable income.  The valuation allowance was established since the Company’s current circumstances might impair the Company’s ability to generate future taxable income and therefore impair its ability to realize all benefits of the deferred tax asset.

General

Peoples’ operations are influenced primarily by 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.  Peoples’ operations are also dependent on the level of other income, the provision for losses on loans, general, administrative and other expenses and federal income taxes.  The provision for losses on loans has had a significant impact on People’s operations in 2006, 2007 and 2008.  Peoples’ operations are also subject to changes in interest rates, applicable statutes and regulations and general economic conditions, as well as other factors beyond management’s control.

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 Peoples’ 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

9

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.

Valuation Allowance of Deferred Income Taxes.  Peoples 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 future taxable income.  A valuation allowance is provided for net deferred tax assets to the extent that the value of net temporary differences and carryforward attributes exceeds management’s estimates of taxes payable on future taxable income.

Goodwill.  Peoples has developed procedures to test goodwill for impairment on an annual basis using September 30 financial data and more frequently if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount. The evaluation of possible impairment is outsourced to a third party. This evaluation is based on the analysis set forth below.

The test involves estimating the fair value of tangible assets and liabilities, identified intangible assets and goodwill of the Bank (which is the Company’s reporting unit as defined under FAS 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; and (2) the discounted cash flow approach. The application of the valuation techniques takes into account the reporting unit’s operating history, the current market environment and future prospects. 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

10

fair value. Any impairment loss would require an immediate charge to earnings. After each testing period, the third party compiles a summary of the test that is then provided to the audit committee for review.

Peoples evaluated the goodwill balance as of September 30, 2007 and June 30, 2008.  As a result of these evaluations, Peoples recorded impairment charges of $11.4 million and $12.5 million respectively, which eliminated the goodwill on its books. The impairment of goodwill was primarily attributable to lower market valuations for financial institutions, the weakening of the credit market, the decline in real estate values, particularly in the Cincinnati region, and the net losses recorded by Peoples from 2006 to 2008.

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.

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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.

	For the Year Ended
	December 31, 2008						December 31, 2007						December 31, 2006
	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)	$	594,991	35,446		5.96	%	$	751,917	53,390		7.10	%	$	870,327	61,096		7.02	%
Mortgage-backed securities	29,321		1,430		4.88		49,427		2,394		4.84		60,474		2,467		4.08
Investment securities (2)	40,088		1,773		4.42		18,150		1,100		6.06		17,473		951		5.44
Interest-earning deposits	80,648		1,588		1.97		64,965		3,349		5.16		18,206		961		5.28
Total interest-earning assets	745,048		40,237		5.40		884,459		60,233		6.81		966,480		65,475		6.77
Non-interest-earning assets	49,680						85,652						93,635
Total assets	$	794,728					$	970,111					$	1,060,115
Interest-bearing liabilities:
Savings and checking accounts	$	79,365	919		1.16		$	69,133	1,472		2.13		$	103,865	1,137		1.09
Money market deposit accounts	95,605		2,538		2.65		144,809		4,354		3.01		146,791		5,420		3.69
Certificates of deposit	465,491		18,594		3.99		506,294		24,202		4.78		478,148		20,682		4.33
FHLB advances and other borrowings	76,789		3,429		4.47		117,546		5,341		4.54		173,622		7,163		4.13
Subordinated debentures	15,000		757		5.05		15,000		1,091		7.27		26,740		2,083		7.79
Total interest-bearing liabilities	732,250		26,237		3.58		852,782		36,460		4.28		929,166		36,485		3.93
Non-interest-bearing liabilities	25,159						30,346						40,384
Total liabilities	757,409						883,128						969,550
Stockholders’ equity	37,319						86,983						90,565
Total liabilities and stockholders’ equity	$	794,728					$	970,111					$	1,060,115
Net interest income			$	14,000					$	23,773					$	28,990
Interest rate spread					1.82	%					2.53	%					2.84	%
Net interest margin (3)					1.88	%					2.69	%					3.00	%
Average interest-earning assets to average interest-bearing liabilities					101.75	%					103.71	%					104.02	%

(1)Includes non-accruing loans.

(2)Includes Federal Home Loan Bank stock.

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

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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 Peoples’ 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, 2007 to									December 31, 2006 to
	December 31, 2008									December 31, 2007
	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	$	(7,814	)	$	(10,130	)	$	(17,944	)	$	705		$	(8,411	)	$	(7,706	)
Mortgage-backed securities	17			(981		)	(964		)	(3,776		)	3,703			(73		)
Investment securities (1)	64			(134		)	(70		)	111			38			149
Interest-earning deposits	(2,260		)	1,242			(1,018		)	(21		)	2,409			2,388
Total interest-earning assets	(9,993		)	(10,003		)	(19,996		)	(2,981		)	(2,261		)	(5,242		)
Interest-bearing liabilities:
Savings and checking accounts	(819		)	266			(553		)	(1,127		)	395			(732		)
Money market deposit accounts	(465		)	(1351		)	(1,816		)	1			—			1
Certificates of deposit	(3,763		)	(1,845		)	(5,608		)	2,305			1,215			3,520
FHLB advances and other borrowings	(89		)	(1,822		)	(1,911		)	809			(2,631		)	(1,822		)
Subordinated debentures	(335		)	—			(335		)	(150		)	(842		)	(992		)
Total interest-bearing liabilities	(5,471		)	(4,752		)	(10,223		)	1,838			(1,863		)	(25		)
Increase (decrease) in net interest income	$	(4,522	)	$	(5,251	)	$	(9,773	)	$	(4,819	)	$	(398	)	$	(5,217	)

(1)           Includes FHLB stock.

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Discussion of Financial Condition Changes from December 31, 2007 to December 31, 2008

At December 31, 2008, Peoples’ total assets amounted to $712.4 million, a decrease of $175.0 million, or 19.7%, compared to total assets at December 31, 2007.  The decrease in assets was comprised primarily of a $172.6 million net decrease in loans receivable, a decrease in goodwill of $12.5 million, a decrease of $14.6 million in cash and cash equivalents, and the elimination of $8.8 million in deferred income taxes.  The decreases were partially offset by an increase of $33.4 million in securities designated as available for sale.

Liquid assets (i.e. cash and interest-bearing deposits) totaled $72.0 million at December 31, 2008, a decrease of $14.6 million, or 16.9%, compared to the amount at December 31, 2007.  The decrease in liquid assets as of December 31, 2008 was primarily due to the purchase of securities available for sale in order to increase yields.  Approximately $60.9 million was invested in interest bearing deposits in other financial institutions with a yield of 2.93% at December 31, 2008.

Investment securities totaled $101.0 million at December 31, 2008, an increase of $33.4 million, or 49.4%, from the amount at December 31, 2007.  The increase was comprised primarily of $81.6 million in purchases, partially offset by  $48.1 million of sales and repayments during the period.

Loans receivable totaled $461.9 million at December 31, 2008, a decrease of $172.6 million, or 27.2%, over December 31, 2007 levels. Loan disbursements amounted to $48.3 million during 2008, which were offset by principal repayments of $143.8 million and loan sales and participations sold totaling $28.4 million.  Between 2001 and 2005, Peoples 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, Peoples, beginning in late 2006, began to reduce all aspects of its lending exposure.  In addition, as discussed below, Peoples charged off $47.8 million and $18.3 million of loans in 2008 and 2007, respectively.

The allowance for loan losses totaled $28.7 million at December 31, 2008, a decrease of $5.8 million, or 16.8% compared to the allowance at December 31, 2007.  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, $41.5 million was added to the allowance through the provision for losses on loans during 2008.   Approximately $47.8 million of loans were charged-off during the year.  The charged-off loans were comprised of $6.7 million in loans secured by one-to-four-family residential real estate, $9.3 million in loans secured by multi-family residential real estate, $8.8 million in construction loans, $18.9 million in loans secured by commercial real estate and land, and $4.0 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 5.4% and 4.9% of total loans at December 31, 2008 and 2007, respectively.  The allowance for loan losses represented 66.6% and 133.1% of nonperforming loans at December 31, 2008 and 2007, respectively.  Nonperforming assets totaled $53.3 million and $32.8 million at December 31, 2008 and 2007, respectively.  Nonperforming assets at December 31, 2008 consisted of $6.6 million of loans secured by one-to-four-family residential real estate, $7.1 million of loans secured by multi-family residential real estate, $25.2 million of loans secured by nonresidential real estate and land, $3.9 million in construction loans, $381,000 in commercial and consumer loans, and $10.2 million in foreclosed real estate.  The Bank’s management continues to aggressively pursue the collection and resolution of all delinquent and nonperforming loans.

At December 31, 2008, non-accrual loans secured by one-to-four-family residential real estate consisted of $4.5 million in owner-occupied residences with an average balance of $161,000 and $2.1 million in non-owner occupied residences with an average balance of $114,000.

14

Non-accrual loans secured by multi-family residential real estate amounted to $7.1 million at December 31, 2008, with an average balance of $787,000.  One borrower represented $5.3 million of this total.  Non-residential real estate and land secured non-accrual loans totaled $25.2 million at December 31, 2008.  The average balance of these loans was $647,000.  Three borrowers represented $7.8 million of the non-accrual loans secured by non-residential real estate and land, with the largest borrower representing $3.9 million.

Non-accrual construction loans totaled $3.9 million at December 31, 2008, with an average balance of $241,000.  Commercial and consumer non-accrual loans totaled $381,000, with $3,000 of these loans being unsecured.

Management has considered these loan concentrations as a part of its overall evaluation of the adequacy of Peoples’ allowance for loan losses.  Although management believes that its allowance for loan losses at December 31, 2008 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 continue to adversely affect Peoples’ results of operations.

Peoples recorded a goodwill impairment of $12.5 million as of June 30, 2008, primarily due to lower market valuations for financial institutions, the weakening of the credit market, the decline in real estate values, particularly in the Cincinnati region, and the net losses recorded by Peoples.

Deposits totaled $630.2 million at December 31, 2008, a decrease of $105.0 million, or 14.3%, over the total at December 31, 2007.  Total demand, transaction and savings deposits decreased by $21.2 million, or 9.5%, to $202.2 million at December 31, 2008, while total certificates of deposit decreased by $83.8 million, or 16.4%, to $428.0 million at December 31, 2008.  During the first three quarters of 2007, Peoples utilized competitive pricing strategies on certificates of deposits, which included advertised special rates.  In late 2007, due to the cost of funds and interest margin compression, management shifted its focus to demand and savings deposits.  Due to the anticipated decline in loan balances, deposits were priced to provide controlled runoff throughout 2008.

Advances from the Federal Home Loan Bank and other borrowings totaled $76.5 million at December 31, 2008, a decrease of $1.1 million, or 1.4%, compared to December 31, 2007 totals.  In the fourth quarter of 2007, Peoples 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’ deficit totaled $14.8 million at December 31, 2008, a decrease of $68.4 million compared to stockholders’ equity at December 31, 2007.  The decrease resulted primarily from net losses of $68.5 million, which included $41.5 million in provision for losses on loans and $12.5 million in goodwill impairment.

15

Comparison of Results of Operations for the Years Ended December 31, 2008 and December 31, 2007

General

Peoples recorded a net loss of $68.5 million for the year ended December 31, 2008, compared to a net loss of $33.3 million for the year ended December 31, 2007.  The higher net loss was primarily due to a $9.8 million decrease in net interest income, a $4.2 million, or 107.2%, decrease in other income, an $11.8 million increase in income tax expense, and an $8.7 million increase in provision for loan losses.

Net Interest Income

Total interest income amounted to $40.2 million for the year ended December 31, 2008, a $20.0 million, or 33.2%, decrease over the year ended December 31, 2007.  The decrease was due to a $139.4 million, or 15.8%, decrease in average interest-earning assets and a 141 basis point decrease in the average yield on interest earning assets for the year ended December 31, 2008 compared to the year ended December 31, 2007.

Interest income on loans totaled $35.4 million for the year ended December 31, 2008, a decrease of $17.9 million, or 33.6%, from the year ended December 31, 2007.  This decrease was primarily due to a $156.9 million, or 20.9%, decrease in the average portfolio balance outstanding for the year ended December 31, 2008 compared to the year ended December 31, 2007 and a 114 basis point decrease in the weighted-average yield to 5.96% for 2008. The decrease in the average balance was primarily due to loan sales of $28.4 million, and loan repayments totaling $143.8 million, partially offset by loan disbursements of $48.3 million.  As previously stated, the Bank, beginning in late 2006, reduced all aspects of its lending exposure in response to the downturn in the local real estate market.  The decrease in the Bank’s yield reflects a downward shift in market rates and the corresponding impact on adjustable-rate loans.

Interest income on mortgage-backed securities totaled $1.4 million for 2008, a decrease of $964,000, or 40.3%, compared to the year ended December 31, 2007.  The decrease in interest income is due to a $20.1 million, or 40.7%, decrease in the average balance outstanding for the year ended December 31, 2008 compared to the year ended December 31, 2007. The decrease in the average balance of the mortgage-backed securities portfolio was primarily due to approximately $10.9 million in repayments, and a sale in the first quarter of approximately $28.8 million.  Interest income on investment securities and interest-bearing deposits totaled $3.4 million, an increase of $1.1 million, due primarily to a $37.6 million increase in the average balance of the related assets for the year ended December 31, 2008 compared to the year ended December 31, 2007, partially offset by a 257 basis point decrease in the weighted average yield to 2.78% for 2008.  The increase in interest-bearing deposits was primarily due to curtailed lending.

Interest expense on deposits totaled $22.1 million for the year ended December 31, 2008, a decrease of $8.0 million, or 26.6%, over the $30.0 million recorded for the year ended December 31, 2007.  The decrease was due primarily to a decrease of $79.8 million, or 11.1%, in the average balance of deposits outstanding for the year ended December 31, 2008 compared to the year ended December 31, 2007 and a decrease in the weighted-average cost of deposits of 73 basis points, to 3.44% for 2008.  The decrease in the average cost of deposits was primarily due to the decrease in market interest rates.  The decrease in the average balance of deposits was primarily due to pricing by Peoples at levels intended to provide controlled runoff throughout 2008.

Interest expense on borrowings totaled $4.2 million for 2008, a decrease of $2.2 million, or 34.9%, compared to the year ended December 31, 2007, due primarily to a $40.8 million, or 30.7%, decrease in the average balance of borrowings outstanding and a 29 basis point decrease in the average cost of borrowings for 2008.

As a result of the changes in interest income and interest expense, net interest income decreased by $9.8 million, or 41.1%, during the year ended December 31, 2008, compared to the year ended December 31, 2007.  The interest rate

16

spread amounted to 1.82% for 2008 compared to 2.53% for the year ended December 31, 2007.  The net interest margin totaled 1.88% and 2.69% for the years ended December 31, 2008 and 2007, 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 $41.5 million for the year ended December 31, 2008, compared to $32.8 million for the year ended December 31, 2007.

The provisions recorded during 2008 and 2007 were predicated on higher non-performing, classified and criticized assets for the years, as well as significant charge-offs during both years.  The increase in delinquent loans in Peoples’ non-owner-occupied (investment property) residential loan portfolio and its acquisition, development, and construction loan portfolio contributed to the increased provisions.  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 loans in the future.

Other Income (Loss)

Other income (loss) totaled $(286,000) for the year ended December 31, 2008, a decrease of $4.2 million, compared to the year ended December 31, 2007.  The decrease was due primarily to a $4.2 million decrease in gain on sale of loans.

General, Administrative and Other Expense

General, administrative and other expense totaled $33.8 million for the year ended December 31, 2008; an increase of $676,000, or 2.0%, compared to the year ended December 31, 2007.  Peoples recorded goodwill non-cash impairment charges of $12.5 million in 2008, compared to $11.4 million recorded in 2007.  The charge was made by Peoples following a valuation by an independent third party.  This impairment is primarily attributable to lower market valuations for financial institutions, the weakening of the credit market, the decline in real estate values, particularly in the Cincinnati region, and the net losses recorded by Peoples during 2006, 2007 and 2008.  Peoples recorded a $2.0 million, or 48.2%, increase in other operating expense, partially offset by a $437,000, or 42.8%, decrease in franchise tax, a $445,000, or 24.2%, decrease in amortization of intangibles, a $357,000, or 10.2% decrease in occupancy and equipment, and a $1.3 million, or 12.6%, decrease in employee compensation and benefits expense due to a decrease in the number of employees.  The increase in other operating expenses was due primarily to an increase in legal and collection fees recorded as well as an increase in FDIC insurance paid during the year ended December 31, 2008.

Federal Income Taxes

Peoples recorded an expense for federal income taxes totaling $6.9 million for the year ended December 31, 2008 compared to an income tax benefit $4.9 million for the year ended December 31, 2007.  The income tax benefit for 2007 was due to net losses incurred in 2007.  A valuation allowance against deferred tax assets of approximately $4.4 million was recorded in the fourth quarter of 2007; an additional $22.8 million was added to the valuation allowance in year 2008.  Generally, the losses incurred in 2006, 2007 and 2008 resulted in tax losses and deferred tax assets which may be used to the extent of future taxable income.  The valuation allowance was established since Peoples’ current position impairs the Company’s ability to generate future taxable income and therefore impairs its ability to realize all benefits of the deferred tax asset.

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

General

Peoples recorded a net loss of $33.3 million for the year ended December 31, 2007, compared to a net loss of $4.1 million for the 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, Peoples 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 year ended December 31, 2007, a $5.2 million, or 8.0%, decrease over the 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 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 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,  beginning in late 2006, Peoples began to reduce all aspects of its lending exposure in response to the downturn in the local real estate market.  The increase in Peoples’ 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 year.

Interest income on mortgage-backed securities totaled $2.4 million for 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 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 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 competitive Cincinnati market place.

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Interest expense on borrowings totaled $6.4 million for 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 2007.  During 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.

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 year ended December 31, 2007, compared to year ended December 31, 2006.  The interest rate spread amounted to 2.53% for 2007 compared to 2.84% for the year ended December 31, 2006.  The net interest margin totaled 2.69% and 3.00% for the 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 year ended December 31, 2007, compared to $17.5 million for the 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 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 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 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 year 2007 compared to a net loss of $59,000 recorded during 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 year 2007.

General, Administrative and Other Expense

General, administrative and other expense totaled $33.2 million for the year ended December 31, 2007, an increase of $12.0 million, or 57.0%, compared to the year ended December 31, 2006.  This increase resulted primarily from goodwill non-cash impairment charges of $11.4 million recorded in the fourth quarter of 2007 by the Bank following

19

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.

Excluding the goodwill impairment, general, administrative and other expense increased $652,000, or 3.1%. Peoples 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 year ended December 31, 2006.  During the fourth quarter of 2007, Peoples recorded approximately $508,000 in ESOP expense for the release of 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

Peoples recorded a credit provision for federal income taxes totaling $4.9 million for the year ended December 31, 2007 compared to a credit provision of $2.3 million for the 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.

Exposure to Changes in Interest Rates

Peoples’ 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, 2008, approximately $219.0 million, or 47.4%, of Peoples’ loan portfolio consisted of loans with fixed-rates of interest and approximately $242.9 million, or 52.6%, had adjustable-rates of interest.  Further, nonresidential real estate and land loans, construction loans, commercial loans and consumer loans totaled $175.6 million or 33.0% of the total loan portfolio at December 31, 2008.  These loans typically have higher rates and/or shorter terms to maturity compared to single-family residential mortgage loans.

Quantitative Analysis

The OTS provides a quarterly report on the potential impact of interest rate changes upon the net portfolio value (“NPV”) of the Bank.  Management reviews the quarterly reports from the OTS that show the impact of changing interest rates on NPV.  Net portfolio value 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 increase or decrease in market interest rates.

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The following tables present the Bank’s net portfolio value as of December 31, 2008 and December 31, 2007, based on information provided to the OTS by the Bank.

December 31, 2008
										Change in
										NPV as a
								NPV as a		Percentage of
Change in				Change in		Percentage		Percentage of		the Present
Interest Rates		NPV		NPV		Change in		the Present		Value of Assets
(In basis points)		(In thousands)		(In thousands)		NPV		Value of Assets		(In basis points)
+300	bp	$	10,136	$	516	+5	%	1.42	%	+10	bp
+200		12,651		3,031		+32		1.76		+44
+100		12,340		2,720		+28		1.71		+38
+50		11,133		1,513		+16		1.53		+21
0		9,620		—		—		1.32		—
-50		6,975		-2,645		-27		0.96		-36
-100		4,143		-5,477		-57		0.57		-75

December 31, 2007
										Change in
										NPV as a
								NPV as a		Percentage of
Change in				Change in		Percentage		Percentage of		the Present
Interest Rates		NPV		NPV		Change in		the Present		Value of Assets
(In basis points)		(In thousands)		(In thousands)		NPV		Value of Assets		(In basis points)
+300	bp	$	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
+50		92,980		-1,657		-2		10.39		-14
0		94,637		—		—		10.53		—
-50		95,428		791		1		10.59		5
-100		95,789		1,153		1		10.59		6

As shown by the 2008 table above, an increase in market interest rates would result in an increase in the Bank’s net portfolio value as of December 31, 2008.  Conversely, the 2008 table indicates a decrease in market interest rates would result in a decrease in the Bank’s net portfolio value as of December 31, 2008.  The instantaneous shock as indicated in the tables is subject to periodic interest rate adjustments and caps as dictated by the underlying notes.

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 against fixed rate loans.  Historically, the Bank has been able to maintain relatively stable levels of net interest income despite the interest rate risk inherent in its operations.

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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.

As of December 31, 2008, the estimated percentage change in NPV for declining rate scenarios is in excess of the limits established in the Bank’s Asset/Liability Management policy.  Similarly, the Bank’s NPV as a percentage of the present value of assets has fallen below Bank policy minimums for all rate scenarios illustrated in the December 31, 2008 table above.  This condition is primarily due to the decrease in the Bank’s capital.

Liquidity and Capital Resources

The Bank, 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 in its local market.  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, 2008, included cash and deposits in other financial institutions totaling $72.0 million, in addition to investment securities and mortgage-backed securities available for sale at a total market value of $101.0 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.  The Orders prohibit the Bank from paying cash dividends to the Company without the prior written consent of the OTS.  The Company has no expectation that the OTS will permit such dividends from the Bank.  Further, current cash flows and capital resources of the Company have been insufficient to fund the Company’s operating expenses and to meet its debt service obligations on the junior subordinated debentures or to pay off the $17.5 million line of credit which was due on June 30, 2008.  Peoples is actively evaluating various funding strategies to meet its obligations, including restructuring its outstanding debt and selling branch offices.  See “Overview and Recent Regulatory Matters” beginning on page 6 herein.  Any increase in the Company’s outstanding indebtedness will also require OTS approval.  The Company cannot provide assurance that it will succeed in obtaining funds to meet its financial obligations.  Failure to do so will have a material adverse effect on, and impair Peoples’ business, financial condition and ability to operate as a going concern.

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The following table sets forth information regarding Peoples’ obligations and commitments to make future payments under contract as of December 31, 2008.

	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	$	45	$	—	$	160
Advances from the Federal Home Loan Bank and other borrowings	20,472		2		1,971		54,062		76,507
Subordinated debentures	—		—		—		15,464		15,464
Certificates of deposit	304,468		84,613		38,901		—		427,982
Amount of commitments expiring per period Commitments to originate loans:
Consumer lines of credit	519		—		—		—		519
Commercial lines of credit	511		—		—		—		511
One-to-four family and multi-family loans	23,303		—		—		—		23,303
Commitments to fund commercial or other:
Letters of credit	5,723		—		—		—		5,723
Total contractual obligations	$	355,034	$	84,692	$	40,917	$	69,526	$	550,169

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, 2008, the Bank did not meet two of its capital requirements with tangible, core and risk-based capital ratios of 2.3%, 2.3% and 4.8%, respectively.  In addition, at such date, the Bank was deemed a significantly undercapitalized institution under the framework for prompt corrective action.  On April 30, 2009, the Bank filed its Thrift Financial Report for the quarter ended March 31, 2009. This report reflected the Bank’s capital under the framework for prompt corrective action at the “critically undercapitalized” level.  As a result, the Bank is subject to numerous operational restrictions and requirements, including the requirement to file a capital restoration plan to return to an adequately capitalized status.  The Company and the Bank are currently in negotiations concerning a transaction to sell certain branches of the Bank, the proposed results of which are the basis for the Bank’s capital restoration plan, as filed with the OTS on April 30, 2009.  The Bank intends to negotiate and enter unto a transaction to sell certain branches in order to reduce assets and liabilities, generate a deposit premium and return the Bank to an adequately capitalized status.  The Company cannot provide assurance that such a transaction will be entered into or consummated or that the Bank’s capital restoration plan will be acceptable to the OTS.  If the Bank’s capital plan is not approved by the OTS or the Bank cannot enter into and consummate a transaction to return the Bank to an adequately capitalized status on a timely basis, the Company will not be able to continue as a going concern.

For a further discussion of the Company’s and the Bank’s regulatory enforcement actions, see “Overview and Recent Regulatory Matters” beginning on page 6 herein.

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Impact of Inflation and Changing Prices

The consolidated financial statements and related financial data presented herein regarding Peoples 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 Peoples’ assets and liabilities are monetary in nature.  As a result, interest rates generally have a more significant impact on Peoples’ 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.

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Report of Independent Registered Public Accounting Firm

To the Board of Directors and Stockholders

Peoples Community Bancorp, Inc.

We have audited the accompanying consolidated statement of financial condition of Peoples Community Bancorp, Inc. as of December 31, 2008, and the related consolidated statements of operations, comprehensive income (loss), stockholders’ equity, and cash flows for the year then ended.  These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audit.

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 audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements.  An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Peoples Community Bancorp, Inc. as of December 31, 2008 and the consolidated results of its operations and its cash flows for the year then ended, 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 L to the financial statements, at December 31, 2008, the Company’s wholly-owned Bank, Peoples Community Bank, is considered to be significantly undercapitalized. The Bank is required to file a capital restoration plan with the Office of Thrift Supervision (OTS) outlining its plans for attaining the required levels of regulatory capital. Failure to meet the capital requirements and capital targets included in the capital plan would expose the Bank to significant regulatory sanctions.  The Company also has suffered significant losses from operations. These matters raise substantial doubt about the ability of the Company to continue as a going concern. Management’s plans in regard to these matters are described in Note P. The accompanying financial statements do not include any adjustments that might result from the outcome of this uncertainty.

April 30, 2009

Columbus, Ohio

25

312 Walnut Street, Suite 3000
Cincinnati, OH 45202-4025
513.621.8300 Fax 513.621.8345 www.bkd.com

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 statement of financial condition of Peoples Community Bancorp, Inc. as of December 31, 2007, 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 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 the results of its operations and its cash flows for the years ended December 31, 2007 and 2006, 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 theformal 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.

	/s/ BKD, LLP
Cincinnati, Ohio
April 15, 2008

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PEOPLES COMMUNITY BANCORP, INC.

CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION

(In thousands, except share data)

	For Years Ended December 31,
	2008			2007
ASSETS
Cash and due from banks	$	11,133		$	16,117
Federal funds sold	—			67,000
Interest-bearing deposits in other financial institutions	60,882			3,497
Cash and cash equivalents	72,015			86,614
Securities designated as available for sale	100,952			67,572
Loans receivable - net	461,861			634,421
Office premises and equipment	26,671			27,795
Real estate held for sale	510			510
Real estate acquired through foreclosure	10,176			6,915
Federal Home Loan Bank stock	14,549			14,024
Accrued interest receivable	2,941			4,295
Bank-owned life insurance	18,566			17,812
Prepaid expenses and other assets	1,336			1,906
Goodwill	—			12,514
Intangible assets	2,838			4,232
Deferred federal income taxes	—			8,816
Total assets	$	712,415		$	887,426
LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT)
Deposits	$	630,198		$	735,212
Advances from the Federal Home Loan Bank and other borrowings	76,507			77,628
Subordinated debentures	15,464			15,464
Accrued interest payable	1,022			382
Other liabilities	4,069			5,175
Total liabilities	727,260			833,861
Commitments and contingent liabilities	—			—
Stockholders’ equity (deficit) Common stock - 15,000,000 shares of $.01 par value authorized; 4,844,489 and 4,838,964 shares issued at December 31, 2008 and 2007, respectively	48			48
Additional paid-in capital	71,345			71,136
Accumulated deficit	(85,879		)	(17,364		)
Shares acquired by stock benefit plan	—			(295		)
Accumulated comprehensive income (loss)	(359		)	40
Total stockholders’ equity (deficit)	(14,845		)	53,565
Total liabilities and stockholders’ equity (deficit)	$	712,415		$	887,426

The accompanying notes are an integral part of these statements.

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PEOPLES COMMUNITY BANCORP, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except share data)

	For Years Ended December 31,
	2008			2007			2006
Interest income
Loans	$	35,446		$	53,390		$	61,096
Mortgage-backed securities	1,430			2,394			2,467
Investment securities	1,030			1,100			951
Interest-bearing deposits and other	2,331			3,349			961
Total interest income	40,237			60,233			65,475
Interest expense
Deposits	22,051			30,028			27,239
Borrowings	4,186			6,432			9,246
Total interest expense	26,237			36,460			36,485
Net interest income	14,000			23,773			28,990
Provision for losses on loans	41,477			32,800			17,450
Net interest income (loss) after provision for losses on loans	(27,477		)	(9,027		)	11,540
Other income
Gain (loss) on sale of investment securities	558			53			100
Gain (loss) on sale of branch premises and equipment	—			—			(21		)
Gain (loss) on sale of loans	(3,855		)	326			9
Gain (loss) on sale of foreclosed real estate	4			(81		)	(47		)
Income from bank-owned life insurance	754			719			685
Other operating	2,253			2,915			2,487
Total other income (loss)	(286		)	3,932			3,213
General, administrative and other expense
Employee compensation and benefits	8,727			9,988			10,058
Occupancy and equipment	3,130			3,487			3,505
Franchise taxes	583			1,020			975
Data processing	1,240			1,217			1,004
Amortization of intangibles	1,394			1,838			1,633
Goodwill impairment	12,514			11,397			—
Other operating	6,259			4,224			3,947
Total general, administrative and other expense	33,847			33,171			21,122
Loss before income taxes	(61,610		)	(38,266		)	(6,369		)
Federal income taxes (benefits)
Current	—			774			(817		)
Deferred	6,905			(5,707		)	(1,491		)
Total federal income taxes (benefits)	6,905			(4,933		)	(2,308		)
Net loss	$	(68,515	)	$	(33,333	)	$	(4,061	)
Loss per share
Basic	$	(14.17	)	$	(6.97	)	$	(.88	)
Diluted	$	(14.17	)	$	(6.97	)	$	(.88	)

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 Ended December 31,
	2008			2007			2006
Net loss	$	(68,515	)	$	(33,333	)	$	(4,061	)
Other comprehensive income (loss), net of tax:
Unrealized holding gains (losses) on securities during the period, net of tax effects (benefits) of $0, $109, and $120 in years ended December 31, 2008, 2007, and 2006 respectively	159			211			234
Reclassification adjustment for realized losses (gains) included in earnings, net of tax (effects) benefits of $0, $(18), and $(34) in years ended December 31, 2008, 2007, and 2006 respectively	(558		)	(35		)	(66		)
Comprehensive income (loss)	$	(68,914	)	$	(33,157	)	$	(3,893	)
Accumulated comprehensive income (loss)	$	(359	)	$	40		$	(136	)

The accompanying notes are an integral part of these statements.

29

PEOPLES COMMUNITY BANCORP, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (DEFICIT)

(In thousands)

								Shares
								acquired			Accumulated
			Additional		Retained			by stock			Other
	Common		paid-in		earnings			benefit			Comprehensive
	stock		capital		(deficit)			plan			Income (Loss)			Total
Balance at January 1, 2006	$	44	$	62,945	$	24,785		$	(1,423	)	$	(304	)	$	86,047
Amortization expense of stock benefit plans	—		235		—			211			—			446
Compensation expense relating to vested stock options	—		170		—			—			—			170
Exercise of stock options	—		46		—			—			—			46
Issuance of common shares	4		7,591		—			—			—			7,595
Net losses for the year ended December 31, 2006	—		—		(4,061		)	—			—			(4,061		)
Dividends paid of $.60 per common share	—		—		(2,795		)	—			—			(2,795		)
Unrealized losses on securities designated as available for sale, net of related tax effects	—		—		—			—			168			168
Balance at December 31, 2006	$	48	$	70,987	$	17,929		$	(1,212	)	$	(136	)	$	87,616
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
Amortization expense of stock benefit plans	—		84		—			295			—			379
Compensation expense relating to vested stock options	—		125		—			—			—			125
Net losses for the year ended December 31, 2008	—		—		(68,515		)	—			—			(68,515		)
Unrealized gains on securities designated as available for sale, net of related tax effects	—		—		—			—			(399		)	(399		)
Balance at December 31, 2008	$	48	$	71,345	$	(85,879	)	$	—		$	(359	)	$	(14,845	)

The accompanying notes are an integral part of these statements.

30

PEOPLES COMMUNITY BANCORP, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

	For Years Ended December 31,
	2008			2007			2006
Cash flows provided by (used in) operating activities:
Net loss for the year	$	(68,515	)	$	(33,333	)	$	(4,061	)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
Amortization of premiums and discounts on securities	(167		)	90			628
Amortization of deferred loan origination fees & premiums	1,040			(131		)	(948		)
Amortization of premiums and discounts on deposits	—			(16		)	(424		)
Amortization of premiums and discounts on borrowings	38			104			159
Expense of stock benefit plans	504			1,059			616
Amortization of other intangible assets	1,394			1,671			1,633
Amortization of mortgage servicing rights	165			165			101
Goodwill impairment	12,514			11,397			—
Depreciation	1,131			1,348			1,407
Provision for losses on loans	41,477			32,800			17,450
Investment securities dividends	(57		)	(52		)	(57		)
Federal Home Loan Bank stock dividends	(525		)	—			(664		)
Income from bank-owned life insurance	(754		)	(719		)	(685		)
Undistributed income from investment in Columbia	—			—			(172		)
Loss (gain) on sale of securities	(558		)	(53		)	(100		)
Loss (gain) on sale of branch premises and equipment	—			—			21
Loss (gain) on sale of loans	3,855			(326		)	(9		)
Gain on sale of real estate	—			(32		)	(9		)
Loss (gain)on sale of foreclosed real estate	(4		)	113			56
Write down of real estate acquired through foreclosure	130			—			—
Proceeds from sale of loans in the secondary market	28,312			1,688			831
Loans originated for sale in the secondary market	(3,505		)	(1,663		)	(822		)
Increase (decrease) in cash, due to changes in:
Accrued interest receivable	1,354			1,166			(56		)
Prepaid expenses and other assets	9,242			(3,235		)	(770		)
Accrued interest payable and other liabilities	(466		)	(8,288		)	4,981
Net cash provided by operating activities	26,605			3,753			19,106
Cash flows provided by (used in) investing activities:
Sale of investment in Columbia	—			—			2,856
Purchases of investment securities and mortgage-backed securities	(81,635		)	(29,801		)	—
Proceeds from sale of investment securities and mortgage-backed securities designated as available for sale	29,444			61			1,635
Principal repayments on investment securities and mortgage-backed securities	19,173			19,349			22,425
Proceeds from sale of loans and loan participations	69			32,000			34,635
Principal repayments (disbursements) on loans — net	95,502			106,929			24,885
Purchase of office premises and equipment	(11		)	(1,774		)	(4,035		)
Proceeds from sale of branch premises and equipment	4			—			15
Redemption of Federal Home Loan Bank stock	—			—			473
Proceeds from sale of real estate acquired through foreclosure	2,423			165			830
Cash received in acquisition of Mercantile Financial Corporation - net	—			—			11,123
Net cash provided by investing activities	64,969			126,929			94,842
Net cash provided by (used in) operating and investing activities (balance carried forward)	$	91,574		$	130,682		$	113,948

31

PEOPLES COMMUNITY BANCORP, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

	For Years Ended December 31,
	2008			2007			2006
Net cash provided by (used in) operating and investing activities (balance brought forward)	$	91,574		$	130,682		$	113,948
Cash flows provided by (used in) financing activities:
Net increase (decrease) in deposit accounts	(105,014		)	(20,033		)	(19,627		)
Proceeds from Federal Home Loan Bank advances and other borrowings	1,000			29,550			97,500
Repayment of Federal Home Loan Bank advances and other borrowings	(2,159		)	(108,911		)	(140,284		)
Redemption of subordinated debentures	—			—			(12,887		)
Dividends paid on common stock	—			(2,140		)	(2,795		)
Proceeds from exercise of stock options	—			7			46
Shares acquired by ESOP	—			—			—
Net cash used in financing activities	(106,173		)	(101,527		)	(78,047		)
Net increase (decrease) in cash and cash equivalents	(14,599		)	29,155			35,901
Cash and cash equivalents at beginning of period	86,614			7,459			1,558
Cash and cash equivalents at end of period	$	72,015		$	86,614		$	57,459
Supplemental disclosure of cash flow information:
Cash paid during the year for:
Federal income taxes	$	—		$	—		$	380
Interest on deposits and borrowings	$	25,598		$	36,655		$	36,608
Supplemental disclosure of noncash investing activities:
Transfers from loans to real estate acquired through foreclosure	$	5,810		$	6,860		$	1,008
Loans disbursed to facilitate sale of real estate	$	—		$	—		$	308
Common stock issued in acquisition of Mercantile Financial Corp.	$	—		$	—		$	7,595

32

PEOPLES COMMUNITY BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Peoples Community Bancorp, Inc. is a registered savings and loan holding company whose activities are primarily limited to holding the stock of Peoples Community Bank.  Peoples 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.  Peoples’ 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 Peoples can be significantly influenced by a number of factors, such as governmental monetary policy, that are outside of management’s control.

On June 9, 2006, the Company acquired Mercantile Financial Corporation (“Mercantile”) and the 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 $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 Bancorp, Inc. 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 Peoples’ 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, its 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 estate owned.  In accordance with FIN 46, Peoples Bancorp Capital Trust II is not consolidated with Peoples’ financial statements.  The Company accounts for its investment in Peoples Community Bancorp Capital Trust II as an asset, its subordinated debentures as debt, and the interest paid thereon as interest expense.

33

PEOPLES COMMUNITY BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

2.  Investment Securities and Mortgage-Backed Securities

Peoples 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 Peoples 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.  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-portfolio 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.

Peoples 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.

Peoples 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 the Bank 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, net of certain direct loan origination costs, over the life of the related loan as an adjustment of yield.  Loan origination costs are limited to the direct costs of originating a loan, principally direct personnel costs.  The net origination fee/cost for most loans is amortized using the interest rate method, whereas the net origination fee/cost for demand loans and revolving lines of credit or similar arrangements is amortized on a straight-line basis.

34

PEOPLES COMMUNITY BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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.

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,

35

PEOPLES COMMUNITY BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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.  Peoples 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.   Another evaluation was done as of June 30, 2008, and the remaining goodwill was eliminated.  The impairment of goodwill is primarily attributable to lower market valuations for financial institutions in the latter part of 2007 and first half of 2008, the weakening of the credit market, the decline in real estate values, particularly in the Cincinnati region, and the net losses recorded by the Bank and Company for the past ten 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 was 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 December 2005 and June 2006, Peoples acquired Peoples Federal and Mercantile resulting in goodwill of approximately $9.9 million and $4.0 million, respectively.  The changes in the carrying amount of goodwill for the years ended December 31, 2008, 2007 and 2006 are summarized below.

	For Years Ended December 31,
	2008			2007			2006
	(In thousands)
Balance at beginning of period	$	12,514		$	23,911		$	20,282
Final adjustment to purchase of Peoples Federal	—			—			(334		)
Purchase of Mercantile	—			—			3,963
Impairment	(12,514		)	(11,397		)	—
Balance at end of period	$	—		$	12,514		$	23,911

36

PEOPLES COMMUNITY BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

10.  Other Intangible Assets

In June 2006, Peoples recorded $2.2 million in core deposit intangibles in conjunction with the acquisition of Mercantile.  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, 2008 and 2007 were:

	2008		2007
	(In thousands)
Core deposit intangibles
Gross carrying amount	$	7,768	$	7,768
Accumulated amortization	4,930		3,536

Amortization expense for the years ended December 31, 2008, 2007, and 2006, was $1.4 million, $1.7 million, and $1.6 million, respectively.  The following table summarizes the Bank’s current estimates for future amortization expense of the core deposit intangible

(In thousands)
2009	$	1,116
2010	838
2011	561
2012	284
2013 and thereafter	39

11.  Loan Servicing

In conjunction with its acquisition of Mercantile, Peoples 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 $63.0 million and $72.1 million at December 31, 2008 and December 31, 2007, 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, 2008 was $494,000.  The Bank recorded amortization related to mortgage servicing rights totaling $165,000, $167,000, and 101,000 for the years ended December 31, 2008, 2007, and 2006, respectively.

12.  Federal Income Taxes

Peoples 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.  Peoples adopted FIN 48 at the beginning of 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 net result was an increase to retained earnings of $180,000 effective January 1, 2007.

37

PEOPLES COMMUNITY BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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.

Peoples’ federal income tax returns for the tax years ended 2007 and 2008 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 2005 through 2007.

13.  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 vesting for all participants.  The balance of the accrued liability was $1.7 million and $1.7 million, as of December 31, 2008 and 2007, respectively.  The provision for directors’ retirement expense totaled $85,000, $504,000, and $94,000 for the years ended December 31, 2008, 2007 and 2006, respectively.  A higher provision was recorded in 2007 due to a decrease in the discount rate, which is utilized in calculating the present value of the benefits.

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 expenses 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 $295,000, $656,000, and $207,000 for the years ended December 31, 2008, 2007, and 2006, 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 Years Ended December 31,
	2008		2007		2006
Allocated shares	146,760		101,954		96,542
Shares committed to be released	—		34,258		1,875
Unearned shares	—		12,297		54,211
Total ESOP shares	146,760		148,509		152,628
Fair value of unearned shares at end of period (expressed in thousands)	$	—	$	172	$	976

38

PEOPLES COMMUNITY BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

14.  Share-Based Compensation Plans

Effective October 1, 2005, Peoples 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 Peoples’ financial statement as Peoples 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 $228,000, $276,000, $341,000, for the years ended December 31, 2008, 2007, and 2006, 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 authorized but unissued shares of common stock at fair value at the date of grant.  As of December 31, 2008, 111,140 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 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.

	2008		2007		2006
Expected volatility	37.0	%	24.8	%	17.3	%
Expected dividends	0.0	%	3.0	%	3.0	%
Expected term (in years)	10		10		10
Risk-free rate	4.0	%	5.0	%	5.2	%

39

PEOPLES COMMUNITY BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

A summary of the status of the Plans as of and for the year ended December 31, 2008 is presented below:

				Weighted-Average	Aggregate
		Weighted-Average		Remaining Contractual	Intrinsic Value
	Shares	Exercise Price		Term (In years)	(In thousands)
Outstanding at January 1, 2008	252,161	$	18.08
Granted	43,722	2.24
Exercised	—	0.00
Forfeited	24,892	15.30
Expired	12,661	19.98
Outstanding at December 31, 2008	258,330	$	15.55	6.12	$	—
Options exercisable at December 31, 2008	156,586	$	17.68	4.35	$	—
Weighted-average fair value of options granted during period		$	1.24

The weighted-average grant-date fair value of options granted during the years ended December 31, 2008, 2007, and 2006 was $1.24, $4.05, and $4.52, respectively.  There were no options exercised during the year ended December 31, 2008.  The total intrinsic value of options exercised during the years ended December 31, 2007 and 2006 was $1,000, and $19,000, respectively.

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, 2008, 72,259 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, 2008, 2,435 shares have been awarded, net of forfeitures, from the 2004 MRP.  Total shares vested and distributed to recipients through December 31, 2008 under both plans totaled 68,290 shares.

A summary of the status of the Plans as of and for the year ended December 31, 2008 is presented below:

		Weighted-Average
		Grant Date
	Shares	Fair Value
Nonvested at January 1, 2008	15,651	$	20.81
Granted	—	—
Vested	5,556	21.38
Forfeited	1,698	20.93
Nonvested at December 31, 2008	8,397	$	20.40

40

PEOPLES COMMUNITY BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

As of December 31, 2008, there was $425,000 of total unrecognized compensation cost related to the MRP and stock option plans.  The cost is expected to be recognized over a weighted-average period of 1.65 years.   The total fair value of shares vested during the years ended December 31, 2008, 2007, and 2006 was $249,000, $330,000, and $268,000, respectively.

15.  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 Years Ended December 31,
	2008	2007	2006
Weighted-average common shares outstanding (basic)	4,833,351	4,783,610	4,591,802
Dilutive effect of assumed exercise of stock options	—	—	—
Weighted-average common shares outstanding (diluted)	4,833,351	4,783,610	4,591,802

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, 2008, 2007, and 2006 due to the net loss recorded for these periods.

16.  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 Peoples in estimating its fair value disclosures for financial instruments at December 31, 2008 and 2007:

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.

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. 

41

PEOPLES COMMUNITY BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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 historic carrying amount of accrued interest on loans is deemed to approximate 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 deposits 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 Peoples’ 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, 2008 and 2007, 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.  Based on the foregoing methods and assumptions, the carrying value and fair value of Peoples’ financial instruments at December 31 are as follows:

	2008				2007
	Carrying		Fair		Carrying		Fair
	value		value		value		value
	(In thousands)
Financial assets
Cash and cash equivalents	$	72,015	$	72,015	$	86,614	$	86,614
Investment securities	77,968		77,968		4,237		4,237
Mortgage-backed securities	22,984		22,984		63,335		63,335
Loans receivable	461,861		470,464		634,421		638,128
Accrued interest receivable	2,941		2,941		4,295		4,295
Federal Home Loan Bank stock	14,549		14,549		14,024		14,024
Financial liabilities
Deposits	$	630,198	$	646,553	$	735,212	$	740,184
Advances from the Federal Home Loan Bank and other borrowings	76,507		83,495		77,628		79,182
Accrued interest payable	1,022		1,022		382		382
Subordinated debentures	15,464		15,464		15,464		15,464

42

PEOPLES COMMUNITY BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Effective January 1, 2008, Peoples adopted FASB Statement No. 157, Fair Value Measurements (“FAS 157”). FAS 157 defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements. FAS 157 has been applied prospectively as of the beginning of the year.

FAS 157 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. FAS 157 also establishes a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value.

The standard describes three levels of inputs that may be used to measure fair value:

Level 1	Quoted prices in active markets for identical assets or liabilities.
Level 2	Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.
Level 3	Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.

Following is a description of the valuation methodologies used for instruments measured at fair value on              a recurring basis and recognized in the accompanying balance sheet, as well as the general classification of such instruments pursuant to the valuation hierarchy.

Available-for-sale securities. Where quoted market prices are available in an active market, securities are classified within Level 1 of the valuation hierarchy. If quoted market prices are not available, then fair values are estimated by using pricing models, quoted prices of securities with similar characteristics or discounted cash flow. In certain cases where Level 1 or Level 2 inputs are not available, securities are classified within Level 3 of the hierarchy.

The following table presents the fair value measurements of assets recognized in the accompanying  balance sheet measured at fair value on a recurring basis and the level within the FAS 157 fair value hierarchy in which the fair value measurements fall at December 31, 2008:

			Fair Value Measurements Using (in thousands)
	Fair Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Available-for-sale securities	$	100,952	$	1,255	$	99,697	$	0

Impaired Loans. Loans for which it is probable Peoples will not collect all principal and interest due according to contractual terms are measured for impairment in accordance with the provisions of Financial Accounting Standard No. 114, Accounting by Creditors for Impairment of a Loan. Allowable methods for estimating fair value include using the fair value of the collateral for collateral dependent loans, or where a loan is determined not to be collateral dependent, using the discounted cash flow method. If the impaired loan is collateral dependent, then the fair value method of measuring the amount of impairment is utilized. This method utilizes a recent appraisal or other valuations of the collateral and applies a discount factor to the value based on Peoples’ estimate of holding cost and other economic factors, such as estimated cash flow generated from the property.

43

PEOPLES COMMUNITY BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The following table presents the fair value measurements of assets measured at fair value on a nonrecurring basis and the level within the FAS 157 fair value hierarchy in which the fair value measurements fell at December 31, 2008.

			Fair Value Measurements Using (in thousands)
	Fair Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Impaired loans	$	38,400	$	0	$	0	$	38,400

The fair value of the impaired loans of $38.4 million does not have any specific reserves against it. Of the $38.4 million of impaired loans at December 31, 2008, there were charge offs related to these loans of $27.3 million. Loans totaling $18.4 million that were impaired at December 31, 2007, were no longer impaired at December 31, 2008.

17.  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, 2008 and 2007.

18.  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.

19.  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, 2008 and 2007 was $1.0 million and $2.3 million, respectively.

20.   Reclassifications

Certain prior year amounts have been reclassified to conform to the 2008 consolidated financial statement presentation.

44

PEOPLES COMMUNITY BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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, 2008 and 2007, are summarized as follows:

	2008
			Gross		Gross		Estimated
	Amortized		Unrealized		Unrealized		Fair
	Cost		Gains		Losses		Value
	(In thousands)
Available for sale:
US Government agency obligations	$	75,497	$	290	$	—	$	75,787
Municipal securities	943		21		39		925
Mutual funds	1,309		—		54		1,255
Mortgage-backed securities	23,562		13		590		22,985
	$	101,311	$	324	$	683	$	100,952

	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

The amortized cost and fair value of available-for-sale securities at December 31, 2008, by contractual maturity, are shown below.  There were no held-to-maturity securities at December 31, 2008.  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.

	Amortized		Fair
	Cost		Value
	(In Thousands)
Within one year	$	75,025	$	75,310
One to five years	166		170
Five to ten years	529		531
After ten years	720		701
	76,440		76,712
Mortgage-backed securities	23,562		22,985
Mutual funds	1,309		1,255
Totals	$	101,311	$	100,952

45

PEOPLES COMMUNITY BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Proceeds from the sale of investment securities during 2008 amounted to $29.4 million, with gains of $558,000.  Proceeds from the sale of investment securities during 2007 amounted to $61,000, with gains of $53,000 and a related tax effect of $18,000.  Proceeds from the sale of investment securities during 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.

At December 31, 2008, Peoples had $1.5 million of mortgage-backed securities pledged to secure public deposits and $9.4 million of mortgage-backed securities and $25.0 million of agencies pledged to secure advances from the Federal Home Loan Bank.  At December 31, 2007, Peoples 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.

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, 2008 and 2007, was $23.8 million and $20.6 million, respectively, which approximated 23.6% and 30.4% of Peoples’ investment portfolio.  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, 2008 and 2007.

46

PEOPLES COMMUNITY BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

2008

	Less than 12 months					12 Months or Longer					Total
Investment	Number of	Fair		Unrealized		Number of	Fair		Unrealized		Fair		Unrealized
Category	Investments	Value		Losses		Investments	Value		Losses		Value		Losses
	(Dollars in thousands)
US Government agency obligations	—	$	—	$	—	—	$	—	$	—	$	—	$	—
Municipal securities	2	170		14		1	198		25		368		39
Mutual funds	—	—		—		2	1,255		54		1,255		54
Mortgage-backed securities	16	10,679		206		7	11,537		384		22,216		590
Total temporarily impaired securities	18	$	10,849	$	220	10	$	12,990	$	463	$	23,839	$	683

2007

	Less than 12 months					12 Months or Longer					Total
Investment	Number of	Fair		Unrealized		Number of	Fair		Unrealized		Fair		Unrealized
Category	Investments	Value		Losses		Investments	Value		Losses		Value		Losses
	(Dollars 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

47

PEOPLES COMMUNITY BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE C - LOANS RECEIVABLE

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

	2008		2007
	(In thousands)
Residential real estate
One-to-four-family	$	300,340	$	311,968
Multifamily	55,502		82,176
Construction	69,930		131,777
Nonresidential real estate and land	75,251		128,955
Nonresidential real estate construction	9,294		12,394
Commercial	8,082		20,012
Consumer and other	13,029		16,758
Total loans receivable	531,428		704,040
Less:
Undisbursed portion of loans in process	40,110		33,661
Deferred loan origination fees	752		1,459
Allowance for loan losses	28,705		34,499
Loans receivable – net	$	461,861	$	634,421

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 $620,000 and $725,000 at December 31, 2008 and 2007, respectively.  During the year ended December 31, 2008, there were no loans originated to executive officers and directors.  During the year ended December 31, 2007, there was one loan renewed to executive officers and directors for $200,000.  During the year ended December 31, 2008, principal repayments of approximately $117,000 were received from executive officers and directors.

48

PEOPLES COMMUNITY BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE D - ALLOWANCE FOR LOAN LOSSES

The activity in the allowance for loan losses is summarized as follows for the years ended December 31, 2008, 2007, and 2006:

	For Years Ended December 31,
	2008			2007			2006
	(In thousands)
Balance at beginning of period	$	34,499		$	18,369		$	13,444
Increase due to acquisition	—			—			302
Provision for losses on loans	41,477			32,800			17,450
Charge off of loans	(47,765		)	(18,284		)	(13,103		)
Recoveries	494			1,614			276
Balance at end of period	$	28,705		$	34,499		$	18,369

At December 31, 2008 and 2007, non-accruing loans amounted to $43.1 million and $25.3 million, respectively.  At December 31, 2008, there were no loans greater than 90 days delinquent and still accruing.  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.  Interest income which would have been recognized if such non-accruing loans had performed pursuant to contractual terms totaled approximately $1.5 million, $1.8 million, $1.4 million, for the years ended December 31, 2008, 2007, ad 2006, respectively.

Information with respect to the Bank’s impaired loans at December 31, 2008 and 2007 and for the three years ended December 31, 2008, is as follows:

	2008		2007
	(In thousands)
Impaired loans with related allowance	$	—	$	23,368
Impaired loans with no related allowance	38,400		—
Total impaired loans	$	38,400	$	23,368
Allowance for losses on impaired loans	$	—	$	5,777

	2008		2007		2006
	(In thousands)
Average recorded investment in impaired loans	$	35,367	$	16,530	$	16,297
Interest income recognized on impaired loans	$	37	$	913	$	861
Interest income recognized on a cash basis on impaired loans	$	37	$	910	$	847

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

49

PEOPLES COMMUNITY BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE E - OFFICE PREMISES AND EQUIPMENT

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

	2008		2007
	(In thousands)
Land and improvements	$	10,448	$	10,448
Office buildings and improvements	17,991		17,991
Furniture, fixtures and equipment	6,888		6,883
	35,327		35,322
Less accumulated depreciation	8,146		7,017
	$	27,181	$	28,305

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 year 2007 was approximately $76,000.

NOTE F - DEPOSITS

Deposits consist of the following major classifications at December 31:

	2008		2007
	(In thousands)
Non-interest bearing checking accounts	$	15,897	$	21,936
Checking accounts	36,693		50,686
Savings accounts	20,382		29,256
Money market demand deposit	129,244		121,537
Total demand, transaction and passbook deposits	202,216		223,415
Certificates of deposit:
Original maturities of:
Less than 12 months	207,513		272,986
12 months to 36 months	79,922		85,174
More than 36 months	62,022		66,676
Individual retirement accounts	78,525		86,961
Total certificates of deposit	427,982		511,797
Total deposits	$	630,198	$	735,212

At December 31, 2008 and 2007, Peoples had certificate of deposit accounts with balances greater than $100,000 totaling $106.9 million and $152.4 million, respectively.

50

PEOPLES COMMUNITY BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

	2008
	(In thousands)
One year or less	$	304,468
One to two years	69,001
Two to three years	15,612
Three to four years	32,611
Four to five years	6,290
Five to six years	—
	$	427,982

NOTE G - ADVANCES FROM THE FEDERAL HOME LOAN BANK

Advances from the Federal Home Loan Bank, collateralized at December 31, 2008 by pledges of certain residential mortgage loans totaling $259.3 million, certain mortgage backed securities and agencies totaling $34.4 million, and Peoples’ investment in Federal Home Loan Bank stock, are summarized as follows:

	Maturing
Interest Rate	In Year	Amount
		(In thousands)
3.73%	2009	2,972
7.65%	2011	2
4.53%	2012	1,971
4.78%	2015	1,965
4.07%	2016	25,000
3.45%	2017	25,000
5.60%	2018	55
5.60% - 6.61%	2019	2,042
		$	59,007
Weighted-average interest rate		3.90		%

NOTE H - OTHER BORROWED MONEY

The Company has a $17.5 million line of credit with Integra.  At December 31, 2008 and 2007, the outstanding balance was $17.5 million and $16.5 million, respectively.  At December 31, 2007, the Company was not in compliance with certain loan covenants and the lender had the ability to accelerate all outstanding amounts upon notice.  The line of credit matured June 30, 2008.  Effective July 24, 2008, the Company entered into a forbearance agreement to extend the repayment period and allow the Company to structure a transaction which would result in repayment of the line of credit in full.  On December 31, 2008, the Company and Integra extended the forbearance period to January 31, 2009.  The forbearance period has expired and the Company is in default on its line of credit with Integra.  This matter remains unresolved.

At December 31, 2008, interest was calculated at the prime rate plus 300 basis points. The effective interest rate at December 31, 2008 was 6.25%.  During the forbearance period, interest is payable monthly at the prime rate (3.25% at December 31, 2008); when the loan principal and initial interest is paid in full, under the forbearance terms, the remainder of the interest is due.  Interest accrued and not paid related to the line of

51

PEOPLES COMMUNITY BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

credit totaled $264,000 at December 31, 2008 and is included in accrued interest payable in the consolidated statement of financial condition. At December 31, 2007, interest was payable at daily LIBOR plus 200 basis points or prime less 50 basis points based on the selection made by the Company. The effective interest rate at December 31, 2007 was 7.24%.

NOTE I - GUARANTEED PREFFERED BENEFICIAL INTERESTS IN JUNIOR SUBORDINATED DEBENTURES

In June 2005, the Company formed a wholly owned Delaware 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 scheduled to be made quarterly at an annual variable interest rate equal to the three-month LIBOR rate plus 175 basis points, or equal to 3.74% at December 31, 2008 and 7.11% at December 31, 2007, and are reported as a component of interest expense on borrowings.   On May 23, 2008, the Company gave notice to the trustee that it has elected to exercise its right to defer payments of interest beginning with its June 15, 2008 payment.  Interest accrued and not paid related to the Trust II totaled $544,000 at December 31, 2008, and is included in accrued interest payable in the consolidated statement of financial condition.

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.

The following are commitments Peoples had as of December 31, 2008:

	2008		2007
	(In thousands)
Commitments to originate loans	$	50	$	143
Unused lines of credit	24,283		31,931
Unused letters of credit	5,723		5,868
Unused balances of loans	16,727		34,497

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

52

PEOPLES COMMUNITY BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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.  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 $38,000, $68,000, and $128,000, for the years ended December 31, 2008, 2007, and 2006, respectively. The following table summarizes minimum payments due under lease agreements by year as of December 31, 2008.

Year ending
December 31,	Amount
	(in thousands)
2009	$	38
2010	38
2011	38
2012	38
2013	6
Thereafter	—
	$	160

NOTE K - FEDERAL INCOME TAXES

Federal income taxes differ from the amounts computed at the statutory corporate tax rate for the years ended December 31, 2008, 2007, and 2006 as follows:

	For Years Ended December 31,
	2008			2007			2006
	(In thousands)
Federal income taxes at statutory rate	$	(23,295	)	$	(13,010	)	$	(2,165	)
Increase (decrease)in taxes resulting from:
Goodwill impairment	4,255			3,875			—
Bank owned life insurance undistributed earnings	(256		)	(244		)	(233		)
Tax exempt interest on municipal securities	(99		)	(15		)	(15		)
Valuation allowance	22,809			4,400			—
Other	3,491			61			105
Federal income taxes per consolidated financial statements	$	6,905		$	(4,933	)	$	(2,308	)
Effective tax rate	n/a			n/a			n/a

53

PEOPLES COMMUNITY BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The composition of Peoples’ net deferred tax asset at December 31 is as follows:

	2008			2007
	(In thousands)
Taxes (payable) refundable on temporary differences at estimated corporate tax rate:
Deferred tax assets:
General loan loss allowance	$	9,760		$	11,730
Deferred compensation	583			576
Charitable contributions	60			60
Stock benefit plans	27			32
Deferred loan origination fees	256			496
Net operating loss carryforwards	19,294			3,859
Nonaccrual interest	428			190
Other	971			962
Total deferred tax assets	31,379			17,905
Deferred tax liabilities:
Federal Home Loan Bank stock dividends	(2,159		)	(1,919		)
Unrealized losses on securities designated as available for sale	—			(21		)
Book/tax depreciation differences	(113		)	(113		)
Mortgage servicing rights	(168		)	(224		)
Core deposit intangible and other purchase accounting adjustments	(1,730		)	(2,199		)
Other	—			(213		)
Total deferred tax liabilities	(4,170		)	(4,689		)
Valuation allowance	(27,209		)	(4,400		)
Net deferred tax asset	$	—		$	8,816

At December 31, 2008, Peoples had a valuation allowance of $27.2 million based principally on uncertainty about Peoples’ ability to generate sufficient future taxable income to realize all of the related temporary differences.  The expense for recording the valuation allowance is a non-cash item, and the recording of this expense does not imply that Peoples owes additional income taxes.

As of December 31, 2008, Peoples had approximately $60.2 million of net operating loss carry forward available to offset future federal taxable income.  The net operating loss carry forward expires in 2025.

54

PEOPLES COMMUNITY BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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, 2008.  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).  As of December 31, 2008, the Bank was categorized as “significantly undercapitalized” under the regulatory framework for prompt corrective action.  This categorization is based on the capital ratios as set forth in the following tables.

On April 13, 2009, Peoples was notified by the OTS of certain prompt corrective actions that Peoples is required to take.  These requirements include submitting to the OTS a capital restoration plan by April 30, 2009 and achieving certain capital levels by June 15, 2009.  The Bank’s capital restoration plan to be submitted to the OTS will consist of selling branches in order to reduce assets and liabilities, generate a deposit premium and return the Bank to an adequately capitalized status.  The Company cannot provide assurance that its capital restoration plan will be acceptable to the OTS.  If the Bank’s capital plan is not approved by the OTS or the Bank cannot enter into and consummate a transaction to return the Bank to an adequately capitalized status on a timely basis, the Company will not be able to continue as a going concern.

Peoples Community Bancorp, as a savings institution holding company at December 31, 2008 and 2007, is not subject to regulatory capital requirements separate from those of the Bank.

55

PEOPLES COMMUNITY BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

As of December 31, 2008

	Actual	Critically Undercapitalized	Significantly Undercapitalized	Undercapitalized	Adequately Capitalized	Well Capitalized
	Ratio/Amount	Ratio/Amount	Ratio/Amount	Ratio/Amount	Ratio/Amount	Ratio/Amount
Total Capital to	4.8%		<6.0%	<8.0%	³8.0%	³10.0%
Risk Weighted Assets	$21,785		<$27,150	<$36,200	³$36,200	³$45,250
Tier 1 Capital to	3.5%		<3.0%	<4.0%	³4.0%	³6.0%
Risk-Weighted Assets	$15,844		<$13,575	<$18,100	³$18,100	³$27,150
Tier 1 Capital to	2.2%		<3.0%	<4.0%	³4.0%	³ 5.0%
Adjusted Total Assets	$15,844		<$21,283	<$28,378	³$28,378	³$35,472
Tangible Equity to	2.2%	<2%
Tangible Assets	$15,844	<$14,189

As of December 31, 2007

	Actual	Critically Undercapitalized	Significantly Undercapitalized	Undercapitalized	Adequately Capitalized	Well Capitalized
	Ratio/Amount	Ratio/Amount	Ratio/Amount	Ratio/Amount	Ratio/Amount	Ratio/Amount
Total Capital to	11.4%		<6.0%	<8.0%	³8.0%	³10.0%
Risk Weighted Assets	$68,335				³$48,102	³$60,127
Tier 1 Capital to	10.1%		<3.0%	<4.0%	³4.0%	³ 6.0%
Risk-Weighted Assets	$60,486				³$24,051	³$36,076
Tier 1 Capital to	7.0%		<3.0%	<4.0%	³4.0%	³ 5.0%
Adjusted Total Assets	$60,486				³$34,500	³$43,125
Tangible Equity to	7.0%	<2%
Tangible Assets	$60,486

The recessionary forces in the local economy have continued to impact Peoples’ 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 prescribed 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 Company and the Bank 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 prescribed time periods. In addition, the Orders require that the Company and the Bank receive

56

PEOPLES COMMUNITY BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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 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.

57

PEOPLES COMMUNITY BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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, 2008 and 2007, and the results of its operations and its cash flows for the years ended December 31, 2008, 2007, and 2006.

PEOPLES COMMUNITY BANCORP, INC.

STATEMENTS OF FINANCIAL CONDITION

December 31, 2008 and 2007

(In thousands)

	2008			2007
ASSETS
Cash and cash equivalents	$	262		$	145
Loan receivable from Bank	—			1,001
Investment in Peoples Community Bank	18,389			85,091
Investment in Peoples Bancorp Capital Trust II	464			464
Total assets	$	19,115		$	86,701
LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT)
Loan payable	$	17,500		$	16,500
Accrued expenses and other liabilities	983			146
Accounts payable to subsidiary	13			1,026
Subordinated debentures	15,464			15,464
Total liabilities	33,960			33,136
Stockholders’ equity
Common stock and additional paid-in capital	71,393			70,889
Accumulated deficit	(85,879		)	(17,364		)
Accumulated other comprehensive income (loss)	(359		)	40
Total stockholders’ equity (deficit)	(14,845		)	53,565
Total liabilities and stockholders’ equity (deficit)	$	19,115		$	86,701

58

PEOPLES COMMUNITY BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

PEOPLES COMMUNITY BANCORP, INC.

STATEMENTS OF OPERATIONS

	For Years Ended December 31,
	2008			2007			2006
	(In thousands)
Income
Dividends from subsidiaries	$	—		$	—		$	—
Other income	17			56			73
Total income	17			56			73
Expenses
Interest expense	1,824			2,236			2,186
Other expenses	100			178			252
Total expenses	1,924			2,414			2,438
Loss before income tax and equity in undistributed income of subsidiary	(1,907		)	(2,358		)	(2,365		)
Income tax benefit	(200		)	—			(693		)
Loss before equity in undistributed income of subsidiary	(1,707		)	(2,358		)	(1,672		)
Equity in undistributed loss of subsidiary	(66,808		)	(30,975		)	(2,389		)
Net loss	$	(68,515	)	$	(33,333	)	$	(4,061	)

59

PEOPLES COMMUNITY BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

PEOPLES COMMUNITY BANCORP, INC.

STATEMENTS OF CASH FLOWS

(In thousands)

	For Years Ended December 31,
	2008			2007			2006
Operating Activities
Net loss	$	(68,515	)	$	(33,333	)	$	(4,061	)
Items not requiring (providing) cash
Undistributed losses of subsidiary	66,808			30,975			2,561
Undistributed earnings of Columbia	—			—			(172		)
Gain on sale of securities	—			—			(6		)
Increase (decrease) in cash due to changes in:
Other assets	—			110			1,229
Other liabilities	824			324			(214		)
Net cash used in operating activities	(883		)	(1,924		)	(663		)
Investing Activities
Proceeds from repayment of loan to ESOP	—			211			211
Proceeds from sale of investment securities				—			126
Sale of interest in Columbia	—			—			2,856
Cash paid in acquisition of Mercantile - net	—			—			(364		)
Net cash provided by investing activities	—			211			2,829
Financing Activities
Proceeds from borrowings	1,000			4,550			16,500
Repayment of borrowings	—			(750		)	(3,800		)
Dividends paid on common stock	—			(2,140		)	(2,795		)
Proceeds from exercise of stock options	—			7			46
Redemption of subordinated debentures	—			—			(12,887		)
Net cash provided by (used in) financing activities	1,000			1,667			(2,936		)
Net increase (decrease) in cash and cash equivalents	117			(46		)	(770		)
Cash and cash equivalents at beginning of year	145			191			961
Cash and cash equivalents at end of year	$	262		$	145		$	191

60

PEOPLES COMMUNITY BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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 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.

This acquisition focused on increasing Peoples’ market share and scale of operations, as well as expanding its distribution network within its primary market area.  The results of operations of this acquisition have been included in the consolidated financial statements as of the acquisition date.

Presented below are the estimated fair values of the assets acquired and liabilities assumed from the acquisition in the year ended December 31, 2006.

	Mercantile
	June 9, 2006
	(in thousands)
Cash and investments	$	12,913
Investment securities	7,407
Loans	38,030
Office premises and equipment	—
Core deposits premium	2,206
Goodwill	3,963
Other assets	2,560
Total assets acquired	67,079
Deposits	48,683
Borrowings	6,378
Other liabilities	2,633
Total liabilities	57,694
Net assets acquired	$	9,385

61

PEOPLES COMMUNITY BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Presented below are pro-forma condensed consolidated statements of earnings which have been prepared as if the Mercantile transaction had  been consummated at the beginning of the year ended December 31, 2006.

	Year  Ended  December 31,
	2006
Total interest income	$	66,720
Total interest expense	37,017
Net interest income	29,703
Provision for losses on loans	17,450
Other income	3,471
General, administrative and other expense	22,532
Loss before income taxes	(6,808		)
Federal income tax benefits	(2,314		)
Net loss	$	(4,494	)
Pro-forma basic loss per share	$	(0.94	)
Pro-forma diluted loss per share	$	(0.94	)

62

PEOPLES COMMUNITY BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE O - QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)

The following table summarizes Peoples’ quarterly results for the years ended December 31, 2008 and December 31, 2007.  Certain amounts, as previously reported, have been reclassified to conform to the 2008 presentation.

	Three Months Ended
2008:	March 31,			June 30,			September 30,			December 31,
	(In thousands, except per share data)
Total interest income	$	11,929		$	10,685		$	9,216		$	8,407
Total interest expense	7,983			5,806			5,866			6,582
Net interest income	3,946			4,879			3,350			1,825
Provision for losses on loans	1,800			1,800			16,604			21,273
Gain (loss) on sale of assets	503			34			(3,883		)	53
Other income	799			728			735			745
General, administrative and other expense	5,230			5,485			5,994			4,624
Goodwill impairment	—			12,514			—			—
Loss before income taxes	(1,782		)	(14,158		)	(22,396		)	(23,274		)
Federal income taxes (benefits)	(657		)	(558		)	9,790			(1,670		)
Net loss	$	(1,125	)	$	(13,600	)	$	(32,186	)	$	(21,604	)
Loss per share
Basic	$	(.23	)	$	(2.82	)	$	(6.66	)	$	(4.46	)
Diluted	$	(.23	)	$	(2.82	)	$	(6.66	)	$	(4.46	)

	Three Months Ended
2007:	March 31,			June 30,			September 30,			December 31,
	(In thousands, except per share data)
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		)
Benefits	(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	)

63

PEOPLES COMMUNITY BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Net loss for the fourth quarter of 2008 was $21.6 million, or $4.46 loss per share, compared to a net loss for the third quarter of 2008 of $32.2 million and $31.5 million for the fourth quarter of 2007.  Net interest income for the fourth quarter of 2008 decreased $1.5 million, or 45.5%, compared to the third quarter of 2008, primarily due to a decrease of 63 basis points in the net interest margin to 1.24% for the fourth quarter of 2008.

Management recorded a provision for losses on loans of $21.3 million in the fourth quarter of 2008, compared to $16.6 million in the third quarter of 2008.  The larger provision in the fourth quarter reflects loans that were identified as having specific losses and charging them down to their net realizable value.  Nonperforming assets at September 30, 2008 totaled $33.5 million, compared to $53.3 million at December 31, 2008, while classified assets increased from $80.6 million at September 30, 2008 to $114.1 million at December 31, 2008.

General, administrative and other expenses recorded during the fourth quarter of 2008 totaled $4.6 million, a decrease of $1.4 million, or 22.9%, compared to the third quarter of 2008, and a decrease of $607,000, or 11.6%, and a decrease of $861,000, or 15.7%, from the first and second quarter of 2008, respectively.

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.   An updated valuation was performed in the second quarter of 2008 which resulted in a non-cash impairment charge of $12.5 million, which eliminated the goodwill on the books of the Bank.  This impairment was primarily attributable to lower market valuations for financial institutions in the latter part of 2007 and first half of 2008, the weakening of the credit market, the decline in real estate values, particularly in the Cincinnati region, and the net losses recorded by the Bank and Company.

In the fourth quarter of 2007, Peoples recorded a valuation allowance of deferred income tax in the amount of $4.4 million based principally on uncertainty about its ability to generate sufficient future taxable income to realize all of the related temporary differences.  Peoples recorded an additional $22.8 million to this valuation allowance in 2008.  The expense for recording the valuation allowance is a non-cash item, and the recording of this expense does not imply that Peoples owes additional income taxes.

NOTE P — OPERATING AND LIQUIDITY MATTERS

Beginning in early 2007, Peoples 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, Peoples 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.  Despite actions taken by Peoples during 2007 and 2008, the continued recessionary forces in the local economy have had a significant adverse impact on Peoples’ financial condition and results of operations.  For 2007 and 2008, net losses recorded by Peoples amounted to $33.3 million and $68.5 million, respectively.

The Bank’s primary federal regulator, the OTS has, in light of Peoples’ 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 prescribed 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

64

PEOPLES COMMUNITY BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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 the 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 with Integra, which was due and payable June 30, 2008.  The line of credit is secured by all outstanding shares of common stock of the Bank.  The Orders prohibit the Bank from paying cash dividends to the Company without the prior consent of the OTS.  Without this consent, the Company has only existing cash and cash equivalents as its source of liquidity.  Absent 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 or replacing the existing line of credit.  Effective July 24, 2008, the Company entered into a forbearance agreement with Integra regarding its $17.5 million line of credit. The forbearance was negotiated in order to extend the repayment period and allow the Company to structure a transaction which would result in repayment of the $17.5 million line of credit.

On December 31, 2008, the Company and Integra extended the forbearance period to January 31, 2009.  The forbearance period has expired and the Company is in default on its line of credit with Integra.  This matter remains unresolved.

Management of the Company and the Bank is working diligently to resolve the issues associated with their 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.  Peoples’ business plan contemplates, among other things, a consolidation of Peoples’ operations through branch sales and a reduction in adversely classified assets through loan resolutions, repayments, sales and charge-offs.  Branch sale transactions would decrease Peoples’ assets and liabilities, improve capital ratios, 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.

There are no assurances that the measures set forth in the 3-year business plan will successfully improve the condition of Peoples 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 Peoples, there are no assurances that such measures will successfully enable Peoples to continue as a going concern.  Although not currently planned, the liquidation of assets in other than the ordinary course of business in order to meet liquidity needs could result in losses not reflected in these financial statements.

65

PEOPLES COMMUNITY BANCORP, INC.

DIRECTORS AND EXECUTIVE OFFICERS

PEOPLES COMMUNITY BANCORP, INC. AND PEOPLES COMMUNITY BANK

DIRECTORS

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

EXECUTIVE & SENIOR OFFICERS

Jerry D. Williams	Thomas J. Noe
President and Chief Executive Officer	CFO, Treasurer and Executive Vice President
Fred L. Darlington	Jerry Gore
Interim Chief Lending Officer, General Counsel,	Director of Retail Banking and Senior Vice President
Corporate Secretary and Senior Vice President
Lori M. Henn	Rick Wade
Compliance Officer and Senior Vice President	Chief Operations Officer and Senior Vice President
Joan Woodward
Director of Human Resources and Senior Vice President

66

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 RoadWest Chester, Ohio 45069
	Branch Offices in Ohio
7615 Voice of America DriveWest Chester, Ohio 45069	11 South BroadwayLebanon, Ohio 45036	4825 Marburg AvenueCincinnati, Ohio 45209
5712 Bridgetown RoadCincinnati, Ohio 45248	6570 Harrison AvenueCincinnati, Ohio 45247	7522 Hamilton AvenueCincinnati, Ohio 45231
4100 State Route 128Cleves, Ohio 45002	1101 Columbus AvenueLebanon, Ohio 45036	5797 South State Route 48Maineville, Ohio 45039
8350 Arbor Square DriveMason, Ohio 45040	3530 Springdale RoadCincinnati, Ohio 45251	7200 Blue Ash RoadCincinnati, Ohio 45236
9360 Montgomery Road Cincinnati, Ohio 45242		6945 South Liberty Drive Liberty Township, Ohio 45044
	Branch Offices in Indiana
131 Walnut StreetLawrenceburg, Indiana 47025	320 Importing StreetAurora, Indiana 47001	24128 State Line RoadBright, Indiana 47025
	330 Industrial Access RoadRising Sun, Indiana 47040

ANNUAL MEETING

The annual meeting of stockholders of Peoples Community Bancorp, Inc. for 2009 has not been scheduled.  The Company presently intends to hold the annual meeting in June 2009.  The date, time and location will be announced by press release and other means of public dissemination.

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, West Chester, Ohio  45069.

Stockholders needing assistance with stock records, transfers or lost certificates, please contact Peoples Community Bancorp’s transfer agent, Registrar and Transfer Company.

67

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 30, 2009 on our audit of the consolidated financial statements of Peoples Community Bancorp, Inc. as of and for the year ended December 31, 2008, incorporated by reference in this Annual Report on Form 10-K of Peoples Community Bancorp, Inc., for the year ended December 31, 2008.

/s/ PLANTE & MORAN PLLC

Columbus, Ohio

April 30, 2009

EX-23.2

Exhibit 23.2

CONSENT OF REGISTERED INDEPENDENT PUBLIC ACCOUNTING FIRM

We consent to the inclusion 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 for the years ended December 31, 2007 and December 31, 2006 in this Annual Report on Form 10-K of Peoples Community Bancorp, Inc. for the year ended December 31, 2008.

	/s/ BKD, LLP
Cincinnati, Ohio
April 29, 2009

EX-31.1

Exhibit 31.1

CERTIFICATION OF THE 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

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)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f) 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 the 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 30, 2009	By:	/s/ Jerry D. Williams
		Jerry D. Williams
		President and Chief Executive Officer

EX-31.2

Exhibit 31.2

CERTIFICATION OF THE 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

I, Thomas J. Noe, 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)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f) for the Registrant and have:
	(a)	(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 the 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 30, 2009	By:	/s/ Thomas J. Noe
		Thomas J. Noe
		Chief Financial Officer

EX-32.1

Exhibit 32.1

CERTIFICATION OF THE 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 year ended December 31, 2008 as filed with the Securities and Exchange Commission on the date hereof fully complies with the requirements of Section 13(a) or 15(d)of the Securities Exchange Act of 1934, as amended and that the information contained therein fairly presents, in all material respects, the consolidated financial condition and results of operations of the Registrant.

	PEOPLES COMMUNITY BANCORP, INC.
Date:  April 30, 2009	By:	/s/ Jerry D. Williams
		Jerry D. Williams
		President and Chief Executive Officer

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 THE 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 year ended December 31, 2008 as filed with the Securities and Exchange Commission on the date hereof fully complies with the requirements of Section 13(a) or 15(d)of the Securities Exchange Act of 1934, as amended and that the information contained therein fairly presents, in all material respects, the consolidated financial condition and results of operations of the Registrant.

Date:  April 30, 2009	By:	/s/ Thomas J. Noe
		Thomas J. Noe
		Chief Financial Officer

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.