<PAGE>
 
                      SECURITIES AND EXCHANGE COMMISSION
                            WASHINGTON, D.C. 20549

                          ---------------------------

                                   FORM 10-Q


(MARK ONE)
[X]  QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
     ACT OF 1934
     For the quarterly period ended March 31, 1999.


[ ]  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES 
     EXCHANGE ACT OF 1934

     For the transition period from __________________ to _________________

                        Commission File Number 0-22641


                             PEOPLES BANCORP, INC.
                             ---------------------
            (Exact name of registrant to specified in its charter)


          DELAWARE                                      22-6764023
--------------------------------            ------------------------------------
(State or other jurisdiction of             (IRS Employer Identification Number)
incorporation or organization)


           134 FRANKLIN CORNER ROAD, LAWRENCEVILLE, NEW JERSEY 08648
           ---------------------------------------------------------
                   (Address of principal executive offices)

Registrant's telephone number, including area code:    609-844-3100



________________________________________________________________________________
Former name, former address and former fiscal year, if changed since last report


     Indicate by check whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or 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 _____
                         -----


                     APPLICABLE ONLY TO CORPORATE ISSUERS:

     As of March 31, 1999 there were 32,654,198 shares of the company's common 
stock outstanding.

<PAGE>
 
                             PEOPLES BANCORP, INC.

                                     INDEX


<TABLE>
<CAPTION>
                                                                                                          PAGE
<S>                                                                                                       <C>
PART I.   FINANCIAL INFORMATION                                                                        
                                                                                                       
          Item 1.   Financial Statements                                                               
                                                                                                       
                    Consolidated Statements of Condition as of                                         
                         March 31, 1999 and December 31, 1998..........................................       3
                                                                                                       
                    Consolidated Statements of Income for the three                                    
                         months ended March 31, 1999 and 1998..........................................       4
                                                                                                       
                    Consolidated Statements of Stockholders' Equity for the                            
                         three months ended March 31, 1999 and 1998....................................       5
                                                                                                       
                    Consolidated Statements of Cash Flows for the three month ended                    
                         March 31, 1999 and 1998.......................................................       6
                                                                                                       
                    Notes to the Consolidated Financial Statements.....................................    7-11
                                                                                                       
          Item 2.   Management's Discussion and Analysis of Financial Condition                        
                    and Results of Operations..........................................................   12-13
                                                                                                       
                                                                                                       
PART II.  OTHER INFORMATION............................................................................      13

                    Signatures.........................................................................      14
</TABLE>

                                       2

<PAGE>
 
ITEM I. FINANCIAL STATEMENTS

                             PEOPLES BANCORP, INC.
                     CONSOLIDATED STATEMENTS OF CONDITION
                           (In Thousands of Dollars)

<TABLE> 
<CAPTION> 
                                                            MARCH 31      DECEMBER 31    
           ASSETS                                             1999            1998       
           ------                                          ----------     ------------    
                                                           (unaudited)                    
<S>                                                        <C>            <C>            
Cash and due from banks                                    $   13,193     $    11,668    
Federal funds sold                                             99,500          69,600    
                                                           ----------     -----------    
                                                                                         
      Total cash and cash equivalents                         112,693          81,268     
                                                           ----------     -----------    
                                                                                         
Investment and mortgage backed securities                                                
  available for sale, at market                               759,517         811,453    
Investment and mortgage backed securities held                                           
  to maturity, at cost (market value of $15,436 in                                       
  1999 and $23,213 in 1998)                                    15,210          22,834    
Federal Home Loan Bank stock, at cost                          29,055          29,055    
Loans, net                                                    498,382         494,569    
Bank premises and equipment, net                                6,698           6,763    
Accrued interest receivable                                     7,982           8,657    
Prepaid expenses                                                1,021             810    
Intangible assets                                               9,536           9,757    
Other assets                                                    4,107           4,432    
                                                           ----------     -----------    
                                                                                         
      Total assets                                         $1,444,201     $ 1,469,598    
                                                           ==========     ===========    
                                                                                         
 LIABILITIES AND STOCKHOLDERS' EQUITY                                                    
 ------------------------------------                                                    
                                                                                         
Liabilities:                                                                             
 Deposits                                                  $  506,976     $   504,900    
 Borrowings                                                   611,100         611,100    
 Accrued interest payable                                       5,712           5,865    
 Accrued expenses and other liabilities                         7,836           7,863    
                                                           ----------     -----------    
                                                                                         
      Total liabilities                                     1,131,624       1,129,728    
                                                           ----------     -----------    
                                                                                         
Stockholders' Equity                                                                     
  Common Stock: par value $0.01; authorized                                              
    70,000,000 shares; issued 36,458,067 shares and                                      
    outstanding 32,654,198 shares at March 31, 1999                                      
    issued 36,411,645 shares and outstanding                                             
    35,741,676 shares at December 31, 1998                        365             364    
  Additional paid in capital                                  267,500         267,533    
  Unallocated ESOP shares                                      (8,920)         (9,040)   
  Treasury stock, at cost (3,803,869 shares at March                                      
    31, 1999) and 669,969 shares at December 31, 1998)        (38,257)         (6,808)   
  Retained earnings                                            91,822          87,091    
  Unearned Management Recognition Plan shares                       0             (84)   
  Accumulated other comprehensive income, net of tax               67             814    
                                                           ----------     -----------   
                                                                                         
      Total stockholders' equity                              312,577         339,870    
                                                           ----------     -----------   
                                                                                         
    Total liabilities and stockholders' equity             $1,444,201     $ 1,469,598    
                                                           ==========     ===========    
</TABLE> 

         See accompanying notes to Consolidated Financial Statements.

                                       3

<PAGE>
 
                       CONSOLIDATED STATEMENTS OF INCOME
                           (In Thousands of Dollars)
                                  (Unaudited)

<TABLE> 
<CAPTION> 
                                                                                THREE MONTHS
                                                                               ENDED MARCH 31
                                                                           ----------------------
                                                                              1999          1998
                                                                           ----------------------
<S>                                                                        <C>            <C> 
Interest and dividend income:
     Interest and fees on loans                                            $ 9,418        $ 7,793
     Interest on securities available for sale                              13,129          2,522
     Interest and dividends on securities held to maturity                     330            736                      
     Interest on Federal funds sold                                            796            263 
                                                                           -------        ------- 
          Total interest income                                             23,673         11,314
                                                                           -------        ------- 
Interest expense on deposits                                                 4,876          5,086
Interest expense on borrowings                                               7,854            452 
                                                                           -------        ------- 
          Total interest expense                                            12,730          5,538 
                                                                           
            Net interest income                                             10,943          5,776
                                                                                                 
Provision for loan losses                                                      600            186
                                                                           -------        ------- 

          Net interest income after provision for loan losses               10,343          5,590
                                                                           -------        ------- 

Other income:                                                                                    
     Fees on loans and deposit accounts                                        211            196
     Fees for trust services                                                   442            415
     Net gain on sale of securities                                            299             -- 
     Other income                                                              310            381 
                                                                           -------        ------- 
          Total other income                                                 1,262            992
                                                                           -------        ------- 

Operating expense:                                                         
     Salaries and employee benefits                                          2,158          2,269
     Net occupancy expense                                                     412            386
     Equipment expense                                                          33             33
     Data processing fees                                                      182            148
     Amortization of intangible assets                                         221            221
     FDIC insurance premium                                                     17             18
     Marketing expense                                                          93            105
     Other operating expense                                                   785            624 
                                                                           -------        ------- 
          Total operating expense                                            3,901          3,804 
                                                                           -------        ------- 
          Income before income taxes                                         7,704          2,778                     
                                                                             
Income taxes                                                                 2,973          1,075 
                                                                           -------        ------- 
            Net income                                                     $ 4,731        $ 1,703 
                                                                           =======        ======= 
Earnings per common share:                                                                         
     Basic                                                                 $  0.14        $  0.05  
                                                                           =======        ======= 
     Diluted                                                               $  0.14        $  0.05
                                                                           =======        ======= 
</TABLE> 

         See accompanying notes to Consolidated Financial Statements.

                                       4
<PAGE>


                             PEOPLES BANCORP, INC.
                CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
              For the Three Months ended March 31, 1999 and 1998
                                (In Thousands)
                                  (Unaudited)

<TABLE> 
<CAPTION> 
                                     NUMBER                                                       RETAINED          
                                       OF                          ADDITIONAL                     EARNINGS         UNALLOCATED 
                                     COMMON          COMMON         PAID-IN       TREASURY     (SUBSTANTIALLY         ESOP
                                     SHARES          STOCK          CAPITAL        STOCK         RESTRICTED)       PLAN SHARES
                                  -----------    ------------    ------------    ----------   -----------------  ----------------
<S>                               <C>            <C>             <C>             <C>          <C>                <C>               
Balance at December 31, 1997       36,236,500     $     362       $    31,045     $       0     $     78, 870      $        0    

Net income for three months                   
 ended March 31, 1998                                                                                   1,703
Other comprehensive income:
  Net change in net unrealized gain
   on securities available for sale
Comprehensive income                                                   
  Dividends declared                                                                                     (285)              
  Amortization of unearned Management                                                                 
   Recognition Plan shares
                                 ------------    -----------      -----------     ---------     -------------      ----------
Balance at March 31, 1998          36,236,500            362           31,045             0            80,288               0
                                 ============    ===========      ===========     =========     =============      ==========
Balance at December 31,1998        35,741,676            364          267,533        (6,808)           87.091           9,040
Net income for three months
  ended March 31, 1999                                                                                  4,731
Other comprehensive income:
  Net change in unrealized gain on
  securities available for sale
Comprehensive income
  Proceeds from exercise of
  stock options                        46,422              1              (33)   
  Treasury stock repurchase        (3,133,900)                                      (31,449)   
  Allocation of ESOP plan shares                                                                                          120
  Amortization of unearned Management                                                                              
   Recognition Plan shares                  
                                 ------------    -----------      -----------     ---------     -------------      ----------
Balance at March 31, 1999          32,654,198     $      365      $   267,500     $ (38,257)    $      91.822      $   (8,920)
                                 ============    ===========      ===========     =========     =============      ==========

<CAPTION> 
                                                  UNEARNED        ACCUMULATED
                                                 MANAGEMENT         OTHER            TOTAL
                                                 RECOGNITION     COMPREHENSIVE     STOCKHOLDER 
                                                 PLAN SHARES        INCOME           EQUITY
                                              ---------------- ----------------   -------------
<S>                                           <C>              <C>                <C> 
Balance at December 31, 1997                      $     (673)     $       434      $   110,038

Net income for three months
 ended March 31, 1998                 
Other comprehensive income:                                                              1,703
  Net change in net unrealized gain
   on securities available for sale                                       248              248
                                                                                   -----------
Comprehensive income                                                                     1,951
  Dividends declared                                                                      (285)
  Amortization of unearned Management
   Recognition Plan shares                               336                               336
                                               -------------     ------------      -----------
Balance at March 31, 1998                               (337)             682          112,040
                                               =============     ============      ===========
Balance at December 31,1998                              (84)             814          339,870
Net income for three months
  ended March 31, 1999                                                                   4,731      
Other comprehensive income:
  Net change in unrealized gain on
   securities available for sale                                         (747)            (747)
                                                                                   -----------
Comprehensive income                                                                     3,984
  Proceeds from exercise of stock options                                                  (32)
  Treasury stock repurchase                                                            (31,449)
  Allocation of ESOP plan shares                                                           120
  Amortization of unearned Management      
   Recognition Plan shares                                84                                84
                                               -------------     ------------      -----------
Balance at March 31, 1999                         $        0      $        67      $   312,577
                                               =============     ============      ===========
</TABLE> 

         See accompanying Notes to Consolidated Financial Statements.
<PAGE>
 
                     CONSOLIDATED STATEMENTS OF CASH FLOWS
                           (In Thousands of Dollars)
                                  (unaudited)

<TABLE> 
<CAPTION>                                                               
                                            THREE MONTHS ENDED MARCH 31,   
                                              1999               1998   
                                        --------------      -------------  
<S>                                     <C>                 <C> 
Cash flows from operating activities:                                   
 Net income                                   $  4,731           $  1,703    
 Adjustments to reconcile net income                                    
  to net cash provided by operating                                     
   activities:                                                     
   Provision for loan losses                       600                186   
   Depreciation and amortization expense           183                178   
   Amortization of Management 
    Recognition Plan shares                         84                336   
   Amortization of intangible assets               221                221   
   Amortization of ESOP                            120                  0   
   Net amortization (accretion) of
    premiums and discounts on securities           164                (26)  
   Decrease in accrued interest
    receivable and other assets                    789                 19   
    increase in accrued interest
    payable and other liabilities                  708                353   
   Net gain on sale of securities                 (299)                 0   
                                        --------------      -------------  
 Net cash provided by operating
  activities                                     7,301              2,970   
                                        --------------      ------------- 

Cash flows used in investing activities:                                
 Proceeds from maturities of investment                                 
  securities available for sale and held                                
   to maturity                                  14,700             19,370    
 Purchase of investment securities                                
  available for sale                            (3,323)           (15,570) 
 Maturities and repayments of
  mortgage-backed securities                    44,669              4,745
 Net increase in loans                          (3,760)           (16,297)
 Net additions to bank, premises, 
  furniture, and equipment                        (116)              (207)
 Proceeds from sales of securities
  available for sale                             2,213                  0
                                        --------------      -------------       
Net cash provided by (used in)
 investing financing activities                 54,383             (7,959)
                                        --------------      -------------  

Cash flows from financing activities:
 Net proceeds from exercise of stock 
  options                                            1                  0   
 Net proceeds received from stock
  offering subscriptions                             0            229,052
 Purchase of treasury shares                   (31,449)                 0
 Dividends paid                                   (887)              (285)
 Net increase in demand deposits                 5,502             11,780
 Net (decrease) increase in savings  
  and time deposits                             (3,426)             5,266
                                        --------------      -------------  
Net cash provided by (used in) 
 financing activities                          (30,259)           245,813
                                        --------------      -------------   
Net increase in cash and cash
 equivalents                                    31,425            240,824
Cash and cash equivalents as of
 beginning of year                              81,268             15,546

Cash and cash equivalents as of         --------------      -------------
 end of year                                  $112,693           $256,370
                                        --------------      -------------  
Supplemental disclosure of cash
 flow information:
 Cash paid:                             --------------      -------------  
 Interest                                     $ 12,883           $  5,582
                                        ==============      ============= 
 Income taxes                                 $    795           $      0
                                        ==============      =============  
Non investing activities:
                           
 Assets acquired in settlement
  of loans                                    $     11           $      9
                                        ==============      ============= 
</TABLE> 


         SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. 

                                       6

<PAGE>
 
                       NOTES TO THE FINANCIAL STATEMENTS

(1)  BASIS OF PRESENTATION

     The accompanying unaudited financial statements have been prepared in 
accordance with generally accepted accounting principles for interim financial 
information and in conformity with the instructions to Form 10-Q and Article 10 
of Regulation S-X for Peoples Bancorp. Inc. (the "Registrant" or "Company").

     In the opinion of management, all adjustments (consisting of only normal 
recurring accruals) necessary to present fairly the financial condition, results
of operations, and changes in cash flows have been made at and for the three 
month periods ended March 31, 1999 and 1998. The results of operations for the 
three month period ended March 31, 1999 are not necessarily indicative of 
results that may be expected for the entire year ending December 31, 1999.

(2)  THE CONVERSION OF THE MUTUAL HOLDING COMPANY TO THE STOCK FORM OF 
     ORGANIZATION

     Peoples Bancorp. Inc. (the "Mid-Tier Holding Company") a federal 
corporation and the Registrant's predecessor, became the holding company for 
Trenton Savings Bank, FSB (the "Bank") in a reorganization (the "Two-Tier 
Reorganization"), in which all of the outstanding shares of the Bank's common 
stock ("Bank Common Stock"), including shares held by Peoples Bancorp, MHC (the 
"Mutual Holding Company") and stockholders other than the Mutual Holding Company
(the "Minority Stockholders"), were converted into shares of common stock of the
Mid-Tier Holding Company ("Mid-Tier Common Stock"), and the Bank became the
wholly-owned subsidiary of the Mid-Tier Holding Company. From July 1997 through
April 8, 1998, the Mid-Tier Holding Company's only material asset consisted of
100% of the outstanding shares of common stock of the Bank. The Registrant,
Peoples Bancorp, Inc., a Delaware corporation, is the successor to the Mid-Tier
Holding Corporation. The Company was formed as part of the mutual-to-stock
conversion (the "Conversion") of the Mutual Holding Company. In the Conversion
the Bank became the wholly-owned subsidiary of the Company and the corporate
existence of the Mutual Holding Company ended. The Conversion was completed on
April 8, 1998. Prior to the completion of the Conversion the Company had
insignificant assets and liabilities.

     As part of the Conversion each of the outstanding shares of Mid-Tier Common
Stock held by Minority Stockholders was automatically converted into 3.8243 
shares of common stock, par value $.01 per share ("Common Stock") of the 
Company. As part of the Conversion and in addition to the 12,430,673 shares 
issued due to the conversion of Mid-Tier Common Stock into Common Stock, the 
Company sold 23,805,827 shares of Common Stock for a subscription price of 
$10.00 per share in a subscription offering (the "Offering"). Net proceeds of 
the Offering were approximately $217 million. At the conclusion of the 
Conversion there were 36,236,500 shares of Common Stock outstanding, including 
952,233 shares held by the Comany's employee stock ownership plan (the "ESOP").

(3)  PLAN OF MERGER

     On September 7, 1998, the Company and Sovereign Bancorp, Inc. ("Sovereign")
entered into an Agreement and Plan of Merger (the "Agreement") providing for, 
among other things, the merger (the "Merger") of the Company with and into 
Sovereign, with Sovereign as the surviving entity. As part of the Merger, the 
Bank has entered into a Bank Plan of Merger with Sovereign Bank, a federally 
chartered savings bank and Sovereign's wholly-owned subsidiary, which provides 
for, among other things, the merger of the Bank with and into Sovereign Bank 
with Sovereign Bank as the surviving entity.

     Pursuant to the Merger Agreement, each share of the Company's Common Stock,
outstanding immediately prior to the effective time (the "Effective Date") of 
the Merger shall automatically be converted into and become the right to receive
 .80 shares of common stock, no par value per share, of Sovereign ("Sovereign 
Common Stock"). Holders of the Company's Common Stock who would be entitled to 
receive fractional shares of Sovereign Common Stock will instead receive cash in
an amount equal to such fraction of a share multiplied by the Sovereign Market 
Price (as defined in the Agreement) as of the Effective Date.

     In addition, in connection with the Agreement, the Company and Sovereign 
entered into a Stock Option Agreement pursuant to which the Company granted to 
Sovereign the option to purchase, under certain conditions, up to 7,225,000 
shares of the Company's Common Stock at an exercise price of $8.50 per share, 
subject to adjustment as provided in the Stock Option Agreement. The option is 
exercisable only upon the occurrence of certain events that would jeopardize the
completion of the Merger.

                                       7

<PAGE>

(3)  PLAN OF MERGER, CONT. 

     The merger is expected to be completed in the second quarter of 1999 
pending shareholder and regulatory approval. The transaction will be accounted 
for under the purchase accounting method for business combinations.

(4)  NON PERFORMING LOANS, NON PERFORMING ASSETS AND THE ALLOWANCE FOR LOAN 
     LOSSES

     Loans contractually in arrears by three months or more at March 31, 1999 
and December 31, 1998 are as follows (in thousands of dollars):

<TABLE> 
<CAPTION> 
                                             March 31, 1999               December 31, 1998       
                                         ----------------------       -------------------------    
<S>                                      <C>                          <C>  
Loans delinquent 90 days or more               $  3,632                      $  4,123 

Loans delinquent 90 days or more
 as a percentage of net loans
 receivable                                        0.73%                         0.83%  
</TABLE> 

     An analysis of the allowance for loan losses for the three month periods 
ended March 31, 1999 and 1998 is as follows (in thousands of dollars):

<TABLE> 
<CAPTION> 
                                       March 31, 1999        March 31, 1998
                                    ---------------------  -------------------
<S>                                 <C>                    <C>   
Balance at beginning of the period      $      4,095          $      3,415 
Provision charged to operations                  600                   186  
(Charge-offs), Recoveries, net                    53                   (39) 
                                    ---------------------  -------------------
Balance at the end of the period        $      4,748          $      3,562   
                                    ---------------------  -------------------
</TABLE> 

     Generally, the Bank's loans are placed on a non-accrual status when a
default of principal or interest has existed for a period of 90 days except
when, in the opinion of management, the collection of principal or interest is
reasonably anticipated or adequate collateral exists. In addition, the Bank
places any loan on non-accrual status if any part of it is classified as
doubtful or loss or if any part has been charged to the allowance for loan
losses. Real estate owned consists of property acquired through formal
foreclosures and acquired by deed in lieu of foreclosure, and is recorded at the
lower of cost or fair value. At March 31, 1999, the Bank had $35 thousand
classified as real estate owned.

     The Bank continually reviews the quality of the loan portfolio, and engages
an outside consultant to perform routine reviews of the portfolio on a quarterly
basis. Management believes that the allowance for loan losses is adequate based
on historical experience, the volume and type of lending conducted by the Bank,
the amount of non-performing loans, general economic conditions and other
factors relating to the Bank's loan portfolio. However, there can be no
assurance that actual losses will not exceed estimated amounts.

     As of March 31, 1999, the Bank's total non-performing loans and foreclosed 
assets amounted to $3.6 million, or .25% of total assets, compared to $4.3 
million, or .29% of total assets at December 31, 1998.

     Federal regulations required that each insured savings institution 
classify its assets on a regular basis. There are four classifications for
problem assets: "special mention," "substandard," "doubtful" and "loss." At 
March 31, 1999, the Bank had $6.8 million of loans classified as special 
mention, $6.2 million classified as substandard and $.2 million classified as 
doubtful or loss.

     It is management's policy to maintain an allowance for estimated loan
losses based upon an assessment [1] in the case of residential loans,
management's review of delinquent loans, loans in foreclosure and market
conditions, [2] in the case of commercial business loans and commercial mortgage
loans, when a significant decline in value can be identified as well as an
overall assessment of the inherent risk in the portfolio and [3] in the case of
consumer loans, based on the assessment of risks inherent in the loan portfolio.
The Bank's allowance for loan losses, which includes a general valuation
allowance, amounted to approximately $4.7 million and $3.6 million, respectively
at March 31, 1999 and December 31, 1998.

                                       8


<PAGE>
 
(5)  PER SHARE DATA

     As discussed in Note 2, the Company completed the Conversion on April 8, 
1998, which included the exchange of previously outstanding shares of Mid-Tier 
Common Stock for shares of common stock at an exchange ratio of 3.8243 shares 
of Common Stock for each share of Mid-Tier Common Stock. All historical share 
and per share information has been adjusted to reflect this change.

(6)  RECENT ACCOUNTING PRONOUNCEMENTS

     Statement of Financial Accounting Standards No. 133 (SFAS No. 133), 
"Accounting for Derivative Instruments and Hedging Activities", established 
accounting and reporting standards for derivative instruments, and for hedging 
activities. SFAS No. 133 supersedes the disclosure requirements in Statements 
No. 80, 105 and 119. This statement is effective for fiscal quarters of fiscal 
years beginning after June 15, 1999. The adoption of SFAS 133 is not expected to
have a material impact on the financial position or results of operations of the
Company.

     Statement of Financial Accounting Standards No. 134 (SFAS No. 134), 
"Accounting for Mortgage-Backed Securities Retained after the Securitization of 
Mortgage Loans Held for Sale by a Mortgage Banking Enterprise" amends FASB No. 
65, "Accounting for Certain Mortgage Banking Activities", to require that after 
the securitization of mortgage loans held for sale, an entity engaged in 
mortgage banking activities classify the resulting mortgage-backed securities or
other retained interest based on its ability and intent to sell or hold those 
investments. SFAS No. 134 was effective January 1, 1999. The adoption of this 
statement is not expected to have a material impact on the financial position or
results of operations of the Company.

(7)  BORROWINGS

     The Bank may obtain advances from the Federal Home Loan Bank ("FHLB") of 
New York upon the security of the common stock it owns in that bank and certain 
of its residential mortgage loans, provided certain standards related to 
creditworthiness have been met. Such advances are made pursuant to several 
credit programs, each of which has its own interest rate and range of 
maturities. Such advances are generally available to meet seasonal and other 
withdrawals of deposit accounts and to permit increased lending and investment.

     On November 16, 1998 and December 10, 1998 the Bank entered into 
collateralized borrowing agreements with the FHLB. The monies received from 
these agreements funded the acquisition of three private mortgaged-backed 
securities (REMICS), rated Aaa, which are subject to agreements to sell to 
Sovereign.

     In January 1997, the Board of Directors approved a borrowing agreement with
Morgan Stanley & Co., Inc. Pursuant to the borrowing agreement, the Bank 
borrowed $30.0 million at an interest rate of 6.02% and for a term of three
years, and purchased a FNMA security that yields approximately 7.2%, matures
approximately ten years after the date of the purchase and is callable after
three years.


     The following table sets forth the terms of the FHLB borrowings and 
collateral at March 31, 1999.

<TABLE> 
<CAPTION> 
              Amount      Borrowing     Maturity      Certificate      Amortized     
Rate         Borrowed       Date          Date        Face Value         Value               Collateral             Rating    Yield
----         --------     ---------     --------      -----------      ---------    -----------------------------   ------    -----
<S>          <C>          <C>           <C>           <C>              <C>          <C>                             <C>       <C> 
5.11%        $297,100     11/16/98       7/1/99       $  300,000       $ 273,935    Residential Funding Mtg. Sec.    Aaa      6.78%
                                                                                         6.75% due 8/25/2028     

5.08%        $284,000     12/10/98       7/1/99       $  238,125       $ 223,381       Citicorp Mtg. Sec. Corp.      Aaa      6.36%
                                                                                         6.25% due 11/25/2028

                                                      $   50,000       $  45,815    Residential Funding Mtg. Sec.    Aaa      6.75% 
                                                                                         6.75% due 8/25/2028
</TABLE> 

                                       9

<PAGE>
 
(7)  BORROWINGS, CONT.

     During the fourth quarter 1998, the Company and the Bank entered into
agreements to sell securities to Sovereign. The agreements were entered into for
the purpose of leveraging the balance sheet of the Company. The Agreements
provide that in the event the merger is not completed by the later of July 1,
1999 (the "Merger Agreement Date") or such later date as may be agreed upon by
the parties no later than 10 days after the Merger Agreement Date, Sovereign
will purchase the securities at the amortized book value.

     The following table sets forth for the Company and the Bank at March 31, 
1999, the maturities and securities under agreements to sell securities to 
Sovereign. The securities are carried at amortized value and are classified as 
available for sale securities.


<TABLE> 
<CAPTION> 
(In Thousands of Dollars)
                    Certificate    Amortized
     Term           Face Value       Value                          Issue                     Rating       Yield  
------------      --------------   ---------  --------------------------------------------   --------     -------
<S>               <C>              <C>        <C>                                            <C>          <C> 
WITH THE BANK

11/05/98-7/1/99     $  51,161       $ 30,441       Northwest Asset Securities Corp.            Aaa         6.52%
                                                        6.52% due 2/25/2028

11/16/98-7/1/99     $ 300,000       $273,381       Residential Funding Mtg. Sec.               Aaa         6.78%
                                                        6.75% due 8/25/2028

12/10/98-7/1/99     $ 238,125       $223,381         Citicorp. Mtg. Sec. Corp.                 Aaa         6.36%
                                                        6.75% due 11/25/2028

12/10/98-7/1/99     $  50,000       $ 45,815       Residential Funding Mtg. Sec.               Aaa         6.75%
                                                        6.75% due 8/25/2028

WITH THE COMPANY

11/5/98-7/1/99      $  50,000       $ 29,750       Northwest Asset Securities Corp.            Aaa         6.52%
                                                        6.52% due 2/25/2028
</TABLE> 


(8)  IMPACT OF YEAR 2000

     Like many financial institutions, the Company relies upon computers for the
daily conduct of its business and for data processing generally. There is a 
concern among industry experts that on January 1, 2000 computers will be unable 
to "read" the new year and there may be widespread computer malfunctions. The 
Company began to address its Year 2000 issues in 1997. A Year 2000 Committee was
formed to formulate and implement the Year 2000 Plan, develop policies, modify 
and replace existing hardware and software as necessary, and to monitor and test
Year 2000 plans and remediation efforts of third party servicers.

     The Company primarily relies on independent third parties to provide data 
processing services and application software. In-house applications are limited 
to word processing and spread sheet functions. In March 1998 the Committee 
completed an inventory and risk assessment of hardware and software and 
identified "mission critical" systems and application interdependencies. At 
March 31, 1999, 100% of the identified "mission critical" systems have been 
upgraded to the Year 2000 version distributed and tested by the applicable 
vendor. The Company has installed a test lab simulating Year 2000 environment 
to accomplish its testing of

                                      10

<PAGE>
 
(8)  IMPACT OF YEAR 2000, CONT.

"mission critical" systems. The Company commenced testing of these "mission 
critical" systems in the fourth quarter of 1998 and will continue testing into 
1999. As of March 31, 1999, the Company's testing was approximately 90% 
complete.

     The estimated cost of the Year 2000 conversion is not expected to be 
material. Upgrades of the hardware and software are being made in the ordinary 
course of business and testing is being done with existing staff and equipment. 
All costs are being expenses as incurred.

     In the development of the Company's Year 2000 Plan, the Company has 
followed the guidelines published by the Federal Institution's Examination 
Council (FFIEC), the formal interagency body empowered to prescribe uniform
principles, standards and examination procedures for the examination of
financial institutions by the federal regulatory agencies.

     The Company has communicated with vendors, customers, governmental agencies
and others to obtain assurance of their Year 2000 compliance. Failure of the 
Company or its third party data processing vendor to correct Year 2000 issues 
could cause a disruption in operation and increased operating costs. The Company
continues to monitor its major commercial borrowers who may be adversely
affected by Year 2000 issues. When a determination is made that a borrower is so
affected, the Bank is obtaining appropriate information from the borrower as to
the remediation of those issues. In appropriate cases, compliance with Year 2000
has been made a condition of the loan. To the extent that the Company's loan
customers' financial positions are weakened due to Year 2000 issues, credit
quality could be adversely impacted. The Company is formulating detailed
contingency plans in the event that the company's vendors are not successful
with their Year 2000 remediation plans. These contingency plans are projected to
be completed by the end of the second quarter of 1999. The Company believes at
this time that its efforts are adequate to address its Year 2000 concerns.

                                      11

<PAGE>
 
                     MANAGEMENT'S DISCUSSION AND ANALYSIS
               OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

FINANCIAL CONDITION

     Total assets decreased by $25.4 million, or 1.7%, to 1,444.2 million at
March 31, 1999 from $1,469.6 million at December 31, 1998 primarily due to
normal maturities of securities available for sale and held to maturity. Cash
and cash equivalents increased by $31.4 million to $112.7 million at March 31,
1999 from $81.3 million at December 31, 1998. The net increase reflects the
proceeds from securities maturities, redemptions and prepayments, offset by the
funds used to repurchase common stock. Securities available for sale decreased
by $51.9 million, or 6.40% to $759.5 million at March 31, 1999 from $811.5
million at December 31, 1998. During the first quarter, redemptions and
prepayments of principal on mortgage pass-through instruments in the securities
available for sale category were primarily held as cash and equivalents.
Securities held to maturity decreased $7.6 million, or 33.4% to $15.2 million at
March 31, 1999 from $22.8 million at December 31, 1998. Loans increased by $3.8
million, or .8%, to $498.4 million at March 31, 1999 from $494.6 million at
December 31, 1998. Deposits increased by $2.1 million, or .4%, to $507.0 million
at March 31, 1999 from $504.9 million at December 31, 1998.

     Stockholders' equity decreased by $27.3 million, or 8.03%, to $312.6 
million at March 31, 1999 from $339.9 million at December 31, 1998. The decrease
in stockholders' equity was primarily due to the common stock repurchases which 
reduced equity from December 31, 1998 by $31.4 million, offset by the increase 
in net income for the first quarter of $4.7 million. At March 31, 1999 the 
stated equity as a percentage of assets was 21.64% and the tangible equity as a 
percentage of assets was 20.99%.

RESULTS OF OPERATIONS

     Net income was $4.7 million (including net securities gains of $.3 million)
for the first quarter of 1999 compared to $1.7 million for the first quarter
1998. There were no securities gains for the first quarter of 1998.

     Total interest income increased $12.4 million, or 109.2%, to $23.7 million 
for the quarter ended March 31, 1999 from $11.3 million for the quarter ended 
March 31, 1998. The increase resulted from an increase in average interest 
earnings assets to $1,401.4 million for the quarter ended March 31, 1999 from 
$625.3 million for the quarter ended March 31, 1998 which offset a decline in 
the average yield on interest-earnings assets to 6.76% for the quarter ended 
March 31, 1999 from 7.24% for the quarter ended March 31, 1998. The $776.1 
million increase in average interest earnings assets was primarily attributable 
to the Conversion on April 8, 1998 and the $581.1 million leverage program 
instituted in the fourth quarter of 1998.

     Total interest expense increased by $7.2 million, or 130%, to $12.7 million
for the three months ended March 31, 1999 from $5.5 million for the three months
ended March 31, 1998. Interest on deposits decreased by $210 thousand to $4.9 
million for the three months ended March 31, 1999. The overall cost of deposits 
was 3.88% for the three months ended March 31, 1999 compared to 3.97% for the 
three months ended March 31, 1998.

     Interest expense on borrowings increased $7.4 million to $7.9 million for 
the three months ended March 31, 1999 compared to the three months ended March 
31, 1998. The increase in cost of average borrowings resulted from the $581.1 
million leverage borrowings at an average interest cost of 5.10% in November and
December of 1998.

     Total other income was $1.3 million for the quarter ended March 31, 1999 
compared to $1.0 million for the quarter ended March 31, 1998. Other income 
included $.3 million of gains from the sale of securities for the quarter ended 
March 31, 1999 compared to $0 from the sale of securities for the quarter ended 
March 31, 1998. Excluding gains on sales of securities, other income was 
approximately the same for both quarters. Total operating expenses increased by 
$.1 million, or 2.55%, to $3.9 million for the quarter ended March 31, 1999 
compared to $3.8 million for the quarter ended March 31, 1998.

     The evaluation of the loan loss reserve adequacy and the resultant loan 
loss provision includes a review of all loans for which full collectibility may 
not be reasonably assured and considers, among other matters, the estimated net 
realized value of the underlying collateral, economic conditions and other 
matters which warrant consideration.

     The provision for loan losses was $.6 million for the quarter ended March 
31, 1999 compared to $.2 million for the three months ended March 31, 1998. The 
increase was due primarily to the growth in the loan portfolio of 20.9% with the
continued

                                      12

<PAGE>
 
RESULTS OF OPERATIONS, CONT.

growth in commercial loans of 42.1%. The allowance for loan losses as a
percentage of loans outstanding was .94% at March 31, 1999 compared to .82% at
December 31, 1998. The allowance for loan losses as a percentage of non-
performing loans was 131.3% at March 31, 1999 compared to 96.92% at December 31,
1998.

BANK CAPITAL

     The OTS requires that the Bank meet minimum tangible, core and risk-based 
capital requirements. As of March 31, 1999, the Bank exceeded all regulatory 
capital requirements. The Bank's required, actual, and excess capital levels as 
of March 31, 1999, are as follows:


<TABLE> 
<CAPTION> 
                                                                                         EXCESS OF ACTUAL OVER
                                                     REQUIRED              ACTUAL        REGULATORY REQUIREMENT  
                                              ----------------------------------------------------------------------
                                                           % of                 % of                     % of  
                                                  AMOUNT  ASSETS        AMOUNT  ASSETS    AMOUNT        ASSETS
                                              ----------------------------------------------------------------------
                                                                     (DOLLARS IN THOUSANDS)
<S>                                           <C>         <C>        <C>        <C>       <C>           <C>   
Tangible capital to tangible assets             $20,462   1.50%      $232,843    17.07%    $212,381      15.57% 
Core capital to tangible assets                 $40,924   3.00%      $232,843    17.07%    $191,919      14.07% 
Core capital to risk-adjusted assets            $26,250   4.00%      $232,843    35.48%    $206,593      31.48%
Risk-based capital to risk-adjusted assets      $52,500   8.00%      $237,591    36.20%    $185,091      28.20%
</TABLE> 

BANK LIQUIDITY

     The Bank is required to maintain minimum levels of liquid assets as defined
by OTS regulations. This requirement, which varies from time to time depending
upon economic conditions and deposit flows, is based upon a percentage of
deposits and short-term borrowings. The required ratio currently is 4%. The
Bank's liquidity ratio was 76.40% at March 31, 1998 and 35.79% at March 31,
1999. The Bank adjusts liquidity as appropriate to meet its asset and liability
management objectives.

PART II.   OTHER INFORMATION

LEGAL PROCEEDINGS

     There are various claims and lawsuits in which the Company and the Bank are
periodically involved incidental to their business. In the opinion of
management, no material loss is expected from any of such pending claims or
lawsuits.

CHANGES IN SECURITIES

     Not applicable.

DEFAULTS UPON SENIOR SECURITIES

     Not applicable.

SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

     Not applicable.

OTHER INFORMATION

     Not applicable. 

EXHIBITS AND REPORT ON FORM 8-K

     Exhibit 27 Edgar Financial Data Schedule

                                      13


<PAGE>
 
                                  SIGNATURES


     Pursuant to the requirements of the Securities Exchange Act of 1934, the 
Registrant has duly caused this report to be signed by the undersigned thereunto
duly authorized.




                                             PEOPLES BANCORP, INC.



Date:  May 10, 1999                          By: /s/ Wendell T. Breithaupt
                                                 -------------------------------
                                                 Wendell T. Breithaupt      
                                                 President and Chief Executive
                                                 Officer


Date:  May 10, 1999                          By: /s/ Dan A. Chila
                                                 -------------------------------
                                                 Dan A. Chila      
                                                 Senior Vice President and Chief
                                                 Financial Officer

                                      14