<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 September 30, 1998.


     [_]  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 as specified in its charter)


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

            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 September 30, 1998 there were 36,373,038 shares of the company's
common stock.
<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: November 10, 1998              By: /s/ Wendell T. Breithaupt
                                         -------------------------------------
                                         Wendell T. Breithaupt
                                         President and Chief Executive Officer


Date: November 10, 1998              By: /s/ Dan A. Chila
                                         -------------------------------------
                                         Dan A. Chila
                                         Senior Vice President and Chief 
                                           Financial Officer
<PAGE>

                              PEOPLES BANCORP, INC.

                                      INDEX

<TABLE>
<CAPTION>
                                                                                                       Page
<S>                                                                                                    <C>
PART I.  FINANCIAL INFORMATION


         Item 1.  Financial Statements

                  Consolidated Statements of Condition as of
                           September 30, 1998 and December 31, 1997......................................4

                  Consolidated Statements of Income for the three and nine
                           months ended September 30, 1998 and 1997......................................5

                  Consolidated Statements of Stockholders' Equity for the
                           nine months ended September 30, 1998 and 1997.................................6

                  Consolidated Statements of Cash Flows for the nine months ended
                           September 30, 1998 and 1997...................................................7

                  Notes to the Consolidated Financial Statements......................................8-12

         Item 2.  Management's Discussion and Analysis of Financial Condition
                  and Results of Operations..........................................................13-14


PART II.  OTHER INFORMATION.............................................................................15
</TABLE>

                                       3
<PAGE>

Part I.  Financial Information
Item I.  Financial Statements

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

<TABLE>
<CAPTION>
                                                                         September 30       December 31 
                           ASSETS                                            1998               1997  
                           ------                                       --------------     ------------- 
                                                                          (unaudited)
<S>                                                                     <C>                <C>  
Cash and due from banks                                                 $       9,498      $      9,596
Federal funds sold                                                             69,400             5,950
                                                                        --------------     -------------  

                           Total cash and cash equivalents                     78,898            15,546
                                                                        --------------     -------------  

Securities available for sale                                                 244,765           137,338
Securities held to maturity                                                    33,833            60,955
Federal Home Loan Bank stock, at cost                                           3,386             3,386
Loans, net                                                                    483,282           396,448
Bank premises and equipment, net                                                6,862             6,747
Accrued interest receivable                                                     6,269             4,975
Prepaid expenses                                                                  569             1,105
Intangible assets                                                               9,978            10,604
Other assets                                                                    4,636             3,315
                                                                        --------------     -------------  

                           Total assets                                 $     872,478      $    640,419
                                                                        ==============     =============

                LIABILITIES AND STOCKHOLDERS' EQUITY
                ------------------------------------

Deposits                                                                $     491,631      $    493,400
Borrowed funds                                                                 30,000            30,000
Accrued expenses and other liabilities                                          8,711             6,981
                                                                        --------------     -------------   

                           Total liabilities                                  530,342           530,381
                                                                        --------------     -------------   

Stockholders' Equity
    Common Stock: par value $0.01; authorized                                     363               362
        70,000,000 shares as of September 30, 1998; issued
        & outstanding 36,373,038 shares as of September 30, 1998
        and 36,236,500 shares as of December 31, 1997
    Additional paid in capital                                                267,534            31,045
  Unearned ESOP Plan shares                                                    (9,201)                0
  Unearned Management Recognition Plan shares                                    (168)             (673)
  Retained earnings - substantially restricted                                 84,341            78,870
  Accumulated other comprehensive income, net of tax                             (733)              434
                                                                        --------------     -------------   

                           Total stockholders' equity                         342,136           110,038
                                                                        --------------     -------------   

                           Total liabilities and stockholders' equity   $     872,478      $    640,419
                                                                        ==============     =============
</TABLE>

          See accompanying notes to Consolidated Financial Statements.

                                       4
<PAGE>

                             PEOPLES BANCORP, INC.

                       CONSOLIDATED STATEMENTS OF INCOME
                           [In Thousands of Dollars]
                                  [unaudited]

<TABLE>
<CAPTION>
                                                                           Three Months                       Nine Months
                                                                        Ended September 30                Ended September 30
                                                                   -----------------------------     ----------------------------
                                                                      1998              1997            1998              1997
                                                                   -----------       -----------     -----------      -----------   
<S>                                                                <C>               <C>             <C>              <C>    
Interest and dividend income:                                                                      
    Interest and fees on loans                                          $8,763            $7,580         $24,861          $22,393
    Interest on securities                                               4,341             3,293          11,035            9,817
    Interest on Federal funds sold                                       1,322               136           4,192              406
                                                                   -----------       -----------     -----------      -----------   

            Total interest income                                       14,426            11,009          40,088           32,616
                                                                   -----------       -----------     -----------      -----------   
                                                                                                   
Interest expense                                                         5,536             5,571          16,667           16,223
                                                                   -----------       -----------     -----------      -----------   
                                                                                                   
            Net interest income                                          8,890             5,438          23,421           16,393
                                                                                                   
Provision for loan losses                                                  709             1,274           1,256            1,488
                                                                   -----------       -----------     -----------      -----------   
        Net interest income after provision                                                        
                for loan losses                                          8,181             4,164          22,165           14,905
                                                                   -----------       -----------     -----------      -----------   
Other income:                                                                                                           
    Service fees on deposit accounts                                       200               200             624              651
    Fees and other income                                                  677               330           2,097              595
    Net gain on sale of securities                                         300             1,676             350            2,923
                                                                   -----------       -----------     -----------      -----------   

        Total other income                                               1,177             2,206           3,071            4,169
                                                                   -----------       -----------     -----------      -----------   
Operating expense:                                                                                                      
    Salaries and employee benefits                                       2,232             2,035           6,584            5,357
    Net occupancy expense                                                  433               409           1,252            1,171
    Equipment expense                                                       46                27             123               84
    FDIC insurance premium                                                  26                20              62               39
    Amortization of intangible assets                                      221               201             663              577
    Data processing fees                                                   162               134             485              392
    Other operating expense                                                864               925           2,385            2,224
                                                                   -----------       -----------     -----------      -----------   

        Total operating expense                                          3,984             3,751          11,554            9,844
                                                                   -----------       -----------     -----------      -----------   

        Income before income taxes                                       5,374             2,619          13,682            9,230
                                                                                                                        
Income taxes                                                             2,096               951           5,202            3,332
                                                                   -----------       -----------     -----------      -----------   
                                                                                                                        
          Net income                                                    $3,278            $1,668          $8,480           $5,898
                                                                   ===========       ===========     ===========      ===========
                                                                                                                        
Earnings per common share:                                                                                              
    Basic                                                                $0.09             $0.05           $0.24            $0.17
                                                                   ===========       ===========     ===========      ===========
    Diluted                                                              $0.09             $0.05           $0.24            $0.17
                                                                   ===========       ===========     ===========      ===========
</TABLE>

          See accompanying notes to Consolidated Financial Statements.

                                       5
<PAGE>

                             PEOPLES BANCORP, INC.
                CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
          For the Nine Month Period ended September 30, 1998 and 1997
                       (In Thousands, except share data)
                                  (unaudited)

<TABLE>
<CAPTION>
                                                                                                                       Unearned
                                                          Number                                       Unearned       Management
                                                            of                         Additional        ESOP         Recognition
                                                          Common          Common         paid-in         Plan            Plan
                                                          Shares          stock          capital        Shares          Shares
                                                       ------------    ------------   ------------   ------------    ------------ 
<S>                                                    <C>             <C>            <C>            <C>             <C> 
Balance at December 31, 1996                            36,200,996           $362         $30,899                       ($1,543)

Net income for the nine months
  ended September 30, 1997                                                                                                        

  Other comprehensive income, net of tax                                                                                          

Dividends declared                                                                                                                

Proceeds from exercise of stock options                     33,023                             13                              

Amortization of unearned Management
  Recognition Plan shares                                                                     125                           589 
                                                       ------------    ------------   ------------   ------------    ------------   
Balance at September 30, 1997                           36,234,019           $362         $31,037             --          ($954)
                                                       ============    ============   ============   ============    ============ 
Balance at December 31, 1997                            36,236,500           $362         $31,045                         ($673)

Common stock offering and
  conversion of Peoples Bancorp, Inc.                                                    236,024                              

Establishment of ESOP plan                                                                                (9,522)                 

Net income for the nine months
  ended September 30, 1998                                                                                                        

Other comprehensive income, net of tax                                                                                            

Dividends declared                                                                                                                

Exercise of stock options                                  136,538              1            465                              

Amortization of unearned Management
  Recognition Plan shares                                                                                                   505

Amortization of ESOP shares                                                                                  321                  
                                                       ------------    ------------   ------------   ------------    ------------ 
Balance at September 30, 1998                           36,373,038           $363       $267,534         ($9,201)         ($168)
                                                       ============    ============   ============   ============    ============

<CAPTION>

                                                                                
                                                                             Accumulated
                                                                                Other                 Total
                                                            Retained        Comprehensive          Stockholders'
                                                            Earnings           Income                equity
                                                           ----------       -------------         --------------
<S>                                                         <C>              <C>                   <C> 
Balance at December 31, 1996                                 $72,545            $1,089               $103,352

Net income for the nine months
  ended September 30, 1997                                     5,898                                  $5,898

  Other comprehensive income, net of tax                                          (887)                ($887)

Dividends declared                                              (851)                                  ($851)

Proceeds from exercise of stock options                                                                  $13

Amortization of unearned Management
  Recognition Plan shares                                                                                714
                                                           ----------       -------------         --------------  
Balance at September 30, 1997                                $77,592              $202              $108,239
                                                           ==========       =============         ==============

Balance at December 31, 1997                                 $78,870             $434               $110,038

Common stock offering and
  conversion of Peoples Bancorp, Inc.                                                               $236,024

Establishment of ESOP plan                                                                           ($9,522)

Net income for the nine months
  ended September 30, 1998                                     8,480                                  $8,480

Other comprehensive income, net of tax                                         (1,167)               ($1,167)

Dividends declared                                            (3,009)                                ($3,009)

Exercise of stock options                                                                               $466

Amortization of unearned Management
  Recognition Plan shares                                                                               $505

Amortization of ESOP shares                                                                             $321
                                                           ----------       -------------         --------------
Balance at September 30, 1998                                $84,341            ($733)              $342,136
                                                           ==========       =============         ============== 
</TABLE>

         See accompanying Notes to Consolidated Financial Statements.

                                       6
<PAGE>
 
                             PEOPLES BANCORP, INC.
                     CONSOLIDATED STATEMENTS OF CASH FLOWS
                           (In Thousands of Dollars)
                                  (unaudited)

<TABLE> 
<CAPTION> 
                                                                                               Nine Months Ended September 30,
                                                                                                  1998                1997
                                                                                               ----------          ----------
<S>                                                                                            <C>                 <C> 
Cash flows from operating activities:
 Net income                                                                                      $  8,480             $ 5,898
 Adjustments to reconcile net income to net cash provided by operating activities:
   Provision for loan losses                                                                        1,256               1,488
   Depreciation and amortization expense                                                            2,029               1,156
   Net accretion of premiums and discounts on securities                                               23                 (64)
   Increase in accrued interest receivable and other assets                                        (2,079)             (3,626)
   Decrease in accrued interest payable and other liabilities                                         820                 826
   Net gain on sale of securities                                                                    (350)             (2,923)
                                                                                                 --------             -------

 Net cash provided by operating activities                                                         10,179               2,755
                                                                                                 --------             -------
Cash flows used in investing activities:
 Proceeds from maturities of securities available for sale and held to maturity                  $ 69,105             $39,940
 Purchase of securities available for sale                                                       (172,830)            (73,046)
 Proceeds from sales of securities available for sale                                               3,428               3,816
 Purchase of Federal Home Loan Bank Stock                                                               0                (297)
 Maturities and repayments of mortgage-backed securities                                           17,858               9,337
 Net increase in loans                                                                            (86,834)            (17,758)
 Net additions to bank premises, furniture, & equipment                                              (654)               (398)
 Proceeds from sale of bank premises, furniture & equipment                                             0                 312
                                                                                                 --------             -------

   Net cash used in investing activities                                                         (169,927)            (38,094)
                                                                                                 --------             -------
Cash flows from financing activities:
 Net (decrease) increase in savings and time deposits                                              (1,769)              2,088
 Dividends paid                                                                                    (2,099)               (851)
 Net increase in borrowings                                                                             0              30,000
 Proceeds from stock offering                                                                     226,502                   0
 Proceeds from exercise of stock options                                                              466                   0
                                                                                                 --------             -------

   Net cash provided by financing activities                                                      223,100              31,237
                                                                                                 --------             -------

Net increase (decrease) in cash and cash equivalents                                               63,352              (7,729)

Cash and cash equivalents as of beginning of year                                                $ 15,546             $20,938
                                                                                                 --------             -------

Cash and cash equivalents as of end of period                                                    $ 78,898             $13,209
                                                                                                 ========             ======= 
Supplemental disclosure of cash flow information:                                                            
  Cash paid:                                                                                     
   Interest                                                                                      $ 16,568             $16,112
                                                                                                 ========             ======= 

   Income taxes                                                                                  $  5,952             $ 3,351
                                                                                                 ========             ======= 
</TABLE> 

         See accompanying Notes to Consolidated Financial Statements.

<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").

     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 and
nine month periods ended September 30, 1998 and 1997. The results of operations
for the three and nine month periods ended September 30, 1998 are not
necessarily indicative of results that may be expected for the entire year
ending December 31, 1998.

(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 (the "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 Company's employee stock ownership plan (the "ESOP").

     The following diagrams outline (i) the organization structure of the Mutual
Holding Company, the Mid-Tier Holding Company, and the Bank and its subsidiaries
prior to the completion of the Conversion and (ii) the organizational structure
of the Company and the Bank and its subsidiaries following the Conversion.

                                       8
<PAGE>
 
     Mutual Holding Company                        Minority Stockholders

                       64.1%                               35.9%


                                   Mid-Tier
                                Holding Company


                                            100%

                                     Bank


                         100%                    100%

     Manchester Trust Bank                         TSBusiness Finance


Organizational structure following the Conversion:


                              Public Stockholders


                                            100%


                                    Company


                                            100% 


                                     Bank



                         100%                    100%

     Manchester Trust Bank                         TSBusiness Finance

                                       9
<PAGE>
 
(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.

(4)  Non Performing Loans, Non Performing Assets and the Allowance for Loan
     Losses

     Loans contractually in arrears by three months or more at September 30,
1998 and December 31, 1997 are as follows (in thousands of dollars):

                                    September 30, 1998      December 31, 1997
                                    ------------------      -----------------

Loans delinquent 90 days or more                $6,342                 $5,558

Loans delinquent 90 days or more
  as a percentage of net loans
  receivable                                     1.31%                  1.40%

         An analysis of the allowance for loan losses for the nine month periods
ended September 30, 1998 and 1997 is as follows (in thousands of dollars):

                                    September 30, 1998     September 30, 1997
                                    ------------------     ------------------

Balance at beginning of the period              $3,415                 $2,901
Provision charged to operations                  1,256                  1,488
(Charge-offs), Recoveries, net                    (597)                (1,187)
                                    ------------------      -----------------
Balance at the end of the period                $4,074                 $3,202
                                    ==================      =================

     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 September 30, 1998, the Bank had $.5 million
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.

                                       10
<PAGE>
 
     As of September 30, 1998, the Bank's total non-performing loans and
foreclosed assets amounted to $5.0 million, or .57% of total assets, compared to
$5.9 million, or .92% of total assets at December 31, 1997.

     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 September
30, 1998, the Bank had $6.3 million of loans classified as special mention, $3.9
million classified as substandard and $1.2 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 $4.1 million and $3.4 million, respectively
at September 30, 1998 and December 31, 1997.

(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)  Comprehensive Income

     During the first quarter of 1998, the Bank adopted the provisions of
Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive
Income" ("SFAS 130"). SFAS 130 establishes standards for reporting and display
of comprehensive income and its components (revenues, expenses, gains and
losses) in a full set of general-purpose financial statements. This Statement
requires that all items that are required to be recognized under accounting
standards as components of comprehensive income be reported in a financial
statement that is displayed with the same prominence as other financial
statements. This Statement requires that an enterprise (a) classify items of
other comprehensive income by their nature in a financial statement and (b)
display the accumulated balance of other comprehensive income separately from
retained earnings and additional paid-in capital in the equity section of a
statement of financial position. In accordance with the provisions of SFAS 130
for interim period reporting, The Bank's total comprehensive income for the nine
months ended September 30, 1998 and 1997 was $1.2 million and $.9 million,
respectively. The difference between the Bank's net income and total
comprehensive income for these periods relates to the change in the net
unrealized gains on securities available for sale during the applicable period
of time.

(7)  Recent Accounting Pronouncements

     In February 1998, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 132, "Employers' Disclosures About Pensions and Other Postretirement
Benefits." This Statement standardizes the disclosure requirements for pension
and other postretirement benefits by requiring additional information that will
facilitate financial analysis, and eliminating certain disclosures that are
considered no longer useful. SFAS No. 132 supersedes the disclosure requirements
in SFAS Nos. 87, 88 and 106. This Statement is effective for fiscal years
beginning after December 15, 1997 and will be adopted December 31, 1998.

     In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." This statement establishes accounting and
reporting standards for derivative instruments, and for hedging activities. SFAS
No. 133 supersedes the disclosure requirements in SFAS Nos. 80, 105 and 119.
This statement is effective for periods after September 15, 1999. The adoption
of SFAS No. 133 is not expected to have a material impact on the financial
position or results of operations of the Company.

(8)  Year 2000

     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 spreadsheet functions. In March 1998 the Committee
completed an 

                                       11
<PAGE>
 
inventory and risk assessment of hardware and software and identified "mission
critical" systems and application interdependencies. At September 30, 1998, 85%
of the identified "mission critical" systems had been upgraded to the Year 2000
version distributed and tested by the applicable vendor. Beginning in November
1998 through January 1999, the Company will conduct independent tests of these
"mission critical" systems. The Company has installed a test lab simulating a
Year 2000 environment to accomplish its testing, which is scheduled for
completion by January 31, 1999.

     The estimated cost for the Year 2000 conversion are not expected to be
material and are being expensed 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 operations and increased operating costs. 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 plan. The Company believes
at this time that its efforts are adequate to address its Year 2000 concerns.

                                       12
<PAGE>
 
                      MANAGEMENT'S DISCUSSION AND ANALYSIS
                OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS


Financial Condition

     Total assets increased by $232.1 million, or 36.2%, to $872.5 million at
September 30, 1998 from $640.4 million at December 31, 1997 primarily due to the
Conversion proceeds. Cash and cash equivalents increased by $63.4 million to
$78.9 million at September 30, 1998 from $15.5 million at December 31, 1997.
Securities available for sale increased by $107.5 million, or 78.2% to $244.8
million at September 30, 1998 from $137.3 million at December 31, 1997.
Securities held to maturity decreased $27.2 million, or 44.6% to $33.8 million
at September 30, 1998 from $61.0 million at December 31, 1997 as management
maintained its policy of designating all new investments as available for sale.
Loans increased by $86.9 million, or 21.9%, to $483.3 million at September 30,
1998 from $396.4 million at December 31, 1997. Deposits decreased by $ 1.8
million, or .4%, to $491.6 million at September 30, 1998 from $ 493.4 million
at December 31, 1997.

     Stockholders' equity increased by $232.1 million, or 211.0%, to $342.1
million at September 30, 1998 from $110.0 million at December 31, 1997. The
increase in stockholders' equity was primarily due to the Conversion which
provided approximately $217 million in net proceeds. At September 30, 1998 the
Registrant had a stated equity of $342.1 million and tangible equity of $332.1
million. At September 30, 1998 the stated equity as a percentage of assets was
39.21% and the tangible equity a percentage of assets was 38.06%.

Results of Operations

     Net income was $3.3 million (including net securities gains of $.3 million)
for the third quarter of 1998 compared to $1.7 million (including net securities
gain of $1.7 million) for the third quarter of 1997.

     Total interest income increased $3.4 million, or 30.9%, to $14.4 million
for the quarter ended September 30, 1998 from $11.0 million for the quarter
ended September 30, 1997. The increase resulted from an increase in average
interest earnings assets to $843.2 million for the quarter ended September 30,
1998 from $606.3 million for the quarter ended September 30, 1997 which offset a
decline in the average yield on interest-earnings assets to 6.84% for the
quarter ended September 30, 1998 from 7.24% for the quarter ended September 30,
1997. The $236.9 million increase in average interest earnings assets was
primarily attributable to the Conversion.

     Total interest expense decreased slightly to $5.5 million for the quarter
ended September 30, 1998 from $5.6 million for the quarter ended September 30,
1997. The average rate paid on deposits and the amount of average deposits was
relatively flat for the quarter ended September 30, 1998 compared to the quarter
ended September 30, 1997.

     Total other income was $1.2 million for the quarter ended September 30,
1998 compared to $2.2 million for the quarter ended September 30, 1997. Other
income included $.3 million of gains from the sale of equity securities for the
quarter ended September 30, 1998 compared to $1.7 million from the sale of
equity securities for the quarter ended September 30, 1997. Excluding gains on
sales of securities, other income increased $.4 million, or 80.0%, to $.9
million for the quarter ended September 30, 1998 compared to $.5 million for the
quarter ended September 30, 1997. The increase in other income is primarily
attributed to fees earned by Manchester Trust Bank ( "MTB" ) which was acquired
in September of 1997. Total operating expenses increased by $.2 million, or
5.3%, to $4.0 million for the quarter ended September 30, 1998 compared to $3.8
million for the quarter ended September 30, 1997. Operating expenses were
impacted by the acquisition of MTB, staff expansion within the Bank and
expansion within TSBusiness Finance Corporation.

     The Bank made a $.7 million provision for loan losses for the quarter ended
September 30, 1998 compared to a $1.3 million provision for the three months
ended September 30, 1997. The provision for the nine months ended September 30,
1997 was primarily recorded in the quarter ended September 30, 1997 and was
attributable to the exiting of a niche line of business that was inherited
through the acquisition of Burlington County Bank The provision in 1998
generally reflects loan growth. The evaluation of the 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
realizable value of the underlying collateral, economic conditions and other
matters which warrant consideration.

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<PAGE>
 
     Total interest income increased $7.5 million, or 23.0%, to $40.1 million
for the nine months ended September 30, 1998 from $32.6 million for the nine
months ended September 30, 1997. The increase resulted from an increase in
average earnings assets to $771.5 million for the nine months ended September
30, 1998 from $599.4 million for the nine months ended September 30, 1997 which
offset a decrease in the average yield on interest earnings assets to 6.93% for
the nine months ended September 30, 1998 from 7.25% for the nine months ended
September 30, 1997. The $172.1 million increase in average interest earnings
assets was primarily attributed to the Conversion.

     Total interest expense increased by $.5 million, or 3.1%, to $16.7 million
for the nine months ended September 30, 1998 from $16.2 million for the nine
months ended September 30, 1997. The increase was primarily the result of an
increase in average deposits to $499.6 million for the nine months ended
September 30, 1998 from $486.5 million for the nine months ended September 30,
1997 combined with an increase in the average rate paid on deposits to 4.08% for
the nine months ended September 30, 1998 from 4.04% for the nine months ended
September 30,1997. The increase in deposits is primarily attributed to normal
branch deposit inflows and a new branch opening in the third quarter of 1997.
The slight increase in the average rate paid on deposits was attributable to a
shift in deposit mix to higher yielding deposit products.

     Total other income was $3.1 million for the nine months ended September 30,
1998 compared to $4.2 million for the nine months ended September 30, 1997.
Other income included $.4 million from the sale of equity securities for the
nine months ended September 30, 1998 compared to $2.9 million of gains from the
sale of equity securities for the nine months ended September 30,1997. Excluding
gains on sales of securities, other income increased $1.5 million, or 125.0% for
the nine months ended September 30, 1998 compared to the nine months ended
September 30, 1997. The increase in other income is primarily attributed to fees
earned by MTB which was acquired in September of 1997. Total operating expenses
increased by $1.8 million, or 18.4% to $11.6 million for the nine months ended
September 30, 1998 compared to $9.8 million for the nine months ended September
30, 1997. Operating expenses were impacted by the acquisition of MTB, staff
expansion within the Bank, ESOP expense of the new 1998 Plan and an increase in
staff and expansion of TSBusiness Finance Corporation.

     The Bank made a $1.3 million loan loss provision for the nine months ended
September 30, 1998 compared to a $1.5 million loan loss provision for the nine
months ended September 30, 1997. The provision in 1998 generally reflects loan
growth.

Bank Capital

     The OTS requires that the Bank meet minimum tangible, core and risk-based
capital requirements. As of September 30, 1998, the Bank exceeded all regulatory
capital requirements. The Bank's required, actual, and excess capital levels as
of September 30, 1998, are as follows:

                                                          
                              Required               Actual         Excess of 
                         --------------------  ------------------  Actual Over
                                      % of                  % of    Regulatory  
                          Amount     Assets     Amount     Assets  Requirement
                         --------   ---------  ---------  -------  -----------
                                   (Dollars in Thousands)

Core Capital              $30,183        4.0%   $226,917   30.07%    $196,734
Risk-based Capital        $42,377        8.0%   $230,991   43.61%    $188,614


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 averaged 45.93% during the third quarter of 1998 and
39.24% at September 30, 1998. The Bank adjusts liquidity as appropriate to meet
its asset and liability management objectives.

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<PAGE>
 
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.

     On September 21, 1998, Peoples Bancorp, Inc. filed an 8-K to report the
     previously mentioned Agreement and Plan of Merger between Sovereign
     Bancorp, Inc. and Peoples Bancorp, Inc. dated September 7, 1998.

     (a)  Exhibits.

          (27) Financial Data Schedule.

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