UNITED
STATES
 SECURITIES
AND EXCHANGE COMMISSION
 WASHINGTON,
DC   20549
 
 FORM
10-Q
 
 x     Quarterly
report under Section 13 or 15(d) of the Securities Exchange Act of
1934
 
 For the
quarterly period ended September 30, 2009
 
  ̈      Transition
report under Section 13 or 15(d) of the Exchange Act
 
 For the transition period from
_______________ to ________________
 
 Commission
File Number:  0-24169
 
 PEOPLES BANCORP,
INC.
 (Exact
name of registrant as specified in its charter)
 
 Maryland
                  
                  52-2027776(State
      or Other Jurisdiction of
                  
                  (I.R.S.
      EmployerIncorporation
      or Organization)
                  
                  Identification
      No.)
 
 P.O. Box 210, 100 Spring Avenue, Chestertown,
      Maryland
                  
                  21620(Address
      of Principal Executive Offices)
                  
                  (Zip
      Code)
 
 (410)
778-3500
 Registrant’s
Telephone Number, Including Area Code
 
 Indicate by check mark 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 for
such shorter periods 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  ̈
 
 Indicate by check mark whether the
registrant has submitted electronically and posted on its corporate Web site, if
any, every Interactive Data File required to be submitted and posted pursuant to
Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12
months (or for such shorter period that the registrant was required to submit
and post such files).  Yes  ̈ No  ̈ (Not Yet
Applicable)
 
 Indicate by check mark whether the
registrant is a large accelerated filer, an accelerated filer, or a
non-accelerated filer, or a smaller reporting company. See definition of “large
accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule
12b-2 of the Exchange Act.  (Check one):
 
 Large
      accelerated filer  ̈
              Accelerated
      filer  ̈Non-accelerated
      filer  ̈
              Smaller
      reporting company x(Do
      not check if a smaller reporting company
 
 Indicate by check mark whether the
registrant is a shell company (as defined in Rule 12b-2 of the
Act).
 Yes  ̈ No x
 
 APPLICABLE
ONLY TO CORPORATE ISSUERS
 
 State the number of shares outstanding
of each of the issuer’s classes of common stock, as of the latest practicable
date:779,512 shares
of common stock issued and outstanding as of November 1,
2009
  
  PEOPLES
BANCORP, INC.
 
 FORM
10-Q
 INDEX
 
 PagePart
      I – Financial InformationItem
      1.
                                Financial
      StatementsConsolidated
      Balance Sheets at September 30, 2009 (unaudited) and December 31,
      2008
                                3Consolidated
      Statements of Income (unaudited) for three and nine
      months  ended September 30, 2009 and 2008
                                4Consolidated
      Statements of Changes in Stockholders’ Equity (unaudited)  for
      the nine months ended September 30, 2009 and 2008
                                5Consolidated
      Statements of Cash Flows (unaudited) for nine months  ended
      September 30, 2009 and 2008
                                6Notes
      to Financial Statements (unaudited)
                                8Item
      2.
                                Management’s
      Discussion and Analysis of Financial Condition  and Results of
      Operations
                                14Item
      3.
                                Quantitative
      and Qualitative Disclosures About Market Risk
                                23Item
      4.
                                Controls
      and Procedures
                                23Part
      II – Other InformationItem
      1.
                                Legal
      Proceedings
                                23Item
      1A.
                                Risk
      Factors
                                24Item
      2.
                                Unregistered
      Sales of Equity Securities and Use of Proceeds
                                24Item
      3.
                                Defaults
      Upon Senior Securities
                                24Item
      4.
                                Submission
      of Matters to a Vote of Security Holders
                                24Item
      5.
                                Other
      Information
                                24Item
      6.
                                Exhibits
                                24Signatures
                                24Exhibit
      Index
                                25
  -2-
  PART
I - FINANCIAL INFORMATION
 
 Item
1.       Financial Statements.
 PEOPLES
BANCORP, INC. AND SUBSIDIARIES
 Consolidated Balance
Sheets
 September
      30,
                                          
                                          
                                          December
      31,2009
                                          
                                          
                                          2008(unaudited)ASSETSCash
      and due from banks
                                          
                                          $
                                          12,243,516
                                          
                                          
                                          $
                                          3,789,925Federal
      funds sold
                                          
                                          
                                          2,713,861
                                          
                                          
                                          
                                          3,896,890Cash
      and cash equivalents
                                          
                                          
                                          14,957,377
                                          
                                          
                                          
                                          7,686,815Securities
      available for sale
                                          
                                          
                                          4,043,620
                                          
                                          
                                          
                                          4,077,898Securities
      held to maturity  (approximate fairvalue
      of $10,382,685 and $10,430,709)
                                          
                                          
                                          10,061,685
                                          
                                          
                                          
                                          10,055,715Federal
      Home Loan Bank stock, at cost
                                          
                                          
                                          2,401,200
                                          
                                          
                                          
                                          2,494,000Loans,
      less allowance for loan lossesof
      $2,566,807 and $2,001,739
                                          
                                          
                                          206,195,123
                                          
                                          
                                          
                                          214,679,949Premises
      and equipment
                                          
                                          
                                          6,571,726
                                          
                                          
                                          
                                          6,523,845Goodwill
      and intangible assets
                                          
                                          
                                          688,578
                                          
                                          
                                          
                                          712,932Accrued
      interest receivable
                                          
                                          
                                          1,537,119
                                          
                                          
                                          
                                          1,582,688Deferred
      income taxes
                                          
                                          
                                          650,464
                                          
                                          
                                          
                                          858,423Foreclosed
      real estate
                                          
                                          
                                          1,380,000
                                          
                                          
                                          
                                          1,407,000Other
      assets
                                          
                                          
                                          1,447,026
                                          
                                          
                                          
                                          1,814,970Total
      Assets
                                          
                                          $
                                          249,933,918
                                          
                                          
                                          $
                                          251,894,235LIABILITIES
      AND STOCKHOLDERS’ EQUITYDepositsNon-interest-bearing
                                          
                                          $
                                          31,669,422
                                          
                                          
                                          $
                                          34,387,604Interest-1bearing
                                          
                                          
                                          151,321,020
                                          
                                          
                                          
                                          131,350,969182,990,442
                                          
                                          
                                          
                                          165,738,573Securities
      sold under repurchase agreements
                                          
                                          
                                          2,284,527
                                          
                                          
                                          
                                          9,959,539Federal
      funds purchased
                                          
                                          
                                          0
                                          
                                          
                                          
                                          2,170,000Federal
      Home Loan Bank advances
                                          
                                          
                                          33,000,000
                                          
                                          
                                          
                                          43,000,000Other
      borrowings
                                          
                                          
                                          0
                                          
                                          
                                          
                                          173,216Accrued
      interest payable
                                          
                                          
                                          347,791
                                          
                                          
                                          
                                          441,832Other
      liabilities
                                          
                                          
                                          2,463,488
                                          
                                          
                                          
                                          1,968,151221,086,248
                                          
                                          
                                          
                                          223,451,311Stockholders'
      equityCommon
      stock, par value $10 per share, 1,000,000 sharesauthorized;
      issued and outstanding 779,512 shares atSeptember
      30, 2009 and at December 31, 2008
                                          
                                          
                                          7,795,120
                                          
                                          
                                          
                                          7,795,120Additional
      paid in capital
                                          
                                          
                                          2,920,866
                                          
                                          
                                          
                                          2,920,866Retained
      earnings
                                          
                                          
                                          18,821,116
                                          
                                          
                                          
                                          18,370,79729,537,102
                                          
                                          
                                          
                                          29,086,783Accumulated
      other comprehensive income (loss)Unrealized
      gain (loss) on available for sales securities
                                          
                                          
                                          6,392
                                          
                                          
                                          
                                          51,965Unfunded
      liability of defined benefit plan
                                          
                                          
                                          -695,824
                                          
                                          
                                          
                                          -695,82428,847,670
                                          
                                          
                                          
                                          28,442,924Total
      Liabilities and Stockholders’ Equity
                                          
                                          $
                                          249,933,918
                                          
                                          
                                          $
                                          251,894,235
 
 The
accompanying notes are an integral part of these consolidated financial
statements.
  -3-
 
 PEOPLES
BANCORP, INC. AND SUBSIDIARIES
 Consolidated Statements of
Income (unaudited)
 
 For the three months ended
                    
                    
                    For the nine months endedSeptember 30,
                    
                    
                    September 30,2009
                    
                    
                    2008
                    
                    
                    2009
                    
                    
                    2008Interest
      and dividend revenueLoans,
      including fees
                    
                    $
                    3,306,921
                    
                    
                    $
                    3,692,342
                    
                    
                    $
                    10,139,100
                    
                    
                    $
                    11,212,858U.
      S. government agencies securities
                    
                    
                    125,756
                    
                    
                    
                    184,146
                    
                    
                    
                    412,307
                    
                    
                    
                    582,196Deposits
      in other banks
                    
                    
                    18
                    
                    
                    
                    1,750
                    
                    
                    
                    54
                    
                    
                    
                    14,538Federal
      funds sold
                    
                    
                    2,409
                    
                    
                    
                    17,291
                    
                    
                    
                    7,780
                    
                    
                    
                    87,672Equity
      securities
                    
                    
                    4,903
                    
                    
                    
                    37,797
                    
                    
                    
                    4,903
                    
                    
                    
                    124,277Total
      interest and dividend revenue
                    
                    
                    3,440,007
                    
                    
                    
                    3,933,326
                    
                    
                    
                    10,564,144
                    
                    
                    
                    12,021,541Interest
      expenseDeposits
                    
                    
                    785,526
                    
                    
                    
                    850,687
                    
                    
                    
                    2,311,635
                    
                    
                    
                    2,678,583Borrowed
      funds
                    
                    
                    370,079
                    
                    
                    
                    575,321
                    
                    
                    
                    1,213,920
                    
                    
                    
                    1,881,406Total
      interest expense
                    
                    
                    1,155,605
                    
                    
                    
                    1,426,008
                    
                    
                    
                    3,525,555
                    
                    
                    
                    4,559,989Net
      interest income
                    
                    
                    2,284,402
                    
                    
                    
                    2,507,318
                    
                    
                    
                    7,038,589
                    
                    
                    
                    7,461,552Provision
      for loan losses
                    
                    
                    316,000
                    
                    
                    
                    440,000
                    
                    
                    
                    1,171,000
                    
                    
                    
                    1,040,000Net
      interest income afterprovision
      for loan losses
                    
                    
                    1,968,402
                    
                    
                    
                    2,067,318
                    
                    
                    
                    5,867,589
                    
                    
                    
                    6,421,552Noninterest
      revenueService
      charges on deposit accounts
                    
                    
                    255,719
                    
                    
                    
                    255,534
                    
                    
                    
                    720,024
                    
                    
                    
                    747,426Insurance
      commissions
                    
                    
                    344,564
                    
                    
                    
                    340,621
                    
                    
                    
                    1,099,439
                    
                    
                    
                    1,000,897Other
      noninterest revenue
                    
                    
                    73,051
                    
                    
                    
                    71.024
                    
                    
                    
                    270,935
                    
                    
                    
                    241,025Total
      noninterest revenue
                    
                    
                    673,334
                    
                    
                    
                    667,179
                    
                    
                    
                    2,090,398
                    
                    
                    
                    1,989,348Noninterest
      expensesSalaries
      and employee benefits
                    
                    
                    1,103,947
                    
                    
                    
                    1,090,179
                    
                    
                    
                    3,382,617
                    
                    
                    
                    3,326,645Occupancy
                    
                    
                    125,167
                    
                    
                    
                    122,453
                    
                    
                    
                    352,116
                    
                    
                    
                    310,972Furniture
      and equipment
                    
                    
                    94,931
                    
                    
                    
                    69,575
                    
                    
                    
                    255,230
                    
                    
                    
                    208,906Other
      operating
                    
                    
                    568,415
                    
                    
                    
                    526,540
                    
                    
                    
                    1,588,296
                    
                    
                    
                    1,427,926Total
      noninterest expenses
                    
                    
                    1,892,460
                    
                    
                    
                    1,808,747
                    
                    
                    
                    5,578,259
                    
                    
                    
                    5,274,449Income
      before income taxes
                    
                    
                    749,276
                    
                    
                    
                    925,750
                    
                    
                    
                    2,379,728
                    
                    
                    
                    3,136,451Income
      taxes
                    
                    
                    279,661
                    
                    
                    
                    338,820
                    
                    
                    
                    884,863
                    
                    
                    
                    1,156,243Net
      income
                    
                    $
                    469,615
                    
                    
                    $
                    586,930
                    
                    
                    $
                    1,494,865
                    
                    
                    $
                    1,980,208Earnings
      per common share
                    
                    $
                    0.60
                    
                    
                    $
                    0.75
                    
                    
                    $
                    1.92
                    
                    
                    $
                    2.53
 
 The
accompanying notes are an integral part of these consolidated financial
statements.
  -4-
 
 PEOPLES
      BANCORP, INC. AND SUBSIDIARIESConsolidated Statements of Changes in
      Stockholders’ Equity
(unaudited)
 
 NINE
MONTHS ENDED SEPTEMBER 30, 2009 and 2008
 
 AccumulatedAdditional
                      
                      
                      
                      
                      
                      otherpaid-in
                      
                      
                      Retained
                      
                      
                      comprehensive
                      
                      
                      ComprehensiveCommon Stock
                      
                      
                      capital
                      
                      
                      earnings
                      
                      
                      income
                      
                      
                      incomeBalance,
      December 31, 2007
                      
                      $
                      7,855,120
                      
                      
                      $
                      2,920,866
                      
                      
                      $
                      17,997,286
                      
                      
                      $
                      (733,478
                      )Net
      income
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      1,980,208
                      
                      
                      
                      -
                      
                      
                      $
                      1,980,208Unrealized
      gain on investmentsecurities
      available for sale netof
      income taxes of $2,387
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      (3,665
                      )
                      
                      
                      (3,665
                      )Comprehensive
      income
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      $
                      1,976,543Repurchase
      of stock
                      
                      
                      (60,000
                      )
                      
                      
                      -
                      
                      
                      
                      (420,000
                      )
                      
                      
                      -Cash
      dividend, $1.25 per share
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      (1,026,381
                      )
                      
                      
                      -Balance,
      September 30, 2008
                      
                      $
                      7,795,120
                      
                      
                      $
                      2,920,866
                      
                      
                      $
                      18,531,113
                      
                      
                      $
                      (737,143
                      )Balance,
      December 31, 2008
                      
                      $
                      7,795,120
                      
                      
                      $
                      2,920,866
                      
                      
                      $
                      18,370,797
                      
                      
                      $
                      (643,859
                      )Net
      income
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      1,494,865
                      
                      
                      
                      -
                      
                      
                      $
                      1,494,865Unrealized
      gain on investmentsecurities
      available for sale netof
      income taxes of $27,338
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      (45,573
                      )
                      
                      
                      (45,573
                      )Comprehensive
      income
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      $
                      1,449,292Repurchase
      of stock
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -Cash
      dividend, $1.32 per share
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      (1,044,546
                      )
                      
                      
                      -Balance,
      September 30, 2009
                      
                      $
                      7,795,120
                      
                      
                      $
                      2,920,866
                      
                      
                      $
                      18,821,116
                      
                      
                      $
                      (689,432
                      )
 
 The
accompanying notes are an integral part of these consolidated financial
statements.
  -5-
 
 PEOPLES
BANCORP, INC. AND SUBSIDIARIES
 Consolidated
Statements of Cash Flows (unaudited)
 For the nine months endedSeptember 30,2009
                  
                  
                  2008CASH
      FLOWS FROM OPERATING ACTIVITIESInterest
      received
                  
                  $
                  10,629,687
                  
                  
                  $
                  12,269,892Fees
      and commissions received
                  
                  
                  2,061,033
                  
                  
                  
                  1,989,348Cash
      paid to suppliers and employees
                  
                  
                  (5,002,868
                  )
                  
                  
                  (5,380,883
                  )Interest
      paid
                  
                  
                  (3,619,595
                  )
                  
                  
                  (4,599,116
                  )Taxes
      paid
                  
                  
                  (52,140
                  )
                  
                  
                  (967,322
                  )4,016,117
                  
                  
                  
                  3,311,919CASH
      FLOWS FROM INVESTING ACTIVITIESCash
      paid for premises, equipment, and software
                  
                  
                  (306,347
                  )
                  
                  
                  (990,994
                  )Loans
      made, net of principal collected
                  
                  
                  6,981,610
                  
                  
                  
                  4,398,189Proceeds
      from sale of foreclosed real estate
                  
                  
                  371,364
                  
                  
                  
                  (990,994
                  )Proceeds
      from maturities and calls of securitiesAvailable
      for sale
                  
                  
                  3,000,000
                  
                  
                  
                  1,000,000Held
      to maturity
                  
                  
                  1,000,650
                  
                  
                  
                  3,501,036Purchase
      of securities Available for Sale
                  
                  
                  (3,049,383
                  )
                  
                  
                  0Purchase
      of securities held to maturity
                  
                  
                  (1,000,000
                  )
                  
                  
                  (2,505,170
                  )Purchase
      of FHLB Stock
                  
                  
                  92,800
                  
                  
                  
                  403,600Acquisition
      of Insurance Agency
                  
                  
                  (25,344
                  )
                  
                  
                  07,065,350
                  
                  
                  
                  5,806,661CASH
      FLOWS FROM FINANCING ACTIVITIESNet
      increase (decrease) inTime
      deposits
                  
                  
                  11,223,141
                  
                  
                  
                  1,714,446Other
      deposits
                  
                  
                  6,028,728
                  
                  
                  
                  (6,400,622
                  )Securities
      sold under repurchase agreements
                  
                  
                  (9,845,012
                  )
                  
                  
                  3,739,044Advances
      under (repayments of) notes payable
                  
                  
                  (10,000,000
                  )
                  
                  
                  (10,000,000
                  )Repayments
      of other borrowings
                  
                  
                  (173,216
                  )
                  
                  
                  (15,662
                  )Repurchase
      of Stock
                  
                  
                  0
                  
                  
                  
                  (480,000
                  )Dividends
      paid
                  
                  
                  (1,044,546
                  )
                  
                  
                  (1,026,381
                  )(3,810,905
                  )
                  
                  
                  (12,469,175
                  )NET
      INCREASE (DECREASE) IN CASH
                  
                  
                  7,270,562
                  
                  
                  
                  (3,350,595
                  )CASH
      AND EQUIVALENTS AT BEGINNING OF PERIOD
                  
                  
                  7,686,815
                  
                  
                  
                  9,840,142CASH
      AND EQUIVALENTS AT END OF PERIOD
                  
                  $
                  14,957,377
                  
                  
                  $
                  6,489,547
  -6-
  PEOPLES
BANCORP, INC. AND SUBSIDIARIES
 Consolidated
Statements of Cash Flows (unaudited) (continued)
  For the nine months endedSeptember 30,2009
                      
                      
                      2008RECONCILIATION
      OF NET INCOME TO NET CASH PROVIDEDFROM
      OPERATING ACTIVITIESNet
      income
                      
                      $
                      1,494,865
                      
                      
                      $
                      1,980,208ADJUSTMENTSDepreciation
      and amortization
                      
                      
                      258,920
                      
                      
                      
                      211,017Provision
      for loan losses
                      
                      
                      1,171,000
                      
                      
                      
                      1,040,000Amortization
      of intangible assets
                      
                      
                      49,698
                      
                      
                      
                      41,250Security
      discount accretion, net of premium amortization
                      
                      
                      2,759
                      
                      
                      
                      (26,338
                      )Gain
      on sale of foreclosed real estate
                      
                      
                      (29,365
                      )
                      
                      
                      0Decrease
      (increase) inAccrued
      interest receivable
                      
                      
                      45,569
                      
                      
                      
                      202,913Income
      tax refund receivable
                      
                      
                      (288,577
                      )
                      
                      
                      188,921Other
      assets
                      
                      
                      892,737
                      
                      
                      
                      (505,129
                      )Increase
      (decrease) inDeferred
      origination fees and costs, net
                      
                      
                      17,216
                      
                      
                      
                      71,776Accrued
      Interest payable and other liabilities
                      
                      
                      401,295
                      
                      
                      
                      107,301$
                      4,016,117
                      
                      
                      $
                      3,311,919
  The
accompanying notes are an integral part of these financial
statements.
  -7-
  Peoples
Bancorp, Inc. and Subsidiaries
 Notes
to Financial Statements (unaudited)
 
 1.
              Basis
      of Presentation
 
 The
accompanying unaudited consolidated financial statements of Peoples Bancorp,
Inc. and its subsidiaries, The Peoples Bank, a Maryland-chartered bank (the
“Bank”), and Fleetwood, Athey, Macbeth & McCown, Inc., a Maryland insurance
agency (the “Insurance Agency”), have been prepared in accordance with
accounting principles generally accepted in the United States of America for
interim financial information and with the instructions to Form 10-Q and
Regulation S-X of the Securities and Exchange
Commission.  Accordingly, they do not include all the information and
notes required by generally accepted accounting principles for complete
financial statements.  In the opinion of management, all adjustments
(consisting of normal recurring entries) considered necessary for a fair
presentation have been included.  Operating results for the three and
nine months ended September 30, 2009 are not necessarily indicative of the
results that may be expected for the year ending December 31, 2009 or any
other future interim period.  The consolidated financial statements
contained herein should be read in conjunction with the consolidated financial
statements and related notes contained in the Company’s Annual Report on Form
10-K for the year ended December 31, 2008.  When used in these notes,
the term “Company” refers to Peoples Bancorp, Inc, and, unless the context
requires otherwise, its consolidated subsidiaries.
 
 The
Account Standards Codification (the “ASC”) of the Financial Accounting Standards
Board (the “FASB”) became effective on July 1, 2009.  At that date,
the ASC became FASB’s officially recognized source of authoritative U. S.
generally accepted accounting principles (“GAAP”) applicable to all public and
non-public non-governmental entities, superseding existing FASB, American
Institute of Certified Public Accountants (“AICPA”), Emerging Issues Task Force
(“EITF”) and related literature.  Rules and interpretive releases of
the U.S. Securities and Exchange Commission (the “SEC”) under the authority of
federal securities laws are also sources of authoritative GAAP for SEC
registrants.  All other accounting literature is considered
non-authoritative.  The switch to the ASC affects the way companies
refer to GAAP in financial statements and accounting policies.  Citing
particular content in the ASC involves specifying the unique numeric path to the
content through the Topic, Subtopic, Section and Paragraph
structure.
 
 In
connection with preparation of the financial statements and in accordance with
the recently issued Statement of Financial Accounting Standards (“SFAS”) No. 165
“Subsequent Events”
(“SFAS 165”), the Company evaluated subsequent events after the balance sheet
date through November 12, 2009.  No significant subsequent events were
identified which would affect the presentation of the financial
information.
 
 2.             Cash
Flows
 
 For
purposes of reporting cash flows, cash and cash equivalents include cash on
hand, amounts due from banks and overnight investments in federal funds
sold.
 
 3. Comprehensive
income
 
 For the nine months ended September
30, 2009 and 2008, total comprehensive income, net of taxes, was $1,449,292 and
$1,976,543, respectively.  Comprehensive income is the sum of net
income and the change in the unrealized gain or loss on securities available for
sale, net of income taxes
  -8-
  4. Commitments
 
 Loan commitments are made to
accommodate the financial needs of the Company’s customers.  Letters
of credit commit the Company to make payments on behalf of customers when
certain specified future events occur.  These obligations are not
recorded in the Company’s financial statements.  The credit risks
inherent in loan commitments and letters of credit are essentially the same as
those involved in extending loans to customers, and these arrangements are
subject to the Company’s normal credit policies.  The Company’s
exposure to credit loss in the event the customer does not satisfy the terms of
these arrangements equals the notional amount of the obligation less the value
of any collateral.  The table below represents unfunded obligations at
September 30, 2009 and December 31, 2008.
 
 At September 30, 2009
                        
                        
                        December 31, 2008Revolving
      Home Equity Lines
                        
                        $
                        3,117,854
                        
                        
                        $
                        3,993,3751-4
      Family Residential Construction loans
                        
                        
                        512,878
                        
                        
                        
                        1,028,568Commercial
      Real Estate
                        
                        
                        3,340,407
                        
                        
                        
                        4,262,266Other
      Unused Commitments
                        
                        
                        16,134,093
                        
                        
                        
                        17,250,351Commercial
      Letters of Credit
                        
                        
                        3,844,378
                        
                        
                        
                        5,278,824Total
                        
                        $
                        26,949,610
                        
                        
                        $
                        31,813,384
 
 5. Earnings
Per Share
 
 Earnings per common share is derived
by dividing net income available to holders of shares of common stock by the
weighted average number of shares of common stock outstanding of 779,512 for the
three- and nine-month periods ended September 30, 2009.  For the
three- and nine-month periods ended September 30, 2008, the weighted average
number of shares of common stock outstanding was 779,512 and 784,167,
respectively.
 
 6. Pension
 
 The Bank maintains a defined benefit
pension plan covering substantially all employees of the
Bank.  Benefits are based on years of service and the employee’s
highest average rate of earnings for five consecutive years during the final ten
full years before retirement.  The Bank’s general funding policy is to
contribute annually the maximum amount that can be deducted for income tax
purposes, determined using the projected unit credit cost method.  The
assets of the plan are invested in various time deposits and held in trust as
required by law.
 
 During
the nine months ended September 30, 2008 and 2007, the Bank recognized net
periodic costs for this plan of $235,101 and $213,846,
respectively.  During the nine months ended September 30, 2009, the
Bank contributed $68,176 to the plan.
 
 7.           Segment
Reporting
 
 The Company operates two primary
businesses: Community Banking and Insurance Products and
Services.  Through the Community Banking business, the Company
provides services to consumers and small businesses on the upper Eastern Shore
of Maryland through its seven branches. Community banking activities include
serving the deposit needs of small business and individual consumers by
providing banking products and services to fit their needs. Loan products
available to consumers include mortgage, home equity, automobile, marine, and
installment loans and other secured and unsecured personal lines of credit.
Small business lending includes commercial mortgages, real estate development
loans, equipment and operating loans, as well as secured and unsecured lines of
credit, accounts receivable financing arrangements, and merchant card
services.
  -9-
 
 Through the Insurance Products and
Services business, the Company provides a full range of insurance products and
services to businesses and consumers in the Company’s market areas. Products
include property and casualty, life, marine, individual health and long-term
care insurance.
 
 Selected financial information by
line of business, is included in the following table:
  For the nine months ended
                      September 30, 2009
                    
                    Community
                      banking
                    
                    
                    Insurance
                      products
                      and services
                    
                    
                    Intersegment
                      Transactions
                    
                    
                    Consolidated
                      TotalNet
      interest income
                    
                    $
                    7,043,351
                    
                    
                    $
                    (4,762
                    )
                    
                    $
                    0
                    
                    
                    $
                    7,038,589Provision
      for loan losses
                    
                    
                    1,171,000
                    
                    
                    
                    0
                    
                    
                    
                    0
                    
                    
                    
                    1,171,000Net
      interest income after provision
                    
                    
                    5,872,351
                    
                    
                    
                    (4,762
                    )
                    
                    
                    0
                    
                    
                    
                    5,867,589Noninterest
      revenue
                    
                    
                    986,259
                    
                    
                    
                    1,104,139
                    
                    
                    
                    0
                    
                    
                    
                    2,090,398Noninterest
      expense
                    
                    
                    4,822,903
                    
                    
                    
                    755,356
                    
                    
                    
                    0
                    
                    
                    
                    5,578,259Income
      before income taxes
                    
                    
                    2,035,707
                    
                    
                    
                    344,021
                    
                    
                    
                    0
                    
                    
                    
                    2,379,728Income
      taxes
                    
                    
                    754,009
                    
                    
                    
                    130,854
                    
                    
                    
                    0
                    
                    
                    
                    884,863Net
      income
                    
                    $
                    1,281,698
                    
                    
                    $
                    213,167
                    
                    
                    $
                    0
                    
                    
                    $
                    1,494,865Average
      assets
                    
                    $
                    250,059,546
                    
                    
                    $
                    1,683,194
                    
                    
                    $
                    (455,059
                    )
                    
                    $
                    251,287,681
  For the nine months ended
                      September 30, 2008
                    
                    Community
                      banking
                    
                    
                    Insurance
                      products
                      and services
                    
                    
                    Intersegment
                      Transactions
                    
                    
                    Consolidated
                      TotalNet
      interest income
                    
                    $
                    7,470,387
                    
                    
                    $
                    (8,835
                    )
                    
                    $
                    0
                    
                    
                    $
                    7,461,552Net
      interest income
                    
                    $
                    7,470,387
                    
                    
                    $
                    (8,835
                    )
                    
                    $
                    0
                    
                    
                    $
                    7,461,552Provision
      for loan losses
                    
                    
                    1,040,000
                    
                    
                    
                    0
                    
                    
                    
                    0
                    
                    
                    
                    1,040,000Net
      interest income after provision
                    
                    
                    6,430,387
                    
                    
                    
                    (8,835
                    )
                    
                    
                    0
                    
                    
                    
                    6,421,552Noninterest
      revenue
                    
                    
                    984,816
                    
                    
                    
                    1,004,532
                    
                    
                    
                    0
                    
                    
                    
                    1,989,348Noninterest
      expense
                    
                    
                    4,470,498
                    
                    
                    
                    803,951
                    
                    
                    
                    0
                    
                    
                    
                    5,274,449Income
      before income taxes
                    
                    
                    2,944,705
                    
                    
                    
                    191,746
                    
                    
                    
                    0
                    
                    
                    
                    3,136,451Income
      taxes
                    
                    
                    1,092,627
                    
                    
                    
                    63,616
                    
                    
                    
                    0
                    
                    
                    
                    1,156,243Net
      income
                    
                    $
                    1,852,078
                    
                    
                    $
                    128,130
                    
                    
                    $
                    0
                    
                    
                    $
                    1,980,208Average
      assets
                    
                    $
                    254,768,066
                    
                    
                    $
                    1,547,267
                    
                    
                    $
                    (278,919
                    )
                    
                    $
                    256,036,414
 
 8.           Insurance
Agency Acquisition
 
 On
January 2, 2007, the Company acquired all of the outstanding common stock of the
Insurance Agency for approximately $1,000,000.  The Insurance Agency
has an office located in Chestertown Maryland.
 
 On
February 23, 2009, the Insurance Agency acquired certain assets of an insurance
agency owned by a director of the Company for approximately
$25,000.
 
 During
the nine months ended September 30. 2009, the Company recorded amortization of
intangible assets of $49,698 related to these acquisitions.
  -10-
  9.           Fair
Value
 
 On  January 1,
2008, the Company adopted SFAS No. 157, “Fair Value
Measurements”.  The adoption of SFAS No. 157 had no
material effect on the Company’s December 31, 2008 and September 30,
2009 Consolidated Balance Sheets or on the Company’s Consolidated Statements of
Income for the three and nine months ended September 30, 2009.
 
 SFAS
No. 157 defines fair value, establishes a framework for measuring fair
value and expands disclosures about fair value. SFAS No. 157 also
establishes a hierarchy for determining fair value measurement. The hierarchy
includes three levels and is based upon the valuation techniques used to measure
assets and liabilities. The three levels are as follows:
 
 Level 1 —
Inputs to the valuation methodology are quoted prices (unadjusted) for
identical assets or liabilities in active markets;
 
 Level 2 —
Inputs to the valuation methodology include quoted prices for similar assets and
liabilities in active markets, and inputs that are observable for the asset or
liability, either directly or indirectly, for substantially the full term of the
financial instrument; and
 
 Level 3 —
Inputs to the valuation methodology are unobservable and significant to the fair
value measurement.
 
 The
following is a description of the valuation methodologies used for instruments
measured at fair value, as well as the general classification of such
instruments pursuant to valuation methodology.
 
 Where
quoted prices are available in an active market, securities available for sale
are classified within Level 1 of the hierarchy. Level 1 includes securities that
have quoted prices in an active market for identical assets. If quoted market
prices are not available, then fair values are estimated using pricing models,
quoted prices of securities with similar characteristics or discounted cash
flows. The Company has categorized its securities available for sale as
follows:
 
 Total
                    
                    
                    Level 1 Inputs
                    
                    
                    Level 2 Inputs
                    
                    
                    Level 3 InputsSecurities
                    
                    $
                    4,043,620
                    
                    
                    $
                    4,043,620
                    
                    
                    $
                    -
                    
                    
                    $
                    -
 
 Certain
other assets are measured at fair value on a nonrecurring
basis.  These adjustments to fair value usually result from
application of lower of cost or fair value accounting or write-downs of
individual assets due to impairment.  For assets measured at fair
value on a nonrecurring basis during the first nine months of 2009 that were
still held in the balance sheet at period-end, the following table provides the
level of valuation assumptions used to determine each adjustment and the
carrying value of the related individual asset at period-end:
 
 Total
                    
                    
                    (Level 1)
                    
                    
                    (Level 2)
                    
                    
                    (Level 3)Foreclosed
      real estate owned
                    
                    $
                    1,380,000
                    
                    
                    $
                    -
                    
                    
                    $
                    1,380,000
                    
                    
                    $
                    -
 
 During
the first nine months of 2009, the Company recognized no write-downs of
foreclosed properties.
  -11-
  10.         Investment
Securities.
 
 Investment securities are
summarized as follows:
 
 Amortized
                      
                      
                      Unrealized
                      
                      
                      Unrealized
                      
                      
                      FairSeptember 30, 2009
                      
                      cost
                      
                      
                      gains
                      
                      
                      losses
                      
                      
                      ValueAvailable
      for SaleU.
      S. government agency
                      
                      $
                      4,032,088
                      
                      
                      $
                      11,532
                      
                      
                      $
                      0
                      
                      
                      $
                      4,043,620Held
      to maturityU.
      S. government agency
                      
                      $
                      10,055,199
                      
                      
                      $
                      321,016
                      
                      
                      $
                      0
                      
                      
                      $
                      10,376,215Mortgage-backed
      securities
                      
                      
                      6,486
                      
                      
                      
                      0
                      
                      
                      
                      15
                      
                      
                      
                      6,471$
                      10,061,685
                      
                      
                      $
                      321,016
                      
                      
                      $
                      15
                      
                      
                      $
                      10,382,686December 31, 2008Available
      for SaleU.
      S. government agency
                      
                      $
                      3,992,083
                      
                      
                      $
                      85,815
                      
                      
                      $
                      0
                      
                      
                      $
                      4,077,898Held
      to maturityU.
      S. government agency
                      
                      $
                      10,048,570
                      
                      
                      $
                      375,170
                      
                      
                      $
                      0
                      
                      
                      $
                      10,423,740Mortgage-backed
      securities
                      
                      
                      7,145
                      
                      
                      
                      0
                      
                      
                      
                      176
                      
                      
                      
                      6,969$
                      10,055,715
                      
                      
                      $
                      375,170
                      
                      
                      $
                      176
                      
                      
                      $
                      10,430,709
 
 Contractual
maturities and the amount of pledged securities are shown
below.  Actual maturities may differ from contractual maturities
because issuers may have the right to call or prepay obligations with or without
call or prepayment penalties.
 
 Available for Sale
                            
                            
                            Held to maturityAmortized
                            
                            
                            Fair
                            
                            
                            Amortized
                            
                            
                            FairSeptember 30, 2009
                            
                            cost
                            
                            
                            Value
                            
                            
                            cost
                            
                            
                            ValueMaturingWithin
      one year
                            
                            $
                            2,026,295
                            
                            
                            $
                            2,033,060
                            
                            
                            $
                            6,537,325
                            
                            
                            $
                            6,721,265Over
      one to five years
                            
                            
                            2,005,793
                            
                            
                            
                            2,010,560
                            
                            
                            
                            3,517,874
                            
                            
                            
                            3,654,950Mortgage-backed
      securities
                            
                            
                            0
                            
                            
                            
                            0
                            
                            
                            
                            6,486
                            
                            
                            
                            6,471$
                            4,032,088
                            
                            
                            $
                            4,043,620
                            
                            
                            $
                            10,061,685
                            
                            
                            $
                            10,382,686Pledged
      securities
                            
                            $
                            999,430
                            
                            
                            $
                            1,004,760
                            
                            
                            $
                            6,569,222
                            
                            
                            $
                            6,784,765December 31, 2008MaturingWithin
      one year
                            
                            $
                            3,992,083
                            
                            
                            $
                            4,077,898
                            
                            
                            $
                            999,039
                            
                            
                            $
                            1,004,100Over
      one to five years
                            
                            
                            0
                            
                            
                            
                            
                            
                            
                            
                            9,049,531
                            
                            
                            
                            9,420,640Mortgage-backed
      securities
                            
                            
                            0
                            
                            
                            
                            
                            
                            
                            
                            7,145
                            
                            
                            
                            6,969$
                            3,992,083
                            
                            
                            $
                            4,077,898
                            
                            
                            $
                            10,055,715
                            
                            
                            $
                            10,431,709Pledged
      securities
                            
                            $
                            1,449,341
                            
                            
                            $
                            1,484,759
                            
                            
                            $
                            6,216,627
                            
                            
                            $
                            6,441,060
 
 Investments are pledged to secure the
deposits of federal and local governments and as collateral for repurchase
agreements.
  -12-
  11.         Recent
Accounting Standards
 
 The
following are recent accounting pronouncements approved by the
FASB.  These Statements will not have any material impact on the
financial statements of the Company.
 
 As
discussed in Note 1 – Significant Accounting Policies, on July 1, 2009, the
Accounting Standards Codification became FASB’s officially recognized source of
authoritative GAAP applicable to all public and non-public non-governmental
entities, superseding existing FASB, AICPA, EITF and related
literature.  Rules and interpretive releases of the SEC under the
authority of federal securities laws are also sources of
authoritative  GAAP for SEC registrants.  All other
accounting literature is considered non-authoritative.  The switch to
the ASC affects the way companies refer to GAAP in financial statements and
accounting policies.  Citing particular content in the ASC involves
specifying the unique numeric path to the content through the Topic, Subtopic,
Section and Paragraph structure.
 
 FASB ASC Topic 320, “Investments –
Debit and Equity Securities”.  New authoritative accounting
guidance under ASC Topic 320, “Investments – Debt and Equity
Securities”, (i) changes existing guidance for determining whether an
impairment is other than temporary to debt securities and (ii) replaces the
existing requirement that the entity’s management assert it has both the intent
and ability to hold an impaired security until recovery with a requirement that
management assert:  (a) it does not have the intent to sell the
security; and (b) it is more likely than not it will not have to sell the
security before recovery of its cost basis.  Under ASC Topic 320,
declines in the fair values of held-to-maturity and available-for-sale
securities below their costs that are deemed to be other than temporary are
reflected in earnings as realized losses to the extent the impairment is related
to credit losses.  The amount of the impairment related to other
factors is recognized in other comprehensive income.  The Company
adopted the provisions of the new authoritative accounting guidance under ASC
Topic 320 during the first quarter of 2009.  Adoption of the new
guidance did not significantly impact the Company’s financial
statements.
 
 FASB ASC Topic 715, “Compensation –
Retirement Benefits”.  New authoritative accounting guidance
under ASC topic 715, “Compensation – Retirement
Benefits”, provides guidance related to an employer’s disclosures about
plan assets of defined benefit pension or other post-retirement benefit
plans.  Under ASC Topic 715, disclosures should provide users of
financial statements with an understanding of how investment allocation
decisions are made, the factors that are pertinent to an understanding of
investment policies and strategies, the major categories of plan assets, the
inputs and valuation techniques used to measure the fair value of plan assets,
the effect of fair value measurements using significant unobservable inputs on
changes in plan assets for the period and significant concentrations of risk
within plan assets.  The disclosures required by ASC Topic 715 will be
included in the Company’s financial statements beginning with the financial
statements for the year ended December 31, 2009.
 
 FASB ASC Topic 855, “Subsequent
Events”.  New authoritative accounting guidance under ASC Topic
855, “Subsequent
Events”, establishes general standards of accounting for and disclosure
of events that occur after the balance sheet date but before financial
statements are issued or available to be issued.  ASC Topic 855
defines (i) the period after the balance sheet date during which a reporting
entity’s management should evaluate events or transactions that may occur for
potential recognition or disclosure in the financial statements, (ii) the
circumstances under which an entity should recognize events to transactions
occurring after the balance sheet date in its financial statements, and (iii)
the disclosures an entity should make about events or transactions that occurred
after the balance sheet date.  The new authoritative accounting
guidance under ASC Topic 855 became effective for the Company’s financial
statements for periods ending after June 15, 2009 and did not have a significant
impact on the Company’s financial statements.
  -13-
  Item
2.           
Management’s Discussion and Analysis of Financial Condition and Results of
Operations.
 
 Peoples Bancorp, Inc. is a Maryland
corporation and a financial holding company registered under the Bank Holding
Company Act of 1956, as amended, located in Chestertown, Kent County,
Maryland.  The Company was incorporated on December 10, 1996 to serve
as the holding company of The Peoples Bank (the “Bank”), a Maryland commercial
bank, which it acquired on March 24, 1997.  On January 2, 2007, the
Company acquired Fleetwood, Athey, Macbeth & McCown, Inc. (the “Insurance
Agency”).
 
 The Bank was incorporated on April 13,
1910 and operates five branches located in Kent County, Maryland and two
branches located in Queen Annes County, Maryland.  The Bank offers a
variety of services to satisfy the needs of consumers and small- to medium-sized
businesses and professional enterprises.  Most of the Bank’s deposit
and loan customers are located in and derived from Kent County, northern Queen
Anne's County, and southern Cecil County, Maryland.  This primary
service area is located between the Chesapeake Bay and the western border of
Delaware.
 
 In December 2008, the Bank completed
the construction of and opened a branch located in Sudlersville, Queen Anne’s
County, Maryland.  The cost of construction and opening this branch
was approximately $1,635,500.  The branch has 2,584 square feet of
office/teller space and is staffed with four employees.  As a result
of this expansion, noninterest expenses are expected to increase in
2009.
 
 The Insurance Agency has roots dating
back to the 1920s, when The Fleetwood-Kirby Agency was formed.  In
1977, that agency was merged with several other well-respected insurances
agencies to form Fleetwood, Athey, Macbeth & McCown, Inc.  The
Insurance Agency operates from one location in Kent County and provides a full
range of insurance products to businesses and consumers.  Product
lines include property, casualty, life, marine, long term care and health
insurance.
 
 Unless the context clearly requires
otherwise, the terms “Company”, “we”, “us” and “our” in this report refer
collectively to Peoples Bancorp, Inc. and its subsidiaries.
 
 Application
of Critical Accounting Policies
 
 The unaudited consolidated financial
statements have been prepared in accordance with accounting principles generally
accepted in the United States of America for interim financial information and
in accordance with the instructions to Form 10-Q.  Application of
these principles requires management to make estimates, assumptions, and
judgments that affect the amounts reported in the unaudited consolidated
financial statements and accompanying notes.  These estimates,
assumptions, and judgments are based on information available as of the date of
the consolidated financial statements; accordingly, as this information changes,
the unaudited consolidated financial statements could reflect different
estimates, assumptions, and judgments.  Certain policies inherently
have a greater reliance on the use of estimates, assumptions, and judgments and
as such have a greater possibility of producing results that could be materially
different than originally reported.  Estimates, assumptions, and
judgments are necessary when assets and liabilities are required to be recorded
at fair value, when a decline in the value of an asset not carried on the
consolidated financial statements at fair value warrants an impairment
write-down or valuation reserve to be established, or when an asset or liability
needs to be recorded contingent upon a future event.  Carrying assets
and liabilities at fair value inherently results in more financial statement
volatility.  The fair values and information used to record valuation
adjustments for certain assets and liabilities are based either on quoted market
prices or are provided by other third-party sources, when
available.
  -14-
  The
policies, along with the disclosures presented in the other financial statement
notes and in this financial review, provide information on how significant
assets and liabilities are valued in the financial statements and how those
values are determined.  Based on the valuation techniques used and the
sensitivity of financial statement amounts to the methods, assumptions, and
estimates underlying those amounts, management has identified the determination
of the allowance for loan losses as the accounting area that requires the most
subjective or complex judgments, and as such should be most subject to revision
as new information becomes available.
 
 The allowance for loan losses
represents management’s estimate of probable loan losses inherent in the loan
portfolio.  Determining the amount of the allowance for loan losses is
considered a critical accounting estimate because it requires significant
judgment and the use of estimates related to the amount and timing of expected
future cash flows on impaired loans, estimated losses on pools of homogeneous
loans based on historical loss experience, and consideration of current economic
trends and conditions, all of which may be susceptible to significant
change.  In addition, various regulatory agencies, as an integral part
of their examination processes, periodically review our allowance for loan
losses.  Such agencies may require us to make additional provisions
for estimated loan losses based upon judgments different from those of
management.  The loan portfolio also represents the largest asset type
on the balance sheet.  Further information about the methodology used
to determine the allowance for loan losses is discussed below under the heading
“Loan Quality”.
 
 The following discussion is designed to
provide a better understanding of the financial position of the Company and
should be read in conjunction with the interim Consolidated Financial Statements
and Notes thereto included elsewhere in this report, and in conjunction with the
audited Consolidated Financial Statements and Notes thereto and Management’s
Discussion and Analysis of Financial Condition and Results of Operations set
forth in the Annual Report of Peoples Bancorp, Inc. on Form 10-K for the year
ended December 31, 2008.
 
 Forward-Looking
Information
 
 This Quarterly Report on Form 10-Q may
contain forward-looking statements within the meaning of The Private Securities
Litigation Reform Act of 1995.  Readers of this quarterly report
should be aware of the speculative nature of “forward-looking
statements”.  Statements that are not historical in nature, including
the words “anticipate”, “estimate”, “should”, “expect”, “believe”, “intend”, and
similar expressions, are based on current expectations, estimates and
projections about (among other things) the industry and the markets in which we
operate; they are not guarantees of future performance.  Whether
actual results will conform to expectations and predictions is subject to known
and unknown risks and uncertainties, including risks and uncertainties discussed
in this report, general economic, market or business conditions; changes in
interest rates, deposit flow, the cost of funds, and demand for loan products
and financial services; changes in our competitive position or competitive
actions by other companies; changes in the quality or composition of loan and
investment portfolios; the ability to mange growth; changes in laws or
regulations or policies of federal and state regulators and agencies; and other
circumstances beyond our control.  These and other risks are discussed
in detail in the section of the periodic reports that Peoples Bancorp, Inc.
files with the Securities and Exchange Commission (see Item 1A of Part II of
this report for further information).  All of the forward-looking
statements made in this report are qualified by these cautionary statements, and
there can be no assurance that the actual results anticipated will be realized,
or if substantially realized, will have the expected consequences on our
business or operations.  Except as required by applicable laws, we do
not intend to publish updates or revisions of any forward-looking statements we
make to reflect new information, future events or otherwise.
  -15-




RESULTS
OF OPERATIONS





Overview





For the three- and nine-month periods
ended September 30, 2009, the Company reported net income of $469,615, or $0.60
per share, and $1,494,865, or $1.92 per share, respectively, compared to
$586,930, or $0.75 per share, and $1,980,208, or $2.53 per share, respectively,
for the same periods in 2008. The decreases for the three months (19.99%) and
nine months (24.51%) ended September 30, 2009 over the same period last year
resulted primarily from decreased net interest income and increased loan loss
reserve. The Insurance Agency produced net income of $60,585 for the three-month
period ended September 30, 2009 and net income of $213,167 for the nine-month
period ended September 30, 2009, compared to $38,760 and $128,130, respectively,
for the corresponding periods last year.





Net
Interest Income





The primary source of income for the
Company is net interest income, which is the difference between revenue on
interest-earning assets, such as investment securities and loans, and interest
incurred on interest-bearing sources of funds, such as deposits and
borrowings.





The key performance measure for net
interest income is the “net margin on interest-earning assets,” or net interest
income divided by average interest-earning assets. The Company’s net interest
margin for the nine-month period ended September 30, 2009 was 4.12%, compared to
4.19% for the same period in 2008. The net margin may decline if competition
increases, loan demand decreases, or the cost of funds rises faster than the
return on loans and securities. The net margin may also be adversely impacted by
a number of factors which cannot be predicted and are beyond our
control.





Net interest income for the three-month
period ended September 30, 2009 was $2,284,402, which represents a decrease of
$222,916 or 8.89% from net interest income for the same period in 2008. Net
interest income for the nine-month period ended September 30, 2009 was
$7,038,589, which represents a decrease of $422,963 or 5.67% from the net
interest income for the first nine months of 2008. The primary contributor to
these decreases was lower interest rates on loans and deposits during the 2009
periods, which was a direct result of a reduction in the federal funds rate from
2.00% at September 30, 2008 to 0.25% at September 30, 2009. The 175 basis-point
reduction in interest rates by the Federal Reserve in the first nine months of
2009 had a significant and immediate impact on the overall yield on earning
assets, while reductions on the rates we pay on deposits have lagged due to
certificates of deposit that do not re-price until they mature. We own shares of
stock issued by the Federal Home Loan Bank (the “FHLB”) of Atlanta, and another
major reduction in interest income resulted from the FHLB of Atlanta’s decision
to not pay dividends on its stock during the first and second quarters of
2009.





Interest revenue for the three and nine
months ended September 30, 2009 totaled $3,440,007 and $10,564,144,
respectively, compared to $3,933,326 and $12,021,541, respectively, for the same
periods last year, representing decreases of $493,319 or 12.54% and $1,457,397
or 12.12%, respectively. We have experienced a $1,073,758 decrease in interest
earned on loans as a direct result of a $6,106,810 decrease (net of the
allowance for loan losses) in our average loan balances when compared to the
first nine months of 2008. Additionally, as noted above, the loss of dividend
income on the FHLB of Atlanta stock for the first nine months of 2009 reduced
interest income by $119,374 over the same time period last year.





Interest expense for the three- and
nine-month periods ended September 30, 2009 totaled $1,155,605 and $3,525,555,
respectively, compared to $1,426,008 and $4,559,989, respectively, for the same
periods last year, representing decreases of $270,403 or 18.96% and $1,034,434
or 22.69%, respectively. The Company decreased its FHLB borrowings during the
first nine months of 2009 from $43,000,000 at December 31, 2008 to $33,000,000
at September 30, 2009. FHLB borrowings at September 30, 2008 were $43,000,000.
As a result, interest expense on borrowed funds for the first nine months of
2009 dropped $667,486 when compared to the nine months ended September 30, 2008.
The Company assumed approximately $450,000 of debt in connection with the
acquisition of the Insurance Agency. As of September 30, 2009, this debt was
paid off.




-16-




A table of the Company’s average
balances, interest and yields follows.





Average
Balances, Interest, and Yield


For
      the Nine Months Ended
                      
                      
                      For
      the Nine Months EndedSeptember 30, 2009
                      
                      
                      September 30, 2008Average
                      
                      
                      
                      
                      
                      
                      
                      
                      AverageBalance
                      
                      
                      Interest
                      
                      
                      Yield
                      
                      
                      Balance
                      
                      
                      Interest
                      
                      
                      YieldAssetsFederal
      funds sold
                      
                      $
                      5,562,255
                      
                      
                      $
                      7,780
                      
                      
                      
                      0.19
                      %
                      
                      $
                      4,498,846
                      
                      
                      $
                      87,672
                      
                      
                      
                      2.60
                      %Interest-bearing
      deposits
                      
                      
                      72,933
                      
                      
                      
                      57
                      
                      
                      
                      0.10
                      %
                      
                      
                      790,825
                      
                      
                      
                      15,242
                      
                      
                      
                      2.57
                      %Investment
      securities:U.  S.  government
      agency
                      
                      
                      13,425,760
                      
                      
                      
                      432,270
                      
                      
                      
                      4.30
                      %
                      
                      
                      16,985,593
                      
                      
                      
                      610,382
                      
                      
                      
                      4.80
                      %Other
                      
                      
                      0
                      
                      
                      
                      0
                      
                      
                      
                      0.00
                      %
                      
                      
                      0
                      
                      
                      
                      0
                      
                      
                      
                      0.00
                      %FHLB
      of Atlanta Stock
                      
                      
                      2,370,502
                      
                      
                      
                      5,141
                      
                      
                      
                      0.29
                      %
                      
                      
                      2,690,997
                      
                      
                      
                      130,297
                      
                      
                      
                      6.47
                      %Total
      investment securities
                      
                      
                      15,796,262
                      
                      
                      
                      437,411
                      
                      
                      
                      3.70
                      %
                      
                      
                      19,676,590
                      
                      
                      
                      740,679
                      
                      
                      
                      5.03
                      %Loans:Demand
      and time
                      
                      
                      37,773,582
                      
                      
                      
                      1,752,831
                      
                      
                      
                      6.20
                      %
                      
                      
                      40,701,755
                      
                      
                      
                      2,071,033
                      
                      
                      
                      6.80
                      %Mortgage
                      
                      
                      170,407,006
                      
                      
                      
                      8,225,417
                      
                      
                      
                      6.45
                      %
                      
                      
                      172,906,349
                      
                      
                      
                      8,916,216
                      
                      
                      
                      6.89
                      %Installment
                      
                      
                      3,795,701
                      
                      
                      
                      228,351
                      
                      
                      
                      8.04
                      %
                      
                      
                      4,526,663
                      
                      
                      
                      280,406
                      
                      
                      
                      8.27
                      %Total
      loans
                      
                      
                      211,976,289
                      
                      
                      
                      10,206,599
                      
                      
                      
                      6.44
                      %
                      
                      
                      218,134,767
                      
                      
                      
                      11,267,655
                      
                      
                      
                      6.90
                      %Allowance
      for loan losses
                      
                      
                      2,179,094
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      2,230,762Total
      loans, net of allowance
                      
                      
                      209,797,195
                      
                      
                      
                      10,206,599
                      
                      
                      
                      6.50
                      %
                      
                      
                      215,904,005
                      
                      
                      
                      11,267,655
                      
                      
                      
                      6.97
                      %Total
      interest-earning assets
                      
                      
                      231,228,645
                      
                      
                      
                      10,651,847
                      
                      
                      
                      6.16
                      %
                      
                      
                      240,870,266
                      
                      
                      
                      12,111,248
                      
                      
                      
                      6.72
                      %Non-interest-bearing
      cash
                      
                      
                      7,691,839
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      4,876,536Premises
      and equipment
                      
                      
                      6,534,335
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      6,067,583Other
      assets
                      
                      
                      5,832,862
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      4,222,029Total
      assets
                      
                      $
                      251,287,681
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      $
                      256,036,414Liabilities
      and Stockholders’ EquityInterest-bearing
      DepositsSavings
      and NOW deposits
                      
                      $
                      34,337,433
                      
                      
                      
                      59,042
                      
                      
                      
                      0.23
                      %
                      
                      $
                      36,053,328
                      
                      
                      
                      78,390
                      
                      
                      
                      0.29
                      %Money
      market and supernow
                      
                      
                      17,220,773
                      
                      
                      
                      61,258
                      
                      
                      
                      0.48
                      %
                      
                      
                      17,274,283
                      
                      
                      
                      132,380
                      
                      
                      
                      1.02
                      %Other
      time deposits
                      
                      
                      86,654,436
                      
                      
                      
                      2,191,335
                      
                      
                      
                      3.38
                      %
                      
                      
                      80,324,358
                      
                      
                      
                      2,467,813
                      
                      
                      
                      4.10
                      %Total
      interest-bearing deposits
                      
                      
                      138,212,642
                      
                      
                      
                      2,311,635
                      
                      
                      
                      2.24
                      %
                      
                      
                      133,651,969
                      
                      
                      
                      2,678,583
                      
                      
                      
                      2.68
                      %Borrowed
      funds
                      
                      
                      49,039,870
                      
                      
                      
                      1,213,919
                      
                      
                      
                      3.31
                      %
                      
                      
                      58,095,060
                      
                      
                      
                      1,881,406
                      
                      
                      
                      4.33
                      %Total
      interest-bearing liabilities
                      
                      
                      187,252,512
                      
                      
                      
                      3,525,554
                      
                      
                      
                      2.52
                      %
                      
                      
                      191,747,029
                      
                      
                      
                      4,559,989
                      
                      
                      
                      3.18
                      %Noninterest-bearing
      deposits
                      
                      
                      32,712,030
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      33,748,179219,964,542
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      225,495,208Other
      liabilities
                      
                      
                      2,522,014
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      1,987,756Stockholders’
      equity
                      
                      
                      28,801,125
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      28,553,450Total
      liabilities and stockholders’ equity
                      
                      $
                      251,287,681
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      $
                      256,036,414Net
      interest spread
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      3.64
                      %
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      3.54
                      %Net
      interest income
                      
                      
                      
                      
                      
                      $
                      7,126,293
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      $
                      7,551,259Net
      margin on interest-earning assets
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      4.12
                      %
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      4.19
                      %





Interest
on tax-exempt loans and investments are reported on fully taxable equivalent
basis (a non GAAP financial measure).




-17-




Provision
for Loan Losses





The provision for loan losses was
$1,171,000 for the first nine months of 2009, compared to $1,040,000 for the
same period of 2008. The increase in the provision was in response to the
increase in net charge-offs, and specific allocations for impaired loans.
Additional information regarding risk elements in the loan portfolio, the
provision for loan losses and management’s assessment of the adequacy of the
allowance for loan losses are discussed below in the section entitled “Loan
Quality”.





Noninterest
Revenue





Noninterest
revenue for the three- and nine-month periods ended September 30, 2009 totaled
$673,334 and $2,090,398, respectively, which represent increases of 0.92% and
5.08%, respectively, over the $667,179 and $1,989,348, respectively, recorded
for the same periods in 2008. The increases resulted from a $98,542 or 9.85%
increase in commission income earned by the Insurance Agency during the first
nine months of 2009. In addition, we experienced an increase in other
noninterest revenue of $29,910 or 12.41%, offset by a reduction of $27,402 or
3.67% in service charges on deposit accounts, during the first nine months of
2009 when compared to the same period of 2008.





Noninterest
Expense





The Company recorded noninterest
expense of $1,892,460 and $5,578,259 for the three- and nine-month periods ended
September 30, 2009, respectively, compared to $1,808,747 and $5,274,449,
respectively, for the same periods in 2008, representing increases of $83,713 or
4.63% and $303,810 or 5.76%, respectively. The increases are mainly attributable
to increased salaries and employee benefits of $55,972 and a $194,637 increase
in FDIC insurance premiums for the first nine months of 2009 when compared to
the same period of last year. As a result of opening our office in Suddlersville
and updating our data processing system, occupancy expense increased $41,144 and
furniture and equipment expense increased $46,324 during the first nine months
of 2009 over the same period in 2008. FDIC insurance premiums for the nine
months ended September 30, 2009 were $249,805, compared to $55,168 for the nine
months ended September 30, 2008.





Income
Tax Expense





The Company’s effective tax rate for
the three- and nine-month periods ended September 30, 2009 was 37.3% and 37.2%,
respectively, compared to 36.6% and 36.9% respectively, for the same periods in
2008. The Company’s income tax expense was $279,661 and $884,863 for the three-
and nine-months ended September 30, 2009, respectively, compared to $338,820 and
$1,156,243, respectively, for the same periods in 2008. Decreases in income
before income tax during the three- and nine-month periods ended September 30,
2009 contributed to the decreases in income tax expense when compared to the
same periods of last year.





FINANCIAL
CONDITION





Overview





Total
assets of the Company at September 30, 2009 were $249,933,918, compared to
$251,894,235 at December 31, 2008, representing a decrease of $1,960,317 or
0.78%.





Total
liabilities at September 30, 2009 were $221,086,248, compared to $223,451,311 at
December 31, 2008, representing a decrease of $2,365,063 or 1.06%.




-18-




Stockholders’ equity was $28,847,670 at
September 30, 2009, compared to $28,442,924 at December 31, 2008, representing
an increase of $404,746. The increase was due to net income for the period
totaling $1,494,865, offset by a $45,573 decrease in the unrealized gains on
securities available for sale net of income taxes and dividends paid to
stockholders of $1,044,546.





Return on average equity for the nine
months ended September 30, 2009 was 6.94%, compared to 9.26% for the same period
in 2008. Return on average assets was 0.84% for the nine months ended September
30, 2009, compared to 1.03% for the same period in 2008.





Composition
of Loan Portfolio





At September 30, 2009, loans, net of
unearned income, were $206,195,123, a decrease of $8,484,826 since December 31,
2008. Because loans are expected to produce higher yields than investment
securities and other interest-earning assets, the absolute volume of loans and
the volume as a percentage of total earning assets is an important determinant
of net interest margin. Average loans, net of the allowance for loan losses,
were $209,797,195 and $215,904,005 during the first nine months of 2009 and
2008, respectively, which constituted 90.73% and 89.63% of average
interest-earning assets for the respective periods. For the nine months ended
September 30, 2009, our average loan to deposit ratio was 122.74%, compared to
128.97% for the nine months ended September 30, 2008. Our ratio of average loans
to deposits plus borrowed funds was 95.38% for the nine months ended September
30, 2009, compared to 95.75% for the nine months ended September 30, 2008. The
Company extends credit primarily to customers located in and near the Maryland
counties of Kent County, Queen Anne’s County, and Cecil County. There are no
industry concentrations in our loan portfolio. A substantial portion of our
loans are, however, secured by real estate, and the real estate market in the
region, which is directly impacted by the local economy, will influence the
performance of the Company’s portfolio and the value of the collateral securing
the portfolio.





Loan
Quality




The allowance for loan losses
represents a reserve for potential losses in the loan portfolio. The adequacy of
the allowance for loan losses is evaluated periodically based on a review of all
significant loans, with a particular emphasis on non-accruing, past due, and
other loans that management believes require attention. The determination of the
reserve level rests upon management's judgment about factors affecting loan
quality and assumptions about the economy. Management believes that the
allowance as of September 30, 2009 is adequate to cover possible losses in the
loan portfolio identified as of that date; however, management's judgment is
based upon a number of assumptions about future events, which are believed to be
reasonable, but which may not prove valid. Thus, there can be no assurance that
charge-offs in future periods will not exceed the allowance for loan losses or
that additional increases in the loan loss allowance will not be
required.





For significant problem loans,
management's review consists of evaluation of the financial strengths of the
borrowers and guarantors, the related collateral, and the effects of economic
conditions. The overall evaluation of the adequacy of the total allowance for
loan losses is based on an analysis of historical loan loss ratios, loan
charge-offs, delinquency trends, and previous collection experience, along with
an assessment of the effects of external economic conditions. The allowance may
be increased to accommodate reserves for specific loans identified as
substandard during management's loan review. Net recoveries and/or decreases in
loans may cause the allowance as a percentage of gross loans to exceed our
target. Historically, our regulators have discouraged negative provisions,
however, management would consider a negative provision if
warranted.





The provision for loan losses is a
charge to earnings in the current period to replenish the allowance and maintain
it at a level management has determined to be adequate.




-19-




The allowance for loan losses increased
to $2,566,807 at September 30, 2009, from $2,001,739 at December 31, 2008. The
provision for loan losses was $1,171,000 for the first nine months of 2009,
compared to $1,040,000 for the same period of 2008. The increase in the
provision for loan losses in the first nine months of 2009 when compared to the
same period of 2008 was in response to the increase in net charge-offs, the
results of our quarterly review of the adequacy of the factors discussed
previously, and specific allocations for impaired loans. As of September 30,
2009 and December 31, 2008, the allowance for loan losses compared to gross
loans was 1.23% and 0.92%, respectively. As part of our loan review process,
management has noted an increase in foreclosures and bankruptcies in the
geographic areas where we operate. Additionally, the current nationwide
recession has had a significant and adverse impact on real estate values and
sales over the past 12 months. Consequently, we have closely reviewed our loan
portfolio and applied sensitivity analyses to collateral values to ensure that
we are adequately measuring potential future losses. Where necessary, we have
obtained new appraisals on collateral. Specific allocations of the allowance
have been provided in these instances where losses may occur.





The following table sets forth
activity in the Company’s allowance for loan losses for the periods
indicated:





Allowance
for Loan Losses


Nine months ended
                
                
                Nine months ended
                
                
                Year endedSeptember 30,
                
                
                September 30,
                
                
                December 31,2009
                
                
                2008
                
                
                2008Balance
      at beginning of year
                
                $
                2,001,739
                
                
                $
                2,328,792
                
                
                $
                2,328,792Loan
      losses:Commercial
                
                
                283,373
                
                
                
                1,331,712
                
                
                
                1,452,890Mortgages
                
                
                295,049
                
                
                
                490,000
                
                
                
                570,665Consumer
                
                
                42,210
                
                
                
                26,259
                
                
                
                66,142Total
      loan losses
                
                
                620,632
                
                
                
                1,847,971
                
                
                
                2,089,697Recoveries
      on loans previously charged offCommercial
                
                
                7,861
                
                
                
                3,868
                
                
                
                4,688Mortgages
                
                
                3,207
                
                
                
                0
                
                
                
                40,000Consumer
                
                
                3,632
                
                
                
                2,807
                
                
                
                2,956Total
      loan recoveries
                
                
                14,700
                
                
                
                6,675
                
                
                
                47,644Net
      loan losses
                
                
                605,932
                
                
                
                1,841,296
                
                
                
                2,042,053Provision
      for loan losses charged to expense
                
                
                1,171,000
                
                
                
                1,040,000
                
                
                
                1,715,000Balance
      at end of year
                
                $
                2,566,807
                
                
                $
                1,527,496
                
                
                $
                2,001,739Allowance
      for loan losses to loans outstanding at end of period
                
                
                1.23
                %
                
                
                0.71
                %
                
                
                0.92
                %





Management believes it has identified
and charged off all significant losses in the loan portfolio, but there can be
no assurance that additional losses will not occur in future periods.. The ratio
of the allowance for loan losses to loans outstanding has increased due to this
effort to adequately fund our allowance for losses.





As a result of management's ongoing
review of the loan portfolio, loans are classified as nonaccrual when it is not
reasonable to expect collection of interest under the original terms. These
loans are classified as nonaccrual even though the presence of collateral or the
borrower's financial strength may be sufficient to provide for ultimate
repayment. Interest on nonaccrual loans is recognized only when received. A loan
is generally placed in nonaccrual status when it becomes 90 days or more past
due. When a loan is placed in nonaccrual status, all interest that had been
accrued on the loan but remains unpaid is reversed and deducted from earnings as
a reduction of reported interest income. No additional interest is accrued on
the loan balance until the collection of both principal and interest becomes
reasonably certain.




-20-




The Company had loans past due 90
days or more including nonaccrual loans of $8,475,610 and $5,162,535 at
September 30, 2009 and December 31, 2007, respectively. These loans are detailed
below:





Risk
Elements of Loan Portfolio


September 30,
                  
                  
                  December 31,2009
                  
                  
                  2008Nonaccrual
      LoansCommercial
                  
                  $
                  278,047
                  
                  
                  $
                  2,639,972Mortgage
                  
                  
                  5,567,820
                  
                  
                  
                  1,030,685Consumer
                  
                  
                  42,688
                  
                  
                  
                  05,888,555
                  
                  
                  
                  3,670,657Accruing
      Loans Past Due 90 Days or MoreCommercial
                  
                  
                  495,579
                  
                  
                  
                  19,540Mortgage
                  
                  
                  2,091,476
                  
                  
                  
                  1,447,221Consumer
                  
                  
                  0
                  
                  
                  
                  25,1172,587,055
                  
                  
                  
                  1,491,878$
                  8,475,610
                  
                  
                  $
                  5,162,535





Gross
interest income of $263,031 for the first nine months of 2009, $217,573 for
fiscal year 2008 and $181,683 for the first nine months of 2008 would have been
recorded if nonaccrual loans had been current and performing in accordance with
their original terms. Interest actually recorded on such loans was $21,277 for
the first nine months of 2009, $9,683 for fiscal year 2008 and $6,325 for the
first nine months of 2008.





Loans are
classified as impaired when the collection of contractual obligations, including
principal and interest, is doubtful. Management believes that it has identified
all significant impaired loans as of September 30, 2009 and has made the
appropriate change to the loan loss reserve in respect of those impaired
loans.





Deposits
and Other Interest-Bearing Liabilities





Average interest-bearing deposits
increased $4,560,673 or 3.41% to $138,212,642 for the nine months ended
September 30, 2009, from $133,651,969 for the same period in 2008. Average
noninterest-bearing deposits decreased $1,036,149 or 3.07% to $32,712,030 for
the nine months ended September 30, 2009, from $33,748,179 for the same period
in 2008. Average total deposits increased 2.11% or $3,524,525 to $170,924,672
for the nine months ended September 30, 2009 from $167,400,148 for the same
period in 2008. Borrowings, primarily from the FHLB of Atlanta to fund loan
demand, decreased to $33,000,000 from $43,000,000 at December 31, 2008, a
decrease of 23.26%.





Deposits,
particularly core deposits, and borrowed funds have been our primary sources of
funding and have enabled us to meet both our short-term and long-term liquidity
needs. Management anticipates that deposits will grow and continue to be our
primary source of funding for the foreseeable future. It should be noted,
however, that investor confidence in alternatives to deposit accounts, which may
pay yields that are higher than those paid on deposits, typically increases when
the economy and stock markets perform well. Increased investor confidence in
nondeposit investment products in future periods would likely have an adverse
impact on our deposit growth. In addition, changes in governmental monetary
policy, especially interest rates, may impact our ability to attract and retain
deposits.




-21-




Short-term
Borrowings




The following table sets forth the our
position with respect to short-term borrowings at September 30, 2009 and
December 31, 2008





September 30, 2009
                
                
                December 31, 2008Amount
                
                
                Rate
                
                
                Amount
                
                
                RateFHLB
      (daily re-price)
                
                $
                0
                
                
                
                -
                %
                
                $
                5,000,000
                
                
                
                .46
                %Retail
      Repurchase Agreements
                
                
                2,284,527
                
                
                
                1.86
                %
                
                
                9,959,539
                
                
                
                2.85
                %Federal
      Funds Borrowed
                
                
                0
                
                
                
                -
                %
                
                
                2,170,000
                
                
                
                .53
                %Total
                
                $
                12,780,520
                
                
                
                
                
                
                $
                9,041,476





We may borrow up to approximately 30%
of total assets from the FHLB through any combination of notes or line of credit
advances. Both the notes payable and the line of credit are secured by a
floating lien on all of our real estate mortgage loans. The Company was required
to purchase shares of capital stock in the FHLB as a condition to obtaining the
line of credit.





We provide collateral of 105% of the
repurchase agreement balances by pledging U.S. Government Agency
securities.





As of
September 30, 2009, the Bank had lines of credit of $13,650,000 in unsecured
overnight federal funds and $5,000,000 in secured overnight federal funds with
correspondent banks.





Liquidity
and Capital Resources





Liquidity describes our ability to meet
financial obligations that arise out of the ordinary course of business.
Liquidity is needed primarily to fund loans, meet depositor withdrawal
requirements, and fund current and planned expenditures. The Company derives
liquidity through increased customer deposits, maturities in the investment
portfolio, loan repayments and income from earning assets. To the extent that
deposits are not adequate to fund customer loan demand, liquidity needs can be
met in the short-term funds markets through lines of credit totaling $13,650,000
from correspondent banks, namely, Community Bankers Bank and M&T Bank. The
Bank is also a member of the FHLB of Atlanta, which provides another source of
liquidity through a secured line of credit in the amount of $42,683,952 of which
$33,000,000 was advanced as of September 30, 2009. We also have the ability to
borrow secured funds through the Federal Reserve’s Discount window as
necessary.





Bank regulatory agencies have adopted
various capital standards, including risk-based capital standards, that apply to
financial institutions like the Company. The primary objectives of the
risk-based capital framework are to provide a more consistent system for
comparing capital positions of financial institutions and to take into account
the different risks among financial institutions’ assets and off-balance sheet
items.





Risk-based capital standards have been
supplemented with requirements for a minimum Tier 1 capital to assets ratio
(leverage ratio). In addition, regulatory agencies consider the published
capital levels as minimum levels and may require a financial institution to
maintain capital at higher levels. A comparison of the Company’s capital ratios
as of September 30, 2009 to the minimum ratios required by federal banking
regulators is presented below.




-22-




Actual
                  
                  
                  Minimum
                    Requirements
                  
                  
                  To Be Well
                    CapitalizedTier
      1 risk-based capital
                  
                  
                  13.32
                  %
                  
                  
                  4.00
                  %
                  
                  
                  6.00
                  %Total
      risk-based capital
                  
                  
                  14.56
                  %
                  
                  
                  8.00
                  %
                  
                  
                  10.00
                  %Leverage
      ratio
                  
                  
                  11.12
                  %
                  
                  
                  4.00
                  %
                  
                  
                  5.00
                  %





Item
3.           Quantitative
and Qualitative Disclosures About Market Risk.





The Company is a “smaller reporting
company” and is not required to include the information required by this
item.





Item
4.           Controls and
Procedures.





We maintain disclosure controls and
procedures that are designed to ensure that information required to be disclosed
in the reports that Peoples Bancorp, Inc. files under the Securities and
Exchange Act of 1934 with the Securities and Exchange Commission, such as this
quarterly report, is recorded, processed, summarized and reported within the
time periods specified in those rules and forms, and that such information is
accumulated and communicated to management, including the President and Chief
Executive Officer (the “CEO”), who also serves as the Chief Financial Officer
(the “CFO”), to allow for timely decisions regarding required disclosure. A
control system, no matter how well conceived and operated, can provide only
reasonable, not absolute, assurance that the objectives of the control system
are met. Further, the design of a control system must reflect the fact that
there are resource constraints, and the benefits of controls must be considered
relative to their costs. These inherent limitations include the realities that
judgments in decision-making can be faulty, and that breakdowns can occur
because of simple error or mistake. Additionally, controls can be circumvented
by the individual acts of some persons, by collusion of two or more people, or
by management override of the control. The design of any system of controls also
is based in part upon certain assumptions about the likelihood of future events,
and there can be no assurance that any design will succeed in achieving its
stated goals under all potential future conditions; over time, control may
become inadequate because of changes in conditions, or the degree of compliance
with the policies or procedures may deteriorate.





An evaluation of the effectiveness of
these disclosure controls was carried out as of September 30, 2009 under the
supervision and with the participation of the Company’s management, including
the CEO. Based on that evaluation, the Company’s management, including the CEO,
has concluded that our disclosure controls and procedures are, in fact,
effective at the reasonable assurance level.





During the third quarter of 2009, there
was no change in our internal control over financial reporting that has
materially affected, or is reasonably likely to materially affect, our internal
control over financial reporting.





PART
II - OTHER INFORMATION




Item
1.           Legal
Proceedings.





None.




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Item
1A.        Risk Factors.





The risks and uncertainties to which
our financial condition and operations are subject are discussed in detail in
Item 1A of Part I of the Annual Report of Peoples Bancorp, Inc. on Form 10-K for
the year ended December 31, 2008. Management does not believe that any material
changes in these risk factors have occurred since December 31,
2008.





Item
2.           Unregistered
Sales of Equity Securities and Use of Proceeds.





None.





Item
3.           Defaults
Upon Senior Securities.





Not applicable.





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





None.





Item
5.           Other
Information.





None.





Item
6.           Exhibits.





The exhibits filed or furnished with
this report are listed in the Exhibit Index that immediately follows the
signatures, which Index is incorporated herein by reference.





SIGNATURES





Pursuant to the requirements of the
Security Exchange Act of 1934, the registrant has causedthis report to be signed
on its behalf by the undersigned, thereunto duly authorized.





PEOPLES
      BANCORP, INC.Date:  November
      12, 2009
              By:
              /s/ Thomas G. StevensonThomas
      G. StevensonPresident/Chief
      Executive Officer&
      Chief Financial Officer




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EXHIBIT
INDEX





Exhibit No.
              
              Description31.1
              
              Certifications
      of the CEO/CFO pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
      (filed herewith)32.1
              
              Certification
      of the CEO/CFO pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
      (furnished herewith)




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