**UNITED
STATES**
 **SECURITIES
AND EXCHANGE COMMISSION**
 **WASHINGTON,
DC 20549**
 
 **FORM
10-QSB**
 
 xQuarterly report under Section 13 or 15(d) of the
Securities Exchange Act of 1934
 
 For the
quarterly period ended  March
31, 2005
 
 oTransition 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) 778-3500Registrant’s Telephone Number, Including Area
      Code
 Check
whether the issuer (1) filed all reports required to be filed by Section 13 or
15(d) of the Exchange Act during the past 12 months (or for such shorter period
that the issuer was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
 Yes x   No o
 
 **APPLICABLE
ONLY TO CORPORATE ISSUERS**
 
 **** State the
number of shares outstanding of each of the issuer’s classes of common equity,
as of the latest practicable date: 789,012 shares of common stock issued and outstanding as of May 1,
2005
 
 Transitional
Small Business Disclosure Format (check one): Yes o No x
  
  **PEOPLES
BANCORP, INC.**
 
 **FORM
10-QSB**
 **INDEX**
 Part
      I - Financial InformationItem
      1.
    Financial
      Statements
    3Consolidated
      Balance Sheets at March 31, 2005 (unaudited) and
      December 31, 2004
    3Consolidated
      Statements of Income (unaudited) for three months ended
      March 31, 2005 and 2004
    4Consolidated
      Statements of Cash Flows (unaudited) for three months ended
      March 31, 2005 and 2004
    5Notes
      to Financial Statements
    6Item
      2.
    Management’s
      Discussion and Analysis or Plan of Operation
    7Item
      3.
    Controls
      and Procedures
    14Part
      II - Other InformationItem
      1.
    Legal
      Proceedings
    15Item
      2.
    Unregistered
      Sales of Equity Securities and Use of Proceeds
    15Item
      3.
    Defaults
      Upon Senior Securities
    15Item
      4.
    Submission
      of Matters to a Vote of Security Holders
    15Item
      5.
    Other
      Information
    15Item
      6.
    Exhibits
    15Signatures
    
    16Exhibit
      Index
    
    17
  - 2
-
  **PART
I - FINANCIAL INFORMATION**
 
 **Item
1.** **Financial
Statements.**
 **PEOPLES
      BANCORP, INC. AND SUBSIDIARY****Consolidated
      Balance Sheets**
    
    
    March
      31
    
    
    December
      31,2005
    
    
    2004**ASSETS**
    
    
    (unaudited)Cash
      and due from banks
    
    $
    4,305,908
    
    $
    3,965,562Federal
      funds sold
    
    
    1,770,029
    
    
    1,947,273Investment
      securities available for sale
    
    
    13,547,373
    
    
    14,138,781Securities
      held to maturity (approximate fairvalue
      of $6,389,395 and $5,954,064)
    
    
    6,506,371
    
    
    6,011,312Federal
      Home Loan Bank stock, at cost
    
    
    1,427,400
    
    
    864,800Loans,
      less allowance for loan lossesof
      $1,312,809 and $1,204,274
    
    
    182,617,841
    
    
    170,592,710Premises
      and equipment
    
    
    3,779,687
    
    
    3,794,199Accrued
      interest receivable
    
    
    1,054,995
    
    
    908,069Deferred
      income taxes
    
    
    73,511
    
    
    38,411Other
      assets
    
    
    710,749
    
    
    684,588**Total
      Assets**
    
    $
    215,793,864
    
    $
    202,945,705**LIABILITIES
      AND STOCKHOLDERS’ EQUITY**DepositsNon-interest-bearing
    
    $
    29,710,896
    
    $
    28,596,460Interest-bearing
    
    
    129,292,671
    
    
    131,166,366159,003,567
    
    
    159,762,826Securities
      sold under repurchase agreementsand
      federal funds purchased
    
    
    11,170,033
    
    
    10,088,407Federal
      Home Loan Bank advances
    
    
    22,700,000
    
    
    11,200,000Accrued
      Interest payable
    
    
    281,359
    
    
    271,081Income
      taxes payable
    
    
    521,977
    
    
    75,677Other
      liabilities
    
    
    389,285
    
    
    340,396194,066,221
    
    
    181,738,387Stockholders'
      equityCommon
      stock, par value $10 per share authorized 1,000,000shares
      issued, and 789,012 shares outstanding
    
    
    7,890,120
    
    
    7,890,120Additional
      Paid in Capital
    
    
    2,920,866
    
    
    2,920,866Retained
      earnings
    
    
    10,885,775
    
    
    10,309,73421,696,761
    
    
    21,120,720Accumulated
      other comprehensive income
    
    
    30,882
    
    
    86,59821,727,643
    
    
    21,207,318**Total
      Liabilities and Stockholders’ Equity**
    
    $
    215,793,864
    
    $
    202,945,705
 
 The
accompanying notes are an integral part of these financial
statements.
 - 3
-
  ****PEOPLES
BANCORP, INC. AND SUBSIDIARY**Consolidated Statements of
Income (unaudited)**
 For
      the three months endedMarch
      312005
    
    2004Interest
      and dividend revenueLoans,
      including fees
    
    $
    2,883,264
    
    $
    2,209,408Government
      Agencies Securities
    
    
    184,961
    
    
    238,638From
      deposits in other banks
    
    
    246
    
    
    65Federal
      funds sold
    
    
    8,416
    
    
    13,839Equity
      securities
    
    
    5,050
    
    
    3,624Total
      interest and dividend revenue
    
    
    3,081,937
    
    
    2,465,574Interest
      expenseDeposits
    
    
    621,770
    
    
    618,720Borrowed
      funds
    
    
    128,072
    
    
    10,249Total
      interest expense
    
    
    749,842
    
    
    628,969Net
      interest income
    
    
    2,332,095
    
    
    1,836,605Provision
      for loan losses
    
    
    120,000
    
    
    6,500Net
      interest income afterprovision
      for loan losses
    
    
    2,212,095
    
    
    1,830,105Noninterest
      revenueService
      charges on deposit accounts
    
    
    179,016
    
    
    170,315Other
      noninterest revenue
    
    
    77,778
    
    
    82,223Total
      noninterest revenue
    
    
    256,794
    
    
    252,538Noninterest
      expensesSalaries
      and employee benefits
    
    
    672,283
    
    
    629,710Occupancy
    
    
    55,080
    
    
    61,737Furniture
      and equipment
    
    
    52,772
    
    
    55,743Other
      operating
    
    
    309,401
    
    
    278,538Total
      noninterest expenses
    
    
    1,089,536
    
    
    1,025,728Income
      before income taxes
    
    
    1,379,353
    
    
    1,056,915Income
      taxes
    
    
    519,268
    
    
    397,890Net
      income
    
    $
    860,085
    
    $
    659,025Earnings
      per common share
    
    $
    1.09
    
    $
    0.83
  
 The
accompanying notes are an integral part of these financial
statements.
 
 - 4
-
 ****
 **PEOPLES
BANCORP, INC. AND SUBSIDIARY**
 **Consolidated
Statements of Cash Flows (unaudited)**
 ****
    
    For
      the three months endedMarch
      31**2005**
    
    **2004****CASH
      FLOWS FROM OPERATING ACTIVITIES**Interest
      received
    
    $
    2,925,075
    
    $
    2,468,676Fees
      and commissions received
    
    
    256,794
    
    
    252,538Cash
      paid to suppliers and employees
    
    
    (1,021,562
    )
    
    (557,801
    )Interest
      paid
    
    
    (739,564
    )
    
    (653,307
    )Taxes
      paid
    
    
    (72,968
    )
    
    (482,011
    )1,347,775
    
    
    1,028,095**CASH
      FLOWS FROM INVESTING ACTIVITIES**Cash
      paid for premises, equipment, and software
    
    
    (30,734
    )
    
    (70,394
    )Loans
      made, net of principal collected
    
    
    (12,134,142
    )
    
    (6,625,171
    )Proceeds
      from maturities and calls of securitiesAvailable
      for sale
    
    
    500,000
    
    
    3,000,000Held
      to maturity
    
    
    417
    
    
    884Purchase
      of securities held to maturity
    
    
    (495,937
    )
    
    (1,988,875
    )Purchase
      of FHLB Stock
    
    
    (562,600
    )
    
    0(12,722,996
    )
    
    (5,683,556
    )**CASH
      FLOWS FROM FINANCING ACTIVITIES**Net
      increase (decrease) inTime
      deposits
    
    
    854,501
    
    
    1,360,445Other
      deposits
    
    
    (1,613,760
    )
    
    (1,989,331
    )Securities
      sold under repurchase agreements
    
    
    1,081,626
    
    
    (416,606
    )Advances
      under (repayments of) notes payable
    
    
    11,500,000
    
    
    2,000,000Repurchase
      of stock
    
    
    0
    
    
    0Dividends
      paid
    
    
    (284,044
    )
    
    (269,964
    )11,538,323
    
    
    684,544**NET
      INCREASE (DECREASE) IN CASH**
    
    
    163,102
    
    
    (3,970,917
    )CASH
      AND EQUIVALENTS AT BEGINNING OF PERIOD
    
    
    5,912,835
    
    
    10,988,572CASH
      AND EQUIVALENTS AT END OF PERIOD
    
    $
    6,075,937
    
    $
    7,017,655**RECONCILIATION
      OF NET INCOME TO NET CASH PROVIDED****FROM
      OPERATING ACTIVITIES**Net
      income
    
    $
    860,085
    
    $
    659,025**ADJUSTMENTS**Depreciation
      and amortization
    
    
    45,246
    
    
    58,228Provision
      for loan losses
    
    
    120,000
    
    
    6,500Security
      discount accretion, net of premium amortization
    
    
    1,053
    
    
    4,115Decrease
      (increase) inAccrued
      interest receivable
    
    
    (146,926
    )
    
    3,228Other
      assets
    
    
    (26,161
    )
    
    (67,864
    )Increase
      (decrease) inDeferred
      origination fees and costs, net
    
    
    (10,989
    )
    
    (4,241
    )Accrued
      Interest payable and other liabilities
    
    
    59,167
    
    
    8,965Income
      taxes payable
    
    
    446,300
    
    
    360,139$
    1,347,775
    
    $
    1,028,095
 
 The accompanying notes are an integral part of these
financial statements
 - 5
-
 **Peoples
Bancorp, Inc. and Subsidiary**
 **Notes
to Financial Statements**
  1.
    Basis
      of Presentation
 
 The
accompanying unaudited consolidated financial statements of Peoples Bancorp,
Inc. (the “Company”) and its subsidiary have been prepared in accordance with
generally accepted accounting principles in the United States of America for
interim financial information and with the instructions to Form 10-QSB and
Regulation S-X of the Securities and Exchange Commission. Accordingly, they do
not include all the information and footnotes required by generally accepted
accounting principles for complete financial statements. In the opinion of
management, all adjustments (consisting of normal recurring accruals) considered
necessary for a fair presentation have been included. Operating results for the
three months ended March 31, 2005 are not necessarily indicative of the results
that may be expected for the year ending December 31, 2005 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-KSB for the
year ended December 31, 2004.
 
 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
three months ended March 31, 2005 and 2004, total comprehensive income, net of
taxes, was $804,369 and $646,544, 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.
 
 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 March 31, 2005, rounded to the
approximate thousand dollar of obligation. The Company is not party to any other
off-balance sheet arrangements.
 At
      March 31, 2005Revolving
      Home Equity Lines
    
    $
    3,087,284Commercial
      Real Estate
    
    $
    3,825,974Other
      Unused Commitments
    
    $
    25,413,980Commercial
      Letters of Credit
    
    $
    1,768,886
 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 789,012 for three-month period ended March 31, 2005 and 794,012
for the comparable period in 2004, respectively.
 
 - 6
-
 ****
 **Item
2.** **Management’s
Discussion and Analysis or Plan of Operation.**
 
 The
Company is a Maryland corporation and a bank 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 of Kent County, Maryland (the “Bank”), a
Maryland commercial bank, which it acquired on March 24, 1997.
 
 The Bank
was incorporated on April 13, 1910 and operates five branches located in Kent
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.
 
 **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-QSB. 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 as 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.
 
 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 the Company’s allowance
for loan losses. Such agencies may require the Company 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”.
 
 - 7
-
 
 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
March 31, 2005 Consolidated Financial Statements and Notes thereto included
elsewhere in this report, and in conjunction with the December 31, 2004 audited
Consolidated Financial Statements and Notes thereto and Management’s Discussion
and Analysis or Plan of Operation set forth in the Company’s Annual Report on
Form 10-KSB for the year ended December 31, 2004. When the term “Company” is
used in this report, it means Peoples Bancorp, Inc. and, as the context
requires, the Bank.
 
 **Forward-Looking
Information**
 
 Portions
of this Quarterly Report on Form 10-QSB contain forward-looking statements
within the meaning of The Private Securities Litigation Reform Act of 1995.
Statements that are not historical in nature, including statements that include
the words “anticipate,” “estimate,” “should,” expect,” “believe,” “intend,” and
similar expressions, are expressions about the Company’s confidence, policies,
and strategies, the adequacy of capital levels, and liquidity and are not
guarantees of future performance. Such forward-looking statements involve
certain risks and uncertainties, including economic conditions, competition in
the geographic and business areas in which the Company and the Bank operate,
inflation, fluctuations in interest rates, legislation, and governmental
regulation. These risks and uncertainties are described in more detail the
Company’s Annual Report on Form 10-KSB for the year ended December 31, 2004.
Actual results may differ materially from such forward-looking statements, and
the Company assumes no obligation to update forward-looking statements at any
time.
 
 **FINANCIAL
CONDITION**
 
 **Overview**
 
 Total
assets of the Company at March 31, 2005 were $215,793,864, compared to
$202,945,705 at December 31, 2004, representing an increase of $12,848,159 or
6.33% over December 31, 2004.
 
 Total
liabilities at March 31, 2005 were $194,066,221, compared to $181,738,387 at
December 31, 2004, representing an increase of $12,327,834 or 6.78%.
 
 Stockholders’
equity was $21,727,643 as of March 31, 2005, compared to $21,207,318 as of
December 31, 2004, an increase of $520,325. The increase was due to net income
for the period totaling $860,085 offset by a decrease in the unrealized gain on
securities available for sale net of income taxes of $55,716 and dividends paid
to stockholders of $284,044.
 
 - 8
-
 
 Return on
average equity at March 31, 2005 was 16.13%, compared to 13.23% at March 2004.
Return on average assets was 1.67% for the period ended March 30, 2005, compared
to 1.47% for the same period in 2004.
 
 **Composition
of Loan Portfolio**
 
 At March
31, 2005, loans, net of
unearned income, were $182,617,841, an increase of $12,025,131 since December
31, 2004. 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 $177,009,278 and $139,586,905 during the first quarters of 2005 and 2004,
respectively, which constituted 88.62% and 81.72% of average interest-earning
assets for the respective periods. At March 31, 2005, the Company’s average loan
to deposit ratio was 111.36%, compared to 94.68% at March 31, 2004. The
securities sold under repurchase agreements function like deposits, with the
securities providing collateral in place of the FDIC insurance. The Company’s
ratio of average loans to deposits plus repurchase agreements was 108.21% as of
March 31, 2005, compared to 89.72% at March 31, 2004. The Company extends loans
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
the Company’s loan portfolio. A substantial portion of the Company’s loans are,
however, secured by real estate, and the real estate market in the region will
influence the performance of the Company’s 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 March 31, 2005 is
adequate to cover possible losses in the loan portfolio; 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 loss 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. This allowance may be increased to accommodate reserves for specific
loans identified as substandard during management's loan review. Generally,
however, neither net recoveries nor a decrease in loans will require a negative
provision to reduce the allowance. Therefore, net recoveries and/or decreases in
loans may cause the allowance as a percentage of gross loans to exceed the
Company’s target.
 
 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. As of March 31, 2005 and December 31, 2004, the allowance for loan
losses compared to gross loans was 0.71% and 0.70%, respectively.
 
 - 9
-
 
 The
following table sets forth activity in the Company’s allowance for loan losses
for the periods indicated:
 
 **Allowance
for Loan Losses**
 Three
      months ended
    
    Year
      endedMarch
    
    December2005
    
    2004Balance
      at beginning of year
    
    $
    1,204,274
    
    $
    1,216,881Loan
      losses:Commercial
    
    
    0
    
    
    61,145Mortgages
    
    
    0
    
    
    0Consumer
    
    
    11,607
    
    
    22,806Total
      loan losses
    
    
    11,607
    
    
    83,951Recoveries
      on loans previously charged offCommercial
    
    
    0
    
    
    7,500Mortgages
    
    
    0
    
    
    0Consumer
    
    
    142
    
    
    2,344Total
      loan recoveries
    
    
    142
    
    
    9,844Net
      loan losses
    
    
    11,465
    
    
    74,107Provision
      for loan losses charged to expense
    
    
    120,000
    
    
    61,500Balance
      at end of year
    
    $
    1,312,809
    
    $
    1,204,274Allowance
      for loan losses to loans outstandingat
      end of period
    
    
    0.71
    %
    
    0.70
    %
 
 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.
 
 The
Company had nonperforming loans of $163,700 and $218,092 at March 31, 2005 and
December 31, 2004, respectively. Loans are classified as impaired when the
collection of contractual obligations, including principal and interest, is
doubtful. Management has identified no significant impaired loans as of March
31, 2005 or December
31 ,
2004.
  - 10
-
  **Deposits
and Other Interest-Bearing Liabilities**
 
 Average
interest-bearing deposits increased $7,768,167 or 6.33% to $130,478,739 at March
31, 2005, from $122,710,572 at March 31, 2004. Average noninterest-bearing
deposits increased $3,755,799 or 15.19% to $28,479,072 at March 31, 2005, from
$24,723,273 at March 31, 2004. Average total deposits have increased 7.82% or
$11,523,966 to $158,957,811 at March 31, 2005 from $147,433,845 at March 31,
2004. Borrowings, primarily from the Federal Home Loan Bank of Atlanta,
increased to $22,700,000 or 102.68% from $11,200,000 at December 31, 2004 to
fund strong loan demand.
 
 Deposits,
particularly core deposits, have been the Company’s primary source of funding
and have enabled the Company to meet both its short-term and long-term liquidity
needs. Management anticipates that such deposits will continue to be the
Company’s primary source of funding for the foreseeable future. It should be
noted, however, that there appears to be a new confidence in the overall economy
and stock values appear to be recovering. Renewed investor confidence in
alternatives to deposit accounts, which may pay yields that are higher than
those paid on deposits, could impact the growth of deposits in future periods.
 
 **Liquidity
and Capital Resources**
 
 Liquidity
describes the ability of the Company 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 $20,400,000 from correspondent banks, namely, Bank of
America, Community Bank and M & T Bank. The Bank is also a member of the
Federal Home Loan Bank of Atlanta, which provides another source of liquidity
through a secured line of credit in the amount of $28,410,000 of which
$22,700,000 has been advanced as of March 31, 2005.
 
 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 March 31, 2005 to the minimum ratios required by
federal banking regulators is presented below.
  MinimumActual
    
    RequirementsTier
      1 risk-based capital
    
    
    12.49
    %
    
    4.00
    %Total
      risk-based capital
    
    
    13.25
    %
    
    8.00
    %Leverage
      ratio
    
    
    10.37
    %
    
    4.00
    %
  - 11
-
 ****
 **RESULTS
OF OPERATIONS**
 
 **General**
 
 For the
three-month period ended March 31, 2005, the Company reported net income of
$860,085 or $1.09 per share, compared to $659,025 or $0.83 per share for the
same period in 2004, which represents an increase of $201,060 or 30.51%. This
increase resulted primarily from increases in loan interest income offset by an
increase in the provision for loan losses and an increase in interest expense on
borrowed funds.
 
 **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.
 
 Net
interest income for the three-month period ended March 31, 2005 was $2,332,095,
which represents an increase of $495,490 or 26.98% over $1,836,605 for the same
period in 2004. Interest earned on the increased loan volume generated in the
first three months of 2004, coupled with historically low rates paid on
deposits, contributed to these increases in net interest income.
 
 Interest
revenue for the three months ended March 31, 2005 totaled $3,081,937, compared
to $2,465,574 for the same period last year, representing an increase of
$616,363 or 25.00%. This increase is attributable primarily to an increase in
loan income of $673,856 for the first three months of 2005 offset by a decrease
in Government Agencies Security income of $53,677 over the same time period.
This has resulted from the Bank using maturing securities and increased Federal
Home Bank borrowings to originate new loans.
 
 Interest
expense for the three-month period ended March 31, 2005 totaled $749,842,
compared to $628,969 for the same period last year, representing an increase of
$120,873 or 19.22%. Although deposits have decreased during the first three
months of 2005, the Bank increased its borrowings during the first quarter of
2005 to fund strong loan demand as described above from $11,200,000 at December
31, 2004 to $22,700,000 at March 31, 2005, resulting in an increase to borrowed
funds interest expense during the first quarter of 2005 of $117,823 when
compared to the same period last year.
 
 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 three-month
period ended March 30, 2005, was 4.74%, compared to 4.32% for the same period in
2004. 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. Although these expectations are based on management’s judgment,
actual results may be impacted by a number of unpredictable factors and cannot
be assured.
  - 12
-
  A table
of the Company’s average balances, interest and yields follows.
 
 **Average
Balances, Interest, and Yield**
  For
      the Quarter Ended
    
    For
      the Quarter EndedMarch
      31, 2005
    
    March
      31, 2004Average
    
    
    
    
    
    AverageBalance
    
    Interest
    
    Yield
    
    Balance
    
    Interest
    
    Yield**Assets**Federal
      funds sold
    
    $
    1,445,277
    
    $
    8,416
    
    
    2.36
    %
    $
    5,888,003
    
    $
    13,840
    
    
    0.95
    %Interest-bearing
      deposits
    
    
    19,196
    
    
    246
    
    
    5.20
    %
    
    40,836
    
    
    66
    
    
    0.65
    %Investment
      securities:U.
      S. government agency
    
    
    20,102,275
    
    
    184,961
    
    
    3.73
    %
    
    24,875,049
    
    
    238,638
    
    
    3.86
    %Other
    
    
    1,168,672
    
    
    5,050
    
    
    1.75
    %
    
    410,900
    
    
    3,625
    
    
    3.55
    %Total
      investment securities
    
    
    21,270,947
    
    
    190,011
    
    
    3.62
    %
    
    25,285,949
    
    
    242,262
    
    
    3.85
    %Loans:Demand
      and time
    
    
    34,946,288
    
    
    609,097
    
    
    7.07
    %
    
    26,733,460
    
    
    387,377
    
    
    5.83
    %Mortgage
    
    
    138,374,420
    
    
    2,174,318
    
    
    6.37
    %
    
    109,466,441
    
    
    1,731,690
    
    
    6.36
    %Installment
    
    
    4,927,079
    
    
    99,849
    
    
    8.22
    %
    
    4,595,723
    
    
    90,359
    
    
    7.91
    %Total
      loans
    
    
    178,247,787
    
    
    2,883,264
    
    
    6.56
    %
    
    140,795,624
    
    
    2,209,426
    
    
    6.31
    %Allowance
      for loan losses
    
    
    1,238,509
    
    
    
    
    
    
    
    
    1,208,719Total
      loans, net of allowance
    
    
    177,009,278
    
    
    2,883,264
    
    
    6.61
    %
    
    139,586,905
    
    
    2,209,426
    
    
    6.37
    %Total
      interest-earning assets
    
    
    199,744,698
    
    
    3,081,937
    
    
    6.26
    %
    
    170,801,693
    
    
    2,465,594
    
    
    5.81
    %Non-interest-bearing
      cash
    
    
    4,006,811
    
    
    
    
    
    
    
    
    3,754,457Premises
      and equipment
    
    
    3,791,906
    
    
    
    
    
    
    
    
    3,750,308Other
      assets
    
    
    1,687,024
    
    
    
    
    
    
    
    
    1,506,642Total
      assets
    
    $
    209,230,439
    
    
    
    
    
    
    
    $
    179,813,100Liabilities
      and Stockholders’ EquityInterest-bearing
      DepositsSavings
      and NOW deposits
    
    $
    45,028,323
    
    $
    38,247
    
    
    0.34
    %
    $
    42,265,528
    
    $
    42,806
    
    
    0.41
    %Money
      market and supernow
    
    
    20,595,085
    
    
    27,356
    
    
    0.54
    %
    
    15,537,436
    
    
    22,493
    
    
    0.58
    %Other
      time deposits
    
    
    64,855,331
    
    
    512,309
    
    
    3.20
    %
    
    64,907,607
    
    
    548,864
    
    
    3.40
    %Total
      interest-bearing deposits
    
    
    130,478,739
    
    
    577,912
    
    
    1.80
    %
    
    122,710,572
    
    
    614,163
    
    
    2.01
    %Borrowed
      funds
    
    
    27,782,863
    
    
    171,930
    
    
    2.51
    %
    
    11,332,464
    
    
    14,814
    
    
    0.53
    %Total
      interest-bearing liabilities
    
    
    158,261,602
    
    
    749,842
    
    
    1.92
    %
    
    134,043,036
    
    
    628,976
    
    
    1.89
    %Noninterest-bearing
      deposits
    
    
    28,479,072
    
    
    
    
    
    
    
    
    24,723,273186,740,674
    
    
    
    
    
    
    
    
    158,766,309Other
      liabilities
    
    
    870,443
    
    
    
    
    
    
    
    
    846,261Stockholders’
      equity
    
    
    21,619,322
    
    
    
    
    
    
    
    
    20,200,530Total
      liabilities and stockholders equity
    
    $
    209,230,439
    
    
    
    
    
    
    
    $
    179,813,100Net
      interest spread
    
    
    
    
    
    
    
    
    4.34
    %
    
    
    
    
    
    
    
    3.92
    %Net
      interest income
    
    
    
    
    $
    2,332,095
    
    
    
    
    
    
    
    $
    1,836,618Net
      margin on interest-earning assets
    
    
    
    
    
    
    
    
    4.74
    %
    
    
    
    
    
    
    
    4.32
    %
 Interest
      on tax-exempt loans and investments are reported on fully taxable
      equivalent basis (a non GAAP financial measure).
 ****
 - 13
-
 ****
 **Noninterest
Revenue**
 
 Noninterest
revenue for the three-month period ended March 31, 2005 totaled $256,794, which
represents an increase of 1.69% over $252,538 for the same period in 2004.
Income from service charges has remained stable when compared to the first
quarter of 2004, resulting in part from the fact that the Company has not
materially increased service charges.
 
 **Noninterest
Expense**
 
 The
Company recorded noninterest expense of $1,089,536 for the three-month period
ended March 31, 2005, compared to $1,025,728 for the same period in 2004, an
increase of $63,808 or 6.22%. This increase is mainly attributable to increased
salaries and employee benefits of $42,573, the addition of regulatory compliance
consulting fees of $6,479 and data processing fees charged by outside processors
of $13,872.
 
 **Income
Tax Expense**
 
 The
Company’s effective tax rate for the three month period ended March 31, 2005 was
37.6%, compared to 37.7% for the respective period in 2004. The Company’s income
tax expense was $519,268 for the three months ended March 31, 2005, compared to
$397,890 for the same period in 2004, which represents an increase of $121,378
or 30.51%. Increases in net interest income during the three month period ended
March 31, 2005 contributed to the increase in income tax expense when compared
to the same period last year.
 
 **Item
3.** **Controls
and Procedures.**
 
 The
Company maintains disclosure controls and procedures that are designed to ensure
that information required to be disclosed in the Company’s reports filed 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 the Company’s
management, including the President and Chief Executive Officer, who also serves
as the Company’s Chief Financial Officer (the “CEO”), 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 March 31, 2005 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 the Company’s disclosure
controls and procedures are effective.
 
 - 14
-
 
 During
the first quarter of 2005, there was no change in the Company’s internal control
over financial reporting that has materially affected, or is reasonably likely
to materially affect, the Company’s internal control over financial
reporting.
 
 **PART
II - OTHER INFORMATION**
  **Item
1.** **Legal
Proceedings.**
 
 None.
 
 **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.**
  3.1
    Articles
      of Incorporation of the Company, as corrected and amended (incorporated by
      reference to Exhibit 3.1 of the Company’s Current Report on Form 8-K filed
      on January 24, 2005)3.2
    Bylaws
      of the Company, as amended (incorporated by reference to Exhibit 3.2 of
      the Company’s Annual Report on Form 10-K for the year ended December 31,
      2004)31.1
    Certifications
      of the Chief Executive Officer and Chief Financial Officer pursuant to
      Section 302 of the Sarbanes-Oxley Act of 2002 (filed
    herewith)32.1
    Certifications
      of the Chief Executive Officer and Chief Financial Officer pursuant to 18
      U.S.C. § 1350 (furnished herewith)
 - 15
-
  **SIGNATURES**
 
 In
accordance with the requirements of the Exchange Act, the registrant has
caused **** this
report to be signed on its behalf by the undersigned, thereunto duly
authorized.
  **PEOPLES BANCORP,
      INC.**Date: May 11, 2005
    By:
    /s/ Thomas G.
    StevensonThomas G. StevensonPresident/Chief
      Executive Officer
      &
      Chief Financial Officer
  - 16
-
   **EXHIBIT
INDEX**
 
 Exhibit
      No.
    Description3.1
    Articles
      of Incorporation of the Company, as corrected and amended (incorporated by
      reference to Exhibit 3.1 of the Company’s Current Report on Form 8-K filed
      on January 24, 2005)3.2
    Bylaws
      of the Company, as amended (incorporated by reference to Exhibit 3.2 of
      the Company’s Annual Report on Form 10-K for the year ended December 31,
      2004)31.1
    Certifications
      of the Chief Executive Officer and Chief Financial Officer pursuant to
      Section 302 of the Sarbanes-Oxley Act of 2002 (filed
    herewith)32.1
    Certifications
      of the Chief Executive Officer and Chief Financial Officer pursuant to 18
      U.S.C. § 1350 (furnished herewith)
 - 17
-