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 March 31,
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 R  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
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
                      R(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
R
 
 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:779,512 shares
of common stock issued and outstanding as of May 1, 2009
  
  PEOPLES
BANCORP, INC.
 
 FORM
10-Q
 INDEX
 
 PagePart
      I – Financial InformationItem
      1.
                Financial
      Statements
                3Consolidated
      Balance Sheets at March 31, 2009 (unaudited) and December 31,
      2008
                3Consolidated
      Statements of Income (unaudited) for the three months ended March 31, 2009
      and 2008
                4Consolidated
      Statements of Changes in Stockholders’ Equity (unaudited) for the three
      months ended March 31, 2009 and 2008
                5Consolidated
      Statements of Cash Flows (unaudited) for the three months ended March 31,
      2009 and 2008
                6Notes
      to Financial Statements (unaudited)
                8Item
      2.
                Management’s
      Discussion and Analysis of Financial Condition and Results of
      Operations
                13Item
      3.
                Quantitative
      and Qualitative Disclosures About Market Risk.
                22Item
      4.
                Controls
      and Procedures
                22Part
      II – Other InformationItem
      1.
                Legal
      Proceedings
                22Item
      1A.
                Risk
      Factors
                23Item
      2.
                Unregistered
      Sales of Equity Securities and Use of Proceeds
                23Item
      3.
                Defaults
      Upon Senior Securities
                23Item
      4.
                Submission
      of Matters to a Vote of Security Holders
                23Item
      5.
                Other
      Information
                23Item
      6.
                Exhibits
                23Signatures
                23Exhibit
      Index
                24
  - 2
-
  PART
I - FINANCIAL INFORMATION
 
 Item
      1.
              Financial
      Statements.
 PEOPLES
BANCORP, INC. AND SUBSIDIARIES
 CONSOLIDATED
BALANCE SHEETS
 
 March 31,
                    
                    
                    December, 312009
                    
                    
                    2008(unaudited)ASSETSCash
      and due from banks
                    
                    $
                    8,543,448
                    
                    
                    $
                    3,789,925Federal
      funds sold
                    
                    
                    7,017,407
                    
                    
                    
                    3,896,890Cash
      and cash equivalents
                    
                    
                    15,560,855
                    
                    
                    
                    7,686,815Securities
      available for sale
                    
                    
                    3,042,390
                    
                    
                    
                    4,077,898Securities
      held to maturity (approximate fair value of $10,424,981 and
      $10,430,709)
                    
                    
                    10,058,363
                    
                    
                    
                    10,055,715Federal
      Home Loan Bank stock, at cost
                    
                    
                    2,341,200
                    
                    
                    
                    2,494,000Loans,
      less allowance for loan losses of $2,259,011 and
$2,001,739
                    
                    
                    210,335,087
                    
                    
                    
                    214,679,949Premises
      and equipment
                    
                    
                    6,496,505
                    
                    
                    
                    6,523,845Goodwill
      and intangible assets
                    
                    
                    722,413
                    
                    
                    
                    712,932Accrued
      interest receivable
                    
                    
                    1,284,740
                    
                    
                    
                    1,582,688Deferred
      income taxes
                    
                    
                    636,806
                    
                    
                    
                    858,423Foreclosed
      real estate
                    
                    
                    1,340,000
                    
                    
                    
                    1,407,000Other
      assets
                    
                    
                    1,306,549
                    
                    
                    
                    1,814,970Total
      Assets
                    
                    $
                    253,124,908
                    
                    
                    $
                    251,894,235LIABILITIES
      AND STOCKHOLDERS' EQUITYDepositsNon-interest
      bearing
                    
                    $
                    32,978,015
                    
                    
                    $
                    34,387,604Interest-bearing
                    
                    
                    134,921,937
                    
                    
                    
                    131,350,969167,899,952
                    
                    
                    
                    165,738,573Securities
      sold under repurchase agreements
                    
                    
                    11,877,442
                    
                    
                    
                    9,959,539Federal
      funds purchased
                    
                    
                    -
                    
                    
                    
                    2,170,000Federal
      Home Loan Bank advances
                    
                    
                    42,000,000
                    
                    
                    
                    43,000,000Other
      borrowings
                    
                    
                    144,405
                    
                    
                    
                    173,216Accrued
      interest payable
                    
                    
                    430,810
                    
                    
                    
                    441,832Other
      liabilities
                    
                    
                    2,052,933
                    
                    
                    
                    1,968,151224,405,542
                    
                    
                    
                    223,451,311Stockholders'
      equityCommon
      stock, par value $10 per share; 1,000,000 shares authorizes; issued and
      outstanding 779,512 shares at March 31, 2009 and at December 31,
      2008
                    
                    
                    7,795,120
                    
                    
                    
                    7,795,120Additional
      paid-in capital
                    
                    
                    2,920,866
                    
                    
                    
                    2,920,866Retained
      earnings
                    
                    
                    18,671,133
                    
                    
                    
                    18,370,79729,387,119
                    
                    
                    
                    29,086,783Accumulated
      other comprehensive income (loss)Unrealized
      gain(loss) on available for sale securities
                    
                    
                    28,071
                    
                    
                    
                    51,965Unfunded
      liability of defined benefit plan
                    
                    
                    (695,824
                    )
                    
                    
                    (695,824
                    )28,719,366
                    
                    
                    
                    28,442,924Total Liabilities
      and Stockholders' Equity
                    
                    $
                    253,124,908
                    
                    
                    $
                    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 March 31,2009
                  
                  
                  2008Interest
      and dividend revenueLoans,
      including fees
                  
                  $
                  3,442,891
                  
                  
                  $
                  3,857,843U.S.
      government agency securities
                  
                  
                  152,193
                  
                  
                  
                  205,232Deposit
      in other banks
                  
                  
                  24
                  
                  
                  
                  8,882Federal
      funds sold
                  
                  
                  2,020
                  
                  
                  
                  49,259Equity
      securities
                  
                  
                  -
                  
                  
                  
                  43,821Total
      interest and dividend revenue
                  
                  
                  3,597,128
                  
                  
                  
                  4,165,037Interest
      expenseDeposits
                  
                  
                  748,530
                  
                  
                  
                  958,605Borrowed
      funds
                  
                  
                  444,123
                  
                  
                  
                  691,488Total
      interest expense
                  
                  
                  1,192,653
                  
                  
                  
                  1,650,093Net
      interest income
                  
                  
                  2,404,475
                  
                  
                  
                  2,514,944Provision
      for loan losses
                  
                  
                  430,000
                  
                  
                  
                  120,000Noninterest
      revenueService
      charges on deposit accounts
                  
                  
                  226,139
                  
                  
                  
                  234,075Insurance
      commissions
                  
                  
                  476,675
                  
                  
                  
                  441,143Other
      noninterest revenue
                  
                  
                  119,991
                  
                  
                  
                  96,823Total
      noninterest revenue
                  
                  
                  822,805
                  
                  
                  
                  772,041Noninterest
      expenseSalaries
      and employee benefits
                  
                  
                  1,101,156
                  
                  
                  
                  1,094,894Occupancy
                  
                  
                  117,514
                  
                  
                  
                  104,367Furniture
      and equipment
                  
                  
                  77,692
                  
                  
                  
                  73,208Other
      operating
                  
                  
                  466,493
                  
                  
                  
                  451,944Total
      noninterest expense
                  
                  
                  1,762,855
                  
                  
                  
                  1,724,413Income
      before income taxes
                  
                  
                  1,034,425
                  
                  
                  
                  1,442,572Income
      taxes
                  
                  
                  391,103
                  
                  
                  
                  532,615Net
      income
                  
                  $
                  643,322
                  
                  
                  $
                  909,957Earnings
      per common share - basic and diluted
                  
                  $
                  0.83
                  
                  
                  $
                  1.16
 
 The
accompanying notes are an integral part of these consolidated financial
statements.
  - 4
-
  PEOPLES
BANCORP, INC. AND SUBSIDIARIES
 Consolidated Statements of
Changes in Stockholders’ Equity (unaudited)
 
 THREE
      MONTHS ENDED MARCH 31, 2009 and 2008AccumulatedAdditional
                          
                          
                          
                          
                          
                          otherpaid-in
                          
                          
                          Retained
                          
                          
                          comprehensive
                          
                          
                          ComprehensivePar
      value
                          
                          
                          capital
                          
                          
                          earnings
                          
                          
                          income
                          
                          
                          incomeBalance,
      December 31, 2007
                          
                          $
                          7,855,120
                          
                          
                          $
                          2,920,866
                          
                          
                          $
                          17,997,286
                          
                          
                          $
                          (733,478
                          )Net
      income
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          909,957
                          
                          
                          
                          -
                          
                          
                          $
                          909,957Unrealized
      gain on investment securities available for sale net of income taxes of
      $26,494
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          43,300
                          
                          
                          
                          43,300Comprehensive
      income
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          $
                          953,257Cash
      dividend, $0.43 per share
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          (337,770
                          )
                          
                          
                          -Balance,
      March 31, 2008
                          
                          $
                          7,855,120
                          
                          
                          $
                          2,920,866
                          
                          
                          $
                          18,569,473
                          
                          
                          $
                          (690,178
                          )Balance,
      December 31, 2008
                          
                          $
                          7,795,120
                          
                          
                          $
                          2,920,866
                          
                          
                          $
                          18,370,797
                          
                          
                          $
                          (643,859
                          )Net
      income
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          643,322
                          
                          
                          
                          -
                          
                          
                          $
                          643,322Unrealized
      gain on investmentsecurities available for sale netof income taxes of
      ($15,034)
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          (23,894
                          )
                          
                          
                          (23,894
                          )Comprehensive
      income
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          $
                          619,428Cash
      dividend, $.44 per share
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          (342,985
                          )
                          
                          
                          -Balance,
      March 31, 2009
                          
                          $
                          7,795,120
                          
                          
                          $
                          2,920,866
                          
                          
                          $
                          18,671,133
                          
                          
                          $
                          (667,753
                          )
 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 three months ended March 31,2009
                  
                  
                  2008CASH
      FLOWS FROM OPERATING ACTIVITIESInterest
      received
                  
                  $
                  3,901,468
                  
                  
                  $
                  4,512,620Fees
      and commissions received
                  
                  
                  806,659
                  
                  
                  
                  772,041Cash
      paid to suppliers and employees
                  
                  
                  (546,909
                  )
                  
                  
                  (1,340,067
                  )Interest
      paid
                  
                  
                  (1,203,674
                  )
                  
                  
                  (1,679,264
                  )Taxes
      paid
                  
                  
                  (679,680
                  )
                  
                  
                  (343,694
                  )2,277,864
                  
                  
                  
                  1,921,636CASH
      FLOWS FROM INVESTING ACTIVITIESCash
      paid for premises, equipment, and software
                  
                  
                  (54,294
                  )
                  
                  
                  (191,242
                  )Loans
      made, net of principal collected
                  
                  
                  3,902,205
                  
                  
                  
                  3,577,388Proceeds
      from sale of foreclosed real estate
                  
                  
                  83,144
                  
                  
                  
                  0Proceeds
      from maturities and calls of securitiesAvailable
      for sale
                  
                  
                  1,000,000
                  
                  
                  
                  0Held
      to maturity
                  
                  
                  1,000,179
                  
                  
                  
                  2,000,289Purchase
      of securities available for sale
                  
                  
                  0
                  
                  
                  
                  0Purchase
      of securities held to maturity
                  
                  
                  (1,000,000
                  )
                  
                  
                  (993,370
                  )Acquisition
      of Insurance agency, net
                  
                  
                  (25,344
                  )
                  
                  
                  0Redemption
      of FHLB stock, net of purchases
                  
                  
                  152,800
                  
                  
                  
                  133,6005,058,690
                  
                  
                  
                  4,526,665CASH
      FLOWS FROM FINANCING ACTIVITIESNet
      increase (decrease) inTime
      deposits
                  
                  
                  3,735,050
                  
                  
                  
                  (32,303
                  )Other
      deposits
                  
                  
                  (1,573,671
                  )
                  
                  
                  (1,943,710
                  )Securities
      sold under repurchase agreements
                  
                  
                  (252,097
                  )
                  
                  
                  (383,285
                  )Advances
      under (repayments of) notes payable, net
                  
                  
                  (1,000,000
                  )
                  
                  
                  (2,000,000
                  )Repayments
      of other borrowings
                  
                  
                  (28,811
                  )
                  
                  
                  (8,422
                  )Repurchase
      of Stock
                  
                  
                  0
                  
                  
                  
                  0Dividends
      paid
                  
                  
                  (342,985
                  )
                  
                  
                  (337,770
                  )537,486
                  
                  
                  
                  (4,705,490
                  )NET
      INCREASE (DECREASE) IN CASH
                  
                  
                  7,874,040
                  
                  
                  
                  1,742,811CASH
      AND EQUIVALENTS AT BEGINNING OF PERIOD
                  
                  
                  7,686,815
                  
                  
                  
                  9,840,142CASH
      AND EQUIVALENTS AT END OF PERIOD
                  
                  $
                  15,560,855
                  
                  
                  $
                  11,582,953
  - 6
-
  PEOPLES
BANCORP, INC. AND SUBSIDIARIES
 Consolidated
Statements of Cash Flows, Continued (unaudited)
 
 For the three months ended March 31,2009
                        
                        
                        2008RECONCILIATION
      OF NET INCOME TO NET CASH PROVIDEDFROM
      OPERATING ACTIVITIESNet
      income
                        
                        $
                        643,322
                        
                        
                        $
                        909,957ADJUSTMENTSDepreciation
      and amortization
                        
                        
                        82,088
                        
                        
                        
                        70,101Provision
      for loan losses
                        
                        
                        430,000
                        
                        
                        
                        120,000Amortization
      of intangible assets
                        
                        
                        15,862
                        
                        
                        
                        13,750Security
      discount accretion, net of premium amortization
                        
                        
                        (6,265
                        )
                        
                        
                        (7,145
                        )Gain
      of sale of foreclosed real estate
                        
                        
                        (16,145
                        )
                        
                        
                        0Decrease
      (increase) inAccrued
      interest receivable
                        
                        
                        297,948
                        
                        
                        
                        348,950Income
      Tax refund receivable
                        
                        
                        (288,577
                        )
                        
                        
                        188,921Other
      assets
                        
                        
                        1,033,214
                        
                        
                        
                        291,826Increase
      (decrease) inDeferred
      origination fees and costs, net
                        
                        
                        12,657
                        
                        
                        
                        5,778Accrued
      interest payable and other liabilities
                        
                        
                        (11,022
                        )
                        
                        
                        (29,171
                        )Income
      taxes payable
                        
                        
                        0
                        
                        
                        
                        0Other
      Liabilities
                        
                        
                        84,782
                        
                        
                        
                        8,669$
                        2,277,864
                        
                        
                        $
                        1,921,636
 
 The
accompanying notes are an integral part of these consolidated financial
statements.
  - 7
-
  Peoples
Bancorp, Inc. and Subsidiaries
 Notes
to Consolidated Financial Statements
 
 1.
              Basis
      of Presentation
 
 The
accompanying unaudited consolidated financial statements of Peoples Bancorp,
Inc. (the “Company”) 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 months ended March 31, 2009 are not necessarily indicative of the results
that may be expected for the full 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.
 
 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,
2009 and 2008, total comprehensive income, net of taxes, was $619,428 and
$953,257 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, 2009 and December 31, 2008.
 
 At March 31, 2009
                    
                    
                    December 31, 2008Revolving
      Home Equity Lines
                    
                    $
                    3,774,722
                    
                    
                    $
                    3,993,3751-4
      Family Residential Construction loans
                    
                    $
                    387,398
                    
                    
                    $
                    1,028,568Commercial
      Real Estate
                    
                    $
                    4,849,087
                    
                    
                    $
                    4,262,266Other
      Unused Commitments
                    
                    $
                    18,062,912
                    
                    
                    $
                    17,250,351Commercial
      Letters of Credit
                    
                    $
                    4,535,590
                    
                    
                    $
                    5,278,824
  - 8
-
 
 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 and 785,512 for three-month periods ended March 31, 2009
and 2008, 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 10
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 three months ended March
31, 2009 and 2008, the Bank recognized net periodic costs for this plan of
$77,648 and $71,314, respectively.  The Bank did not contribute to the
plan during these three-month periods.
 
 7.
              Segment
      Reporting
 
 The Company operates two primary
businesses: Community Banking and Insurance Products & 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.
 
 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.
  - 9
-
  Selected financial information by
line of business is included in the following table:
 For
      the three months ended March31,
      2009
                  
                  Community
                    banking
                  
                  
                  Insurance
                    products
                    and services
                  
                  
                  Intersegment
                    Transactions
                  
                  
                  Consolidated
                    TotalNet
      interest income
                  
                  $
                  2,407,134
                  
                  
                  $
                  -2,659
                  
                  
                  $
                  0
                  
                  
                  $
                  2,404,475Provision
      for loan losses
                  
                  
                  430,000
                  
                  
                  
                  0
                  
                  
                  
                  0
                  
                  
                  $
                  430,000Net
      interest income after provision
                  
                  
                  1,977,134
                  
                  
                  
                  -2,659
                  
                  
                  
                  0
                  
                  
                  
                  1,974,475Noninterest
      revenue
                  
                  
                  343,530
                  
                  
                  
                  479,275
                  
                  
                  
                  0
                  
                  
                  $
                  822,805Noninterest
      expense
                  
                  
                  1,542,849
                  
                  
                  
                  220,006
                  
                  
                  
                  0
                  
                  
                  $
                  1,762,855Income
      before income taxes
                  
                  
                  777,815
                  
                  
                  
                  256,610
                  
                  
                  
                  0
                  
                  
                  
                  1,034,425Income
      taxes
                  
                  
                  289,883
                  
                  
                  
                  101,220
                  
                  
                  
                  0
                  
                  
                  $
                  391,103Net
      income
                  
                  $
                  487,932
                  
                  
                  $
                  155,390
                  
                  
                  $
                  0
                  
                  
                  $
                  643,322Average
      assets
                  
                  $
                  249,672,624
                  
                  
                  $
                  1,689,292
                  
                  
                  $
                  -444,445
                  
                  
                  $
                  250,917,471
 
 For
      the three months ended March 31, 2008
                  
                  Community
                    banking
                  
                  
                  Insurance
                    products
                    and services
                  
                  
                  Intersegment
                    Transactions
                  
                  
                  Consolidated
                    TotalNet
      interest income
                  
                  $
                  2,517,181
                  
                  
                  $
                  -2,237
                  
                  
                  $
                  0
                  
                  
                  $
                  2,514,944Provision
      for loan losses
                  
                  
                  120,000
                  
                  
                  
                  0
                  
                  
                  
                  0
                  
                  
                  
                  120,000Net
      interest income after provision
                  
                  
                  2,397,181
                  
                  
                  
                  -2,237
                  
                  
                  
                  0
                  
                  
                  
                  2,394,944Noninterest
      revenue
                  
                  
                  329,413
                  
                  
                  
                  442,628
                  
                  
                  
                  0
                  
                  
                  
                  772,041Noninterest
      expense
                  
                  
                  1,488,065
                  
                  
                  
                  236,348
                  
                  
                  
                  0
                  
                  
                  
                  1,724,413Income
      before income taxes
                  
                  
                  1,238,529
                  
                  
                  
                  204,043
                  
                  
                  
                  0
                  
                  
                  
                  1,442,572Income
      taxes
                  
                  
                  464,835
                  
                  
                  
                  67,780
                  
                  
                  
                  0
                  
                  
                  
                  532,615Net
      income
                  
                  $
                  773,694
                  
                  
                  $
                  136,263
                  
                  
                  $
                  0
                  
                  
                  $
                  909,957Average
      assets
                  
                  $
                  258,424,281
                  
                  
                  $
                  1,534,243
                  
                  
                  $
                  -264,743
                  
                  
                  $
                  259,693,781
 
 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 a sole proprietor insurance
agency from a director for approximately $25,000.
 
 During
the three months ended March 31, 2009, the Company recorded amortization of
intangible assets of $15,862.
 
 9.           Fair
Value
 
 On  January 1,
2008 the Company adopted Financial Standards Accounting Board (“FASB”) Statement
of Financial Accounting Standards (“SFAS”) No. 157, Fair Value Measurements
(“SFAS No. 157”).   The adoption of SFAS No. 157 had no
affect on the Company’s December 31, 2008 or March 31, 2009
Consolidated Balance Sheets or the Consolidated Statement of Income for the
three months ended March 31, 2009.
  - 10
-
  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.
 
 Securities
available for sale— Where quoted prices are available in an active market,
securities 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
                        
                        $
                        3,042,390
                        
                        
                        $
                        -
                        
                        
                        $
                        3,042,390
                        
                        
                        $
                        -
 
 Certain
other assets are measured at fair value on a nonrecurring
basis.  These adjustment 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 three 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 assets at period end.
 
 Total
                    
                    
                    (Level
      1)
                    
                    
                    (Level
      2)
                    
                    
                    (Level
      3)Foreclosed
      real estate owned
                    
                    $
                    1,340,000
                    
                    
                    $
                    -
                    
                    
                    $
                    1,340,000
                    
                    
                    $
                    -
 
 During
the first three months of 2009, the Company recognized no write-downs of
foreclosed properties.
  - 11
-
  10.
              Recent
      Accounting Standards
 
 The
following are recent accounting pronouncements approved by the Financial
Accounting Standards Board (FASB).  These Statements will not have any
material impact on the financial statements of the Company.
 
 Effective
January 1, 2009, the Company adopted the FASB Staff Position (“FSP”)
No. 142-3, “Determination
of the Useful Life of Intangible Assets” (“FSP No. 142-3”), which
amends the factors considered in developing renewal or extension assumptions
used to determine the useful life of a recognized intangible asset under SFAS
No. 142. FSP No. 142-3 requires a consistent approach between the
useful life of a recognized intangible asset under SFAS No. 142 and the
period of expected cash flows used to measure the fair value of an asset under
SFAS No. 141(R). The FSP also requires enhanced disclosures when an
intangible asset’s expected future cash flows are affected by an entity’s intent
and/or ability to renew or extend the arrangement. The adoption did not have any
impact on the Company’s consolidated results of operations or financial
condition.
 
 Effective
January 1, 2009, the Company adopted SFAS No. 161, “Disclosures about Derivative
Instruments and Hedging Activities—an amendment of FASB Statement
No. 133” (“SFAS 161”). The standard requires additional
quantitative disclosures (provided in tabular form) and qualitative disclosures
for derivative instruments. The required disclosures include how derivative
instruments and related hedged items affect an entity’s financial position,
financial performance, and cash flows; the relative volume of derivative
activity; the objectives and strategies for using derivative instruments; the
accounting treatment for those derivative instruments formally designated as the
hedging instrument in a hedge relationship; and the existence and nature of
credit-risk-related contingent features for derivatives.  SFAS 161
does not change the accounting treatment for derivative instruments. The Company
adopted the disclosures required by SFAS 161 in the first quarter of fiscal
2009. Since SFAS 161 only required additional disclosure, the adoption did not
impact the Company’s consolidated results of operations, financial condition or
cash flows.
  Effective
January 1, 2009, the Company adopted FSP 157-2, “Effective Date of FASB Statement
No. 157” (“FSP 157-2”). FSP 157-2 delayed the effective date of
SFAS 157 for all non-financial assets and non-financial liabilities, except
for items that are recognized or disclosed at fair value in the financial
statements on a recurring basis (at least annually), until the beginning of the
first quarter of fiscal 2009. These include goodwill and other non-amortizable
intangible assets. The adoption of SFAS 157 to non-financial assets and
liabilities did not have a significant impact on the Company’s consolidated
financial statements.
  Effective
January 1, 2009, the Company adopted SFAS No. 141 (revised 2007),
“Business Combinations”
(“SFAS 141(R)”).  Under SFAS 141(R), an entity is required to
recognize the assets acquired, liabilities assumed, contractual contingencies,
and contingent consideration at their fair value on the acquisition date. It
further requires that acquisition-related costs be recognized separately from
the acquisition and expensed as incurred; that restructuring costs generally be
expensed in periods subsequent to the acquisition date; and that changes in
accounting for deferred tax asset valuation allowances and acquired income tax
uncertainties after the measurement period be recognized as a component of
provision for taxes. In addition, acquired in-process research and development
is capitalized as an intangible asset and amortized over its estimated useful
life.  The adoption of SFAS 141 (R) did not have any impact on the
Company’s consolidated financial statements.
  - 12
-
  Item
      2.
              Management’s
      Discussion and Analysis of Financial Condition and Results of
      Operations.
 
 Peoples Bancorp, Inc. (the “Company”)
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.
  - 13
-
  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 manage 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 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.
  - 14
-
 RESULTS
OF OPERATIONS
 
 General
 
 For the three-month period ended March
31, 2009, the Company reported net income of $643,322 or $0.83 per share,
compared to $909,957 or $1.16 per share for the same period of 2008, which
represents a decrease of $266,635 or 29.30%.  This decrease resulted
primarily from a decrease in net interest income and increased funding of the
loan loss reserve.  If earned, the Insurance Agency receives its
annual contingent sales commission, which constitutes noninterest revenue,
during the first quarter of the year.  Accordingly, it is important to
consider the timing of this revenue when comparing noninterest revenue for the
first quarter of a year to any other quarter of the 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 three-month period ended March 31, 2009 was 4.22%,
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 March 31, 2009 was $2,404,475, which represents a decrease of
$110,469 or 4.39% over net interest income for the same period of
2008.  The primary contributor to this decrease was lower interest
rates on loans and deposits in other banks.  This was a direct result
of a reduction in the federal funds rate from 2.25% at March 31, 2008 to 0.25%
at March 31, 2009.  The 200 basis-point reduction in interest rates by
the Federal Reserve in the first quarter of 2008 had a significant and immediate
impact on the overall yield on earning assets, while reductions on the rates we
pay on deposit have lagged due to certificate of deposit rates that do not
re-price until the certificate matures.  Another major reduction was
due to the Federal Home Loan Bank (the “FHLB”) of Atlanta not declaring a
dividend on its outstanding stock held at December 31, 2008.
 
 Interest revenue for the three months
ended March 31, 2009 totaled $3,597,128, compared to $4,165,037 for the same
period last year, representing a decrease of $567,909 or 13.64%.  We
have experienced a $414,952 decrease in interest earned on loans as a direct
result of our average loan balances decreasing by $2,570,514 (net of the
allowance for loan losses) when compared to the first quarter of
2008.  Additionally, the 100% loss of income on equity securities for
the first quarter of 2009 reduced interest income by $43,821 over the same time
period last year.
 
 Interest expense for the three-month
period ended March 31, 2009 totaled $1,192,653, compared to $1,650,093 for the
same period last year, representing an decrease of $457,440 or
27.72%.  Deposits were $167,899,952 at March 31, 2009, compared to
$165,738,573 at December 31, 2008 and $167,076,236 at March of
2008.  The Company decreased its FHLB borrowings during the first
quarter of 2009 from $43,000,000 at December 31, 2008 to $42,000,000 at March
31, 2009.  FHLB borrowings at March 31, 2008 were
$51,000,000.  As a result, interest expense on borrowed funds for the
first quarter of 2009 dropped $247,365 when compared to the three months ended
March 31, 2008.  The Company assumed approximately $450,000 of debt in
connection with the acquisition of the Insurance Agency in 2007, which has been
reduced to $144,405 as of March 31, 2009.
  - 15
-
  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, 2009
                      
                      
                      March 31, 2008Average
                      
                      
                      
                      
                      
                      
                      
                      
                      AverageBalance
                      
                      
                      Interest
                      
                      
                      Yield
                      
                      
                      Balance
                      
                      
                      Interest
                      
                      
                      YieldAssetsFederal
      funds sold
                      
                      $
                      4,036,172
                      
                      
                      $
                      2,020
                      
                      
                      
                      0.20
                      %
                      
                      $
                      6,382,608
                      
                      
                      $
                      49,259
                      
                      
                      
                      3.10
                      %Interest-bearing
      deposits
                      
                      
                      64,448
                      
                      
                      
                      25
                      
                      
                      
                      0.16
                      %
                      
                      
                      1,220,209
                      
                      
                      
                      9,312
                      
                      
                      
                      3.07
                      %Investment
      securities:U.  S.  government
      agency
                      
                      
                      13,563,914
                      
                      
                      
                      159,561
                      
                      
                      
                      4.77
                      %
                      
                      
                      17,931,208
                      
                      
                      
                      215,166
                      
                      
                      
                      4.83
                      %Other
                      
                      
                      0
                      
                      
                      
                      0
                      
                      
                      
                      0
                      %
                      
                      
                      0
                      
                      
                      
                      0
                      
                      
                      
                      0
                      %FHLB
      of Atlanta Stock
                      
                      
                      2,396,500
                      
                      
                      
                      0
                      
                      
                      
                      0
                      %
                      
                      
                      2,866,112
                      
                      
                      
                      45,944
                      
                      
                      
                      6.45
                      %Total
      investment securities
                      
                      
                      15,960,414
                      
                      
                      
                      159,561
                      
                      
                      
                      4.05
                      %
                      
                      
                      20,797,320
                      
                      
                      
                      261,110
                      
                      
                      
                      5.05
                      %Loans:Demand
      and time
                      
                      
                      39,905,289
                      
                      
                      
                      597,277
                      
                      
                      
                      6.07
                      %
                      
                      
                      40,467,718
                      
                      
                      
                      737,885
                      
                      
                      
                      7.33
                      %Mortgage
                      
                      
                      171,556,117
                      
                      
                      
                      2,783,311
                      
                      
                      
                      6.58
                      %
                      
                      
                      173,294,508
                      
                      
                      
                      3,039,470
                      
                      
                      
                      7.05
                      %Installment
                      
                      
                      3,986,675
                      
                      
                      
                      79,500
                      
                      
                      
                      8.09
                      %
                      
                      
                      4,680,130
                      
                      
                      
                      97,963
                      
                      
                      
                      8.42
                      %Total
      loans
                      
                      
                      215,448,081
                      
                      
                      
                      3,460,088
                      
                      
                      
                      6.51
                      %
                      
                      
                      218,442,356
                      
                      
                      
                      3,875,318
                      
                      
                      
                      7.14
                      %Allowance
      for loan losses
                      
                      
                      1,932,944
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      2,356,705Total
      loans, net of allowance
                      
                      
                      213,515,137
                      
                      
                      
                      3,460,088
                      
                      
                      
                      6.57
                      %
                      
                      
                      216,085,651
                      
                      
                      
                      3,875,318
                      
                      
                      
                      7.21
                      %Total
      interest-earning assets
                      
                      
                      233,576,171
                      
                      
                      
                      3,621,694
                      
                      
                      
                      6.29
                      %
                      
                      
                      244,485,788
                      
                      
                      
                      4,194,999
                      
                      
                      
                      6.90
                      %Non-interest-bearing
      cash
                      
                      
                      4,738,078
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      4,779,614Premises
      and equipment
                      
                      
                      6,469,281
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      5,922,450Other
      assets
                      
                      
                      6,133,941
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      4,505,929Total
      assets
                      
                      $
                      250,917,471
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      $
                      259,693,781Liabilities
      and Stockholders’ EquityInterest-bearing
      DepositsSavings
      and NOW deposits
                      
                      $
                      33,260,260
                      
                      
                      
                      18,679
                      
                      
                      
                      0.23
                      %
                      
                      $
                      37,767,527
                      
                      
                      
                      36,221
                      
                      
                      
                      0.39
                      %Money
      market and supernow
                      
                      
                      16,674,967
                      
                      
                      
                      21,545
                      
                      
                      
                      0.52
                      %
                      
                      
                      17,241,629
                      
                      
                      
                      56,649
                      
                      
                      
                      1.32
                      %Other
      time deposits
                      
                      
                      82,341,481
                      
                      
                      
                      708,306
                      
                      
                      
                      3.49
                      %
                      
                      
                      79,556,143
                      
                      
                      
                      865,735
                      
                      
                      
                      4.38
                      %Total
      interest-bearing deposits
                      
                      
                      132,276,708
                      
                      
                      
                      748,530
                      
                      
                      
                      2.29
                      %
                      
                      
                      134,565,299
                      
                      
                      
                      958,605
                      
                      
                      
                      2.87
                      %Borrowed
      funds
                      
                      
                      54,896,958
                      
                      
                      
                      444,122
                      
                      
                      
                      3.28
                      %
                      
                      
                      61,259,084
                      
                      
                      
                      691,488
                      
                      
                      
                      4.54
                      %Total
      interest-bearing liabilities
                      
                      
                      187,173,666
                      
                      
                      
                      1,192,652
                      
                      
                      
                      2.58
                      %
                      
                      
                      195,824,383
                      
                      
                      
                      1,650,093
                      
                      
                      
                      3.39
                      %Noninterest-bearing
      deposits
                      
                      
                      32,625,532
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      33,260,450219,799,198
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      229,084,833Other
      liabilities
                      
                      
                      2,384,783
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      2,048,610Stockholders’
      equity
                      
                      
                      28,733,490
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      28,560,338Total
      liabilities and stockholders equity
                      
                      $
                      250,917,471
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      $
                      259,693,781Net
      interest spread
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      3.71
                      %
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      3.51
                      %Net
      interest income
                      
                      
                      
                      
                      
                      $
                      2,429,042
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      $
                      2,544,906Net
      margin on interest-earning assets
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      4.22
                      %
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      4.19
                      %
 
 Interest
on tax-exempt loans and investments are reported on fully taxable equivalent
basis (a non GAAP financial measure).
  - 16
-
  Provision
for Loan Losses
 
 The provision for loan losses was
$430,000 for the first three months of 2009, compared to $120,000 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-month
period ended March 31, 2009 totaled $822,805, which represents an increase of
$50,764 or 6.58% over noninterest revenue for the same period of
2008.  This increase resulted primarily from the $35,532 or 8.05%
increase in commission income earned by the Insurance Agency during the first
quarter of 2009 over the same period in 2008.  We expect the Insurance
Agency to generate lower revenue and net income during the remaining quarters of
2009 because of the fact that it received a large annual contingent sales
commission in the first quarter.  In addition, we experienced an
increase in other noninterest revenue of $23,168 or 23.93%, offset by a
reduction of $7,936 or 3.39% in service charges on deposit accounts, during the
first quarter of 2009 when compared to the same period of 2008.
 
 Noninterest
Expense
 
 The Company recorded noninterest
expense of $1,762,855 for the three-month period ended March 31, 2009, compared
to $1,724,413 for the same period in 2008, an increase of $38,442 or
2.23%.  This increase is mainly attributable to increased salaries and
employee benefits of $6,262.
 
 Income
Tax Expense
 
 The Company’s effective tax rate for
the three-month period ended March 31, 2009 was 37.8%, compared to 36.9% for the
same period of 2008.  The Company’s income tax expense was $391,103
for the three months ended March 31, 2009, compared to $532,615 for the same
period of 2008, which represents a decrease of $141,512 or
26.57%.  Decreases in income before income tax during the three-month
period ended March 31, 2009 contributed to the decrease in income tax expense
when compared to the same period last year.
 
 FINANCIAL
CONDITION
 
 Overview
 
 Total
assets of the Company at March 31, 2009 were $253,124,908, compared to
$251,894,235 at December 31, 2008, representing an increase of $1,230,673 or
0.49% over December 31, 2008.
 
 Total
liabilities at March 31, 2009 were $224,405,542, compared to $223,451,311 at
December 31, 2008, representing a increase of  $954,231 or
0.43%.
 
 Stockholders’ equity was $28,719,366 as
of March 31, 2009, compared to $28,442,924 as of December 31, 2008, an increase
of $276,442.  The increase was due to net income for the period
totaling $643,322 offset by a decrease in the unrealized gain on securities
available for sale net of income taxes of $23,894 and dividends paid to
stockholders of $342,985.
  - 17
-
  Return on average equity for the
quarter ended March 31, 2009 was 9.08%, compared to 12.81% for the same period
of 2008.  Return on average assets was 1.04% for the quarter ended
March 31, 2009, compared to 1.41% for the same period of 2008.
 
 Composition
of Loan Portfolio
 
 At March 31, 2009, loans, net of
unearned income, were $210,335,087, a decrease of $4,344,862 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 $213,515,137 and $216,085,651 during the first
quarters of 2009 and 2008, respectively, which constituted 91.41% and 88.38% of
average interest-earning assets for the respective periods.  For the
quarter ended March 31, 2009, our average loan to deposit ratio was 129.48%,
compared to 128.76% for the same period in 2008.  The securities sold
under repurchase agreements function like deposits, with the securities
providing collateral in place of the FDIC insurance.  Our ratio of
average loans to deposits plus borrowed funds was 97.14% for the quarter ended
March 31, 2009, compared to 94.33% for the same period of 2008.  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  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 March 31,
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 strength 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.  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.
  - 18
-
  The allowance for loan losses increased
to $2,259,011 at March 31, 2009, compared to $2,001,739 at December 31,
2008.  The provision for loan losses was $430,000 for the first three
months of 2009, compared to $120,000 for the same period of 2008.  The
increase in the provision for loan losses in the first three 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 March 31, 2009 and December 31, 2008, the allowance for loan losses compared
to gross loans was 1.06% 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 economic environment has caused a decline in real estate
sales.  Consequently, we have closely reviewed and applied sensitivity
analysis to collateral values to more adequately measure 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
  Three months ended
                                    March 31,
                                    2009
                                  
                                  
                                  Three months ended
                                    March 31,
                                    2008
                                  
                                  
                                  Year ended
                                    December 31,
                                    2008Balance
      at beginning of year
                                  
                                  $
                                  2,001,739
                                  
                                  
                                  $
                                  2,328,792
                                  
                                  
                                  $
                                  2,328,792Loan
      losses:Commercial
                                  
                                  
                                  152,243
                                  
                                  
                                  
                                  14,753
                                  
                                  
                                  
                                  1,452,890Mortgages
                                  
                                  
                                  9,753
                                  
                                  
                                  
                                  0
                                  
                                  
                                  
                                  570,665Consumer
                                  
                                  
                                  15,214
                                  
                                  
                                  
                                  3,672
                                  
                                  
                                  
                                  66,142Total
      loan losses
                                  
                                  
                                  177,210
                                  
                                  
                                  
                                  18,425
                                  
                                  
                                  
                                  2,089,697Recoveries
      on loans previously charged offCommercial
                                  
                                  
                                  1,230
                                  
                                  
                                  
                                  0
                                  
                                  
                                  
                                  4,688Mortgages
                                  
                                  
                                  3,207
                                  
                                  
                                  
                                  0
                                  
                                  
                                  
                                  40,000Consumer
                                  
                                  
                                  45
                                  
                                  
                                  
                                  0
                                  
                                  
                                  
                                  2,956Total
      loan recoveries
                                  
                                  
                                  4,482
                                  
                                  
                                  
                                  0
                                  
                                  
                                  
                                  47,644Net
      loan losses
                                  
                                  
                                  172,728
                                  
                                  
                                  
                                  18,425
                                  
                                  
                                  
                                  2,042,053Provision
      for loan losses charged to expense
                                  
                                  
                                  430,000
                                  
                                  
                                  
                                  120,000
                                  
                                  
                                  
                                  120,000 1,715,000Balance
      at end of year
                                  
                                  $
                                  2,259,011
                                  
                                  
                                  $
                                  2,430,367
                                  
                                  
                                  $
                                  2,001,739Allowance
      for loan losses to loans outstandingAt
      end of period
                                  
                                  
                                  1.06
                                  %
                                  
                                  
                                  1.11
                                  %
                                  
                                  
                                  0.92
                                  %
 
 Management believes it has identified
and charged off all significant losses in the loan
portfolio.  The  ratio of the allowance for loan losses to
loans outstanding has decreased due to this effort to charge off the
losses.  Although management believes it has identified all
significant losses in the portfolio, there can be no assurance that additional
losses will not occur in future periods.
 
 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 loans past due 90 days
or more, including nonaccrual loans, of $4,923,081 and $5,162,534 at March 31,
2009 and December 31, 2008, respectively.  These loans are detailed
below:
  - 19
-
 
 Risk Elements of Loan PortfolioMarch
      31,
                                
                                
                                December
      31,2009
                                
                                
                                2008Nonaccrual
      LoansCommercial
                                
                                $
                                837,555
                                
                                
                                $
                                2,639,972Mortgage
                                
                                
                                2,367,863
                                
                                
                                
                                1,030,685Consumer
                                
                                
                                0
                                
                                
                                
                                03,205,418
                                
                                
                                
                                3,670,657Accruing
      Loans Past Due 90 Days or MoreCommercial
                                
                                
                                133,800
                                
                                
                                
                                19,539Mortgage
                                
                                
                                1,575,090
                                
                                
                                
                                1,447,221Consumer
                                
                                
                                8,773
                                
                                
                                
                                25,1171,717,663
                                
                                
                                
                                1,491,877$
                                4,923,081
                                
                                
                                $
                                5,162,534
 
 Gross
interest income of $230,560 for the first three months of 2009, $217,573 for
fiscal year 2008 and $145,270 for the first three 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
$10,319 for the first three months of 2009, $9,683 for fiscal year 2008 and
$1,159 for the first three months of 2008.
 
 Loans are
classified as impaired when the collection of contractual obligations, including
principal and interest, is doubtful.  Management has identified all
significant impaired loans as of March 31, 2009 and has made the appropriate
change to the bank’s loan loss reserve.
 
 Deposits
and Other Interest-Bearing Liabilities
 
 Average interest-bearing deposits
decreased $2,288,591 or 1.70% to $132,276,708 for the three months ended March
31, 2009, from $134,565,299 for the same period of 2008.  Average
noninterest-bearing deposits decreased $634,918 or 1.91% to $32,625,532 for the
three months ended March 31, 2009, from $33,260,450 for the same period of
2008.  Average total deposits have decreased 1.74% or $2,923,509 to
$164,902,240 for the three months ended March 31, 2009 from $167,825,749 for the
same period of 2008.  Borrowings, primarily from the FHLB, decreased
to $42,000,000 or 2.33% from $43,000,000 at December 31, 2008.
 
 Deposits,
particularly core deposits, have been our primary source of funding and have
enabled us to meet both our short-term and long-term liquidity
needs.  Management anticipates that such 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.
  - 20
-
  Short-Term
Borrowings
 
 The following table sets forth the
Company’s position with respect to short-term borrowings at March 31, 2009 and
December 31 2008.
 
 March
      31, 2009
                      
                      
                      December
      31, 2008Amount
                      
                      
                      Rate
                      
                      
                      Amount
                      
                      
                      RateFederal
      Home Loan Bank (daily re-price)
                      
                      $
                      4,000,000
                      
                      
                      
                      .45
                      %
                      
                      $
                      5,000,000
                      
                      
                      
                      .46
                      %Retail
      Repurchase Agreements
                      
                      
                      11,877,442
                      
                      
                      
                      .58
                      %
                      
                      
                      9,959,539
                      
                      
                      
                      .21
                      %Federal
      Funds Borrowed
                      
                      
                      0
                      
                      
                      
                      -
                      %
                      
                      
                      2,170,000
                      
                      
                      
                      .53
                      %Total
                      
                      $
                      15,877,442
                      
                      
                      
                      
                      
                      
                      $
                      17,129,539
 
 We may borrow up to approximately 30%
of total assets from the FHLB of Atlanta 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 our real estate mortgage
loans.  The Bank was required to purchase shares of capital stock in
the FHLB of Atlanta 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.
 
 The Bank
has lines of credit of $16,500,000 in unsecured overnight federal funds and
$5,000,000 in secured overnight federal funds with correspondent banks at March
31, 2009.
 
 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 $21,500,000 from
correspondent banks, namely, the Community 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 $46,210,370 of which $42,000,000 has been advanced as of March 31,
2009.  There was $4,000,000 and $5,000,000 in short-term borrowings
with the FHLB of Atlanta as of March 31, 2009 and December 31, 2008,
respectively.  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 March 31, 2009 to the minimum ratios required by
federal banking regulators is presented below.
  - 21
-
  Minimum
                        
                        
                        To be wellActual
                        
                        
                        Requirements
                        
                        
                        CapitalizedTier
      1 risk-based capital
                        
                        
                        13.13
                        %
                        
                        
                        4.00
                        %
                        
                        
                        6.00
                        %Total
      risk-based capital
                        
                        
                        14.20
                        %
                        
                        
                        8.00
                        %
                        
                        
                        10.00
                        %Leverage
      ratio
                        
                        
                        11.11
                        %
                        
                        
                        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 March 31, 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 first 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 control
over financial reporting.
 
 PART
II - OTHER INFORMATION
  Item
      1.
                Legal
      Proceedings.
  As previously reported, Edwin and
Rosalie Kuechler filed a complaint against the Bank in the Circuit Court for
Kent County, Maryland on or about June 26, 2008.  The Bank removed
this case to the United States District Court for the District of Maryland on or
about July 3, 2008.  The suit related to a commercial loan made by the
Bank that was guaranteed by the plaintiffs, which guaranty is secured by an
indemnity deed of trust on the plaintiffs’ personal residence.  The
commercial loan is in default and the Bank is attempting to seek recourse
against the plaintiffs, as guarantors.  The plaintiffs alleged, among
other things, various violations by the Bank of the federal Truth-in-Lending Act
and that the plaintiffs are entitled to rescission of the guaranty, and to
recover for illegal banking practices arising from the Bank’s demands for
payment, intentional infliction of emotional distress arising from the Bank’s
demands for payment, and professional negligence and intentional and negligent
misrepresentation relating to alleged oral and written representations made to
the plaintiffs by the Bank outside the written transaction
documents.  In addition to rescission, the plaintiffs requested
compensatory and punitive damages in the amount of $950,000.  On March
9, 2009, the United States District Court for the District of Maryland issued an
order granting the Bank’s motion for summary judgment and entered judgment in
favor of the Bank and against the plaintiffs on all counts.  On March
18, 2009, the plaintiffs filed a motion with the Court asking it to reconsider
the judgment.  The plaintiffs have withdrawn their motion and the
parties are negotiating a settlement agreement, which the Bank believes will be
favorable to the Bank.
  - 22
-
  Item
      1A.
                Risk
      Factors.
  The risks and uncertainties to which
the Company’s 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
Securities 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:  May
      11, 2009
                      By:
                      /s/
      Thomas G. StevensonThomas
      G. StevensonPresident/Chief
      Executive Officer&
      Chief Financial
Officer
  - 23
-
  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
                  
                  Certifications
      of the CEO/ CFO pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
      (furnished herewith)
  - 24
-