**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, 2008
 
 o Transition
        report under Section 13 or 15(d) of the Exchange Act
  For
        the
        transition period from _______________ to ________________
 
 Commission
        File Number: 0-24169
 
 **PEOPLES
        BANCORP, INC.**
 (Exact
        name of registrant as specified in its charter)
 
 Maryland
              
              52-2027776(State
                  or Other Jurisdiction of
              
              (I.R.S.
                  EmployerIncorporation
                  or Organization)
              
              Identification
                  No.)P.O. Box 210, 100 Spring Avenue, Chestertown, Maryland
              
              21620(Address
                  of Principal Executive Offices)
              
              (Zip
                  Code)
 
 (410)
        778-3500
 Registrant’s
        Telephone Number, Including Area Code
 
 Indicate
        by check mark whether the registrant (1) has filed all reports required to
        be
        filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
        the
        preceding 12 months (or for such shorter periods that the registrant was
        required to file such reports), and (2) has been subject to such filing
        requirements for the past 90 days. Yes x No o
 
 Indicate
        by check mark whether the registrant is a large accelerated filer, an
        accelerated filer, a non-accelerated filer or a smaller reporting company.
        See
        the definitions of “large accelerated filer”, “accelerated filer” and “smaller
        reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
 
 Large
                  accelerated filer o
              Accelerated
                  filer oNon-accelerated
                  filer o
              Smaller
                  reporting company x(Do
                  not check if a smaller reporting company)
 
 Indicate
        by check mark whether the registrant is a shell company (as defined in Rule
        12b-2 of the Act).
 Yes
o
        No x
  **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: 785,512 shares of common stock issued and outstanding as of May 1,
        2008
  
 
 **PEOPLES
        BANCORP, INC.**
 
 **FORM
        10-Q**
 **INDEX**
 PagePart
                      I – Financial InformationItem
                      1.
                  Financial
                      Statements
                  3Consolidated
                      Balance Sheets at March 31, 2008 (unaudited) and December 31,
                      2007
                  3Consolidated
                      Statements of Income (unaudited) for the three months ended
                      March 31, 2008
                      and 2007
                  4Consolidated
                      Statements of Changes in Stockholders’ Equity (unaudited) for the three
                      months ended March 31, 2008 and 2007
                  5Consolidated
                      Statements of Cash Flows (unaudited) for the three months ended
                      March 31,
                      2008 and 2007
                  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
                      4T.
                  Controls
                      and Procedures
                  22Part
                      II – Other InformationItem
                      1.
                  Legal
                      Proceedings
                  23Item
                      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
                  24Exhibit
                    Index
                  25
 -
                  2
                  -
 **PART
        I - FINANCIAL INFORMATION**
 
 **Item
        1.**   **Financial
        Statements.**
 **PEOPLES
                    BANCORP, INC. AND SUBSIDIARIES****Consolidated
                    Balance Sheets**March 31, 2008
                
                December 31, 2007(unaudited)**ASSETS**Cash
                    and due from banks
                
                $
                6,426,286
                
                $
                5,399,704Federal
                    funds sold
                
                
                5,156,667
                
                
                4,440,438Cash
                    and cash equivalents
                
                
                11,582,953
                
                
                9,840,142Securities
                    available for sale
                
                
                5,107,041
                
                
                5,037,273Securities
                    held to maturity (approximate fair value of $12,424,961 and
                    $13,198,704)
                
                
                12,026,403
                
                
                13,026,151Federal
                    Home Loan Bank stock, at cost
                
                
                2,764,000
                
                
                2,897,600Loans,
                    less allowance for loan losses of $2,430,367 and
                    $2,328,792
                
                
                216,722,559
                
                
                220,425,725Premises
                    and equipment
                
                
                6,022,790
                
                
                5,901,649Goodwill
                    and intangible assets
                
                
                754,182
                
                
                767,932Accrued
                    interest receivable
                
                
                1,465,624
                
                
                1,814,574Deferred
                    income taxes
                
                
                1,095,252
                
                
                1,121,746Other
                    assets
                
                
                494,223
                
                
                974,970**Total
                    Assets**
                
                **$**
                **258,035,027**
                
                **$**
                **261,807,762****LIABILITIES
                    AND STOCKHOLDERS’ EQUITY**DepositsNon-interest-bearing
                
                $
                34,692,989
                
                $
                36,630,744Interest-bearing
                
                
                132,383,247
                
                
                132,421,505167,076,236
                
                
                169,052,249Securities
                    sold under repurchase agreements and federal funds
                    purchased
                
                
                8,658,191
                
                
                9,041,476Federal
                    Home Loan Bank advances
                
                
                51,000,000
                
                
                53,000,000Other
                    borrowings
                
                
                184,175
                
                
                192,597Accrued
                    interest payable
                
                
                492,048
                
                
                521,219Other
                    liabilities
                
                
                1,969,096
                
                
                1,960,427229,379,746
                
                
                233,767,968Stockholders'
                    equityCommon
                    stock, par value $10 per share, 1,000,000 shares authorized:
                    issued and
                    outstanding 785,512 shares at March 31, 2008 and December 31,
                    2007
                
                
                7,855,120
                
                
                7,855,120Additional
                    paid-in capital
                
                
                2,920,866
                
                
                2,920,866Retained
                    earnings
                
                
                18,569,473
                
                
                17,997,28629,345,459
                
                
                28,773,272Accumulated
                    other comprehensive income (loss)Unrealized
                    gain (loss) on available for sales securities
                
                
                76,267
                
                
                32,967Unfunded
                    liability of defined benefit plan
                
                
                (766,445
                )
                
                (766,445
                )28,655,281
                
                
                28,039,794**Total
                    Liabilities and Stockholders’ Equity**
                
                $
                258,035,027
                
                $
                261,807,762
 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 31,2008
              
              2007Interest
                  and dividend revenueLoans,
                  including fees
              
              $
              3,857,843
              
              $
              3,958,196U.
                  S. government agency securities
              
              
              205,232
              
              
              216,896Deposits
                  in other banks
              
              
              8,882
              
              
              4,888Federal
                  funds sold
              
              
              49,259
              
              
              23,248Equity
                  securities
              
              
              43,821
              
              
              37,797Total
                  interest and dividend revenue
              
              
              4,165,037
              
              
              4,241,025Interest
                  expenseDeposits
              
              
              958,605
              
              
              885,817Borrowed
                  funds
              
              
              691,488
              
              
              678,882Total
                  interest expense
              
              
              1,650,093
              
              
              1,564,699Net
                  interest income
              
              
              2,514,944
              
              
              2,676,326Provision
                  for loan losses
              
              
              120,000
              
              
              -Net
                  interest income after provision for loan losses
              
              
              2,394,944
              
              
              2,676,326Noninterest
                  revenueService
                  charges on deposit accounts
              
              
              234,075
              
              
              219,778Insurance
                  commissions
              
              
              441,143
              
              
              400,285Other
                  noninterest revenue
              
              
              96,823
              
              
              82,746Total
                  noninterest revenue
              
              
              772,041
              
              
              702,809Noninterest
                  expensesSalaries
                  and employee benefits
              
              
              1,094,894
              
              
              948,441Occupancy
              
              
              104,367
              
              
              79,363Furniture
                  and equipment
              
              
              73,208
              
              
              43,214Other
                  operating
              
              
              451,944
              
              
              386,792Total
                  noninterest expenses
              
              
              1,724,413
              
              
              1,457,810Income
                  before income taxes
              
              
              1,442,572
              
              
              1,921,325Income
                  taxes
              
              
              532,615
              
              
              721,628Net
                  income
              
              $
              909,957
              
              $
              1,199,697Earnings
                  per common share-basic and diluted
              
              $
              1.16
              
              $
              1.52
 
 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, 2008 and 2007**
  AccumulatedAdditional
                
                
                
                otherpaid-in
                
                Retained
                
                comprehensive
                
                ComprehensivePar
                    value
                
                capital
                
                earnings
                
                income
                
                income**Balance,
                    December 31, 2006**
                
                $
                7,890,120
                
                $
                2,920,866
                
                $
                15,632,965
                
                $
                (836,795
                )Net
                    income
                
                
                -
                
                
                -
                
                
                1,199,697
                
                
                -
                
                $
                1,199,697Unrealized
                    gain on investment securities available for sale net of income
                    taxes of
                    $2,856
                
                
                -
                
                
                -
                
                
                -
                
                
                4,540
                
                
                4,540Comprehensive
                    income
                
                
                
                
                
                
                
                
                
                
                
                
                
                $
                1,204,237Cash
                    dividend, $0.41 per share
                
                
                -
                
                
                -
                
                
                (323,495
                )
                
                -**Balance,
                    March 31, 2007**
                
                $
                7,890,120
                
                $
                2,920,866
                
                $
                16,509,167
                
                $
                (832,255
                )**Balance,
                    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, $.43 per share
                
                
                -
                
                
                -
                
                
                (337,770
                )
                
                -**Balance,
                    March 31, 2008**
                
                $
                7,855,120
                
                $
                2,920,866
                
                $
                18,569,473
                
                $
                (690,178
                )
 
 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,**2008**
              
              **2007****CASH
                  FLOWS FROM OPERATING ACTIVITIES**Interest
                  received
              
              $
              4,512,620
              
              $
              4,097,710Fees
                  and commissions received
              
              
              772,041
              
              
              702,809Cash
                  paid to suppliers and employees
              
              
              (1,340,067
              )
              
              (1,050,555
              )Interest
                  paid
              
              
              (1,679,264
              )
              
              (1,527,694
              )Taxes
                  paid
              
              
              (343,694
              )
              
              (348,136
              )1,921,636
              
              
              1,874,134**CASH
                  FLOWS FROM INVESTING ACTIVITIES**Cash
                  paid for premises, equipment, and software
              
              
              (191,242
              )
              
              (910,374
              )Loans
                  made, net of principal collected
              
              
              3,577,388
              
              
              (6,076,507
              )Proceeds
                  from maturities and calls of securitiesAvailable
                  for sale
              
              
              0
              
              
              0Held
                  to maturity
              
              
              2,000,289
              
              
              1,001,201Purchase
                  of securities available for sale
              
              
              0
              
              
              (1,038,461
              )Purchase
                  of securities held to maturity
              
              
              (993,370
              )
              
              0Acquisition
                  of Insurance agency, net
              
              
              0
              
              
              (884,634
              )Redemption
                  of FHLB stock, net of purchases
              
              
              133,600
              
              
              (319,500
              )4,526,665
              
              
              (8,228,275
              )**CASH
                  FLOWS FROM FINANCING ACTIVITIES**Net
                  increase (decrease) inTime
                  deposits
              
              
              (32,303
              )
              
              1,203,269Other
                  deposits
              
              
              (1,943,710
              )
              
              3,695,539Securities
                  sold under repurchase agreements
              
              
              (383,285
              )
              
              (7,405,947
              )Advances
                  under (repayments of) notes payable, net
              
              
              (2,000,000
              )
              
              7,973,610Repayments
                  of other borrowings
              
              
              (8,422
              )
              
              0Repurchase
                  of Stock
              
              
              0
              
              
              0Dividends
                  paid
              
              
              (337,770
              )
              
              (323,495
              )(4,705,490
              )
              
              5,142,976**NET
                  INCREASE (DECREASE) IN CASH**
              
              
              1,742,811
              
              
              (1,211,166
              )CASH
                  AND EQUIVALENTS AT BEGINNING OF PERIOD
              
              
              9,840,142
              
              
              7,465,410CASH
                  AND EQUIVALENTS AT END OF PERIOD
              
              $
              11,582,953
              
              $
              6,254,244
  -
            6
            -
  **PEOPLES
        BANCORP, INC. AND SUBSIDIARIES**
 **Consolidated
        Statements of Cash Flows, Continued (unaudited)**
 
 For
                  the three months ended March 31,**2008**
              
              **2007****RECONCILIATION
                    OF NET INCOME TO NET CASH PROVIDED FROM OPERATING
                    ACTIVITIES**Net
                  income
              
              $
              909,957
              
              $
              1,199,697**ADJUSTMENTS**Depreciation
                  and amortization
              
              
              70,101
              
              
              46,884Provision
                  for loan losses
              
              
              120,000
              
              
              0Amortization
                  of intangible assets
              
              
              13,750
              
              
              0Security
                  discount accretion, net of premium amortization
              
              
              (7,145
              )
              
              (15,141
              )Decrease
                  (increase) inAccrued
                  interest receivable
              
              
              348,950
              
              
              (117,338
              )Income
                  Tax refund receivable
              
              
              188,921
              
              
              0Other
                  assets
              
              
              291,826
              
              
              331,330Increase
                  (decrease) inDeferred
                  origination fees and costs, net
              
              
              5,778
              
              
              (10,837
              )Accrued
                  interest payable and other liabilities
              
              
              (29,171
              )
              
              66,046Income
                  taxes payable
              
              
              0
              
              
              373,493Other
                  Liabilities
              
              
              8,669
              
              
              0$
              1,921,636
              
              $
              1,874,134Supplemental
                  DisclosureFair
                  value of assets acquired
              
              $
              0
              
              $
              686,499Fair
                  value of liabilities assumed
              
              
              0
              
              
              (634,797
              )Purchase
                  price in excess of assets acquired
              
              
              0
              
              
              832,932Net
                  cash paid for acquisition
              
              $
              0
              
              $
              884,634
 
 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, 2008 are
        not
        necessarily indicative of the results that may be expected for the full year
        ending December 31, 2008 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,
        2007.
 
 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, 2008 and 2007, total comprehensive income, net
        of
        taxes, was $953,257 and $1,204,237 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, 2008 and December
        31,
        2007.
 
 At March 31,2008
              
              December 31,2007Revolving
                  Home Equity Lines
              
              $
              3,670,790
              
              $
              3,717,9641-4
                  Family Residential Construction loans
              
              $
              996,351
              
              $
              991,715Commercial
                  Real Estate
              
              $
              5,829,210
              
              $
              5,864,181Other
                  Unused Commitments
              
              $
              20,799,198
              
              $
              15,382,454Commercial
                  Letters of Credit
              
              $
              4,610,177
              
              $
              4,636,444
  -
            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 785,512 and 789,012 for three-month periods ended March 31,
        2008
        and 2007, 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, 2008 and 2007, the Bank recognized net periodic
        costs for this plan of $71,314 and $70,064, respectively. The Bank did not
        contribute to the plan during the three-month period ended March 31
        2008. ****
 
 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 six 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 March 31,****2008**
              
              **Community**
                **banking**
              
              **Insurance**
                **products**
                **and
                  services**
              
              **Intersegment**
                **Transactions**
              
              **Consolidated**
                **Total**Net
                  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**For
                  the three months ended March 31, 2007**
              
              
              **Community**
                **banking**
              
              
              **Insurance**
                **products**
                **and
                  services**
              
              
              **Intersegment**
                **Transactions**
              
              
              **Consolidated**
                **Total**Net
                  interest income
              
              $
              2,681,437
              
              $
              -5,111
              
              $
              0
              
              $
              2,676,326Provision
                  for loan losses
              
              
              0
              
              
              0
              
              
              0
              
              
              0Net
                  interest income after provision
              
              
              2,681,437
              
              
              -5,111
              
              
              0
              
              
              2,676,326Noninterest
                  revenue
              
              
              301,019
              
              
              401,790
              
              
              0
              
              
              702,809Noninterest
                  expense
              
              
              1,244,996
              
              
              212,814
              
              
              0
              
              
              1,457,810Income
                  before income taxes
              
              
              1,737,460
              
              
              183,865
              
              
              0
              
              
              1,921,325Income
                  taxes
              
              
              650,619
              
              
              71,009
              
              
              0
              
              
              721,628Net
                  income
              
              $
              1,086,841
              
              $
              112,856
              
              $
              0
              
              $
              1,199,697Average
                  assets
              
              $
              245,081,869
              
              $
              1,132,479
              
              $
              -93,357
              
              $
              246,120,991
 
 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.
 
 Through
        the acquisition, the Company acquired approximately $805,000 of assets,
        primarily real estate, accounts receivable and cash, and assumed approximately
        $635,000 of liabilities, primarily notes payable and operating payables.
        The
        acquisition resulted in the recognition of approximately $273,000 of goodwill,
        which will not be amortized, and $550,000 of intangible assets, which will
        be
        amortized on a straight-line basis over 10 years.
 
 During
        the three months ended March 31, 2008, the Company recorded amortization
        of
        intangible assets of $13,750.
 
  -
            10
            -
  9.
              Fair
                  Value
 
 On
        January 1, 2008 the Company adopted SFAS No. 157, *Fair
        Value Measurements* .
        The
        adoption of SFAS No. 157 had no affect on the Company’s December 31,
        2007 and March 31, 2008 Consolidated Balance Sheets or the Consolidated
        Statement of Income for the three months ended March 31, 2008.
 
 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
              
              $
              5,107,041
              
              $
              -
              
              $
              -
              
              $
              5,107,041
 
 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.
 
 FASB
        Statement No. 160 (revised 2007), *Noncontrolling
        Interests in Consolidated Financial Statement* amends
        Accounting Research Bulletin 51, Consolidated Financial Statements, to establish
        accounting and reporting standards for noncontrolling interest in a subsidiary
        and for the deconsolidation of a subsidiary. It also clarifies that a
        noncontrolling interest in a subsidiary is an ownership interest in the
        consolidated entity that should be reported as equity in the consolidated
        financial statements. SFAS 160 also changes the way the consolidated income
        statement is presented by requiring consolidated net income to be reported
        at
        amounts that include the amounts attributable to both the parent and the
        noncontrolling interest. It also requires disclosure, on the face of the
        consolidated income statement of income, of the amounts of consolidated net
        income attributable to the parent and to the noncontrolling interest. SFAS
        160
        is effective at the beginning of the company’s first fiscal year after December
        15, 2008. Management does not expect that SFAS 160 will have a material impact
        on the Company’s results of operations or financial position.
  -
            11
            -
 
 FASB
        Statement No. 141 (revised 2007), *Business
        Combinations* .
        SFAS
        No. 141(R) will significantly change the accounting for business combinations
        in
        a number of areas, including the treatment of contingent consideration,
        contingencies, acquisition costs, in-process research and development costs
        and
        restructuring costs. Additionally, under SFAS No. 141(R), changes in deferred
        tax asset valuation allowances and acquired income uncertainties in a business
        combination after the measurement period will impact income tax expense.
        The
        provisions of this standard are effective beginning January 1, 2009. Management
        does not expect that SFAS No. 141(R) will have a material impact on the
        Company’s results of operations or financial position.
 
 FASB
        Statement No. 161, *Disclosures
        about Derivative Instruments and Hedging Activities an amendment of FASB
        Statement No. 133* requires
        enhanced disclosures about an entity’s derivative and hedging activities and
        thereby improves the transparency of financial reporting. The use and complexity
        of derivative instruments and hedging activities have increased significantly
        over the past several years. Constituents have expressed concerns that the
        existing disclosure requirements in FASB Statement No. 133, *Accounting
        for Derivative Instruments and Hedging Activities,* do
        not
        provide adequate information about how derivative and hedging activities
        affect
        an entity’s financial position, financial performance, and cash flows. This
        Statement is effective for financial statements issued for fiscal years and
        interim periods beginning after November 15, 2008, with early application
        encouraged. This Statement encourages, but does not require, comparative
        disclosures for earlier periods at initial adoption. Management does not
        expect
        SFAS No. 161 will have a material impact on the Company’s results of operations
        or financial position .
  -
            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 one branch 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.
 
 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.
 
 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.
  -
            13
            -
 
 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, 2007.
 
 **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
        annual 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, 2008, the Company reported net income of
      $909,957 or $1.16 per share, compared to $1,199,697 or $1.52 per share for
      the
      same period of 2007, which represents a decrease of $289,740 or 24.15%. This
      decrease resulted primarily from a decrease in interest income generated on
      loans, an increase in interest expense on deposits and borrowed funds, and
      increased funding of the loan loss reserve. The Insurance Agency received its
      annual contingent sales commission during the first quarter of 2008, which
      raised noninterest revenue this quarter. We expect the insurance subsidiary
      to
      generate lower revenue and net income during the remaining quarters of
      2008.





**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, 2008 was 4.19%, compared to 4.69% for the same period
      in
      2007. The net margin may decline if competition increases, loan demand
      decreases, or the cost of funds rises faster than the return on loans and
      securities. Although these expectations are based on management’s judgment,
      actual results may be impacted by a number of unpredictable factors and cannot
      be assured.





Net
      interest income for the three-month period ended March 31, 2008 was $2,514,944,
      which represents a decrease of $161,382 or 6.03% over net interest income for
      the same period of 2007. 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 4.25% at December 31, 2007 to 2.25%
      at March 31, 2008. 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.





Interest
      revenue for the three months ended March 31, 2008 totaled $4,165,037, compared
      to $4,241,025 for the same period last year, representing a decrease of $75,988
      or 1.79%. Although our average loan balances have increased by $5,960,705 (net
      of the allowance for loan losses) when compared to the first quarter of 2007,
      we
      experienced a $100,252 decrease in interest income earned on loans primarily
      because of the aforementioned rate reductions.





Interest
      expense for the three-month period ended March 31, 2008 totaled $1,650,093,
      compared to $1,564,699 for the same period last year, representing an increase
      of $85,394 or 5.46%. Although deposits decreased slightly during the first
      three
      months of 2008, they increased from the $160,084,392 balance at March of 2007.
      The Company decreased its Federal Home Loan Bank (“FHLB”) borrowings during the
      first quarter of 2008 from $53,000,000 at December 31, 2007 to $51,000,000
      at
      March 31, 2008. FHLB borrowings at March 31, 2007 were $51,700,000.
      Nevertheless, interest expense on borrowed funds rose $12,606 from the first
      quarter of 2007 as rates charged on them have increased. The Company assumed
      approximately $450,000 of debt in connection with the acquisition of the
      Insurance Subsidiary in 2007, which has been reduced to $184,175 at March 31,
      2008.




-
          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, 2008
            
            March 31, 2007Average
            
            
            
            
            
            AverageBalance
            
            Interest
            
            Yield
            
            Balance
            
            Interest
            
            Yield**Assets**Federal
                funds sold
            
            $
            6,382,608
            
            $
            49,259
            
            
            3.10
            %
            $
            1,663,397
            
            $
            23,248
            
            
            5.67
            %Interest-bearing
                deposits
            
            
            1,220,209
            
            
            9,312
            
            
            3.07
            %
            
            466,642
            
            
            5,111
            
            
            4.44
            %Investment
                securities:U.
                S. government agency
            
            
            17,931,208
            
            
            215,166
            
            
            4.83
            %
            
            18,821,495
            
            
            227,395
            
            
            4.90
            %Other
            
            
            0
            
            
            0
            
            
            0
            %
            
            27,095
            
            
            127
            
            
            1.90
            %FHLB
                of Atlanta Stock
            
            
            2,866,112
            
            
            45,944
            
            
            6.45
            %
            
            2,711,850
            
            
            39,495
            
            
            5.91
            %Total
                investment securities
            
            
            20,797,320
            
            
            261,110
            
            
            5.05
            %
            
            21,560,440
            
            
            267,017
            
            
            5.02
            %Loans:Demand
                and time
            
            
            40,467,718
            
            
            737,885
            
            
            7.33
            %
            
            42,154,773
            
            
            956,626
            
            
            9.20
            %Mortgage
            
            
            173,294,508
            
            
            3,039,470
            
            
            7.05
            %
            
            165,022,455
            
            
            2,916,616
            
            
            7.17
            %Installment
            
            
            4,680,130
            
            
            97,963
            
            
            8.42
            %
            
            4,797,875
            
            
            101,353
            
            
            8.57
            %Total
                loans
            
            
            218,442,356
            
            
            3,875,318
            
            
            7.14
            %
            
            211,975,103
            
            
            3,974,595
            
            
            7.60
            %Allowance
                for loan losses
            
            
            2,356,705
            
            
            
            
            
            
            
            
            1,850,157Total
                loans, net of allowance
            
            
            216,085,651
            
            
            3,875,318
            
            
            7.21
            %
            
            210,124,946
            
            
            3,974,595
            
            
            7.67
            %Total
                interest-earning assets
            
            
            244,485,788
            
            
            4,194,999
            
            
            6.90
            %
            
            233,815,425
            
            
            4,269,971
            
            
            7.41
            %Non-interest-bearing
                cash
            
            
            4,779,614
            
            
            
            
            
            
            
            
            4,319,660Premises
                and equipment
            
            
            5,922,450
            
            
            
            
            
            
            
            
            4,625,087Other
                assets
            
            
            4,505,929
            
            
            
            
            
            
            
            
            3,360,819Total
                assets
            
            $
            259,693,781
            
            
            
            
            
            
            
            $
            246,120,991Liabilities
                and Stockholders’ EquityInterest-bearing
                DepositsSavings
                and NOW deposits
            
            $
            37,767,527
            
            
            36,221
            
            
            0.39
            %
            $
            38,036,322
            
            
            53,851
            
            
            0.57
            %Money
                market and supernow
            
            
            17,241,629
            
            
            56,649
            
            
            1.32
            %
            
            16,756,913
            
            
            61,195
            
            
            1.48
            %Other
                time deposits
            
            
            79,556,143
            
            
            865,735
            
            
            4.38
            %
            
            72,918,559
            
            
            770,771
            
            
            4.29
            %Total
                interest-bearing deposits
            
            
            134,565,299
            
            
            958,605
            
            
            2.87
            %
            
            127,711,794
            
            
            885,817
            
            
            2.81
            %Borrowed
                funds
            
            
            61,259,084
            
            
            691,488
            
            
            4.54
            %
            
            60,414,514
            
            
            678,882
            
            
            4.56
            %Total
                interest-bearing liabilities
            
            
            195,824,383
            
            
            1,650,093
            
            
            3.39
            %
            
            188,126,308
            
            
            1,564,699
            
            
            3.37
            %Noninterest-bearing
                deposits
            
            
            33,260,450
            
            
            
            
            
            
            
            
            30,240,866229,084,833
            
            
            
            
            
            
            
            
            218,367,174Other
                liabilities
            
            
            2,048,610
            
            
            
            
            
            
            
            
            2,111,420Stockholders’
                equity
            
            
            28,560,338
            
            
            
            
            
            
            
            
            25,642,397Total
                liabilities and stockholders equity
            
            $
            259,693,781
            
            
            
            
            
            
            
            $
            246,120,991Net
                interest spread
            
            
            
            
            
            
            
            
            3.51
            %
            
            
            
            
            
            
            
            4.04
            %Net
                interest income
            
            
            
            
            $
            2,544,906
            
            
            
            
            
            
            
            $
            2,705,272Net
                margin on interest-earning assets
            
            
            
            
            
            
            
            
            4.19
            %
            
            
            
            
            
            
            
            4.69
            %





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




-
          16
          -




**Noninterest
      Revenue**





Noninterest
      revenue for the three-month period ended March 31, 2008 totaled $772,041, which
      represents an increase of $69,232 or 9.85% over noninterest revenue for the
      same
      period of 2007. This increase resulted primarily from the $40,858 or 10.21%
      increase in commission income earned by the Insurance Subsidiary during the
      first quarter of 2008 over the same period in 2007. We expect the
      insurance subsidiary to generate lower revenue and net income during the
      remaining quarters of 2008 .
      In
      addition, we experienced an increase in overdraft activity and other service
      charges of $14,297 or 6.51% during the first quarter of 2008 when compared
      to
      the same period of 2007. Management does not view the increased overdraft
      activity as an indication of problems within our loan portfolio, as we have
      continued to collect these overdrawn balances and the fees associated with
      them.





**Noninterest
      Expense**





The
      Company recorded noninterest expense of $1,724,413 for the three-month period
      ended March 31, 2008, compared to $1,457,810 for the same period in 2007, an
      increase of $266,603 or 18.29%. This increase is mainly attributable to
      increased salaries and employee benefits of $146,453. Other operating costs
      for
      the first quarter of 2008 also increased when compared to the same period last
      year, primarily due to our new branch in Church Hill, which opened in August
      2007, and the rising costs of operations due to rising fuel and energy costs.





**Income
      Tax Expense**





The
      Company’s effective tax rate for the three-month period ended March 31, 2008 was
      36.9%, compared to 37.6% for the same period of 2007. The Company’s income tax
      expense was $532,615 for the three months ended March 31, 2008, compared to
      $721,628 for the same period of 2007, which represents a decrease of $189,013
      or
      26.19%. Decreases in income before income tax during the three-month period
      ended March 31, 2008 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, 2008 were $258,035,027, compared to
      $261,807,762 at December 31, 2007, representing a decrease of $3,772,735 or
      1.44% over December 31, 2007.





Total
      liabilities at March 31, 2008 were $229,379,746, compared to $233,767,968 at
      December 31, 2007, representing a decrease of $4,388,222 or 1.88%.





Stockholders’
      equity was $28,655,281 as of March 31, 2008, compared to $28,039,794 as of
      December 31, 2007, an increase of $615,487. The increase was due to net income
      for the period totaling $909,957 plus an increase in the unrealized gain on
      securities available for sale net of income taxes of $43,300, offset by
      dividends paid to stockholders of $337,770.





Return
      on
      average equity for the quarter ended March 31, 2008 was 12.81%, compared to
      18.97% for the same period of 2007. Return on average assets was 1.41% for
      the
      quarter ended March 31, 2008, compared to 1.98% for the same period of
      2007.




-
          17
          -




**Composition
      of Loan Portfolio**





At
      March
      31, 2008, loans, net of unearned income, were $216,722,559, a decrease of
      $3,703,166 since December 31, 2007. 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 $216,085,651 and $210,124,946 during the first
      quarters of 2008 and 2007, respectively, which constituted 88.38% and 89.87%
      of
      average interest-earning assets for the respective periods. For the quarter
      ended March 31, 2008, our average loan to deposit ratio was 128.76%, compared
      to
      133.03% for the same period in 2007. 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 94.33% for the quarter ended March 31, 2008, compared to
      96.23% for the same period of 2007. 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 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 at least
      quarterly 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, 2008 is adequate to
      cover
      possible losses in the loan portfolio; however, management's judgment is based
      upon a number of assumptions about future events, which are believed to be
      reasonable, but which may not prove valid. Thus, there can be no assurance
      that
      charge-offs in future periods will not exceed the allowance for loan 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. As of March 31, 2008 and December 31, 2007, the allowance for
      loan
      losses compared to gross loans was 1.11% and 1.05%, respectively.




-
          18
          -




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
              
              Three months ended
              
              Year endedMarch 31,
              
              March 31,
              
              December 31,2008
              
              2007
              
              2007Balance
                  at beginning of year
              
              $
              2,328,792
              
              $
              1,860,283
              
              $
              1,860,283Loan
                  losses:Commercial
              
              
              14,753
              
              
              62,941
              
              
              82,881Mortgages
              
              
              0
              
              
              0
              
              
              0Consumer
              
              
              3,672
              
              
              4,882
              
              
              31,882Total
                  loan losses
              
              
              18,425
              
              
              67,823
              
              
              114,763Recoveries
                  on loans previously charged offCommercial
              
              
              0
              
              
              0
              
              
              0Mortgages
              
              
              0
              
              
              2,271
              
              
              2,271Consumer
              
              
              0
              
              
              188
              
              
              1,001Total
                  loan recoveries
              
              
              0
              
              
              2,459
              
              
              3,272Net
                  loan losses
              
              
              18,425
              
              
              65,364
              
              
              111,491Provision
                  for loan losses charged to expense
              
              
              120,000
              
              
              0
              
              
              580,000Balance
                  at end of year
              
              $
              2,430,367
              
              $
              1,794,919
              
              $
              2,328,792Allowance
                  for loan losses to loans outstanding at end of period
              
              
              1.11
              %
              
              0.84
              %
              
              1.05
              %




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
      $8,367,067 and $5,449,838 at March 31, 2008 and December 31, 2007, respectively.
      These loans are detailed below:




**Risk
      Elements of Loan Portfolio**


**March 31,**
              
              **December 31,****2008**
              
              **2007**Nonaccrual
                  LoansCommercial
              
              $
              2,478,453
              
              $
              2,462,002Mortgage
              
              
              1,893,938
              
              
              415,000Consumer
              
              
              0
              
              
              04,372,391
              
              
              2,877,002Accruing
                  Loans Past Due 90 Days or MoreCommercial
              
              
              130,923
              
              
              396,003Mortgage
              
              
              3,812,716
              
              
              2,162,828Consumer
              
              
              51,037
              
              
              14,0053,994,676
              
              
              2,572,836$
              8,367,067
              
              $
              5,449,838




Loans
      are
      classified as impaired when the collection of contractual obligations, including
      principal and interest, is doubtful. Management has identified no significant
      impaired loans as of March 31, 2008 or December
      31 ,
      2007.




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          19
          -




As
      reported during the fourth quarter of 2007, we received notice that a large
      corporate borrower filed a voluntary petition under Chapter 7 of the United
      States Bankruptcy Code. The amounts owed to us by the borrower under all loans
      was approximately $2,435,030 as of March 31, 2008. These loans are secured
      by
      liens on certain of the borrower’s assets, on certain parcels of real property
      and by personal guarantees. In addition, the borrower’s principal is the
      managing member of a limited liability company that was indebted to us in the
      approximate amount of $296,723 as of March 31, 2008, which indebtedness is
      secured by liens on certain parcels of real property and by certain personal
      guarantees. The limited liability company’s primary business activity is leasing
      its real property to the borrower, and management believes that the borrower’s
      financial difficulties have the potential to adversely affect the limited
      liability company’s ability to make timely payments to us under its loans.
      Although management believes that these loans were adequately collateralized
      at
      the time they were made, it is not possible to predict what impact, if any,
      the
      bankruptcy proceeding will have on our ability to obtain repayment under the
      loans or realize on the collateral securing those loans. Management intends
      to
      aggressively pursue repayment of these loans and recovery and liquidation of
      the
      collateral securing the loans if necessary. Nevertheless, it is possible that
      the borrower’s bankruptcy filing, the deterioration of the borrower’s financial
      condition and/or decline in the value of any of the collateral securing the
      loans could have a material, adverse impact on our financial condition and/or
      results of operations.





**Deposits
      and Other Interest-Bearing Liabilities**





Average
      interest-bearing deposits increased $6,853,505 or 5.37% to $134,565,299 for
      the
      three months ended March 31, 2008, from $127,711,794 for the same period of
      2007. Average noninterest-bearing deposits increased $3,019,584 or 9.99% to
      $33,260,450 for the three months ended March 31, 2008, from $30,240,866 for
      the
      same period of 2007. Average total deposits have increased 6.25% or $9,873,089
      to $167,825,749 for the three months ended March 31, 2008 from $157,952,660
      for
      the same period of 2007. Borrowings, primarily from the FHLB, decreased to
      $51,000,000 or 3.77% from $53,000,000 at December 31, 2007.





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 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 for March 31, 2008 and December 31 2007.





**March 31, 2008**
            
            **December 31, 2007****Amount**
            
            **Rate**
            
            **Amount**
            
            **Rate**Federal
                Home Loan Bank (daily re-price)
            
            $
            0
            
            
            -
            %
            $
            0
            
            
            -
            %Retail
                Repurchase Agreements
            
            
            8,658,191
            
            
            3.30
            %
            
            9,041,476
            
            
            3.70
            %Federal
                Funds Borrowed
            
            
            0
            
            
            -
            %
            
            0
            
            
            -
            %Total
            
            $
            8,658,191
            
            
            
            
            $
            9,041,476





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





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





The
      Bank
      has lines of credit of $19,500,000 in unsecured overnight federal funds and
      $5,000,000 in secured overnight federal funds with correspondent banks at March
      31, 2008.





**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 $24,500,000 from correspondent banks, namely, Bank of America,
      Community Bank and M & T Bank. The Bank is also a member of the Federal Home
      Loan Bank of Atlanta, which provides another source of liquidity through a
      secured line of credit in the amount of $73,519,440 of which $51,000,000 has
      been advanced as of March 31, 2008. There were no short-term borrowings with
      the
      Federal Home Loan Bank of Atlanta as of March 31, 2008 or December 31,
      2007.





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, 2008 to the minimum ratios required by
      federal banking regulators is presented below.




-
          21
          -


**Minimum**
              
              **To be well****Actual**
              
              **Requirements**
              
              **Capitalized****Tier
                  1 risk-based capital**
              
              
              12.93
              %
              
              4.00
              %
              
              6.00
              %**Total
                  risk-based capital**
              
              
              14.06
              %
              
              8.00
              %
              
              10.00
              %**Leverage
                  ratio**
              
              
              10.76
              %
              
              4.00
              %
              
              5.00
              %




**Item
      3.**  **Quantitative
      and Qualitative Disclosures About Market Risk.**





Our
      primary market risk is to interest rate fluctuation and management has
      procedures in place to evaluate and mitigate this risk, both of which are
      discussed in Item 7 of Part II of the Annual Report of Peoples Bancorp, Inc.
      on
      Form 10-K for the year ended December 31, 2007 under the caption “Market Risk
      Management”. Management believes that there have been no material changes in the
      our market risks or the procedures used to evaluate and mitigate these risks
      since December 31, 2007. The simulation models that we use to quantify the
      effect a hypothetical immediate plus or minus 200 basis point change in rates
      would have on net interest income and the fair value of capital produced the
      following results as of March 31, 2008 and December 31, 2007:





**Immediate Change in Rates****+200**
            
            **+100**
            
            **-100**
            
            **-200**
            
            **Policy****Basis Points**
            
            **Basis Points**
            
            **Basis Points**
            
            **Basis Points**
            
            **Limit****March
                31, 2008**%
                Change in Net Interest Income
            
            
            5.01
            %
            
            2.49
            %
            
            -3.01
            %
            
            -
                6.81
            %
            
            +10
            %%
                Change in Fair Value of Capital
            
            
            7.67
            %
            
            3.73
            %
            
            -3.60
            %
            
            -7.26
            %
            
            +20
            %**December
                31, 2007**%
                Change in Net Interest Income
            
            
            4.12
            %
            
            2.07
            %
            
            -2.55
            %
            
            -5.62
            %
            
            +10
            %%
                Change in Fair Value of Capital
            
            
            5.89
            %
            
            2.88
            %
            
            -3.26
            %
            
            -6.50
            %
            
            +20
            %





**Item
      4T.**  **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, who also serves as the
      Company’s Chief Financial Officer (the “CEO”), to allow for timely decisions
      regarding required disclosure. A control system, no matter how well conceived
      and operated, can provide only reasonable, not absolute, assurance that the
      objectives of the control system are met. Further, the design of a control
      system must reflect the fact that there are resource constraints, and the
      benefits of controls must be considered relative to their costs. These inherent
      limitations include the realities that judgments in decision-making can be
      faulty, and that breakdowns can occur because of simple error or mistake.
      Additionally, controls can be circumvented by the individual acts of some
      persons, by collusion of two or more people, or by management override of the
      control. The design of any system of controls also is based in part upon certain
      assumptions about the likelihood of future events, and there can be no assurance
      that any design will succeed in achieving its stated goals under all potential
      future conditions; over time, control may become inadequate because of changes
      in conditions, or the degree of compliance with the policies or procedures
      may
      deteriorate.





An
      evaluation of the effectiveness of these disclosure controls was carried out
      as
      of March 31, 2008 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.




-
          22
          -




During
      the first quarter of 2008, there was no change in the Company’s 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.**




None.





**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, 2007.
      Management does not believe that any material changes in these risk factors
      have
      occurred since December 31, 2007.





**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.   O** **ther
      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.




-
          23
          -




**SIGNATURES**





Pursuant
      to the requirements of the Securities Exchange Act of 1934, the registrant
      has
      caused **** this
      report to be signed on its behalf by the undersigned thereunto duly
      authorized.


**PEOPLES
                  BANCORP, INC.**Date:
                  May 13, 2008
              By:
              /s/
                  Thomas G. StevensonThomas
                  G. StevensonPresident/Chief
                  Executive Officer&
                  Chief Financial Officer




-
          24
          -




**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)




-
          25
          -