**UNITED
      STATES**


**SECURITIES
      AND EXCHANGE COMMISSION**


**WASHINGTON,
      DC 20549**





**FORM
      10-Q**





xQuarterly
      report under
      Section 13 or 15(d) of the Securities Exchange Act of 1934




For
      the
      quarterly period ended  September
      30, 2006





oTransition
      report under
      Section 13 or 15(d) of the Exchange Act




For
      the
      transition period from _______________ to ________________





Commission
      File Number: 0-24169





**PEOPLES
      BANCORP, INC.**


(Exact
      name of registrant as specified in its charter)





Maryland
            52-2027776(State
                or Other Jurisdiction of
            (I.R.S.
                EmployerIncorporation
                or Organization)
            Identification
                No.)P.O.
                Box 210, 100 Spring Avenue, Chestertown, Maryland
            21620(Address
                of Principal Executive Offices)
            (Zip
                Code)





(410)
      778-3500


Registrant’s
      Telephone Number, Including Area Code





Indicate
      by check mark whether the registrant (1) has filed all reports required to
      be
      filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
      the
      preceding 12 months (or for such shorter periods that the registrant was
      required to file such reports), and (2) has been subject to such filing
      requirements for the past 90 days. Yes |X|    No |_|





Indicate
      by check mark whether the registrant is a large accelerated filer, an
      accelerated filer, or a non-accelerated filer. See definition of “accelerated
      filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check
      one):





Large
                accelerated filer |_ |
            Accelerated
                filer |_|
            Non-accelerated
                filer |X|





Indicate
      by check mark whether the registrant is a shell company (as defined in Rule
      12b-2 of the Act).


Yes
      |_|    No |X|





**APPLICABLE
      ONLY TO CORPORATE ISSUERS**





State
      the
      number of shares outstanding of each of the issuer’s classes of common stock, as
      of the latest practicable date: 789,012 shares of common stock issued and outstanding as of November 1,
      2006








**PEOPLES
      BANCORP, INC.**





**FORM
      10-Q**


**INDEX**







Part
      I -
      Financial Information





PageItem
                1.
            Financial
                StatementsConsolidated
                Balance Sheets at September 30, 2006 (unaudited)and
                December 31, 2005
            3Consolidated
                Statements of Income (unaudited) for three and nine monthsended
                September 30, 2006 and 2005
            4Consolidated
                Statements of Changes in Stockholders’ Equity (unaudited)for
                the nine months ended September 30, 2006 and 2005
            5Consolidated
                Statements of Cash Flows (unaudited) for nine monthsended
                September 30, 2006 and 2005
            6Notes
                to Financial Statements (unaudited)
            7Item
                2.
            Management’s
                Discussion and Analysis of Financial Conditionand
                Results of Operations
            10Item
                3.
            Quantitative
                and Qualitative Disclosures About Market Risk
            19Item
                4.
            Controls
                and Procedures
            19Part
                II - Other InformationItem
                1.
            Legal
                Proceedings
            20Item
                1A.
            Risk
                Factors
            20Item
                2.
            Unregistered
                Sales of Equity Securities and Use of Proceeds
            20Item
                3.
            Defaults
                Upon Senior Securities
            20Item
                4.
            Submission
                of Matters to a Vote of Security Holders
            20Item
                5.
            Other
                Information
            20Item
                6.
            Exhibits
            20Signatures
            21Exhibit
                Index
            22








-2-


**PART
      I - FINANCIAL INFORMATION**





**Item
      1.**   **Financial
      Statements.**


**PEOPLES
        BANCORP, INC. AND SUBSIDIARY**




**Consolidated
                Balance Sheets**
            
            
            September
                30,
            
            
            December
                31,2006
            
            
            2005(unaudited)**ASSETS**Cash
                and due from banks
            
            $
            4,622,339
            
            $
            4,709,890Federal
                funds sold
            
            
            1,820,343
            
            
            2,099,705Securities
                available for sale
            
            
            7,925,966
            
            
            10,439,293Securities
                held to maturity (approximate fairvalue
                of $11,867,456 and $9,800,311)
            
            
            11,921,086
            
            
            9,465,210Federal
                Home Loan Bank stock, at cost
            
            
            2,533,100
            
            
            2,282,400Loans,
                less allowance for loan lossesof
                $1,882,380 and $1,649,420
            
            
            205,196,400
            
            
            203,143,629Premises
                and equipment
            
            
            3,772,139
            
            
            3,812,831Accrued
                interest receivable
            
            
            1,523,862
            
            
            1,268,377Deferred
                income taxes
            
            
            312,633
            
            
            304,888Other
                assets
            
            
            1,045,528
            
            
            765,214**Total
                Assets**
            
            $
            240,673,396
            
            $
            238,291,437**LIABILITIES
                AND STOCKHOLDERS’ EQUITY**DepositsNon-interest-bearing
            
            $
            28,908,089
            
            $
            33,509,679Interest-bearing
            
            
            128,673,276
            
            
            130,451,691157,581,365
            
            
            163,961,370Securities
                sold under repurchase agreementsand
                federal funds purchased
            
            
            12,683,494
            
            
            9,251,240Federal
                Home Loan Bank advances
            
            
            43,700,000
            
            
            40,700,000Accrued
                interest payable
            
            
            414,572
            
            
            319,987Income
                taxes payable
            
            
            0
            
            
            100,786Other
                liabilities
            
            
            522,995
            
            
            389,833214,902,426
            
            
            214,723,216Stockholders'
                equityCommon
                stock, par value $10 per share, authorized 1,000,000shares,
                issued and outstanding 789,012 shares
            
            
            7,890,120
            
            
            7,890,120Additional
                Paid in Capital
            
            
            2,920,866
            
            
            2,920,866Retained
                earnings
            
            
            14,978,946
            
            
            12,763,90325,789,932
            
            
            23,574,889Accumulated
                other comprehensive income
            
            
            (18,962
            )
            
            (6,668
            )25,770,970
            
            
            23,568,221**Total
                Liabilities and Stockholders’ Equity**
            
            $
            240,673,396
            
            $
            238,291,437




The
      accompanying notes are an integral part of these financial
      statements.




-3-


**PEOPLES
        BANCORP, INC. AND SUBSIDIARY**


**Consolidated
        Statements of Income (unaudited)**




For
                the three months ended
            
            
            For
                the nine months endedSeptember
                30
            
            
            September
                302006
            
            
            2005
            
            
            2006
            
            
            2005Interest
                and dividend revenueLoans,
                including fees
            
            $
            3,816,187
            
            $
            3,325,711
            
            $
            11,168,900
            
            $
            9,337,633Government
                Agencies Securities
            
            
            215,743
            
            
            184,033
            
            
            627,709
            
            
            553,440Deposits
                in other banks
            
            
            376
            
            
            429
            
            
            2,328
            
            
            1,254Federal
                funds sold
            
            
            25,347
            
            
            26,361
            
            
            74,130
            
            
            46,720Equity
                securities
            
            
            35,366
            
            
            19,621
            
            
            93,748
            
            
            37,022Total
                interest and dividend revenue
            
            
            4,093.019
            
            
            3,556.155
            
            
            11,966,815
            
            
            9,976,069


Interest
                expenseDeposits
            
            
            827,718
            
            
            643,306
            
            
            2,297,530
            
            
            1,835,924Borrowed
                funds
            
            
            609,819
            
            
            381,054
            
            
            1,769,955
            
            
            877,597Total
                interest expense
            
            
            1,437,537
            
            
            1,024,360
            
            
            4,067,485
            
            
            2,713,521Net
                interest income
            
            
            2,655,482
            
            
            2,531,795
            
            
            7,899,330
            
            
            7,262,548Provision
                for loan losses
            
            
            0
            
            
            120,000
            
            
            240,000
            
            
            360,000Net
                interest income afterprovision
                for loan losses
            
            
            2,655,482
            
            
            2,411,795
            
            
            7,659,330
            
            
            6,902,548Noninterest
                revenueService
                charges on deposit accounts
            
            
            219,826
            
            
            201,892
            
            
            646,529
            
            
            579,664Other
                noninterest revenue
            
            
            59,780
            
            
            43,929
            
            
            232,635
            
            
            185,371Total
                noninterest revenue
            
            
            279,606
            
            
            245,821
            
            
            879,164
            
            
            765,035Noninterest
                expensesSalaries
                and employee benefits
            
            
            729,584
            
            
            702,731
            
            
            2,100,487
            
            
            2,067,849Occupancy
            
            
            71,150
            
            
            65,624
            
            
            201,302
            
            
            184,337Furniture
                and equipment
            
            
            53,992
            
            
            44,556
            
            
            166,325
            
            
            142,133Other
                operating
            
            
            365,417
            
            
            325,014
            
            
            1,083,510
            
            
            973,157Total
                noninterest expenses
            
            
            1,220,143
            
            
            1,137,925
            
            
            3,551,624
            
            
            3,367,476Income
                before income taxes
            
            
            1,714,945
            
            
            1,519,691
            
            
            4,986,870
            
            
            4,300,107Income
                taxes
            
            
            609,189
            
            
            571,878
            
            
            1,840,793
            
            
            1,617,765Net
                income
            
            $
            1,105,756
            
            $
            947,813
            
            $
            3,146,077
            
            $
            2,682,342Earnings
                per common share
            
            $
            1.40
            
            $
            1.20
            
            $
            3.99
            
            $
            3.40








The
      accompanying notes are an integral part of these financial
      statements.





-4-


**PEOPLES
        BANCORP, INC. AND SUBSIDIARY**


**Consolidated
        Statements of Changes in Stockholders’ Equity
        (unaudited)**


**NINE
        MONTHS ENDED SEPTEMBER 30, 2006 and 2005**




AccumulatedAdditional
            
            
            
            
            
            otherCommon
            
            
            paid-in
            
            
            Retained
            
            
            comprehensive
            
            
            ComprehensiveStock
            
            
            capital
            
            
            earnings
            
            
            income
            
            
            income**Balance,
                December 31, 2004**
            
            $
            7,890,120
            
            $
            2,920,866
            
            $
            10,309,734
            
            $
            86,598Net
                income
            
            
            -
            
            
            -
            
            
            2,682,342
            
            
            -
            
            $
            2,682,342Unrealized
                loss on investmentsecurities
                available for sale netof
                income taxes of $51,413
            
            
            -
            
            
            -
            
            
            -
            
            
            (81,712
            )
            
            (81,712
            )Comprehensive
                income
            
            
            
            
            
            
            
            
            
            
            
            
            
            $
            2,600,630Cash
                dividend, $1.10 per share
            
            
            -
            
            
            -
            
            
            (867,912
            )
            
            -**Balance,
                September 30, 2005**
            
            $
            7,890,120
            
            $
            2,920,866
            
            $
            12,124,164
            
            $
            4,886**Balance,
                December 31, 2005**
            
            $
            7,890,120
            
            $
            2,920,866
            
            $
            12,763,903
            
            $
            (6,668
            )Net
                income
            
            
            -
            
            
            -
            
            
            3,146,077
            
            
            -
            
            $
            3,146,077Unrealized
                loss on investmentsecurities
                available for sale netof
                income taxes of $7,735
            
            
            -
            
            
            -
            
            
            -
            
            
            (12,294
            )
            
            (12,294
            )Comprehensive
                income
            
            
            
            
            
            
            
            
            
            
            
            
            
            $
            3,133,783Cash
                dividend, $1.18 per share
            
            
            -
            
            
            -
            
            
            (931,034
            )
            
            -**Balance,
                September 30, 2006**
            
            $
            7,890,120
            
            $
            2,920,866
            
            $
            14,978,946
            
            $
            (18,962
            )




The
      accompanying notes are an integral part of these financial
      statements.




-5-


**PEOPLES
      BANCORP, INC. AND SUBSIDIARY**


**Consolidated
      Statements of Cash Flows (unaudited)**





For
                the nine months endedSeptember
                30**2006**
            
            
            **2005****CASH
                FLOWS FROM OPERATING ACTIVITIES**Interest
                received
            
            $
            11,529,301
            
            $
            9,560,645Fees
                and commissions received
            
            
            879,164
            
            
            765,035Cash
                paid to suppliers and employees
            
            
            (3,533,841
            )
            
            (3,183,587
            )Interest
                paid
            
            
            (3,972,901
            )
            
            (2,672,062
            )Taxes
                paid
            
            
            (1,941,579
            )
            
            (1,693,442
            )2,960,144
            
            
            2,776,589**CASH
                FLOWS FROM INVESTING ACTIVITIES**Cash
                paid for premises, equipment, and software
            
            
            (124,242
            )
            
            (170,850
            )Loans
                made, net of principal collected
            
            
            (2,141,254
            )
            
            (29,797,242
            )Proceeds
                from maturities and calls of securitiesAvailable
                for sale
            
            
            3,500,000
            
            
            2,500,000Held
                to maturity
            
            
            2,001,222
            
            
            2,001,413Purchase
                of securities available for sale
            
            
            (3,425,525
            )
            
            0Purchase
                of securities held to maturity
            
            
            (2,007,773
            )
            
            (4,453,117
            )Purchase
                of FHLB Stock
            
            
            (250,700
            )
            
            (1,237,600
            )(2,448,272
            )
            
            (31,157,396
            )**CASH
                FLOWS FROM FINANCING ACTIVITIES**Net
                increase (decrease) inTime
                deposits
            
            
            2,350,183
            
            
            4,433,516Other
                deposits
            
            
            (8,730,188
            )
            
            (1,446,447
            )Securities
                sold under repurchase agreements
            
            
            3,432,254
            
            
            2,315,597Advances
                under (repayments of) notes payable
            
            
            3,000,000
            
            
            26,500,000Dividends
                paid
            
            
            (931,034
            )
            
            (867,912
            )(878,785
            )
            
            30,934,754**NET
                INCREASE (DECREASE) IN CASH**
            
            
            (366,913
            )
            
            2,553,947CASH
                AND EQUIVALENTS AT BEGINNING OF PERIOD
            
            
            6,809,595
            
            
            5,912,835CASH
                AND EQUIVALENTS AT END OF PERIOD
            
            $
            6,442,682
            
            $
            8,466,782**RECONCILIATION
                OF NET INCOME TO NET CASH PROVIDED****FROM
                OPERATING ACTIVITIES**Net
                income
            
            $
            3,146,077
            
            $
            2,682,342**ADJUSTMENTS**Depreciation
                and amortization
            
            
            164,934
            
            
            135,739Provision
                for loan losses
            
            
            240,000
            
            
            360,000Security
                discount accretion, net of premium amortization
            
            
            (30,512
            )
            
            (8,841
            )Decrease
                (increase) inAccrued
                interest receivable
            
            
            (255,485
            )
            
            (379,900
            )Other
                assets
            
            
            (280,314
            )
            
            (2,328
            )Increase
                (decrease) inDeferred
                origination fees and costs, net
            
            
            (151,517
            )
            
            (26,683
            )Accrued
                Interest payable and other liabilities
            
            
            227,747
            
            
            91,937Income
                taxes payable
            
            
            (100,786
            )
            
            (75,677
            )$
            2,960,144
            
            $
            2,776,589




The
      accompanying notes are an integral part of these financial
      statements.




-6-





**Peoples
      Bancorp, Inc. and Subsidiary**


**Notes
      to Financial Statements (unaudited)**








1. Basis
          of
          Presentation





The
      accompanying unaudited consolidated financial statements of Peoples Bancorp,
      Inc. (the “Company”) and its subsidiary, The Peoples Bank (the “Bank”), have
      been prepared in accordance with generally accepted accounting principles in
      the
      United States of America for interim financial information and with the
      instructions to Form 10-Q and Regulation S-X of the Securities and Exchange
      Commission. Accordingly, they do not include all the information and footnotes
      required by generally accepted accounting principles for complete financial
      statements. In the opinion of management, all adjustments (consisting of normal
      recurring accruals) considered necessary for a fair presentation have been
      included. Operating results for the three and nine months ended September 30,
      2006 are not necessarily indicative of the results that may be expected for
      the
      year ending December 31, 2006 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,
      2006.





2.       
      Cash Flows





For
      purposes of reporting cash flows, cash and cash equivalents include cash on
      hand, amounts due from banks and overnight investments in federal funds
      sold.





3.       
      Comprehensive income





For
      the
      nine months ended September 30, 2006 and 2005, total comprehensive income,
      net
      of taxes, was $3,133,783 and $2,600,630, 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 September 30, 2006. The Company
      is not party to any other off-balance sheet arrangements.





At
                September 30, 2006Revolving
                Home Equity Lines
            
            $
            3,598,928Commercial
                Real Estate
            
            $
            4,880,545Other
                Unused Commitments
            
            $
            18,911,077Commercial
                Letters of Credit
            
            $
            5,079,359





-7-





5. Earnings
      Per Share





Earnings
      per common share is derived by dividing net income available to holders of
      shares of common stock by the weighted average number of shares of common stock
      outstanding of 789,012 for the three- and nine-month periods ended September
      30,
      2006 and 2005.





6. Pension





The
      Company maintains a defined benefit pension plan covering substantially all
      employees. Benefits are based on years of service and the employee’s highest
      average rate of earnings for five consecutive years during the final ten full
      years before retirement. The Company’s funding policy is to contribute annually
      the maximum amount that can be deducted for income tax purposes, determined
      using the projected unit credit cost method. The assets of the plan are invested
      in various time deposits and held in trust as required by law.





During
      the nine months ended September 30, 2006 and 2005, the Company recognized net
      periodic costs for this plan of $146,351 and $114,956, respectively. During
      the
      nine months ended September 30, 2006 and 2005, the Company contributed $93,810
      and $85,700, respectively, to the plan.





7. Recent
      Accounting Pronouncements





In
      February 2006, the FASB published FASB Statement No. 155, *Accounting
      for Certain Hybrid Financial Instruments* (“SFAS
      No.155”). SFAS 155 amends FASB Statements No. 133, *Accounting
      for Derivative Instruments and Hedging Activities* ,
      and No.
      140, *Accounting
      for Transfers and Servicing of Financial Assets and Extinguishments of
      Liabilities* .
      Among
      other things, SFAS No.155 resolves issues related to the financial reporting
      of
      certain hybrid financial instruments (financial instruments that have embedded
      derivatives) to be accounted for as a whole at fair value if the holder elects
      this option. This accounting eliminates the need to bifurcate the derivative
      from its host. SFAS No.155 also eliminates certain previous guidance that
      provided that beneficial interests in securitized financial assets are not
      subject to the provisions of SFAS No. 133. Lastly, SFAS No.155 also eliminates
      a
      restriction on the passive derivative instruments that a qualifying special
      purpose entity may hold. Management does not expect the adoption of SFAS No.155
      to have a material impact on the Company’s consolidated financial statements.





In
      March
      2006, the FASB published FASB Statement No. 156, *Accounting
      for Servicing of Financial Assets* (“SFAS
      No.156”). SFAS No.156 amends FASB Statement No. 140, *Accounting
      for Transfers and Servicing of Financial Assets and Extinguishments of
      Liabilities* ,
      with
      respect to the accounting for separately recognized servicing assets and
      servicing liabilities. SFAS No.156 requires an entity to recognize a servicing
      asset or servicing liability each time it undertakes an obligation to service
      a
      financial asset by entering into a servicing contract in each of several
      specific situations. It also requires all separately recognized servicing assets
      and servicing liabilities to be initially measured at fair value, if
      practicable, and permits an entity to choose either of two accepted measurement
      methods for each class of separately recognized servicing assets and servicing
      liabilities. Further, SFAS No.156 permits, at its initial adoption, a one-time
      reclassification of available-for-sale securities to trading securities by
      entities with recognized servicing rights. Lastly, SFAS No.156 requires separate
      presentation of servicing assets and servicing liabilities subsequently measured
      at fair value and additional disclosures for all separately recognized servicing
      assets and servicing liabilities. SFAS No. 156 is effective for fiscal years
      beginning after September 15, 2006. Management does not expect the adoption
      of
      SFAS No.156 to have a material impact on the Company’s consolidated financial
      statements.





-8-


In
      September, 2006, the FASB published FASB Statement No. 157, *Fair
      Value Measurements* .
      This
      Statement defines fair value, establishes a framework for measuring fair value,
      and expands disclosures about fair value measurements.  SFAS No. 157 will
      be applied prospectively and is effective for fiscal years beginning after
      November 15, 2007, and interim periods within those fiscal years.  SFAS No.
      157 is not expected to have a material impact on the Company’s financial
      statements.




In
      September, 2006, the FASB published FASB Statement No. 158, *Employers’
      Accounting for Defined Benefit Pension and Other Postretirement
      Plans* , *an
      amendment of FASB Statements No. 87, 88, 106, and 132(R)* ,
      which
      requires companies to recognize a net liability or asset to report the funded
      status of their defined benefit pension and other postretirement benefit plans
      on their balance sheets.  The effective date of the recognition and
      disclosure provisions for calendar-year public companies is for calendar years
      ending after December 15, 2006.  The Company will adopt this standard
      during the year ending December 31, 2006.








-9-


**Item
      2.**   **Management’s
      Discussion and Analysis of Financial Condition and Results of
      Operations.**





Peoples
      Bancorp, Inc. is a Maryland corporation and a financial holding company
      registered under the Bank Holding Company Act of 1956, as amended, headquartered
      in Chestertown, Kent County, Maryland. Peoples Bancorp, Inc. was incorporated
      on
      December 10, 1996 to serve as the holding company of The Peoples Bank of Kent
      County, Maryland (the “Bank”), a Maryland commercial bank, which it acquired on
      March 24, 1997. On June 15, 2006, the Bank changed its name to The Peoples
      Bank.





The
      Bank
      was incorporated on April 13, 1910 and operates five branches located in Kent
      County, Maryland. The Bank offers a variety of services to satisfy the needs
      of
      consumers and small- to medium-sized businesses and professional enterprises.
      Most of the Bank’s deposit and loan customers are located in and derived from
      Kent County, northern Queen Anne's County, and southern Cecil County, Maryland.
      This primary service area is located between the Chesapeake Bay and the western
      border of Delaware.





The
      Bank
      is building a branch location in Church Hill, Queen Annes County, Maryland.
      The
      cost is estimated to be $1,300,000 with an anticipated completion date of
      September 2007. The branch will have 2584 square feet of office/teller space
      and
      will be staffed initially with four employees. As a result of this expansion,
      noninterest expenses in 2007 are expected to increase.





When
      used
      in this report, the terms “Company”. “we”, “us” and “our” refer to Peoples
      Bancorp, Inc. and, unless the context clearly requires otherwise, the
      Bank.





**Application
      of Critical Accounting Policies**





Our
      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.





-10-


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 our
      financial condition and results of operation and should be read in conjunction
      with the September 30, 2006 Consolidated Financial Statements and Notes thereto
      included elsewhere in this report, and in conjunction with the December 31,
      2005
      audited Consolidated Financial Statements and Notes thereto and Management’s
      Discussion and Analysis or Plan of Operation set forth in the Annual Report
      of
      Peoples Bancorp, Inc. on Form 10-K for the year ended December 31, 2005.





**Forward-Looking
      Information**





This
      Quarterly Report on Form 10-Q may contain forward-looking statements within
      the
      meaning of The Private Securities Litigation Reform Act of 1995. Readers of
      this
      quarterly report should be aware of the speculative nature of “forward-looking
      statements”. Statements that are not historical in nature, including the words
“anticipate”, “estimate”, “should”, “expect”, “believe”, “intend”, and similar
      expressions, are based on current expectations, estimates and projections about
      (among other things) the industry and the markets in which we operate; they
      are
      not guarantees of future performance. Whether actual results will conform to
      expectations and predictions is subject to known and unknown risks and
      uncertainties, including risks and uncertainties discussed in this report,
      general economic, market or business conditions; changes in interest rates,
      deposit flow, the cost of funds, and demand for loan products and financial
      services; changes in our competitive position or competitive actions by other
      companies; changes in the quality or composition of loan and investment
      portfolios; the ability to mange growth; changes in laws or regulations or
      policies of federal and state regulators and agencies; and other circumstances
      beyond our control. These and other risks are discussed in detail in the section
      of the periodic reports filed by Peoples Bancorp, Inc. with the Securities
      and
      Exchange Commission (“SEC”) entitled “Risk Factors” (see Item 1A of Part II of
      this report). 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.





**RESULTS
      OF OPERATIONS**





**General**





For
      the
      three- and nine-month periods ended September 30, 2006, the Company reported
      net
      income of $1,105,756, or $1.40 per share, and $3,146,077, or $3.99 per share,
      respectively, compared to $947,813, or $1.20 per share, and $2,682,342, or
      $3.40
      per share, respectively, for the same periods in 2005. The increase of 16.66%
      for the three months and the 17.29% increase for the nine months ended September
      30, 2006 over the same periods last year resulted primarily from increases
      in
      net interest income and noninterest revenue and a decrease in the provision
      for
      loan losses offset by increases in noninterest expense and income tax
      expense.





-11-


**Net
      Interest Income**





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





Net
      interest income for the three-month period ended September 30, 2006 was
      $2,655,482, which represents an increase of $123,687 or 4.89% over net interest
      income for the same period in 2005. Net interest income for the nine-month
      period ended September 30, 2006 was $7,899,330, which represents an increase
      of
      $636,782 or 8.77% over the net interest income for the first nine months of
      2005. Interest earned on loans during the three and nine months ended September
      30, 2006 increased in part due to an increase in loan volume over the same
      periods last year. During 2005 and continuing through the third quarter of
      2006,
      short-term interest rates have steadily risen, while long-term interest rates
      have remained relatively stable.





Interest
      revenue for the three and nine months ended September 30, 2006 totaled
      $4,093,019 and $11,966,815, respectively, compared to $3,556,155 and $9,976,069,
      respectively, for the same periods last year, representing increases of $536,864
      or 15.10% and $1,990,746 or 19.96% respectively. The increase for the three
      and
      nine-month periods are attributable primarily to increases in loan income of
      $490,476 and $1,831,267, income from Government Agency securities of $31,710
      and
      $74,269, and equity securities of $15,745 and $56,726





Interest
      expense for the three- and nine-month periods ended September 30, 2006 totaled
      $1,437,537 and $4,067,485, respectively, compared to $1,024,360 and $2,713,521,
      respectively, for the same periods last year, representing increases of $413,177
      or 40.34% and $1,353,964 or 49.90%, respectively. Much of the increase during
      the first nine months of 2006 is attributable to the rising interest rates
      paid
      on deposits and borrowings.





The
      key
      performance measure for net interest income is the “net margin on
      interest-earning assets,” or net interest income divided by average
      interest-earning assets. The Company’s net interest margin for the nine-month
      period ended September 30, 2006 and 2005 was 4.65%. 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, and these events are impacted
      by
      a number of unpredictable factors.




-12-





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




**Average
      Balances, Interest, and Yield**




For
                the Nine Months Ended
            
            For
                the Nine Months EndedSeptember
                30, 2006
            
            
            September
                30, 2005Average
            
            
            
            
            
            
            
            
            AverageBalance
            
            
            Interest
            
            
            Yield
            
            
            Balance
            
            
            Interest
            
            
            Yield**Assets**Federal
                funds sold
            
            $
            2,051,584
            
            $
            74,130
            
            
            4.83
            %
            $
            2,042,362
            
            $
            46,720
            
            
            3.06
            %Interest-bearing
                deposits
            
            
            68,674
            
            
            2,441
            
            
            4.75
            %
            
            57,648
            
            
            1,315
            
            
            3.05
            %Investment
                securities:U.
                S. government agency
            
            
            19,750,117
            
            
            658,090
            
            
            4.45
            %
            
            20,048,216
            
            
            580,229
            
            
            3.87
            %Other
            
            
            2,493,944
            
            
            98,290
            
            
            5.27
            %
            
            1,632,726
            
            
            38,815
            
            
            3.18
            %Total
                investment securities
            
            
            22,244,061
            
            
            756,380
            
            
            4.55
            %
            
            21,680,942
            
            
            619,044
            
            
            3.82
            %Loans:Demand
                and time
            
            
            41,024,921
            
            
            2,756,614
            
            
            8.98
            %
            
            36,953,921
            
            
            2,106,931
            
            
            7.62
            %Mortgage
            
            
            160,334,009
            
            
            8,144,515
            
            
            6.79
            %
            
            146,191,936
            
            
            6,958,423
            
            
            6.36
            %Installment
            
            
            5,049,721
            
            
            306,060
            
            
            8.10
            %
            
            5,111,382
            
            
            304,914
            
            
            7.98
            %Total
                loans
            
            
            206,408,651
            
            
            11,207,189
            
            
            7.26
            %
            
            188,257,239
            
            
            9,370,268
            
            
            6.65
            %Allowance
                for loan losses
            
            
            1,797,988
            
            
            
            
            
            
            
            
            1,348,129Total
                loans, net of allowance
            
            
            204,610,663
            
            
            11,207,189
            
            
            7.32
            %
            
            186,909,110
            
            
            9,370,268
            
            
            6.70
            %Total
                interest-earning assets
            
            
            228,974,982
            
            
            12,040,140
            
            
            7.03
            %
            
            210,690,062
            
            
            10,037,347
            
            
            6.37
            %Non-interest-bearing
                cash
            
            
            4,683,523
            
            
            
            
            
            
            
            
            4,384,541Premises
                and equipment
            
            
            3,809,369
            
            
            
            
            
            
            
            
            3,808,252Other
                assets
            
            
            2,489,475
            
            
            
            
            
            
            
            
            1,681,963Total
                assets
            
            $
            239,957,349
            
            
            
            
            
            
            
            $
            220,564,818Liabilities
                and Stockholders’ EquityInterest-bearing
                DepositsSavings
                and NOW deposits
            
            $
            40,511,077
            
            
            172,576
            
            
            0.57
            %
            $
            44,774,796
            
            
            113,833
            
            
            0.34
            %Money
                market and supernow
            
            
            17,156,207
            
            
            157,773
            
            
            1.23
            %
            
            19,383,650
            
            
            79,223
            
            
            0.55
            %Other
                time deposits
            
            
            71,007,758
            
            
            1,970,155
            
            
            3.71
            %
            
            66,898,910
            
            
            1,642,868
            
            
            3.28
            %Total
                interest-bearing deposits
            
            
            128,675,042
            
            
            2,300,504
            
            
            2.39
            %
            
            131,057,356
            
            
            1,835,924
            
            
            1.87
            %Borrowed
                funds
            
            
            54,108,203
            
            
            1,769,955
            
            
            4.37
            %
            
            36,011,882
            
            
            877,597
            
            
            3.26
            %Total
                interest-bearing liabilities
            
            
            182,783,245
            
            
            4,070,459
            
            
            2.98
            %
            
            167,069,238
            
            
            2,713,521
            
            
            2.17
            %Noninterest-bearing
                deposits
            
            
            31,551,068
            
            
            
            
            
            
            
            
            30,533,165214,334,313
            
            
            
            
            
            
            
            
            197,602,403Other
                liabilities
            
            
            963,117
            
            
            
            
            
            
            
            
            819,489Stockholders’
                equity
            
            
            24,659,919
            
            
            
            
            
            
            
            
            22,142,926Total
                liabilities and stockholders equity
            
            $
            239,957,349
            
            
            
            
            
            
            
            $
            220,564,818Net
                interest spread
            
            
            
            
            
            
            
            
            4.05
            %
            
            
            
            
            
            
            
            4.20
            %Net
                interest income
            
            
            
            
            $
            7,969,681
            
            
            
            
            
            
            
            $
            7,323,826Net
                margin on interest-earning assets
            
            
            
            
            
            
            
            
            4.65
            %
            
            
            
            
            
            
            
            4.65
            %Interest
                on tax-exempt loans and investments are reported on fully taxable
                equivalent basis (a non GAAP financial measure).





-13-


**Noninterest
      Revenue**





Noninterest
      revenue for the three- and nine-month periods ended September 30, 2006 totaled
      $279,606 and $879,164, respectively, which represent increases of 13.74% and
      14.92%, respectively, over noninterest revenue for the same periods in 2005. The
      increase recognized for the first three and nine month periods of 2006 over
      the
      comparable periods last year resulted primarily from increases in service
      charges, including an increase in debit card income of $4.987 and $18,849,
      and
      an increase in activity service charges of $15,731 and $50,220. The use of
      debit
      cards and volume of overdrafts have increased





**Noninterest
      Expense**





The
      Company recorded noninterest expense of $1,220,143 and $3,551,624 for the three-
      and nine-month periods ended September 30, 2006, respectively, compared to
      $1,137,925 and $3,367,476, respectively for the same periods in 2005,
      representing increases of $82,218 or 7.23% and $184,148 or 5.47%, respectively.
      The increase for the three and nine-month periods are mainly attributable to
      increased directors fees of $881 and $11,572, additional computer and internet
      software expenses of $12,087 and $18,669 and data processing fees charged by
      outside processors of $3,908 and $10,943.





**Income
      Tax Expense**





The
      Company’s effective tax rate for the three- and nine-month periods ended
      September 30, 2006 was 35.5% and 36.9%, respectively, compared to 37.6% for
      the
      same periods in 2005. The Company’s income tax expense was $609,189 and
      $1,840,793 for the three- and nine-months ended September 30, 2006,
      respectively, compared to $571,878 and $1,617,765, respectively, for the same
      periods in 2005. These increases in income tax expense were comparable to the
      percentage increases in pre-tax income for the three and nine months ended
      September 30, 2006 when compared to the same periods last year.





**FINANCIAL
      CONDITION**





**Overview**





Total
      assets of the Company at September 30, 2006 were $240,673,396, compared to
      $238,291,437 at December 31, 2005, representing an increase of $2,381,959 or
      1.00% over December 31, 2005.





Total
      liabilities at September 30, 2006 were $214,902,426, compared to $214,723,216
      at
      December 31, 2005, representing an increase of $179,210 or 0.08%.





Stockholders’
      equity was $25,770,970 at September 30, 2006, compared to $23,568,221 at
      December 31, 2005, which represents an increase of $2,202,749. This increase
      was
      the result of net income for the period totaling $3,146,077, offset by an
      increase in the unrealized loss on securities available for sale net of income
      taxes of $12,294 and dividends paid to stockholders of $931,034.





Return
      on
      average equity for the nine months ended September 30, 2006 was 17.06%, compared
      to 16.20% for the same period in 2005. Return on average assets was 1.75% for
      the nine months ended September 30, 2006, compared to 1.63% for the same period
      in 2005.





-14-





**Composition
      of Loan Portfolio**





At
      September 30, 2006, loans, net of unearned income, were $205,196,400, an
      increase of $2,052,771 since December 31, 2005. 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 $204,610,663 and $186,909,110
      during the first nine months of 2006 and 2005, respectively, which constituted
      89.36% and 88.71% of average interest-earning assets for the respective periods.
      For the nine months ended September 30, 2006, our average loan to deposit ratio
      was 127.70%, compared to 115.67% for the nine months ended September 30, 2005.
      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 95.46% for the nine months
      ended September 30, 2006, compared to 94.59% for the nine months ended September
      30, 2005. We extend credit primarily to customers located in and near the
      Maryland counties of Kent County, Queen Anne’s County, and Cecil County. There
      are no industry concentrations in our loan portfolio. A substantial portion
      of
      our loans are, however, secured by real estate, and the real estate market
      in
      the region will influence the performance of the Company’s
      portfolio.





**Loan
      Quality**




The
      allowance for loan losses represents a reserve for potential losses in the
      loan
      portfolio. The adequacy of the allowance for loan losses is evaluated
      periodically based on a review of all significant loans, with a particular
      emphasis on non-accruing, past due, and other loans that management believes
      require attention. The determination of the reserve level rests upon
      management's judgment about factors affecting loan quality and assumptions
      about
      the economy. Management believes that the allowance as of September 30, 2006
      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 strengths of the borrowers and guarantors, the related collateral,
      and
      the effects of economic conditions. The overall evaluation of the adequacy
      of
      the total allowance for loan losses is based on an analysis of historical loan
      loss ratios, loan charge-offs, delinquency trends, and previous collection
      experience, along with an assessment of the effects of external economic
      conditions. The allowance may be increased to accommodate reserves for specific
      loans identified as substandard during management's loan review. Generally,
      however, neither net recoveries nor a decrease in loans will require a negative
      provision to reduce the allowance. Therefore, net recoveries and/or decreases
      in
      loans may cause the allowance as a percentage of gross loans to exceed our
      target.





The
      provision for loan losses is a charge to earnings in the current period to
      replenish the allowance and maintain it at a level management has determined
      to
      be adequate. As of September 30, 2006 and December 31, 2005, the allowance
      for
      loan losses compared to gross loans was 0.91% and 0.81%, respectively.




-15-




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




**Allowance
      for Loan Losses**




Nine
                months ended
            
            
            Nine
                months ended
            
            
            Year
                endedSeptember
                30,
            
            
            September
                30,
            
            
            December
                31,2006
            
            
            2005
            
            
            2005Balance
                at beginning of year
            
            $
            1,649,420
            
            $
            1,204,274
            
            $
            1,204,274Loan
                losses:Commercial
            
            
            4,946
            
            
            0
            
            
            0Mortgages
            
            
            0
            
            
            0
            
            
            0Consumer
            
            
            8,986
            
            
            15,136
            
            
            37,762Total
                loan losses
            
            
            13,932
            
            
            15,136
            
            
            37,762Recoveries
                on loans previously charged offCommercial
            
            
            25
            
            
            0
            
            
            0Mortgages
            
            
            0
            
            
            0
            
            
            0Consumer
            
            
            6,867
            
            
            2,504
            
            
            2,908Total
                loan recoveries
            
            
            6,892
            
            
            2,504
            
            
            2,908Net
                loan losses
            
            
            (7,040
            )
            
            (12,632
            )
            
            (34,854
            )Provision
                for loan losses charged to expense
            
            
            240,000
            
            
            360,000
            
            
            480,000Balance
                at end of year
            
            $
            1,882,380
            
            $
            1,551,642
            
            $
            1,649,420Allowance
                for loan losses to loans outstandingat
                end of period
            
            
            0.91
            %
            
            0.77
            %
            
            0.81
            %





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.





At
      September 30, 2006 and December 31, 2005, we had loans past due 90 days or
      more
      including nonaccrual loans of $593,250 and $383,540, respectively. These loans
      are detailed below:




**Risk
      Elements of Loan Portfolio**




**September
                30,**
            
            
            **December
                31,****2006**
            
            
            **2005**Nonaccrual
                Loans
            
            $
            38,988
            
            $
            368,204Accruing
                Loans Past Due 90 Days or More
            
            
            554,262
            
            
            15,336





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 September 30, 2006 or December
      31 ,
      2005.




-16-




**Deposits
      and Other Interest-Bearing Liabilities**





Average
      interest-bearing deposits decreased $2,382,314 or 1.82% to $128,675,042 for
      the
      nine months ended September 30, 2006, from $131,057,356 for the same period
      in
      2005. Average noninterest-bearing deposits increased $1,017,903 or 3.33% to
      $31,551,068 for the nine months ended September 30, 2006, from $30,533,165
      for
      the same period in 2005. Average total deposits have decreased 0.84% or
      $1,364,410 to $160,226,111 for the nine months ended September 30, 2006 from
      $161,590,521 for the same period in 2005. Borrowings at September 30, 2006,
      primarily from the Federal Home Loan Bank of Atlanta, increased to $43,700,000
      from $40,700,000 at December 31, 2005, an increase of 7.37%.





Deposits,
      particularly core deposits, have been our primary source of funding and have
      enabled us to meet both our short-term and long-term liquidity needs. Management
      anticipates that such deposits will continue to be our primary source of funding
      for the foreseeable future. It should be noted, however, that the economy and
      stock market continue to show signs of improvement, and renewed investor
      confidence in alternatives to deposit accounts, which may pay yields that are
      higher than those paid on deposits, could impact the growth of deposits in
      future periods.





**Short-term
      Borrowings**




The
      following table sets forth the our position with respect to short-term
      borrowings for September 30, 2006 and December 31 2005.





**September
                30, 2006**
            
            
            **December
                31, 2005****Amount**
            
            
            **Rate**
            
            
            **Amount**
            
            
            **Rate**Federal
                Home Loan Bank (daily re-price)
            
            $
            3,000,000
            
            
            5.61
            %
            $
            2,000,000
            
            
            4.44
            %Retail
                Repurchase Agreements
            
            
            7,583,494
            
            
            3.87
            %
            
            6,531,240
            
            
            2.04
            %Federal
                Funds Borrowed
            
            
            5,100,000
            
            
            5.69
            %
            
            2,720,000
            
            
            2.63
            %Total
            
            $
            15,683,494
            
            
            
            
            $
            11,251,240




We
      may
      borrow up to approximately 30% of total assets from the Federal Home Loan Bank
      (FHLB) through any combination of notes or line of credit advances. Both the
      notes payable and the line of credit are secured by a floating lien on all
      of
      our real estate mortgage loans. We were 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 $17,400,000 in unsecured overnight federal funds and
      $3,000,000 in secured overnight federal funds with correspondent banks at
      September 30, 2006.




-17-


**Liquidity
      and Capital Resources**





Liquidity
      describes the ability of the Company to meet financial obligations that arise
      out of the ordinary course of business. Liquidity is needed primarily to fund
      loans, meet depositor withdrawal requirements, and fund current and planned
      expenditures. We derive liquidity through increased customer deposits,
      maturities in the investment portfolio, loan repayments and income from earning
      assets. To the extent that deposits are not adequate to fund customer loan
      demand, liquidity needs can be met in the short-term funds markets through
      lines
      of credit totaling $20,400,000 from correspondent banks, namely, Bank of
      America, Community Bank and M & T Bank. The Bank is also a member of the
      Federal Home Loan Bank of Atlanta, which provides another source of liquidity
      through a secured line of credit in the amount of $71,480,000 of which
      $43,700,000 has been advanced as of September 30, 2006.





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





Risk-based
      capital standards have been supplemented with requirements for a minimum Tier
      1
      capital to assets ratio (leverage ratio). In addition, regulatory agencies
      consider the published capital levels as minimum levels and may require a
      financial institution to maintain capital at higher levels. A comparison of
      the
      Company’s capital ratios as of September 30, 2006 to the minimum ratios required
      by federal banking regulators is presented below.





Minimum
            
            
            To
                be wellActual
            
            
            Requirements
            
            
            capitalizedLeverage
                ratio
            
            
            10.63
            %
            
            4.00
            %
            
            5.00
            %Tier
                1 risk-based capital
            
            
            12.82
            %
            
            4.00
            %
            
            6.00
            %Total
                risk-based capital
            
            
            13.76
            %
            
            8.00
            %
            
            10.00
            %







-18-




**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, 2005 under the caption “Market Risk
      Management”. Management believes that there have been no material changes in our
      market risks or the procedures used to evaluate and mitigate these risks since
      December 31, 2005. 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 September 30, 2006 and December 31, 2005:






**Immediate
                Change in Rates****+200**
            
            **+100**
            
            **-100**
            
            **-200**
            
            **Policy****Basis
                Points**
            
            **Basis
                Points**
            
            **Basis
                Points**
            
            **Basis
                Points**
            
            **Limit****September
                30, 2006**%
                Change in Net Interest Income
            
            
            3.59
            %
            
            1.84
            %
            
            -2.34
            %
            
            -
                5.47
            %
            
            +10
            %%
                Change in Fair Value of Capital
            
            
            6.85
            %
            
            3.47
            %
            
            -3.82
            %
            
            -8.18
            %
            
            +20
            %**December
                31, 2005**%
                Change in Net Interest Income
            
            
            4.17
            %
            
            2.12
            %
            
            -2.94
            %
            
            -
                7.41
            %
            
            +10
            %%
                Change in Fair Value of Capital
            
            
            6.42
            %
            
            3.27
            %
            
            -3.77
            %
            
            -
                7.96
            %
            
            +20
            %





The
      change in our interest rate sensitivity profile since December 31. 2005 resulted
      from an decrease in our excess assets repricing within one year from $82,587,000
      as of December 31, 2005 to $67,713,000 at September 30, 2006.





**Item
      4.**   **Controls
      and Procedures.**





We
      maintain disclosure controls and procedures that are designed to ensure that
      information required to be disclosed in the Company’s reports filed under the
      Securities and Exchange Act of 1934 with the SEC, 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 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 September 30, 2006 under the supervision and with the participation of the
      Company’s management, including the CEO. Based on that evaluation, the Company’s
      management, including the CEO, has concluded that the Company’s disclosure
      controls and procedures are effective.





-19-


During
      the third quarter of 2006, 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 internal control over financial
      reporting.







**PART
      II - OTHER INFORMATION**




**Item
      1.**   **Legal
      Proceedings.**




None.





**Item
      1A.**  **Risk
      Factors.**





The
      risks
      and uncertainties to which our financial condition and operations are subject
      are discussed in detail in Item 1A of Part I of the Annual Report of Peoples
      Bancorp, Inc. on Form 10-K for the year ended December 31, 2005 and were updated
      in Item 1A of Part II of the Quarterly Report on Form 10-Q for the quarter
      ended
      June 30, 2006. Management does not believe that the Company’s risk factors have
      materially changes since they were last updated.





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


None.





**Item
      3.**   **Defaults
      Upon Senior Securities.**





Not
      applicable.





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





None.





**Item
      5.**  **Other
      Information.**




None.





**Item
      6.**   **Exhibits.**





2.1
            Stock
                Purchase Agreement dated September 12, 2006 (incorporated by reference
                to
                Exhibit 2.1 to the Company’s Current Report on Form 8-K filed on October
                11, 2006).3.1
            Articles
                of Incorporation of the Company, as corrected and amended (incorporated
                by
                reference to Exhibit 3.1 of the Company’s Current Report on Form 8-K filed
                on January 24, 2005)3.2
            Bylaws
                of the Company, as amended (incorporated by reference to Exhibit
                3.2 of
                the Company’s Annual Report on Form 10-K for the year ended December 31,
                2004)10.1
            Changes
                to Director Compensation Arrangement (incorporated by reference to
                Exhibit
                10.1 of the Company’s Current Report on Form 8-K filed on August 10,
                2005)31.1
            Certifications
                of the Chief Executive Officer and Chief Financial Officer pursuant
                to
                Section 302 of the Sarbanes-Oxley Act of 2002 (filed
                herewith)32.1
            Certifications
                of the Chief Executive Officer and Chief Financial Officer pursuant
                to
                Section 906 of the Sarbanes-Oxley Act of 2002 (furnished
                herewith)





-20-





**SIGNATURES**





Pursuant
      to the requirements of the Security 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:
                November 9, 2006
            By:
            /s/
                Thomas G.
                StevensonThomas
                G. StevensonPresident/Chief
                Executive Officer&
                Chief Financial Officer











-21-


**EXHIBIT
      INDEX**





Exhibit
                No.
            Description2.1
            Stock
                Purchase Agreement dated September 12, 2006 (incorporated by reference
                to
                Exhibit 2.1 to the Company’s Current Report on Form 8-K filed on October
                11, 2006).3.1
            Articles
                of Incorporation of the Company, as corrected and amended (incorporated
                by
                reference to Exhibit 3.1 of the Company’s Current Report on Form 8-K filed
                on January 24, 2005)3.2
            Bylaws
                of the Company, as amended (incorporated by reference to Exhibit
                3.2 of
                the Company’s Annual Report on Form 10-K for the year ended December 31,
                2004)10.1
            Changes
                to Director Compensation Arrangement (incorporated by reference to
                Exhibit
                10.1 of the Company’s Current Report on Form 8-K filed on August 10,
                2005)31.1
            Certifications
                of the Chief Executive Officer and the Chief Financial Officer pursuant
                to
                Section 302 of the Sarbanes-Oxley Act of 2002 (filed
                herewith)32.1
            Certification
                of the Periodic Report pursuant to Section 906 of the Sarbanes-Oxley
                Act
                of 2002 (furnished herewith)





-22-