**UNITED
        STATES**
 **SECURITIES
        AND EXCHANGE COMMISSION**
 **WASHINGTON,
        DC 20549**
 
 **FORM
        10-QSB**
  x
              Quarterly
                  report under Section 13 or 15(d) of the Securities Exchange Act
                  of
                  1934
  For
        the
        quarterly period ended  September
        30, 2005
 
 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
 
 Check
        whether the issuer (1) filed all reports required to be filed by Section
        13 or
        15(d) of the Exchange Act during the past 12 months (or for such shorter
        period
        that the issuer was required to file such reports), and (2) has been subject
        to
        such filing requirements for the past 90 days.
 Yes x No
o
 
 Indicate
        by check mark whether the registrant is a shell company (as defined in Rule
        12b-2 of the Exchange 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: 789,012 shares of common stock issued and outstanding as of November 1,
        2005
 
 Transitional
        Small Business Disclosure Format (check one): Yes o
        No x
 
  
  **PEOPLES
        BANCORP, INC.**
 
 **FORM
        10-QSB**
 **INDEX**
 
 PagePart
                  I - Financial
                  InformationItem
                  1.
              Financial
                  Statements
              3Consolidated
                  Balance Sheets at September 30, 2005 (unaudited)and
                  December 31, 2004
              3Consolidated
                  Statements of Income (unaudited) for three and nine monthsended
                  September 30, 2005 and 2004
              4Consolidated
                  Statements of Cash Flows (unaudited) for nine monthsended
                  September 30, 2005 and 2004
              5Notes
                  to Financial Statements (unaudited)
              6Item
                  2.
              Management’s
                  Discussion and Analysis or Plan of Operation
              8Item
                  3.
              Controls
                  and Procedures
              15Part
                  II - Other InformationItem
                  1.
              Legal
                  Proceedings
              16Item
                  2.
              Unregistered
                  Sales of Equity Securities and Use of Proceeds
              16Item
                  3.
              Defaults
                  Upon Senior Securities
              16Item
                  4.
              Submission
                  of Matters to a Vote of Security Holders
              16Item
                  5.
              Other
                  Information
              16Item
                  6.
              Exhibits
              16Signatures
              17Exhibit
                  Index
              18
  -2-
  **PART
        I - FINANCIAL INFORMATION**
 
 **Item
        1.**   **Financial
        Statements.**
  **PEOPLES
          BANCORP, INC. AND SUBSIDIARY**
 **Consolidated
                      Balance Sheets**
                  
                  September
                      30,
                  
                  December
                      31,2005
                  
                  2004**ASSETS**
                  
                  (unaudited)Cash
                      and due from banks
                  
                  $
                  4,749,913
                  
                  $
                  3,965,562Federal
                      funds sold
                  
                  
                  3,716,869
                  
                  
                  1,947,273Securities
                      available for sale
                  
                  
                  9,514,389
                  
                  
                  14,138,781Securities
                      held to maturity (approximate fairvalue
                      of $10,348,537 and $5,954,064)
                  
                  
                  10,463,059
                  
                  
                  6,011,312Federal
                      Home Loan Bank stock, at cost
                  
                  
                  2,102,400
                  
                  
                  864,800Loans,
                      less allowance for loan lossesof
                      $1,551,642 and $1,204,274
                  
                  
                  200,056,635
                  
                  
                  170,592,710Premises
                      and equipment
                  
                  
                  3,829,310
                  
                  
                  3,794,199Accrued
                      interest receivable
                  
                  
                  1,287,969
                  
                  
                  908,069Deferred
                      income taxes
                  
                  
                  89,889
                  
                  
                  38,411Other
                      assets
                  
                  
                  686,916
                  
                  
                  684,588**Total
                      Assets**
                  
                  $
                  236,497,349
                  
                  $
                  202,945,705**LIABILITIES
                      AND STOCKHOLDERS’ EQUITY**DepositsNon-interest-bearing
                  
                  $
                  31,000,046
                  
                  $
                  28,596,460Interest-bearing
                  
                  
                  131,749,849
                  
                  
                  131,166,366162,749,895
                  
                  
                  159,762,826Securities
                      sold under repurchase agreementsand
                      federal funds purchased
                  
                  
                  12,404,004
                  
                  
                  10,088,407Federal
                      Home Loan Bank advances
                  
                  
                  37,700,000
                  
                  
                  11,200,000Accrued
                      Interest payable
                  
                  
                  312,540
                  
                  
                  271,081Income
                      taxes payable
                  
                  
                  0
                  
                  
                  75,677Other
                      liabilities
                  
                  
                  390,874
                  
                  
                  340,396213,557,313
                  
                  
                  181,738,387Stockholders'
                      equityCommon
                      stock, par value $10 per share authorized 1,000,000shares
                      issued, and 789,012 shares outstanding
                  
                  
                  7,890,120
                  
                  
                  7,890,120Additional
                      Paid in Capital
                  
                  
                  2,920,866
                  
                  
                  2,920,866Retained
                      earnings
                  
                  
                  12,124,164
                  
                  
                  10,309,73422,935,150
                  
                  
                  21,120,720Accumulated
                      other comprehensive income
                  
                  
                  4,886
                  
                  
                  86,59822,940,036
                  
                  
                  21,207,318**Total
                      Liabilities and Stockholders’ Equity**
                  
                  $
                  236,497,349
                  
                  $
                  202,945,705
  The
        accompanying notes are an integral part of these financial
        statements.
  -3-
  **PEOPLES
          BANCORP, INC. AND SUBSIDIARY**
 **Consolidated
          Statements of Income (unaudited)**
 For
                    the three months ended
                
                For
                    the nine months endedSeptember
                    30
                
                September
                    302005
                
                2004
                
                2005
                
                2004Interest
                    and dividend revenueLoans,
                    including fees
                
                $
                3,325,711
                
                $
                2,467,951
                
                $
                9,337,633
                
                $
                7,002,883Government
                    Agencies Securities
                
                
                184,033
                
                
                201,679
                
                
                553,440
                
                
                655,820Deposits
                    in other banks
                
                
                429
                
                
                77
                
                
                1,254
                
                
                260Federal
                    funds sold
                
                
                26,361
                
                
                6,309
                
                
                46,720
                
                
                25,848Equity
                    securities
                
                
                19,621
                
                
                3,970
                
                
                37,022
                
                
                11,182Total
                    interest and dividend revenue
                
                
                3,556,155
                
                
                2,679,986
                
                
                9,976,069
                
                
                7,695,993Interest
                    expenseDeposits
                
                
                643,306
                
                
                580,466
                
                
                1,835,924
                
                
                1,778,051Borrowed
                    funds
                
                
                381,054
                
                
                51,123
                
                
                877,597
                
                
                89,361Total
                    interest expense
                
                
                1,024,360
                
                
                631,589
                
                
                2,713,521
                
                
                1,867,412Net
                    interest income
                
                
                2,531,795
                
                
                2,048,397
                
                
                7,262,548
                
                
                5,828,581Provision
                    for loan losses
                
                
                120,000
                
                
                32,000
                
                
                360,000
                
                
                61,500Net
                    interest income afterprovision
                    for loan losses
                
                
                2,411,795
                
                
                2,016,397
                
                
                6,902,548
                
                
                5,767,081Noninterest
                    revenueService
                    charges on deposit accounts
                
                
                201,892
                
                
                189,285
                
                
                579,664
                
                
                545,482Other
                    noninterest revenue
                
                
                43,929
                
                
                47,682
                
                
                185,371
                
                
                178,280Total
                    noninterest revenue
                
                
                245,821
                
                
                236,967
                
                
                765,035
                
                
                723,762Noninterest
                    expensesSalaries
                    and employee benefits
                
                
                702,731
                
                
                661,884
                
                
                2,067,849
                
                
                1,947,191Occupancy
                
                
                65,624
                
                
                63,369
                
                
                184,337
                
                
                184,761Furniture
                    and equipment
                
                
                44,556
                
                
                57,973
                
                
                142,133
                
                
                175,158Other
                    operating
                
                
                325,014
                
                
                319,269
                
                
                973,157
                
                
                897,527Total
                    noninterest expenses
                
                
                1,137,925
                
                
                1,102,495
                
                
                3,367,476
                
                
                3,204,637Income
                    before income taxes
                
                
                1,519,691
                
                
                1,150,869
                
                
                4,300,107
                
                
                3,286,206Income
                    taxes
                
                
                571,878
                
                
                435,799
                
                
                1,617,765
                
                
                1,240,547Net
                    income
                
                $
                947,813
                
                $
                715,070
                
                $
                2,682,342
                
                $
                2,045,659Earnings
                    per common share
                
                $
                1.20
                
                $
                0.90
                
                $
                3.40
                
                $
                2.58
  The
        accompanying notes are an integral part of these financial
        statements.
 
 -4-
 
 **PEOPLES
          BANCORP, INC. AND SUBSIDIARY**
 **Consolidated
          Statements of Cash Flows (unaudited)**
 For
                    the nine months endedSeptember
                    30**2005**
                
                **2004****CASH
                    FLOWS FROM OPERATING ACTIVITIES**Interest
                    received
                
                $
                9,560,645
                
                $
                7,588,656Fees
                    and commissions received
                
                
                765,035
                
                
                723,762Cash
                    paid to suppliers and employees
                
                
                (3,183,587
                )
                
                (2,915,765
                )Interest
                    paid
                
                
                (2,672,062
                )
                
                (1,911,737
                )Taxes
                    paid
                
                
                (1,693,442
                )
                
                (1,268,321
                )2,776,589
                
                
                2,216,595**CASH
                    FLOWS FROM INVESTING ACTIVITIES**Cash
                    paid for premises, equipment, and software
                
                
                (170,850
                )
                
                (177,397
                )Loans
                    made, net of principal collected
                
                
                (29,797,242
                )
                
                (20,921,325
                )Proceeds
                    from maturities and calls of securitiesAvailable
                    for sale
                
                
                2,500,000
                
                
                6,250,000Held
                    to maturity
                
                
                2,001,413
                
                
                2,461Purchase
                    of securities held to maturity
                
                
                (4,453,117
                )
                
                (1,988,875
                )Purchase
                    of FHLB Stock
                
                
                (1,237,600
                )
                
                (49,100
                )(31,157,396
                )
                
                (16,884,236
                )**CASH
                    FLOWS FROM FINANCING ACTIVITIES**Net
                    increase (decrease) inTime
                    deposits
                
                
                4,433,516
                
                
                (2,185,314
                )Other
                    deposits
                
                
                (1,446,447
                )
                
                9,437,778Securities
                    sold under repurchase agreements
                
                
                2,315,597
                
                
                (5,442,790
                )Advances
                    under (repayments of) notes payable
                
                
                26,500,000
                
                
                7,640,000Repurchase
                    of stock
                
                
                0
                
                
                0Dividends
                    paid
                
                
                (867,912
                )
                
                (817,832
                )30,934,754
                
                
                8,631,842**NET
                    INCREASE (DECREASE) IN CASH**
                
                
                2,553,947
                
                
                (6,035,799
                )CASH
                    AND EQUIVALENTS AT BEGINNING OF PERIOD
                
                
                5,912,835
                
                
                10,988,572CASH
                    AND EQUIVALENTS AT END OF PERIOD
                
                $
                8,466,782
                
                $
                4,952,773**RECONCILIATION
                    OF NET INCOME TO NET CASH PROVIDED****FROM
                    OPERATING ACTIVITIES**Net
                    income
                
                $
                2,682,342
                
                $
                2,045,659**ADJUSTMENTS**Depreciation
                    and amortization
                
                
                135,342
                
                
                145,235Provision
                    for loan losses
                
                
                360,000
                
                
                61,500Security
                    discount accretion, net of premium amortization
                
                
                (8,841
                )
                
                10,845Decrease
                    (increase) inAccrued
                    interest receivable
                
                
                (379,900
                )
                
                (91,941
                )Other
                    assets
                
                
                (2,328
                )
                
                (32,009
                )Increase
                    (decrease) inDeferred
                    origination fees and costs, net
                
                
                (26,683
                )
                
                (26,241
                )Accrued
                    Interest payable and other liabilities
                
                
                91,937
                
                
                85,321Income
                    taxes payable
                
                
                (75,677
                )
                
                18,226$
                2,776,589
                
                $
                2,216,595
 The
        accompanying notes are an integral part of these financial
        statements.
  -5-
  **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 have been prepared in accordance with
        generally accepted accounting principles in the United States of America
        for
        interim financial information and with the instructions to Form 10-QSB and
        Regulation S-X of the Securities and Exchange Commission. Accordingly, they
        do
        not include all the information and footnotes required by generally accepted
        accounting principles for complete financial statements. In the opinion of
        management, all adjustments (consisting of normal recurring accruals) considered
        necessary for a fair presentation have been included. Operating results for
        the
        three and nine months ended September 30, 2005 are not necessarily indicative
        of
        the results that may be expected for the year ending December 31,
        2005 or
        any other future interim period. The consolidated financial statements contained
        herein should be read in conjunction with the consolidated financial statements
        and related notes contained in the Company’s Annual Report on Form 10-KSB for
        the year ended December 31, 2004.
 
 2.
              Cash
                  Flows
 
 For
        purposes of reporting cash flows, cash and cash equivalents include cash
        on
        hand, amounts due from banks and overnight investments in federal funds
        sold.
 
 3.
              Comprehensive
                  income
 
 For
        the
        nine months ended September 30, 2005 and 2004, total comprehensive income,
        net
        of taxes, was $2,600,630 and $1,813,592, 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, 2005. The Company
        is not party to any other off-balance sheet arrangements.
  At
                  September 30, 2005Revolving
                  Home Equity Lines
              
              $
              3,918,379Commercial
                  Real Estate
              
              $
              3,635,060Other
                  Unused Commitments
              
              $
              15,827,298Commercial
                  Letters of Credit
              
              $
              2,962,125
 
 -6-
 
 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,
        2005 and 794,012 for the comparable periods in 2004.
 
 6.
              Pension
 
 The
        Company has a defined benefit pension plan covering substantially all of
        the
        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. Assets of the plan are held
        in
        deposit accounts at the Company.
 
 During
        the nine months ended September 30, 2005 and 2004, the Company recognized
        net
        periodic costs for this plan of $114,956 and $86,087, respectively. During
        the
        nine months ended September 30, 2005 and 2004, the Company contributed $85,700
        and $95,100, respectively, to the plan.
  -7-
  **Item
        2.**   **Management’s
        Discussion and Analysis or Plan of Operation.**
 
 The
        Company is a Maryland corporation and a bank holding company registered under
        the Bank Holding Company Act of 1956, as amended, headquartered in Chestertown,
        Kent County, Maryland. The Company was incorporated on December 10, 1996
        to
        serve as the holding company of The Peoples Bank of Kent County, Maryland
        (the
“Bank”), a Maryland commercial bank, which it acquired on March 24, 1997.
 
 The
        Bank
        was incorporated on April 13, 1910 and operates five branches located in
        Kent
        County, Maryland. The Bank offers a variety of services to satisfy the needs
        of
        consumers and small- to medium-sized businesses and professional enterprises.
        Most of the Bank’s deposit and loan customers are located in and derived from
        Kent County, northern Queen Anne's County, and southern Cecil County, Maryland.
        This primary service area is located between the Chesapeake Bay and the western
        border of Delaware.
 
 **Application
        of Critical Accounting Policies**
 
 The
        unaudited consolidated financial statements have been prepared in accordance
        with accounting principles generally accepted in the United States of America
        for interim financial information and in accordance with the instructions
        to
        Form 10-QSB. Application of these principles requires management to make
        estimates, assumptions, and judgments that affect the amounts reported in
        the
        unaudited consolidated financial statements and accompanying notes. These
        estimates, assumptions, and judgments are based on information available
        as of
        the date of the consolidated financial statements; accordingly, as this
        information changes, the unaudited consolidated financial statements could
        reflect different estimates, assumptions, and judgments. Certain policies
        inherently have a greater reliance on the use of estimates, assumptions,
        and
        judgments and as such have a greater possibility of producing results that
        could
        be materially different than originally reported. Estimates, assumptions,
        and
        judgments are necessary when assets and liabilities are required to be recorded
        at fair value, when a decline in the value of an asset not carried on the
        consolidated financial statements at fair value warrants an impairment
        write-down or valuation reserve to be established, or when 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.
 
 The
        most
        critical accounting policy applied by the Company is that related to the
        valuation of the loan portfolio. A variety of estimates impact the carrying
        value of the loan portfolio, including the calculation of the allowance for
        loan
        losses, valuation of underlying collateral, the timing of loan charge-offs
        and
        the placement of loans on non-accrual status. The allowance is established
        and
        maintained at a level that management believes is adequate to cover potential
        losses resulting from the inability of borrowers to make required payment
        on
        loans. Estimates for loan losses are arrived at by analyzing risks associated
        with the specific loans and the loan portfolio, current and historical trends
        in
        delinquencies and charge-offs, and changes in the size and composition of
        the
        loan portfolio. The analysis also requires consideration of the economic
        climate
        and direction, change in lending rates, political conditions, legislation
        impacting the banking industry and economic conditions specific to Kent,
        Queen
        Annes and Cecil counties in Maryland. Because the calculation of the allowance
        for loan losses relies on management’s estimates and judgments relating to
        inherently uncertain events, actual results may differ from management’s
        estimates.
 
 -8-
 The
        following discussion is designed to provide a better understanding of the
        Company’s financial condition and results of operation and should be read in
        conjunction with the September 30, 2005 Consolidated Financial Statements
        and
        Notes thereto included elsewhere in this report, and in conjunction with
        the
        December 31, 2004 audited Consolidated Financial Statements and Notes thereto
        and Management’s Discussion and Analysis or Plan of Operation set forth in the
        Company’s Annual Report on Form 10-KSB for the year ended December 31, 2004.
        When the term “Company” is used in this report, it means Peoples Bancorp, Inc.
        and, as the context requires, the Bank.
 
 **Forward-Looking
        Information**
 
 Portions
        of this Quarterly Report on Form 10-QSB contain forward-looking statements
        within the meaning of The Private Securities Litigation Reform Act of 1995.
        Statements that are not historical in nature, including statements that include
        the words “anticipate,”“estimate,”“should,” expect,”“believe,”“intend,” and
        similar expressions, are expressions about the Company’s confidence, policies,
        and strategies, the adequacy of capital levels, and liquidity and are not
        guarantees of future performance. Such forward-looking statements involve
        certain risks and uncertainties, including economic conditions, competition
        in
        the geographic and business areas in which the Company and the Bank operate,
        inflation, fluctuations in interest rates, legislation, and governmental
        regulation. These risks and uncertainties are described in more detail in
        the
        Company’s Annual Report on Form 10-KSB for the year ended December 31, 2004.
        Actual results may differ materially from such forward-looking statements,
        and
        the Company assumes no obligation to update forward-looking statements at
        any
        time.
 
 **FINANCIAL
        CONDITION**
 
 **Overview**
 
 Total
        assets of the Company at September 30, 2005 were $236,497,349, compared to
        $202,945,705 at December 31, 2004, representing an increase of $33,551,644
        or
        16.53% over December 31, 2004.
 
 Total
        liabilities at September 30, 2005 were $213,557,313, compared to $181,738,387
        at
        December 31, 2004, representing an increase of $31,818,926 or 17.51%.
 
 Stockholders’
        equity was $22,940,036 at September 30, 2005, compared to $21,207,318 at
        December 31, 2004, which represents an increase of $1,732,718. This increase
        was
        the result of net income for the period totaling $2,682,342 was offset by
        a
        decrease in the unrealized gain on securities available for sale net of income
        taxes of $81,712 and dividends paid to stockholders of $867,912
 
 Return
        on
        average equity for the nine months ended September 30, 2005 was 16.20%, compared
        to 13.31% for the same period in 2004. Return on average assets was 1.63%
        for
        the nine months ended September 30, 2005, compared to 1.48% for the same
        period
        in 2004.
 
  -9-
  **Composition
        of Loan Portfolio**
 
 At
        September 30, 2005, loans, net of unearned income, were $200,056,635, an
        increase of $29,463,925 since December 31, 2004. Because loans are expected
        to
        produce higher yields than investment securities and other interest-earning
        assets, the absolute volume of loans and the volume as a percentage of total
        earning assets is an important determinant of net interest margin. Average
        loans, net of the allowance for loan losses, were $186,909,110 and $148,354,537
        during the first nine months of 2005 and 2004, respectively, which constituted
        88.71% and 84.57% of average interest-earning assets for the respective periods.
        For the nine months ended September 30, 2005, the Company’s average loan to
        deposit ratio was 115.67%, compared to 98.86% for the nine months ended
        September 30, 2004. In addition to deposits and securities sold under repurchase
        agreements, the Company also funds loans through borrowings from the Federal
        Home Loan Bank of Atlanta. . The securities sold under repurchase agreements
        function like deposits, with the securities providing collateral in place
        of the
        FDIC insurance. The Company’s ratio of average loans to deposits plus repurchase
        agreements and borrowed funds was 94.59% for the nine months ended September
        30,
        2005, compared to 90.83% for the nine months ended September 30, 2004. The
        Company extends loans primarily to customers located in and near the Maryland
        counties of Kent County, Queen Anne’s County, and Cecil County. There are no
        industry concentrations in the Company’s loan portfolio. A substantial portion
        of the Company’s loans are, however, secured by real estate, and the real estate
        market in the region will influence the performance of the Company’s
        portfolio.
 
 **Loan
        Quality**
 
 The
        allowance for loan losses represents a reserve for potential losses in the
        loan
        portfolio. The adequacy of the allowance for loan losses is evaluated
        periodically based on a review of all significant loans, with a particular
        emphasis on non-accruing, past due, and other loans that management believes
        require attention. The determination of the reserve level rests upon
        management's judgment about factors affecting loan quality and assumptions
        about
        the economy. Management believes that the allowance as of September 30, 2005
        is
        adequate to cover possible losses in the loan portfolio; however, management's
        judgment is based upon a number of assumptions about future events, which
        are
        believed to be reasonable, but which may not prove valid. Thus, there can
        be no
        assurance that charge-offs in future periods will not exceed the allowance
        for
        loan 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 the
        Company’s target.
 
 The
        provision for loan losses is a charge to earnings in the current period to
        replenish the allowance and maintain it at a level management has determined
        to
        be adequate.
 
 The
        following table sets forth activity in the Company’s allowance for loan losses
        for the periods indicated:
 
 -10-
  **Allowance
        for Loan Losses**
 Nine
                    months ended
                
                Year
                    endedSeptember
                    30,
                
                December
                    31,2005
                
                2004Balance
                    at beginning of year
                
                $
                1,204,274
                
                $
                1,216,881Loan
                    losses:Commercial
                
                
                0
                
                
                61,145Mortgages
                
                
                0
                
                
                0Consumer
                
                
                15,136
                
                
                22,806Total
                    loan losses
                
                
                15,136
                
                
                83,951Recoveries
                    on loans previously charged offCommercial
                
                
                0
                
                
                7,500Mortgages
                
                
                0
                
                
                0Consumer
                
                
                2,504
                
                
                2,344Total
                    loan recoveries
                
                
                2,504
                
                
                9,844Net
                    loan losses
                
                
                12,632
                
                
                74,107Provision
                    for loan losses charged to expense
                
                
                360,000
                
                
                61,500Balance
                    at end of year
                
                $
                1,551,642
                
                $
                1,204,274Allowance
                    for loan losses to loans outstandingat
                    end of period
                
                
                0.77
                %
                
                0.70
                %
 
 As
        a
        result of management's ongoing review of the loan portfolio, loans are
        classified as nonaccrual when it is not reasonable to expect collection of
        interest under the original terms. These loans are classified as nonaccrual
        even
        though the presence of collateral or the borrower's financial strength may
        be
        sufficient to provide for ultimate repayment. Interest on nonaccrual loans
        is
        recognized only when received. A loan is generally placed in nonaccrual status
        when it becomes 90 days or more past due. When a loan is placed in nonaccrual
        status, all interest that had been accrued on the loan but remains unpaid
        is
        reversed and deducted from earnings as a reduction of reported interest income.
        No additional interest is accrued on the loan balance until the collection
        of
        both principal and interest becomes reasonably certain.
 
 The
        Company had loans past due 90 days or more, including nonaccrual
        loans **** of
        $732,767 and $218,092 at September 30, 2005 and December 31, 2004, respectively.
        Loans are classified as impaired when the collection of contractual obligations,
        including principal and interest, is doubtful. Management has identified
        no
        significant impaired loans as of September 30, 2005 or December
        31 ,
        2004.
 
 **Deposits
        and Other Interest-Bearing Liabilities**
 
 Average
        interest-bearing deposits increased $7,645,589 or 6.20% to $131,057,356 for
        the
        nine months ended September 30, 2005, from $123,411,767 for the same period
        in
        2004. Average noninterest-bearing deposits increased $3,882,710 or 14.57%
        to
        $30,533,165 for the nine months ended September 30, 2005, from $26,650,455
        for
        the same period in 2004. Average total deposits have increased 7.68% or
        $11,528,299 to $161,590,521 for the nine months ended September 30, 2005
        from
        $150,062,222 for the same period in 2004. Borrowings at September 30, 2005,
        primarily from the Federal Home Loan Bank of Atlanta, increased to $37,700,000
        from $11,200,000 at December 31, 2004, an increase of 236.61%. This increase
        was
        primarily the result of the Company’s need to fund strong loan demand during the
        first nine months of 2005.
 
 -11-
 Deposits,
        particularly core deposits, have been the Company’s primary source of funding
        and have enabled the Company to meet both its short-term and long-term liquidity
        needs. Management anticipates that such deposits will continue to be the
        Company’s primary source of funding for the foreseeable future. It should be
        noted, however, that there appears to be a renewal in investor confidence
        in the
        overall economy and stock values appear to be recovering from the market
        downturn that occurred several years ago. Renewed investor confidence in
        alternatives to deposit accounts, which may pay yields that are higher than
        those paid on deposits, could impact the growth of deposits in future periods.
 
 **Liquidity
        and Capital Resources**
 
 Liquidity
        describes the ability of the Company to meet financial obligations that arise
        out of the ordinary course of business. Liquidity is needed primarily to
        fund
        loans, meet depositor withdrawal requirements, and fund current and planned
        expenditures. The Company derives liquidity through increased customer deposits,
        maturities in the investment portfolio, loan repayments and income from earning
        assets. To the extent that deposits are not adequate to fund customer loan
        demand, liquidity needs can be met in the short-term funds markets through
        lines
        of credit totaling $20,400,000 from correspondent banks, namely, Bank of
        America, Community Bank and M & T Bank. The Bank is also a member of the
        Federal Home Loan Bank of Atlanta, which provides another source of liquidity
        through a secured line of credit in the amount of $74,803,000 of which
        $37,700,000 has been advanced as of September 30, 2005.
 
 Bank
        regulatory agencies have adopted various capital standards, including risk-based
        capital standards, that apply to financial institutions like the Company.
        The
        primary objectives of the risk-based capital framework are to provide a more
        consistent system for comparing capital positions of financial institutions
        and
        to take into account the different risks among financial institutions’ assets
        and off-balance sheet items.
 
 Risk-based
        capital standards have been supplemented with requirements for a minimum
        Tier 1
        capital to assets ratio (leverage ratio). In addition, regulatory agencies
        consider the published capital levels as minimum levels and may require a
        financial institution to maintain capital at higher levels. A comparison
        of the
        Company’s capital ratios as of September 30, 2005 to the minimum ratios required
        by federal banking regulators is presented below.
  Actual
              
              Minimum
                Requirements
              
              To
                  be well
                capitalizedTier
                  1 risk-based capital
              
              
              11.96
              %
              
              4.00
              %
              
              6.00
              %Total
                  risk-based capital
              
              
              12.77
              %
              
              8.00
              %
              
              10.00
              %Leverage
                  ratio
              
              
              9.96
              %
              
              3.00
              %
              
              5.00
              %
  -12-
  **RESULTS
        OF OPERATIONS**
 
 **General**
 
 For
        the
        three- and nine-month periods ended September 30, 2005, the Company reported
        net
        income of $947,813, or $1.20 per share, and $2,682,342, or $3.40 per share,
        respectively, compared to $715,070, or $0.90 per share, and $2,045,659, or
        $2.58
        per share, respectively, for the same periods in 2004. The increases for
        the
        three months (32.55%) and nine months (31.12%) ended September 30, 2005 over
        the
        same periods last year resulted primarily from increases in loan interest
        income
        offset by an increase in the provision for loan losses and an increase in
        interest expense on borrowed funds.
 
 **Net
        Interest Income**
 
 The
        primary source of income for the Company is net interest income, which is
        the
        difference between revenue on interest-earning assets, such as investment
        securities and loans, and interest incurred on interest-bearing sources of
        funds, such as deposits and borrowings.
 
 Net
        interest income for the three-month period ended September 30, 2005 was
        $2,531,795, which represents an increase of $483,398 or 23.60% over net interest
        income for the same period in 2004. Net interest income for the nine-month
        period ended September 30, 2005 was $7,262,548, which represents an increase
        of
        $1,433,967 or 24.60% over the net interest income for the first nine months
        of
        2004. Interest earned on loans during the three and nine months ended September
        30, 2005, in part due to an increase in loan volume over the same periods
        last
        year, coupled with the continued payment of extremely low rates on deposits,
        contributed significantly to the period-to-period increases.
 
 Interest
        revenue for the three months ended September 30, 2005 totaled $3,556,155,
        representing an increase of $876,169 or 32.69% over the three-month period
        ended
        September 30, 2004. This increase resulted primarily from an $857,760 increase
        in loan income over the same period last year. Interest revenue for the first
        nine months of 2005 was $9,976,069, which represents an increase of $2,280,076
        or 29.63% over the same period last year and resulted primarily from an increase
        in loan income of $2,334,750 offset by a decrease in Government Agencies
        Security income of $102,380.
 
 Interest
        expense for the three- and nine-month periods ended September 30, 2005 totaled
        $1,024,360 and $2,713,521, respectively, compared to $631,589 and $1,867,412,
        respectively, for the same periods last year. Much of the increase during
        the
        first nine months of 2005 is attributable to the increase in borrowings to
        fund
        strong loan demand from $11,200,000 at December 31, 2004 to $37,700,000 at
        September 30, 2005, which resulted in increases in interest expense for the
        three and nine months ended September 30, 2005 of $329,931 and $788,236,
        respectively, over the same periods of last year.
 
 The
        key
        performance measure for net interest income is the “net margin on
        interest-earning assets,” or net interest income divided by average
        interest-earning assets. The Company’s net interest margin for the nine-month
        period ended September 30, 2005 was 4.65%, compared to 4.47% for the same
        period
        in 2004. The net margin may decline if competition increases, loan demand
        decreases, or the cost of funds rises faster than the return on loans and
        securities, and these events are impacted by a number of unpredictable
        factors.
  -13-
  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, 2005
                
                September
                    30, 2004Average
                
                
                
                
                
                AverageBalance
                
                Interest
                
                Yield
                
                Balance
                
                Interest
                
                Yield**Assets**Federal
                    funds sold
                
                $
                2,042,362
                
                $
                46,720
                
                
                3.06
                %
                $
                3,302,739
                
                $
                25,848
                
                
                1.05
                %Interest-bearing
                    deposits
                
                
                57,648
                
                
                1,315
                
                
                3.05
                %
                
                60,301
                
                
                273
                
                
                0.61
                %Investment
                    securities:U.
                    S. government agency
                
                
                20,048,216
                
                
                580,229
                
                
                3.87
                %
                
                23,269,316
                
                
                687,570
                
                
                3.95
                %Other
                
                
                1,632,726
                
                
                38,815
                
                
                3.18
                %
                
                441,046
                
                
                11,724
                
                
                3.55
                %Total
                    investment securities
                
                
                21,680,942
                
                
                619,044
                
                
                3.82
                %
                
                23,710,362
                
                
                699,294
                
                
                3.94
                %Loans:Demand
                    and time
                
                
                36,953,921
                
                
                2,106,931
                
                
                7.62
                %
                
                29,369,579
                
                
                1,295,529
                
                
                5.90
                %Mortgage
                
                
                146,191,936
                
                
                6,958,423
                
                
                6.36
                %
                
                115,382,488
                
                
                5,423,803
                
                
                6.28
                %Installment
                
                
                5,111,382
                
                
                304,914
                
                
                7.98
                %
                
                4,820,453
                
                
                286,820
                
                
                7.96
                %Total
                    loans
                
                
                188,257,239
                
                
                9,370,268
                
                
                6.65
                %
                
                149,572,520
                
                
                7,006,152
                
                
                6.26
                %Allowance
                    for loan losses
                
                
                1,348,129
                
                
                
                
                
                
                
                
                1,217,982Total
                    loans, net of allowance
                
                
                186,909,110
                
                
                9,370,268
                
                
                6.70
                %
                
                148,354,538
                
                
                7,006,152
                
                
                6.31
                %Total
                    interest-earning assets
                
                
                210,690,062
                
                
                10,037,347
                
                
                6.37
                %
                
                175,427,940
                
                
                7,731,567
                
                
                5.89
                %Non-interest-bearing
                    cash
                
                
                4,384,541
                
                
                
                
                
                
                
                
                3,927,749Premises
                    and equipment
                
                
                3,808,252
                
                
                
                
                
                
                
                
                3,773,308Other
                    assets
                
                
                1,681,963
                
                
                
                
                
                
                
                
                1,522,579Total
                    assets
                
                $
                220,564,818
                
                
                
                
                
                
                
                $
                184,651,576Liabilities
                    and Stockholders’ EquityInterest-bearing
                    DepositsSavings
                    and NOW deposits
                
                $
                44,774,796
                
                
                113,833
                
                
                0.34
                %
                $
                42,479,575
                
                
                116,245
                
                
                0.37
                %Money
                    market and supernow
                
                
                19,383,650
                
                
                79,223
                
                
                0.55
                %
                
                16,907,741
                
                
                69,207
                
                
                0.55
                %Other
                    time deposits
                
                
                66,898,910
                
                
                1,642,868
                
                
                3.28
                %
                
                64,024,451
                
                
                1,592,599
                
                
                3.32
                %Total
                    interest-bearing deposits
                
                
                131,057,356
                
                
                1,835,924
                
                
                1.87
                %
                
                123,411,767
                
                
                1,778,051
                
                
                1.92
                %Borrowed
                    funds
                
                
                36,011,882
                
                
                877,597
                
                
                3.26
                %
                
                13,263,921
                
                
                89,361
                
                
                0.90
                %Total
                    interest-bearing liabilities
                
                
                167,069,238
                
                
                2,713,521
                
                
                2.17
                %
                
                136,675,688
                
                
                1,867,412
                
                
                1.82
                %Noninterest-bearing
                    deposits
                
                
                30,533,165
                
                
                
                
                
                
                
                
                26,650,455197,602,403
                
                
                
                
                
                
                
                
                163,326,143Other
                    liabilities
                
                
                819,489
                
                
                
                
                
                
                
                
                776,939Stockholders’
                    equity
                
                
                22,142,926
                
                
                
                
                
                
                
                
                20,548,495Total
                    liabilities and stockholders equity
                
                $
                220,564,818
                
                
                
                
                
                
                
                $
                184,651,576Net
                    interest spread
                
                
                
                
                
                
                
                
                4.20
                %
                
                
                
                
                
                
                
                4.07
                %Net
                    interest income
                
                
                
                
                $
                7,323,826
                
                
                
                
                
                
                
                $
                5,864,155Net
                    margin on interest-earning assets
                
                
                
                
                
                
                
                
                4.65
                %
                
                
                
                
                
                
                
                4.47
                %
 Interest
        on tax-exempt loans and investments are reported on fully taxable equivalent
        basis (a non GAAP financial measure).
  -14-
  **Noninterest
        Revenue**
 
 Noninterest
        revenue for the three- and nine-month periods ended September 30, 2005 totaled
        $245,821 and $765,035, respectively, which represent increases of 3.74% and
        5.70% over $236,967 and $723,762, respectively, for the same periods in 2004.
        When comparing the three and nine months ended September 30, 2005 to the
        same
        periods of 2004, service charges imposed on the use of debit cards increased
        by
        $13,391 and $19,935, respectively, service charges on open Letter of Credit
        obligations increased by $17,953 and $19,217, respectively, and charges related
        to overdraft activity increased by $8,240 and $13,391,
        respectively.
 
 **Noninterest
        Expense**
 
 The
        Company recorded noninterest expense of $1,137,925 and $3,367,476 for the
        three-
        and nine-month periods ended September 30, 2005, respectively, representing
        increases of $35,430 or 3.21% and $162,839 or 5.08%, respectively, over the
        same
        periods last year. These increases are attributable primarily to increases
        in
        salaries and employee benefits, regulatory compliance consulting fees, and
        data
        processing fees charged by outside processors, and decreases in furniture
        and
        equipment expenses.
 
 **Income
        Tax Expense**
 
 The
        Company’s effective tax rate for the three- and nine-month periods ended
        September 30, 2005 was 37.6%, compared to 37.9% and 37.7%, respectively,
        for the
        same periods in 2004. The Company’s income tax expense was $571,878 and
        $1,617,765 for the three- and nine-months ended September 30, 2005,
        respectively, compared to $435,799 and $1,240,547, respectively, for the
        same
        periods in 2004. 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, 2005 when compared to the same periods last year.
 
 **Item
        3.**   **Controls
        and Procedures.**
 
 The
        Company maintains disclosure controls and procedures that are designed to
        ensure
        that information required to be disclosed in the Company’s reports filed under
        the Securities and Exchange Act of 1934 with the Securities and Exchange
        Commission, such as this quarterly report, is recorded, processed, summarized
        and reported within the time periods specified in those rules and forms,
        and
        that such information is accumulated and communicated to the Company’s
        management, including the President and Chief Executive Officer, who also
        serves
        as the Company’s Chief Financial Officer (the “CEO”), to allow for timely
        decisions regarding required disclosure. A control system, no matter how
        well
        conceived and operated, can provide only reasonable, not absolute, assurance
        that the objectives of the control system are met. Further, the design of
        a
        control system must reflect the fact that there are resource constraints,
        and
        the benefits of controls must be considered relative to their costs. These
        inherent limitations include the realities that judgments in decision-making
        can
        be faulty, and that breakdowns can occur because of simple error or mistake.
        Additionally, controls can be circumvented by the individual acts of some
        persons, by collusion of two or more people, or by management override of
        the
        control. The design of any system of controls also is based in part upon
        certain
        assumptions about the likelihood of future events, and there can be no assurance
        that any design will succeed in achieving its stated goals under all potential
        future conditions; over time, control may become inadequate because of changes
        in conditions, or the degree of compliance with the policies or procedures
        may
        deteriorate.
 
 -15-
 An
        evaluation of the effectiveness of these disclosure controls was carried
        out as
        of September 30, 2005 under the supervision and with the participation of
        the
        Company’s management, including the CEO. Based on that evaluation, the Company’s
        management, including the CEO, has concluded that the Company’s disclosure
        controls and procedures are effective.
 
 During
        the third quarter of 2005, there was no change in the Company’s internal control
        over financial reporting that has materially affected, or is reasonably likely
        to materially affect, the Company’s internal control over financial
        reporting.
 
 **PART
        II - OTHER INFORMATION**
 
 **Item
        1.**   **Legal
        Proceedings.**
  None.
 
 **Item
        2.**   **Unregistered
        Sales of Equity Securities and Use of Proceeds.**
  None.
 
 **Item
        3.**   **Defaults
        Upon Senior Securities.**
 
 Not
        applicable.
 
 **Item
        4.**   **Submission
        of Matters to a Vote of Security Holders.**
 
 None.
 
 **Item
        5.**  **Other
        Information.**
  None.
 
 **Item
        6.**   **Exhibits.**
 
 3.1
              Articles
                  of Incorporation of the Company, as corrected and amended (incorporated
                  by
                  reference to Exhibit 3.1 of the Company’s Current Report on Form 8-K filed
                  on January 24, 2005)
 3.2
              Bylaws
                  of the Company, as amended (incorporated by reference to Exhibit
                  3.2 of
                  the Company’s Annual Report on Form 10-K for the year ended December 31,
                  2004)
 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 Periodic Report pursuant to Section 906 of the Sarbanes-Oxley
                  Act
                  of 2002 (furnished herewith)
  -16-
  **SIGNATURES**
 
 In
        accordance with the requirements of the Exchange Act, the registrant has
        caused **** this
        report to be signed on its behalf by the undersigned, thereunto duly
        authorized.
 **PEOPLES BANCORP,
                INC.**Date:
                November 9, 2005
              By:
              /s/ Thomas G. StevensonThomas
                G. StevensonPresident/Chief
                  Executive Officer& Chief Financial
                Officer
  -17-
  **EXHIBIT
        INDEX**
 
 Exhibit
                  No.
                Description
 
 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)
  -18-