UNITED
STATES
 SECURITIES
AND EXCHANGE COMMISSION
 WASHINGTON,
DC   20549
 
 FORM
10-Q
 
 x
              Quarterly
      report under Section 13 or 15(d) of the Securities Exchange Act of
      1934
 
 For the quarterly period
ended      September 30,
2010
 
 £
              Transition
      report under Section 13 or 15(d) of the Exchange
  Act
 
 For the transition period from
_______________ to ________________
 
 Commission
File Number:  0-24169
 
 PEOPLES BANCORP,
INC.
 (Exact
name of registrant as specified in its charter)
 
 Maryland
                        
                        52-2027776(State
      or Other Jurisdiction of
                        
                        (I.R.S.
      EmployerIncorporation
      or Organization)
                        
                        Identification
      No.)
 
 P.O. Box 210, 100 Spring Avenue, Chestertown,
      Maryland
                  21620(Address
      of Principal Executive Offices)
                  (Zip
      Code)
 
 (410)
778-3500
 Registrant’s
Telephone Number, Including Area Code
 
 Indicate by check mark whether the
registrant (1) has filed all reports required to be filed by Section 13 or 15(d)
of the Securities Exchange Act of 1934 during the preceding 12 months (or for
such shorter periods that the registrant was required to file such reports), and
(2) has been subject to such filing requirements for the past 90
days.  Yes x No £
 
 Indicate by check mark whether the
registrant has submitted electronically and posted on its corporate Web site, if
any, every Interactive Data File required to be submitted and posted pursuant to
Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12
months (or for such shorter period that the registrant was required to submit
and post such files).  Yes £ No £ (Not Yet
Applicable)
 
 Indicate by check mark whether the
registrant is a large accelerated filer, an accelerated filer, or a
non-accelerated filer, or a smaller reporting company. See definition of “large
accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule
12b-2 of the Exchange Act.  (Check one):
 
 Large
      accelerated filer £
                Accelerated
      filer £Non-accelerated
      filer £
                Smaller
      reporting company x(Do
      not check if a smaller reporting company
 
 Indicate by check mark whether the
registrant is a shell company (as defined in Rule 12b-2 of the
Act).
 Yes £ 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:779,512 shares
of common stock issued and outstanding as of November 1,
2010
  
  PEOPLES
BANCORP, INC.
 
 FORM
10-Q
 INDEX
 
 PagePart
      I – Financial InformationItem
      1.
                                
                                Financial
      StatementsConsolidated
      Balance Sheets at September 30, 2010 (unaudited) and December 31,
      2009
                                
                                3Consolidated
      Statements of Income (unaudited) for three and nine months ended September
      30, 2010 and 2009
                                
                                4Consolidated
      Statements of Changes in Stockholders’ Equity (unaudited) for the nine
      months ended September 30, 2010 and 2009
                                
                                5Consolidated
      Statements of Cash Flows (unaudited) for nine months ended September 30,
      2010 and 2009
                                
                                6Notes
      to Financial Statements (unaudited)
                                
                                8Item
      2.
                                
                                Management’s
      Discussion and Analysis of Financial Condition  and Results of
      Operations
                                
                                15Item
      3.
                                
                                Quantitative
      and Qualitative Disclosures About Market Risk
                                
                                24Item
      4.
                                
                                Controls
      and Procedures
                                
                                24Part
      II – Other InformationItem
      1.
                                
                                Legal
      Proceedings
                                
                                24Item
      1A.
                                
                                Risk
      Factors
                                
                                24Item
      2.
                                
                                Unregistered
      Sales of Equity Securities and Use of Proceeds
                                
                                25Item
      3.
                                
                                Defaults
      Upon Senior Securities
                                
                                25Item
      4.
                                
                                (Removed
      and Reserved)
                                
                                25Item
      5.
                                
                                Other
      Information
                                
                                25Item
      6.
                                
                                Exhibits
                                
                                25Signatures
                                
                                25Exhibit
      Index
                                
                                26
  -2-
  PART
I - FINANCIAL INFORMATION
 
 Item
1. Financial Statements.
 PEOPLES
BANCORP, INC. AND SUBSIDIARIES Consolidated
Balance Sheets
 September 30,
                    
                    
                    December 31,2010
                    
                    
                    2009(unaudited)ASSETSCash
      and due from banks
                    
                    $
                    10,993,803
                    
                    
                    $
                    15,988,739Federal
      funds sold
                    
                    
                    1,016,000
                    
                    
                    
                    7,015,811Cash
      and cash equivalents
                    
                    
                    12,009,803
                    
                    
                    
                    23,004,550Securities
      available for sale
                    
                    
                    8,046,630
                    
                    
                    
                    3,027,700Securities
      held to maturity (approximate fair value of $3,582,939 and
      $10,312,156)
                    
                    
                    3,513,424
                    
                    
                    
                    10,063,376Federal
      Home Loan Bank & Community Bankers Bank stock, at cost
                    
                    
                    2,233,400
                    
                    
                    
                    2,401,200Loans,
      less allowance for loan losses of $2,869,097 and
$2,845,364
                    
                    
                    208,224,660
                    
                    
                    
                    203,899,678Premises
      and equipment
                    
                    
                    6,472,829
                    
                    
                    
                    6,521,504Goodwill
      and intangible assets
                    
                    
                    620,906
                    
                    
                    
                    671,660Accrued
      interest receivable
                    
                    
                    1,240,955
                    
                    
                    
                    1,450,155Deferred
      income taxes
                    
                    
                    1,270,597
                    
                    
                    
                    1,277,611Foreclosed
      real estate
                    
                    
                    1,157,000
                    
                    
                    
                    1,335,000Other
      assets
                    
                    
                    2,149,201
                    
                    
                    
                    1,814,991Total
      Assets
                    
                    $
                    246,939,405
                    
                    
                    $
                    255,467,425LIABILITIES
      AND STOCKHOLDERS’ EQUITYDepositsNon-interest-bearing
                    
                    $
                    37,428,051
                    
                    
                    $
                    36,951,197Interest-bearing
                    
                    
                    152,562,045
                    
                    
                    
                    156,299,711189,990,096
                    
                    
                    
                    193,250,908Securities
      sold under repurchase agreements
                    
                    
                    2,192,868
                    
                    
                    
                    2,917,339Federal
      Home Loan Bank advances
                    
                    
                    24,000,000
                    
                    
                    
                    28,000,000Accrued
      interest payable
                    
                    
                    418,630
                    
                    
                    
                    439,410Other
      liabilities
                    
                    
                    1,867,223
                    
                    
                    
                    1,970,020218,468,817
                    
                    
                    
                    226,577,677Stockholders'
      equityCommon
      stock, par value $10 per share, 1,000,000 shares authorized; issued and
      outstanding 779,512 shares at September 30, 2010 and at December 31,
      2009
                    
                    
                    7,795,120
                    
                    
                    
                    7,795,120Additional
      paid in capital
                    
                    
                    2,920,866
                    
                    
                    
                    2,920,866Retained
      earnings
                    
                    
                    18,434,482
                    
                    
                    
                    18,865,39929,150,468
                    
                    
                    
                    29,581,385Accumulated
      other comprehensive income (loss)Unrealized
      gain (loss) on available for sales securities
                    
                    
                    15,344
                    
                    
                    
                    3,587Unfunded
      liability of defined benefit plan
                    
                    
                    (695,224
                    )
                    
                    
                    (695,224
                    )28,470,588
                    
                    
                    
                    28,889,748Total
      Liabilities and Stockholders’ Equity
                    
                    $
                    246,939,405
                    
                    
                    $
                    255,467,425
 
 The
accompanying notes are an integral part of these consolidated financial
statements.
  -3-
  PEOPLES
BANCORP, INC. AND SUBSIDIARIES
 Consolidated
Statements of Income (unaudited)
 
 For the three months ended
                  
                  
                  For the nine months endedSeptember 30,
                  
                  
                  September 30,2010
                  
                  
                  2009
                  
                  
                  2010
                  
                  
                  2009Interest
      and dividend revenueLoans,
      including fees
                  
                  $
                  2,986,669
                  
                  
                  $
                  3,306,921
                  
                  
                  $
                  9,274,109
                  
                  
                  $
                  10,139,100U.
      S. government agencies securities
                  
                  
                  58,589
                  
                  
                  
                  125,756
                  
                  
                  
                  253,855
                  
                  
                  
                  412,307Deposits
      in other banks
                  
                  
                  42
                  
                  
                  
                  18
                  
                  
                  
                  60
                  
                  
                  
                  54Federal
      funds sold
                  
                  
                  587
                  
                  
                  
                  2,409
                  
                  
                  
                  1,862
                  
                  
                  
                  7,780Equity
      securities
                  
                  
                  2,568
                  
                  
                  
                  4,903
                  
                  
                  
                  5,662
                  
                  
                  
                  4,903Total
      interest and dividend revenue
                  
                  
                  3,048,455
                  
                  
                  
                  3,440,007
                  
                  
                  
                  9,535,548
                  
                  
                  
                  10,564,144Interest
      expenseDeposits
                  
                  
                  730,960
                  
                  
                  
                  785,526
                  
                  
                  
                  2,203,740
                  
                  
                  
                  2,311,635Borrowed
      funds
                  
                  
                  205,147
                  
                  
                  
                  370,079
                  
                  
                  
                  661,759
                  
                  
                  
                  1,213,920Total
      interest expense
                  
                  
                  936,107
                  
                  
                  
                  1,155,605
                  
                  
                  
                  2,865,499
                  
                  
                  
                  3,525,555Net
      interest income
                  
                  
                  2,112,348
                  
                  
                  
                  2,284,402
                  
                  
                  
                  6,670,049
                  
                  
                  
                  7,038,589Provision
      for loan losses
                  
                  
                  485,000
                  
                  
                  
                  316,000
                  
                  
                  
                  1,985,000
                  
                  
                  
                  1,171,000Net
      interest income after provision for loan losses
                  
                  
                  1,627,348
                  
                  
                  
                  1,968,402
                  
                  
                  
                  4,685,049
                  
                  
                  
                  5,867,589Noninterest
      revenueService
      charges on deposit accounts
                  
                  
                  200,872
                  
                  
                  
                  255,719
                  
                  
                  
                  642,043
                  
                  
                  
                  720,024Insurance
      commissions
                  
                  
                  325,987
                  
                  
                  
                  344,564
                  
                  
                  
                  949,382
                  
                  
                  
                  1,099,439Other
      noninterest revenue
                  
                  
                  67,337
                  
                  
                  
                  73,051
                  
                  
                  
                  246,468
                  
                  
                  
                  270,935Total
      noninterest revenue
                  
                  
                  594,196
                  
                  
                  
                  673,334
                  
                  
                  
                  1,837,893
                  
                  
                  
                  2,090,398Noninterest
      expensesSalaries
      and employee benefits
                  
                  
                  969,335
                  
                  
                  
                  1,103,947
                  
                  
                  
                  3,077,192
                  
                  
                  
                  3,382,617Occupancy
                  
                  
                  151,644
                  
                  
                  
                  125,167
                  
                  
                  
                  393,213
                  
                  
                  
                  352,116Furniture
      and equipment
                  
                  
                  87,049
                  
                  
                  
                  94,931
                  
                  
                  
                  258,528
                  
                  
                  
                  255,230Other
      operating
                  
                  
                  568,171
                  
                  
                  
                  568,415
                  
                  
                  
                  1,865,637
                  
                  
                  
                  1,588,296Total
      noninterest expenses
                  
                  
                  1,776,199
                  
                  
                  
                  1,892,460
                  
                  
                  
                  5,594,570
                  
                  
                  
                  5,578,259Income
      before income taxes
                  
                  
                  445,345
                  
                  
                  
                  749,276
                  
                  
                  
                  928,372
                  
                  
                  
                  2,379,728Income
      taxes
                  
                  
                  157,110
                  
                  
                  
                  279,661
                  
                  
                  
                  306,947
                  
                  
                  
                  884,863Net
      income
                  
                  $
                  288,235
                  
                  
                  $
                  469,615
                  
                  
                  $
                  621,425
                  
                  
                  $
                  1,494,865Earnings
      per common share
                  
                  $
                  0.37
                  
                  
                  $
                  0.60
                  
                  
                  $
                  0.80
                  
                  
                  $
                  1.92
 
 The
accompanying notes are an integral part of these consolidated financial
statements.
  -4-
  PEOPLES
BANCORP, INC. AND SUBSIDIARIES
 Consolidated Statements of
Changes in Stockholders’ Equity (unaudited)
 
 NINE
MONTHS ENDED SEPTEMBER 30, 2010 and 2009
 
 AccumulatedAdditional
                    
                    
                    
                    
                    
                    otherCommon
                    
                    
                    paid-in
                    
                    
                    Retained
                    
                    
                    comprehensive
                    
                    
                    ComprehensiveStock
                    
                    
                    capital
                    
                    
                    earnings
                    
                    
                    income
                    
                    
                    incomeBalance,
      December 31, 2008
                    
                    $
                    7,795,120
                    
                    
                    $
                    2,920,866
                    
                    
                    $
                    18,307,797
                    
                    
                    $
                    (643,859
                    )Net
      income
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    1,494,885
                    
                    
                    
                    -
                    
                    
                    $
                    1,494,865Unrealized
      loss on investment securities available for sale net of income taxes of
      $27,338
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    (45,665
                    )
                    
                    
                    (45,573
                    )Comprehensive
      income
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    $
                    1,449,292Repurchase
      of stock
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -Cash
      dividend, $1.32 per share
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    (1,044,546
                    )
                    
                    
                    -Balance,
      September 30, 2009
                    
                    $
                    7,795,120
                    
                    
                    $
                    2,920,866
                    
                    
                    $
                    18,821,116
                    
                    
                    $
                    (689,432
                    )Balance,
      December 31, 2009
                    
                    $
                    7,795,120
                    
                    
                    $
                    2,920,866
                    
                    
                    $
                    18,865,399
                    
                    
                    $
                    (691,637
                    )Net
      income
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    621,425
                    
                    
                    
                    -
                    
                    
                    $
                    621,425Unrealized
      gain on investment securities available for sale net of income taxes of
      ($7,695)
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    11,757
                    
                    
                    
                    11,757Comprehensive
      income
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    $
                    633,182Repurchase
      of stock
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -Cash
      dividend, $1.35 per share
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    (1,052,342
                    )
                    
                    
                    -Balance,
      September 30, 2010
                    
                    $
                    7,795,120
                    
                    
                    $
                    2,920,866
                    
                    
                    $
                    18,434,482
                    
                    
                    $
                    (679,880
                    )
 
 The
accompanying notes are an integral part of these consolidated financial
statements.
  -5-
  PEOPLES
BANCORP, INC. AND SUBSIDIARIES
 Consolidated
Statements of Cash Flows (unaudited)
 
 For the nine months endedSeptember 30,2010
                              
                              
                              2009CASH
      FLOWS FROM OPERATING ACTIVITIESInterest
      received
                              
                              $
                              9,804,945
                              
                              
                              $
                              10,629,687Fees
      and commissions received
                              
                              
                              1,942,499
                              
                              
                              
                              2,061,033Cash
      paid to suppliers and employees
                              
                              
                              (5,667,166
                              )
                              
                              
                              (5,002,868
                              )Interest
      paid
                              
                              
                              (2,886,279
                              )
                              
                              
                              (3,619,595
                              )Taxes
      paid
                              
                              
                              (306,536
                              )
                              
                              
                              (52,140
                              )2,887,463
                              
                              
                              
                              4,016,117CASH
      FLOWS FROM INVESTING ACTIVITIESCash
      paid for premises, equipment, and software
                              
                              
                              (214,982
                              )
                              
                              
                              (306,347
                              )Loans
      made, net of principal collected
                              
                              
                              (6,526,416
                              )
                              
                              
                              6,981,610Proceeds
      from sale of foreclosed real estate
                              
                              
                              200,394
                              
                              
                              
                              371,364Proceeds
      from maturities and calls of securitiesAvailable
      for sale
                              
                              
                              1,000,000
                              
                              
                              
                              3,000,000Held
      to maturity
                              
                              
                              6,550,709
                              
                              
                              
                              1,000,650Purchase
      of securities Available for Sale
                              
                              
                              (6,022,091
                              )
                              
                              
                              (3,049,383
                              )Purchase
      of securities held to maturity
                              
                              
                              0
                              
                              
                              
                              (1,000,000
                              )Redemption
      of FHLB Stock
                              
                              
                              167,800
                              
                              
                              
                              92,800Acquisition
      of Insurance Agency
                              
                              
                              0
                              
                              
                              
                              (25,344
                              )4,844,586
                              
                              
                              
                              7,065,350CASH
      FLOWS FROM FINANCING ACTIVITIESNet
      increase (decrease) inTime
      deposits
                              
                              
                              4,695,081
                              
                              
                              
                              11,223,141Other
      deposits
                              
                              
                              (7,955,893
                              )
                              
                              
                              6,028,728Securities
      sold under repurchase agreements
                              
                              
                              (724,471
                              )
                              
                              
                              (9,845,012
                              )Advances
      under (repayments of) notes payable
                              
                              
                              (4,000,000
                              )
                              
                              
                              (10,000,000
                              )Repayments
      of other borrowings
                              
                              
                              0
                              
                              
                              
                              (173,216
                              )Repurchase
      of Stock
                              
                              
                              0
                              
                              
                              
                              0Dividends
      paid
                              
                              
                              (1,052,341
                              )
                              
                              
                              (1,044,546
                              )(9,037,624
                              )
                              
                              
                              (3,810,905
                              )NET
      INCREASE (DECREASE) IN CASH
                              
                              
                              (10,994,747
                              )
                              
                              
                              7,270,562CASH
      AND EQUIVALENTS AT BEGINNING OF PERIOD
                              
                              
                              23,004,550
                              
                              
                              
                              7,686,815CASH
      AND EQUIVALENTS AT END OF PERIOD
                              
                              $
                              12,009,803
                              
                              
                              $
                              14,957,377
  -6-
  PEOPLES
BANCORP, INC. AND SUBSIDIARIES
 Consolidated
Statements of Cash Flows (unaudited) (continued)
 
 For the nine months endedSeptember 30,2010
                  
                  
                  2009RECONCILIATION
      OF NET INCOME TO NET CASH PROVIDED FROM OPERATING
    ACTIVITIESNet
      income
                  
                  $
                  621,425
                  
                  
                  $
                  1,494,865ADJUSTMENTSDepreciation
      and amortization
                  
                  
                  263,657
                  
                  
                  
                  258,920Provision
      for loan losses
                  
                  
                  1,985,000
                  
                  
                  
                  1,171,000Amortization
      of intangible assets
                  
                  
                  50,754
                  
                  
                  
                  49,698Write-down
      of foreclosed real estate
                  
                  
                  50,000
                  
                  
                  
                  0Security
      discount accretion, net of premium amortization
                  
                  
                  20,763
                  
                  
                  
                  2,759Deferred
      income taxes
                  
                  
                  411
                  
                  
                  
                  0Loss
      (gain) on sale of foreclosed real estate
                  
                  
                  104,606
                  
                  
                  
                  (29,365
                  )Decrease
      (increase) inAccrued
      interest receivable
                  
                  
                  209,200
                  
                  
                  
                  45,569Income
      tax refund receivable
                  
                  
                  0
                  
                  
                  
                  (288,577
                  )Other
      assets
                  
                  
                  (334,210
                  )
                  
                  
                  892,737Increase
      (decrease) inDeferred
      origination fees and costs, net
                  
                  
                  39,434
                  
                  
                  
                  17,216Accrued
      Interest payable and other liabilities
                  
                  
                  (123,577
                  )
                  
                  
                  401,295$
                  2,887,463
                  
                  
                  $
                  4,016,117
 
 The
accompanying notes are an integral part of these financial
statements.
  -7-
  Peoples
Bancorp, Inc. and Subsidiaries
 Notes
to Financial Statements (unaudited)
 
 1.
              Basis
      of Presentation
 
 The
accompanying unaudited consolidated financial statements of Peoples Bancorp,
Inc. and its subsidiaries, The Peoples Bank, a Maryland-chartered bank (the
“Bank”), and Fleetwood, Athey, Macbeth & McCown, Inc., a Maryland insurance
agency (the “Insurance Agency”), have been prepared in accordance with
accounting principles generally accepted in the United States of America for
interim financial information and with the instructions to Form 10-Q and
Regulation S-X of the Securities and Exchange
Commission.  Accordingly, they do not include all the information and
notes required by generally accepted accounting principles for complete
financial statements.  In the opinion of management, all adjustments
(consisting of normal recurring entries) considered necessary for a fair
presentation have been included.  Operating results for the three and
nine months ended September 30, 2010 are not necessarily indicative of the
results that may be expected for the year ending December 31, 2010 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, 2009.  When used in these notes,
the term “Company” refers to Peoples Bancorp, Inc, and, unless the context
requires otherwise, its consolidated subsidiaries.
 
 The
Accounting Standards Codification (the “ASC”) of the Financial Accounting
Standards Board (the “FASB”) became effective on July 1, 2009.  At
that date, the ASC became FASB’s officially recognized source of authoritative
U. S. generally accepted accounting principles (“GAAP”) applicable to all public
and non-public non-governmental entities, superseding existing FASB, American
Institute of Certified Public Accountants (“AICPA”), Emerging Issues Task Force
(“EITF”) and related literature.  Rules and interpretive releases of
the U.S. Securities and Exchange Commission (the “SEC”) under the authority of
federal securities laws are also sources of authoritative GAAP for SEC
registrants.  All other accounting literature is considered
non-authoritative.  The switch to the ASC affects the way companies
refer to GAAP in financial statements and accounting policies.  Citing
particular content in the ASC involves specifying the unique numeric path to the
content through the Topic, Subtopic, Section and Paragraph
structure.
 
 The
Company evaluated subsequent events after the balance sheet date through
November 10, 2010.  No significant subsequent events were identified
which would affect the presentation of the financial information.
 
 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, 2010 and 2009, total comprehensive income, net of taxes, was $633,182 and
$1,449,292, 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.
  -8-
  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, 2010 and December 31, 2009.
 
 At September 30, 2010
                    
                    
                    December 31, 2009Check
      loan lines of credit
                    
                    $
                    495,053
                    
                    
                    $
                    502,887Mortgage
      lines of credit
                    
                    
                    11,016,585
                    
                    
                    
                    11,202,534Other
      lines of credit
                    
                    
                    15,938,339
                    
                    
                    
                    16,776,329Un-disbursed
      construction loan commitments
                    
                    
                    2,103,029
                    
                    
                    
                    933,503Standby
      letters of credit
                    
                    $
                    3,366,948
                    
                    
                    $
                    3,761,110
 
 5.
                Earnings
      Per Share
 
 Earnings (loss) per common share is
derived by dividing net income (loss) available to holders of shares of common
stock by the weighted average number of shares of common stock outstanding of
779,512 for the three- and nine-month periods ended September 30, 2010 and
2009.
 
 6.
                Pension
 
 The Bank maintains a defined benefit
pension plan covering substantially all employees of the
Bank.  Benefits are based on years of service and the employee’s
highest average rate of earnings for five consecutive years during the final ten
full years before retirement.  The Bank’s general funding policy is to
contribute annually the maximum amount that can be deducted for income tax
purposes, determined using the projected unit credit cost method.  The
assets of the plan are invested in various time deposits and held in trust as
required by law.
 
 During the nine months ended
September 30, 2010 and 2009, the Bank recognized net periodic costs for this
plan of $230,861 and $235,101, respectively.  The Bank contributed
$136,351 to the plan during the nine months ended September 30, 2010, compared
to $68,176 for the first nine months of 2009.
 
 7.
              Segment
      Reporting
 
 The Company operates two primary
businesses: Community Banking and Insurance Products and
Services.  Through the Community Banking business, the Company
provides services to consumers and small businesses on the upper Eastern Shore
of Maryland through its seven branches. Community banking activities include
serving the deposit needs of small business and individual consumers by
providing banking products and services to fit their needs. Loan products
available to consumers include mortgage, home equity, automobile, marine, and
installment loans and other secured and unsecured personal lines of credit.
Small business lending includes commercial mortgages, real estate development
loans, equipment and operating loans, as well as secured and unsecured lines of
credit, accounts receivable financing arrangements, and merchant card
services.
  -9-
  Through the Insurance Products and
Services business, the Company provides a full range of insurance products and
services to businesses and consumers in the Company’s market areas. Products
include property and casualty, life, marine, individual health and long-term
care insurance.
 
 Selected financial information by
line of business, is included in the following table:
  For the nine months ended
                    September 30, 2010
                  
                  Community
                    banking
                  
                  
                  Insurance
                    products
                    and services
                  
                  
                  Intersegment
                    Transactions
                  
                  
                  Consolidated
                    TotalNet
      interest income
                  
                  $
                  6,669,076
                  
                  
                  $
                  973
                  
                  
                  $
                  0
                  
                  
                  $
                  6,670,049Provision
      for loan losses
                  
                  
                  1,985,000
                  
                  
                  
                  0
                  
                  
                  
                  0
                  
                  
                  
                  1,985,000Net
      interest income after provision
                  
                  
                  4,684,076
                  
                  
                  
                  973
                  
                  
                  
                  0
                  
                  
                  
                  4,685,049Noninterest
      revenue
                  
                  
                  880,260
                  
                  
                  
                  957,633
                  
                  
                  
                  0
                  
                  
                  
                  1,837,893Noninterest
      expense
                  
                  
                  4,890,796
                  
                  
                  
                  703,774
                  
                  
                  
                  0
                  
                  
                  
                  5,594,570Income
      before income taxes
                  
                  
                  673,540
                  
                  
                  
                  254,832
                  
                  
                  
                  0
                  
                  
                  
                  928,372Income
      taxes
                  
                  
                  206,245
                  
                  
                  
                  100,702
                  
                  
                  
                  0
                  
                  
                  
                  306,947Net
      income
                  
                  $
                  467,295
                  
                  
                  $
                  154,130
                  
                  
                  $
                  0
                  
                  
                  $
                  621,425Average
      assets
                  
                  $
                  247,585,518
                  
                  
                  $
                  1,603,469
                  
                  
                  $
                  -480,405
                  
                  
                  $
                  248,708,582
 
 For the nine months ended
                        September 30, 2009
                      
                      Community
                        banking
                      
                      
                      Insurance
                        products
                        and services
                      
                      
                      Intersegment
                        Transactions
                      
                      
                      Consolidated
                        TotalNet
      interest income
                      
                      $
                      7,043,351
                      
                      
                      $
                      (4,762
                      )
                      
                      $
                      0
                      
                      
                      $
                      7,038,589Provision
      for loan losses
                      
                      
                      1,171,000
                      
                      
                      
                      0
                      
                      
                      
                      0
                      
                      
                      
                      1,171,000Net
      interest income after provision
                      
                      
                      5,872,351
                      
                      
                      
                      (4,762
                      )
                      
                      
                      0
                      
                      
                      
                      5,867,589Noninterest
      revenue
                      
                      
                      986,259
                      
                      
                      
                      1,104,139
                      
                      
                      
                      0
                      
                      
                      
                      2,090,398Noninterest
      expense
                      
                      
                      4,822,903
                      
                      
                      
                      755,356
                      
                      
                      
                      0
                      
                      
                      
                      5,578,259Income
      before income taxes
                      
                      
                      2,035,707
                      
                      
                      
                      344,021
                      
                      
                      
                      0
                      
                      
                      
                      2,379,728Income
      taxes
                      
                      
                      754,009
                      
                      
                      
                      130,854
                      
                      
                      
                      0
                      
                      
                      
                      884,863Net
      income
                      
                      $
                      1,281,698
                      
                      
                      $
                      213,167
                      
                      
                      $
                      0
                      
                      
                      $
                      1,494,865Average
      assets
                      
                      $
                      250,059,546
                      
                      
                      $
                      1,683,194
                      
                      
                      $
                      (455,059
                      )
                      
                      $
                      251,287,681
 
 8.
              Fair
      Value
 
 The fair
value of an asset or a liability is the price that would be received to sell
that asset or paid to transfer that liability in an orderly transaction
occurring in the principal market (or most advantageous market in the absence of
a principal market) for such asset or liability.  In estimating fair
value, the Company utilizes valuation techniques that are consistent with the
market approach, the income approach and/or the cost approach.  Such
valuation techniques are consistently applied.  Inputs to valuation
techniques include the assumptions that market participants would use in pricing
an asset or liability.   FASB ASC valuation techniques include
the assumptions that market participants would use in pricing an asset or a
liability.  FASB ASC Topic 820 establishes a fair value hierarchy for
valuation inputs that gives the highest priority to quoted prices in active
markets for identical assets or liabilities and the lowest priority to
unobservable inputs.  The fair value hierarchy is as
follows:
  -10-
  •
              Level 1 inputs—
      Unadjusted quoted prices in active markets for identical assets or
      liabilities that the reporting entity has the ability to access at the
      measurement date.
 
 •
              Level 2 inputs — Inputs
      other than quoted prices included in Level 1 that are observable for the
      asset or liability, either directly or indirectly.  These might
      include quoted prices for similar assets or liabilities in active markets,
      quoted prices for identical or similar assets or liabilities in markets
      that are not active, inputs other than quoted prices that are observable
      for the asset or liability (such as interest rates. volatilities,
      prepayment speeds, credit risks, etc.) or inputs that are derived
      principally from or corroborated by market data by correlation or other
      means.
 
 •
              Level 3 inputs —
      Unobservable inputs for determining the fair values of assets or
      liabilities that reflect an entity’s own assumptions about the assumptions
      that market participants would use in pricing the assets or
      liabilities.
 
 In
general, fair value is based upon quoted market prices, where
available.  If such quoted market prices are not available, fair value
is based upon internally developed models that primarily use, as inputs,
observable market-based parameters.  Valuation adjustments may be made
to ensure that financial instruments are recorded at fair
value.  These adjustments may include amounts to reflect counterparty
credit quality and the Company’s creditworthiness, among other things, as well
as unobservable parameters.  Any such valuation adjustments are
applied consistently over time.  The Company’s valuation methodologies
may produce a fair value calculation that may not be indicative of net
realizable value or reflective of future fair values.  Although
management believes the Company’s valuation methodologies are appropriate and
consistent with those used by other market participants, the use of different
methodologies or assumptions to determine the fair value of certain financial
instruments could result in a different estimate of fair value at the reporting
date.  Furthermore, the reported fair value amounts have not been
comprehensively revalued since the presentation dates, and, therefore, estimates
of fair value after the balance sheet date may differ significantly from the
amounts presented herein.  Transfers between levels of the fair value
hierarchy are recognized on the actual date of the event or circumstance that
caused the transfer, which generally coincides with the Company’s monthly and
quarterly valuation process.
 
 Financial Assets and Financial
Liabilities:  The following table summarizes financial assets
measured at fair value on a recurring basis as of September 30, 2010, segregated
by the level of the valuation inputs within the fair value hierarchy utilized to
measure fair value.  The Company did not have any financial
liabilities measured at fair value.
 
 Available for Sale
                    
                    Total
                    
                    
                    Level 1 Inputs
                    
                    
                    Level 2 Inputs
                    
                    
                    Level 3 InputsU.
      S. Government Securities
                    
                    $
                    8,046,630
                    
                    
                    $
                    8,046,630
                    
                    
                    $
                    -
                    
                    
                    $
                    -
 
 Certain
financial assets and financial liabilities are measured at fair value on a
nonrecurring basis, which means that the instruments are not measured at fair
value on an ongoing basis but are subject to fair value adjustments in certain
circumstances (for example, when there is evidence of reduced property
value).  Financial assets and liabilities measured at fair value on a
non-recurring basis during the nine months ended September 30, 2010 and 2009
include certain properties held as foreclosed real estate and are reported at
the fair value of the underlying collateral, assuming that the sale prices of
the properties will be their current appraised values.  Appraised
values are estimated using Level 2 inputs based on observable market data and
current property tax assessments.  Financial assets and liabilities
measured at fair value on a nonrecurring basis during the nine months ended
September 30, 2010 are as follows.
  -11-
 
 Total
                    
                    
                    (Level 1)
                    
                    
                    (Level 2)
                    
                    
                    (Level 3)Foreclosed
      real estate
                    
                    $
                    1,157,000
                    
                    
                    $
                    -
                    
                    
                    $
                    1,157,000
                    
                    
                    $
                    -
 
 During
the first nine months of 2010, the Company recognized a write down of $50,000 to
foreclosed properties compared to no write downs for the same time period in
2009.  At December 31, 2009, the Company recognized a write down of
$45,000 on foreclosed real estate.
 
 FASB ASC
Topic 825 requires disclosure of the fair value of financial assets and
financial liabilities, including those financial assets and financial
liabilities that are not measured and reported at fair value on a recurring
basis or nonrecurring basis.  A detailed description of the valuation
methodologies used in estimating the fair value of financial instruments is set
forth in the Company’s Annual Report on Form 10-K for the year ended December
31, 2009.
 
 Information
about estimated fair values of financial instruments as of September 30, 2010
and December 31, 2009 is set forth in the following table:
  September 30, 2010
                  
                  
                  December 31, 2009Carrying
                  
                  
                  Fair
                  
                  
                  Carrying
                  
                  
                  Fairamount
                  
                  
                  value
                  
                  
                  amount
                  
                  
                  valueFinancial
      assetsCash
      and due from banks
                  
                  $
                  10,993,803
                  
                  
                  $
                  10,933,803
                  
                  
                  $
                  15,988,739
                  
                  
                  $
                  15,988,739Federal
      funds sold
                  
                  
                  1,016,000
                  
                  
                  
                  1,016,000
                  
                  
                  
                  7,015,811
                  
                  
                  
                  7,015,811Investment
      securities (total)
                  
                  
                  11,560,054
                  
                  
                  
                  11,629,569
                  
                  
                  
                  13,091,076
                  
                  
                  
                  13,339,856Federal
      Home Loan Bank  and Community Bankers Bank stock
                  
                  
                  2,233,400
                  
                  
                  
                  2,233,400
                  
                  
                  
                  2,401,200
                  
                  
                  
                  2,401,200Loans,
      net
                  
                  
                  208,224,660
                  
                  
                  
                  207,498,026
                  
                  
                  
                  203,899,678
                  
                  
                  
                  204,083,903Accrued
      interest receivable
                  
                  
                  1,240,955
                  
                  
                  
                  1,240,955
                  
                  
                  
                  1,450,155
                  
                  
                  
                  1,450,155Financial
      liabilitiesNoninterest-bearing
      deposits
                  
                  $
                  37,428,051
                  
                  
                  $
                  37,428,051
                  
                  
                  $
                  36,951,197
                  
                  
                  $
                  36,951,197Interest-bearing
      deposits
                  
                  
                  152,562,045
                  
                  
                  
                  156,042,686
                  
                  
                  
                  156,299,711
                  
                  
                  
                  160,895,134Short-term
      borrowings
                  
                  
                  2,192,868
                  
                  
                  
                  2,192,868
                  
                  
                  
                  2,917,339
                  
                  
                  
                  2,917,339Federal
      Home Loan Bank advances
                  
                  
                  24,000,000
                  
                  
                  
                  25,979,348
                  
                  
                  
                  28,000,000
                  
                  
                  
                  28,457,862Accrued
      interest payable
                  
                  
                  418,630
                  
                  
                  
                  418,630
                  
                  
                  
                  439,410
                  
                  
                  
                  439,410
  -12-
  10.
              Investment
      Securities.
 
 Investment securities are summarized
as follows:
  Amortized
                                
                                
                                Unrealized
                                
                                
                                Unrealized
                                
                                
                                FairSeptember 30, 2010
                                
                                cost
                                
                                
                                gains
                                
                                
                                losses
                                
                                
                                ValueAvailable
      for SaleU.
      S. government agency
                                
                                $
                                8,021,292
                                
                                
                                $
                                25,338
                                
                                
                                $
                                0
                                
                                
                                $
                                8,046,630Held
      to maturityU.
      S. government agency
                                
                                $
                                3,507,848
                                
                                
                                $
                                69,472
                                
                                
                                $
                                0
                                
                                
                                $
                                3,577,320Mortgage-backed
      securities
                                
                                
                                5,576
                                
                                
                                
                                43
                                
                                
                                
                                0
                                
                                
                                
                                5,619$
                                3,513,424
                                
                                
                                $
                                69,515
                                
                                
                                $
                                0
                                
                                
                                $
                                3,582,939December 31, 2009Available
      for SaleU.
      S. government agency
                                
                                $
                                3,020,741
                                
                                
                                $
                                6,959
                                
                                
                                $
                                0
                                
                                
                                $
                                3,027,700Held
      to maturityU.
      S. government agency
                                
                                $
                                10,057,082
                                
                                
                                $
                                248,790
                                
                                
                                $
                                0
                                
                                
                                $
                                10,305,872Mortgage-backed
      securities
                                
                                
                                6,294
                                
                                
                                
                                3
                                
                                
                                
                                13
                                
                                
                                
                                6,284$
                                10,063,376
                                
                                
                                $
                                248,793
                                
                                
                                $
                                13
                                
                                
                                $
                                10,312,156
 
 Contractual
maturities and the amount of pledged securities are shown
below.  Actual maturities may differ from contractual maturities
because issuers may have the right to call or prepay obligations with or without
call or prepayment penalties.
 
 Available for Sale
                                    
                                    
                                    Held to maturityAmortized
                                    
                                    
                                    Fair
                                    
                                    
                                    Amortized
                                    
                                    
                                    FairSeptember 30, 2010
                                    
                                    cost
                                    
                                    
                                    Value
                                    
                                    
                                    cost
                                    
                                    
                                    ValueMaturingWithin
      one year
                                    
                                    $
                                    4,002,264
                                    
                                    
                                    $
                                    4,010,890
                                    
                                    
                                    $
                                    3,002,036
                                    
                                    
                                    $
                                    3,051,760Over
      one to five years
                                    
                                    
                                    4,019,028
                                    
                                    
                                    
                                    4,035,740
                                    
                                    
                                    
                                    505,812
                                    
                                    
                                    
                                    525,560Mortgage-backed
      securities
                                    
                                    
                                    0
                                    
                                    
                                    
                                    0
                                    
                                    
                                    
                                    5,576
                                    
                                    
                                    
                                    5,619$
                                    8,021,292
                                    
                                    
                                    $
                                    8,046,630
                                    
                                    
                                    $
                                    3,513,424
                                    
                                    
                                    $
                                    3,582,939Pledged
      securities
                                    
                                    $
                                    633,734
                                    
                                    
                                    $
                                    637,963
                                    
                                    
                                    $
                                    2,532,767
                                    
                                    
                                    $
                                    2,583,072December 31, 2009MaturingWithin
      one year
                                    
                                    $
                                    1,015,880
                                    
                                    
                                    $
                                    1,017,300
                                    
                                    
                                    $
                                    6,541,691
                                    
                                    
                                    $
                                    6,663,095Over
      one to five years
                                    
                                    
                                    2,004,861
                                    
                                    
                                    
                                    2,010,400
                                    
                                    
                                    
                                    3,515,391
                                    
                                    
                                    
                                    3,642,777Mortgage-backed
      securities
                                    
                                    
                                    0
                                    
                                    
                                    
                                    0
                                    
                                    
                                    
                                    6,294
                                    
                                    
                                    
                                    6,284$
                                    3,020,741
                                    
                                    
                                    $
                                    3,027,700
                                    
                                    
                                    $
                                    10,063,376
                                    
                                    
                                    $
                                    10,312,156Pledged
      securities
                                    
                                    $
                                    0
                                    
                                    
                                    $
                                    0
                                    
                                    
                                    $
                                    2,971,405
                                    
                                    
                                    $
                                    3,068,439
 
 Investments are pledged to secure the
deposits of federal and local governments and as collateral for repurchase
agreements.
  -13-
  11.
              Recent
      Accounting Standards
 
 Recent
accounting pronouncements approved by FASB that apply to the Company are
discussed below.  These pronouncements are not expected to have a
material impact on the financial statements of the Company.
  ASU No. 2010-06, “Fair Value
Measurements and Disclosures (Topic 820) – Improving Disclosures About Fair
Value Measurements.”ASU 2010-06 requires expanded disclosures
related to fair value measurements including (i) the amounts of significant
transfers of assets or liabilities between Levels 1 and 2 of the fair value
hierarchy and the reasons for the transfers, (ii) the reasons for transfers of
assets or liabilities in or out of Level 3 of the fair value hierarchy, with
significant transfers disclosed separately, (iii) the policy for determining
when transfers between levels of the fair value hierarchy are recognized and
(iv) for recurring fair value measurements of assets and liabilities in Level 3
of the fair value hierarchy, a gross presentation of information about
purchases, sales, issuances and settlement.  ASU 2010-06 further
clarifies that (a) fair value measurement disclosures should be provided for
each class of assets and liabilities (rather than major category), which would
generally be a subset of assets or liabilities within a line item in the
statement of financial position and (b) companies should provide disclosures
about the valuation techniques and inputs used to measure fair value for both
recurring and nonrecurring fair value measurements for each class of assets and
liabilities included in Levels 2 and 3 of the fair value
hierarchy.  The disclosures related to the gross presentation of
purchases, sales, issuances and settlements of assets and liabilities included
in Level 3 of the fair value hierarchy will be required for the Company
beginning January 1, 2011.  The remaining disclosure requirements and
clarifications made by ASU 2010-06 became effective for the Company on January
1, 2010.
  ASU No. 2010-11, “Derivatives and
Hedging (Topic 815)- Scope Exception Related to Embedded Credit
Derivatives.”  ASU 2010-11clarifies that the only
form of embedded credit derivative that is exempt from embedded derivative
bifurcation requirements are those that relate to the subordination of one
financial instrument to another.  As a result, entities that have
contracts containing an embedded credit derivative feature in a form other than
such subordination may need to separately account for the embedded credit
derivative feature.  The provisions of ASU 2010-11 will be effective
for the Company on July 1, 2010.
  ASU No. 2010-20, “Receivables (Topic
310) – Disclosures about the Credit Quality of Financing Receivables and the
Allowance for Credit Losses.”  ASU 2010-20 requires entities to
provide disclosures designed to facilitate financial statement users’ evaluation
of (i) the nature of credit risk inherent in the entity’s portfolio of financing
receivables, (ii) how that risk is analyzed and assessed in arriving at the
allowance for credit losses and (iii) the changes and reasons for those changes
in the allowance for credit losses.  Disclosures must be disaggregated
by portfolio segment, the level at which an entity develops and documents a
systematic method for determining its allowance for credit losses, and class of
financing receivable, which is generally a disaggregation of portfolio
segment.  The required disclosures include, among other things, a
rollforward of the allowance for credit losses as well as information about
modified, impaired, non-accrual and past due loans and credit quality
indicators.  ASU 2010-20 will be effective for the Company’s financial
statements as of December 31, 2010, as it relates to disclosures required as of
the end of a reporting period.  Disclosures that relate to activity
during a reporting period will be required for the Company’s financial
statements that include periods beginning on or after January 1,
2011.
  -14-
  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, located in Chestertown, Kent County,
Maryland.  The Company was incorporated on December 10, 1996 to serve
as the holding company of The Peoples Bank (the “Bank”), a Maryland commercial
bank, which it acquired on March 24, 1997.  On January 2, 2007, the
Company acquired Fleetwood, Athey, Macbeth & McCown, Inc. (the “Insurance
Agency”).
 
 The Bank was incorporated on April 13,
1910 and operates five branches located in Kent County, Maryland and two
branches located in Queen Annes County, Maryland.  The Bank offers a
variety of services to satisfy the needs of consumers and small- to medium-sized
businesses and professional enterprises.  Most of the Bank’s deposit
and loan customers are located in and derived from Kent County, northern Queen
Anne's County, and southern Cecil County, Maryland.  This primary
service area is located between the Chesapeake Bay and the western border of
Delaware.
 
 The Insurance Agency has roots dating
back to the 1920s, when The Fleetwood-Kirby Agency was formed.  In
1977, that agency was merged with several other well-respected insurances
agencies to form Fleetwood, Athey, Macbeth & McCown, Inc.  The
Insurance Agency operates from one location in Kent County and provides a full
range of insurance products to businesses and consumers.  Product
lines include property, casualty, life, marine, long term care and health
insurance.
 
 Unless the context clearly requires
otherwise, the terms “Company”, “we”, “us” and “our” in this report refer
collectively to Peoples Bancorp, Inc. and its subsidiaries.
 
 Application
of Critical Accounting Policies
 
 The unaudited consolidated financial
statements have been prepared in accordance with accounting principles generally
accepted in the United States of America for interim financial information and
in accordance with the instructions to Form 10-Q.  Application of
these principles requires management to make estimates, assumptions, and
judgments that affect the amounts reported in the unaudited consolidated
financial statements and accompanying notes.  These estimates,
assumptions, and judgments are based on information available as of the date of
the consolidated financial statements; accordingly, as this information changes,
the unaudited consolidated financial statements could reflect different
estimates, assumptions, and judgments.  Certain policies inherently
have a greater reliance on the use of estimates, assumptions, and judgments and
as such have a greater possibility of producing results that could be materially
different than originally reported.  Estimates, assumptions, and
judgments are necessary when assets and liabilities are required to be recorded
at fair value, when a decline in the value of an asset not carried on the
consolidated financial statements at fair value warrants an impairment
write-down or valuation reserve to be established, or when an asset or liability
needs to be recorded contingent upon a future event.  Carrying assets
and liabilities at fair value inherently results in more financial statement
volatility.  The fair values and information used to record valuation
adjustments for certain assets and liabilities are based either on quoted market
prices or are provided by other third-party sources, when
available.
 
 The
policies, along with the disclosures presented in the other financial statement
notes and in this financial review, provide information on how significant
assets and liabilities are valued in the financial statements and how those
values are determined.  Based on the valuation techniques used and the
sensitivity of financial statement amounts to the methods, assumptions, and
estimates underlying those amounts, management has identified the determination
of the allowance for loan losses as the accounting area that requires the most
subjective or complex judgments, and as such should be most subject to revision
as new information becomes available.
  -15-
  The allowance for loan losses
represents management’s estimate of probable loan losses inherent in the loan
portfolio.  Determining the amount of the allowance for loan losses is
considered a critical accounting estimate because it requires significant
judgment and the use of estimates related to the amount and timing of expected
future cash flows on impaired loans, estimated losses on pools of homogeneous
loans based on historical loss experience, and consideration of current economic
trends and conditions, all of which may be susceptible to significant
change.  In addition, various regulatory agencies, as an integral part
of their examination processes, periodically review our allowance for loan
losses.  Such agencies may require us to make additional provisions
for estimated loan losses based upon judgments different from those of
management.  The loan portfolio also represents the largest asset type
on the balance sheet.  Further information about the methodology used
to determine the allowance for loan losses is discussed below under the heading
“Loan Quality”.
 
 The following discussion is designed to
provide a better understanding of the financial position of the Company and
should be read in conjunction with the interim Consolidated Financial Statements
and Notes thereto included elsewhere in this report, and in conjunction with the
audited Consolidated Financial Statements and Notes thereto and Management’s
Discussion and Analysis of Financial Condition and Results of Operations set
forth in the Annual Report of Peoples Bancorp, Inc. on Form 10-K for the year
ended December 31, 2009.
 
 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 that Peoples Bancorp, Inc.
files with the Securities and Exchange Commission (see Item 1A of Part II of
this report for further information).  All of the forward-looking
statements made in this report are qualified by these cautionary statements, and
there can be no assurance that the actual results anticipated will be realized,
or if substantially realized, will have the expected consequences on our
business or operations.  Except as required by applicable laws, we do
not intend to publish updates or revisions of any forward-looking statements we
make to reflect new information, future events or otherwise.
  -16-
  RESULTS
OF OPERATIONS
 
 Overview
 
 For the three- and nine-month periods
ended September 30, 2010, the Company reported net income of $288,235, or $0.37
per share, and $621,425, or $0.80 per share, respectively, compared to $469,615,
or $0.60 per share, and $1,494,865, or $1.92 per share, respectively, for the
same periods in 2009.  The decreases for the three months (38.62%) and
nine months (58.43%) ended September 30, 2010 over the same periods last year
resulted primarily from decreased net interest income, insurance contingency
commissions, and other income.  Additional funding of the loan loss
reserve and increased other expenses contributed to the decrease as
well.  The Insurance Agency’s year to date income has decreased
$59,037 over the same time period in 2009 due to a 58.431% reduction in
contingency income.
 
 Net
Interest Income
 
 The primary source of income for the
Company is net interest income, which is the difference between revenue on
interest-earning assets, such as investment securities and loans, and interest
incurred on interest-bearing sources of funds, such as deposits and
borrowings.
 
 The key performance measure for net
interest income is the “net margin on interest-earning assets,” or net interest
income divided by average interest-earning assets.  The Company’s net
interest margin for the nine-month period ended September 30, 2010 was 4.04%,
compared to 4.12% for the same period in 2009.  The net margin may
decline if competition increases, loan demand decreases, or the cost of funds
rises faster than the return on loans and securities.  The net margin
may also be adversely impacted by a number of factors which cannot be predicted
and are beyond our control.
 
 Net interest income for the three-month
period ended September 30, 2010 was $2,112,348, which represents a decrease of
$172,054 or 7.53% from net interest income for the same period in
2009.  Net interest income for the nine-month period ended September
30, 2010 was $6,670,049, which represents a decrease of $368,540 or 5.24% from
the net interest income for the first nine months of 2009.  The
primary contributor to the decreases was the reduction in interest earning
assets
 
 Interest revenue for the three and nine
months ended September 30, 2010 totaled $3,048,455 and $9,535,548, respectively,
compared to $3,440,007 and $10,564,144, respectively, for the same periods last
year, representing decreases of $391,552 or 11.38% and $1,028,596 or 9.74%,
respectively.  We experienced a $864,991 decrease in interest earned
on loans during the first nine months of 2010 as a direct result of a $3,011,277
decrease (net of the allowance for loan losses) in our average loan balances
when compared to the first nine months of 2009.  Additionally, we
recorded a $158,452 decrease in income on U. S. Government Agency securities for
the first nine months of 2010 when compared to the same time period in
2009.
 
 Interest expense for the three- and
nine-month periods ended September 30, 2010 totaled $936,107 and $2,865,499,
respectively, compared to $1,155,605 and $3,525,555, respectively, for the same
periods last year, representing decreases of $219,498 or 18.99% and $660,056 or
18.72%, respectively.  The Company decreased its FHLB borrowings
during the first nine months of 2009 from $28,000,000 at December 31, 2009 to
$24,000,000 at September 30, 2010.  FHLB borrowings at September 30,
2009 were $33,000,000.  As a result, interest expense on borrowed
funds for the first nine months of 2010 dropped $552,161 when compared to the
nine months ended September 30, 2009.  The Company assumed
approximately $450,000 of debt in connection with the acquisition of the
Insurance Agency in 2007, which was paid in full during 2009.
  -17-
  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, 2010
                    
                    
                    September 30, 2009Average
                    
                    
                    
                    
                    
                    
                    
                    
                    AverageBalance
                    
                    
                    Interest
                    
                    
                    Yield
                    
                    
                    Balance
                    
                    
                    Interest
                    
                    
                    YieldAssetsFederal
      funds sold
                    
                    $
                    1,446,565
                    
                    
                    $
                    1,862
                    
                    
                    
                    0.17
                    %
                    
                    $
                    5,562,255
                    
                    
                    $
                    7,780
                    
                    
                    
                    0.19
                    %Interest-bearing
      deposits
                    
                    
                    43,625
                    
                    
                    
                    63
                    
                    
                    
                    0.19
                    %
                    
                    
                    72,933
                    
                    
                    
                    57
                    
                    
                    
                    0.10
                    %Investment
      securities:U.  S.  government
      agency
                    
                    
                    13,531,296
                    
                    
                    
                    268,468
                    
                    
                    
                    2.65
                    %
                    
                    
                    13,425,760
                    
                    
                    
                    432,270
                    
                    
                    
                    4.30
                    %FHLB
      of Atlanta & Community Bankers Bank Stock
                    
                    
                    2,363,351
                    
                    
                    
                    5,988
                    
                    
                    
                    0.34
                    %
                    
                    
                    2,370,502
                    
                    
                    
                    5,141
                    
                    
                    
                    0.29
                    %Total
      investment securities
                    
                    
                    15,894,647
                    
                    
                    
                    274,456
                    
                    
                    
                    2.31
                    %
                    
                    
                    15,796,262
                    
                    
                    
                    437,411
                    
                    
                    
                    3.70
                    %Loans:Business
                    
                    
                    27,544,150
                    
                    
                    
                    1,183,039
                    
                    
                    
                    5.74
                    %
                    
                    
                    37,773,582
                    
                    
                    
                    1,752,831
                    
                    
                    
                    6.20
                    %Mortgage
                    
                    
                    176,033,250
                    
                    
                    
                    7,868,542
                    
                    
                    
                    5.98
                    %
                    
                    
                    170,407,006
                    
                    
                    
                    8,225,417
                    
                    
                    
                    6.45
                    %Personal
                    
                    
                    6,308,184
                    
                    
                    
                    309,920
                    
                    
                    
                    6.57
                    %
                    
                    
                    3,795,701
                    
                    
                    
                    228,351
                    
                    
                    
                    8.04
                    %Total
      loans
                    
                    
                    209,885,584
                    
                    
                    
                    9,361,501
                    
                    
                    
                    5.96
                    %
                    
                    
                    211,976,289
                    
                    
                    
                    10,206,599
                    
                    
                    
                    6.44
                    %Allowance
      for loan losses
                    
                    
                    3,099,666
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    2,179,094Total
      loans, net of allowance
                    
                    
                    206,785,918
                    
                    
                    
                    9,361,501
                    
                    
                    
                    6.05
                    %
                    
                    
                    209,797,195
                    
                    
                    
                    10,206,599
                    
                    
                    
                    6.50
                    %Total
      interest-earning assets
                    
                    
                    224,170,755
                    
                    
                    
                    9,637,882
                    
                    
                    
                    5.75
                    %
                    
                    
                    231,228,645
                    
                    
                    
                    10,651,847
                    
                    
                    
                    6.16
                    %Non-interest-bearing
      cash
                    
                    
                    11,689,401
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    7,691,839Premises
      and equipment
                    
                    
                    6,510,957
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    6,534,335Other
      assets
                    
                    
                    6,337,469
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    5,832,862Total
      assets
                    
                    $
                    248,708,582
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    $
                    251,287,681Liabilities
      and Stockholders’ EquityInterest-bearing
      DepositsSavings,
      NOW and supernow deposits
                    
                    $
                    46,149,438
                    
                    
                    
                    63,431
                    
                    
                    
                    0.18
                    %
                    
                    $
                    34,337,433
                    
                    
                    
                    59,042
                    
                    
                    
                    0.23
                    %Money
      market
                    
                    
                    11,007,339
                    
                    
                    
                    34,027
                    
                    
                    
                    0.41
                    %
                    
                    
                    17,220,773
                    
                    
                    
                    61,258
                    
                    
                    
                    0.48
                    %Other
      time deposits
                    
                    
                    96,530,726
                    
                    
                    
                    2,106,281
                    
                    
                    
                    2.92
                    %
                    
                    
                    86,654,436
                    
                    
                    
                    2,191,335
                    
                    
                    
                    3.38
                    %Total
      interest-bearing deposits
                    
                    
                    153,687,503
                    
                    
                    
                    2,203,740
                    
                    
                    
                    1.92
                    %
                    
                    
                    138,212,642
                    
                    
                    
                    2,311,635
                    
                    
                    
                    2.24
                    %Borrowed
      funds
                    
                    
                    28,401,635
                    
                    
                    
                    661,759
                    
                    
                    
                    3.12
                    %
                    
                    
                    49,039,870
                    
                    
                    
                    1,213,919
                    
                    
                    
                    3.31
                    %Total
      interest-bearing liabilities
                    
                    
                    182,089,138
                    
                    
                    
                    2,865,499
                    
                    
                    
                    2.10
                    %
                    
                    
                    187,252,512
                    
                    
                    
                    3,525,554
                    
                    
                    
                    2.52
                    %Noninterest-bearing
      deposits
                    
                    
                    35,426,592
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    32,712,030217,515,730
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    219,964,542Other
      liabilities
                    
                    
                    2,526,906
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    2,522,014Stockholders’
      equity
                    
                    
                    28,665,946
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    28,801,125Total
      liabilities and stockholders’ equity
                    
                    $
                    248,708,582
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    $
                    251,287,681Net
      interest spread
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    3.64
                    %
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    3.64
                    %Net
      interest income
                    
                    
                    
                    
                    
                    $
                    6,772,383
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    $
                    7,126,293Net
      margin on interest-earning assets
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    4.04
                    %
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    4.12
                    %
 
 Interest
on tax-exempt loans and investments are reported on fully taxable equivalent
basis (a non GAAP financial measure).
  -18-
  Provision
for Loan Losses
 
 The provision for loan losses was
$1,985,000 for the first nine months of 2010, compared to $1,171,000 for the
same period of 2009.  The increase in the provision was in response to
the increase in net charge-offs, and specific allocations for impaired
loans.  Additional information regarding risk elements in the loan
portfolio, the provision for loan losses and management’s assessment of the
adequacy of the allowance for loan losses are discussed below in the section
entitled “Loan Quality.”
 
 Noninterest
Revenue
 
 Noninterest revenue for the three- and
nine-month periods ended September 30, 2010 totaled $594,196 and $1,837,893,
respectively, which represent decreases of 11.75% and 12.08%, respectively, from
the $673,334 and $2,090,398, respectively, recorded for the same periods in
2009.  These decreases resulted primarily from the $144,370 or 58.43%
decrease in Insurance Agency contingency income of $102,729 earned during the
first nine months of 2010, from $247,099 for the first nine months of
2009.  Insurance Agency contingency income is based on sales of new
policies to customers and claims against existing policies for the prior year.
During 2009, there were several insurance loss claims by customers that caused
contingency income to decrease in 2010.  In addition, we experienced a
decrease in other noninterest revenue of $24,467 or 9.03% and in service charges
on deposit accounts of $77,981 or 10.83% during the first nine months of 2010
when compared to the same period of 2009.
 
 Noninterest
Expense
 
 The Company recorded noninterest
expense of $1,776,199 and $5,594,570 for the three- and nine-month periods ended
September 30, 2010, respectively, compared to $1,892,460 and $5,578,259,
respectively, for the same periods in 2009.  These changes represent a
decrease of $116,261 or 6.14% for the three-month period and an increase of
$16,311 or 0.29% over the nine-month period, respectively.  The
increases are mainly attributable to increased other operating expenses of
$277,341 for the first nine months of 2010.  The items in other
operating expenses contributing to this increase are other real estate expenses
increase of $165,821 and data processing fees increase of
$82,853.  These increases were offset by a decrease in salaries and
employee benefits of $305,425.
 
 Income
Tax Expense
 
 The Company’s effective tax rate for
the three- and nine-month periods ended September 30, 2009 was 35.3% and 33.1%,
respectively, compared to 37.3% and 37.2%, respectively, for the same periods in
2009.  The Company’s income tax expense was $157,110 and $306,947 for
the three- and nine-months ended September 30, 2010, respectively, compared to
$279,661 and $884,863, respectively, for the same periods in
2009.  Decreases in income before income tax during the three- and
nine-month periods ended September 30, 2010 contributed to the decreases in
income tax expense when compared to the same periods of last year.
 
 FINANCIAL
CONDITION
 
 Overview
 
 Total
assets of the Company at September 30, 2010 were $246,939,405, compared to
$255,467,425 at December 31, 2009, representing a decrease of $8,528,020 or
3.34%.  The decrease resulted primarily from the reduction in federal
funds of $5,999,811.
  -19-
  Total
liabilities at September 30, 2010 were $218,468,817, compared to $226,577,677 at
December 31, 2009, representing a decrease of  $8,108,860 or
3.58%.  The decrease resulted primarily from deposits reducing
$3,260,812 and borrowed funds reducing $4,000,000.
 
 Stockholders’ equity was $28,470,588 at
September 30, 2010, compared to $28,889,748 at December 31, 2009, representing a
decrease of $419,160.  The decrease was due to net income for the
period totaling $621,425, offset by a $11,757 decrease in the unrealized gains
on securities available for sale net of income taxes and dividends paid to
stockholders of $1,052,342.
 
 Return on average equity for the nine
months ended September 30, 2010 was 2.90%, compared to 6.94% for the same period
in 2009.  Return on average assets was 0.33% for the nine months ended
September 30, 2010, compared to 0.80% for the same period in 2009.
 
 Composition
of Loan Portfolio
 
 At September 30, 2010, loans, net of
the allowance for loan losses, were $208,224,660, an increase of $4,324,982
since December 31, 2009.  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 $206,785,918 and $209,797,195 during
the first nine months of 2010 and 2009, respectively, which constituted 92.24%
and 90.73% of average interest-earning assets for the respective
periods.  For the nine months ended September 30, 2010, our average
loan to deposit ratio was 109.34%, compared to 122.74% for the nine months ended
September 30, 2009.  Our ratio of average loans to deposits plus
borrowed funds was 95.07% for the nine months ended September 30, 2010, compared
to 95.38% for the nine months ended September 30, 2009.  The Company
extends 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, which is directly impacted by the local economy, will influence the
performance of the Company’s portfolio and the value of the collateral securing
the portfolio.
 
 Loan
Quality
  The allowance for loan losses
represents a reserve for potential losses in the loan portfolio.  The
adequacy of the allowance for loan losses is evaluated periodically based on a
review of all significant loans, with a particular emphasis on non-accruing,
past due, and other loans that management believes require
attention.  The determination of the reserve level rests upon
management's judgment about factors affecting loan quality and assumptions about
the economy.  Management believes that the allowance as of September
30, 2010 is adequate to cover possible losses in the loan portfolio identified
as of that date; however, management's judgment is based upon a number of
assumptions about future events, which are believed to be reasonable, but which
may not prove valid.  Thus, there can be no assurance that charge-offs
in future periods will not exceed the allowance for loan losses or that
additional increases in the loan loss allowance will not be
required.
 
 For significant problem loans,
management's review consists of evaluation of the financial 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.  Net recoveries and/or decreases in loans may cause the
allowance as a percentage of gross loans to exceed our
target.  Historically, our regulators have discouraged negative
provisions, however, management would consider a negative provision if
warranted.
  -20-
  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 allowance for loan losses increased
to $2,869,097 at September 30, 2010, from $2,845,364 at December 31,
2009.  The provision for loan losses was $1,985,000 for the first nine
months of 2010, compared to $1,171,000 for the same period of
2009.  The increase in the provision for loan losses in the first nine
months of 2010 when compared to the same period of 2009 was in response to the
increase in net charge-offs, the results of our quarterly review of the adequacy
of the factors discussed previously, and specific allocations for impaired
loans.  As of September 30, 2010 and December 31, 2009, the allowance
for loan losses compared to gross loans was 1.36% and 1.38%,
respectively.  As part of our loan review process, management has
noted an increase in foreclosures and bankruptcies in the geographic areas where
we operate.  Additionally, the current nationwide recession has had a
significant and adverse impact on real estate values and sales over the past 12
months.  Consequently, we have closely reviewed our loan portfolio and
applied sensitivity analyses to collateral values to ensure that we are
adequately measuring potential future losses.  Where necessary, we
have obtained new appraisals on collateral.  Specific allocations of
the allowance have been provided in these instances where losses may
occur.
 
 The following table sets forth
activity in the Company’s allowance for loan losses for the periods
indicated:
 
 Allowance
for Loan Losses
 Nine months ended
                  
                  
                  Nine months ended
                  
                  
                  Year endedSeptember 30,
                  
                  
                  September 30,
                  
                  
                  December 31,2010
                  
                  
                  2009
                  
                  
                  2009Balance
      at beginning of year
                  
                  $
                  2,845,364
                  
                  
                  $
                  2,001,739
                  
                  
                  $
                  2,001,739Loan
      losses:Commercial
                  
                  
                  166,779
                  
                  
                  
                  283,373
                  
                  
                  
                  290,126Mortgages
                  
                  
                  1,743,615
                  
                  
                  
                  295,049
                  
                  
                  
                  490,049Consumer
                  
                  
                  69,425
                  
                  
                  
                  42,210
                  
                  
                  
                  157,367Total
      loan losses
                  
                  
                  1,979,819
                  
                  
                  
                  620,632
                  
                  
                  
                  937,542Recoveries
      on loans previously charged offCommercial
                  
                  
                  2,460
                  
                  
                  
                  7,861
                  
                  
                  
                  47,501Mortgages
                  
                  
                  148
                  
                  
                  
                  3,207
                  
                  
                  
                  3,207Consumer
                  
                  
                  15,944
                  
                  
                  
                  3,632
                  
                  
                  
                  4,459Total
      loan recoveries
                  
                  
                  18,552
                  
                  
                  
                  14,700
                  
                  
                  
                  55,167Net
      loan losses
                  
                  
                  1,961,267
                  
                  
                  
                  605,932
                  
                  
                  
                  882,375Provision
      for loan losses charged to expense
                  
                  
                  1,985,000
                  
                  
                  
                  1,171,000
                  
                  
                  
                  1,726,000Balance
      at end of year
                  
                  $
                  2,869,097
                  
                  
                  $
                  2,566,807
                  
                  
                  $
                  2,845,364Allowance
      for loan losses to loans outstanding
                  
                  
                  1.36
                  %
                  
                  
                  1.23
                  %
                  
                  
                  1.38
                  %
 
 Management believes it has identified
and charged off all significant losses in the loan portfolio, but there can be
no assurance that additional losses will not occur in future
periods. The  ratio of the allowance for loan losses to loans
outstanding has increased due to the economic conditions being felt in our
market area.
  -21-
  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 $7,923,834 and $8,631,961 at
September 30, 2010 and December 31, 2009, respectively.  These loans
are detailed below:
 
 Risk
Elements of Loan Portfolio
 September 30,
                    
                    
                    December 31,2010
                    
                    
                    2009Nonaccrual
      LoansCommercial
                    
                    $
                    574,014
                    
                    
                    $
                    485,579Mortgage
                    
                    
                    4,472,070
                    
                    
                    
                    1,898,607Consumer
                    
                    
                    0
                    
                    
                    
                    05,046,084
                    
                    
                    
                    2,384,186Accruing
      Loans Past Due 90 Days or MoreCommercial
                    
                    
                    1,913
                    
                    
                    
                    168,020Mortgage
                    
                    
                    2,864,985
                    
                    
                    
                    6,055,484Consumer
                    
                    
                    10,852
                    
                    
                    
                    24,2712,877,750
                    
                    
                    
                    6,247,775$
                    7,923,834
                    
                    
                    $
                    8,631,961
 
 Gross
interest income of $333,350 for the first nine months of 2010, $81,889 for
fiscal year 2009 and $55,140 for the first nine months of 2009 would have been
recorded if nonaccrual loans had been current and performing in accordance with
their original terms.  Interest actually recorded on such loans was
$20,738 for the first nine months of 2010, $25,918 for fiscal year 2009 and
$21,277 for the first nine months of 2009.
 
 Loans are
classified as impaired when the collection of contractual obligations, including
principal and interest, is doubtful.  Management believes that it has
identified all significant impaired loans as of September 30, 2010 and has made
the appropriate charges to the allowance for loan losses.
 
 Deposits
and Other Interest-Bearing Liabilities
 
 Average interest-bearing deposits
increased $15,474,861 or 11.20% to $153,687,503 for the nine months ended
September 30, 2010, from $138,212,642 for the same period in
2009.  Average noninterest-bearing deposits increased $2,714,562 or
8.30% to $35,426,592 for the nine months ended September 30, 2010, from
$32,712,030 for the same period in 2009.  Average total deposits
increased 10.64% or $18,189,423 to $189,114,095 for the nine months ended
September 30, 2010 from $170,924,672 for the same period in
2009.  Average borrowed funds, primarily from the FHLB of Atlanta to
fund loan demand, decreased to $28,401,635 from $49,039,870 at September 30,
2009, a decrease of 42.08%.
 
 Deposits,
particularly core deposits, have been our primary sources of funding and have
enabled us to meet both our short-term and long-term liquidity
needs.  Management anticipates that deposits will grow and continue to
be our primary source of funding for the foreseeable future.  It
should be noted, however, that investor confidence in alternatives to deposit
accounts, which may pay yields that are higher than those paid on deposits,
typically increases when the economy and stock markets perform
well.  Increased investor confidence in nondeposit investment products
in future periods would likely have an adverse impact on our deposit
growth.  In addition, changes in governmental monetary policy,
especially interest rates, may impact our ability to attract and retain
deposits.
  -22-
  Short-term
Borrowings
  The following table sets forth the our
position with respect to short-term borrowings at September 30, 2010 and
December 31, 2009:
 
 September 30, 2010
                  
                  
                  December 31, 2009Amount
                  
                  
                  Rate
                  
                  
                  Amount
                  
                  
                  RateFHLB
      (daily re-price)
                  
                  $
                  0
                  
                  
                  
                  .00
                  %
                  
                  $
                  0
                  
                  
                  
                  .00
                  %Retail
      Repurchase Agreements
                  
                  
                  2,192,868
                  
                  
                  
                  1.33
                  %
                  
                  
                  2,917,339
                  
                  
                  
                  .36
                  %Federal
      Funds Borrowed
                  
                  
                  0
                  
                  
                  
                  .00
                  %
                  
                  
                  0
                  
                  
                  
                  .53
                  %Total
                  
                  $
                  2,192,868
                  
                  
                  
                  
                  
                  
                  $
                  2,917,339
 
 We may borrow up to approximately 30%
of total assets from the FHLB through any combination of notes or line of credit
advances.  Both the notes payable and the line of credit are secured
by a floating lien on all of our real estate mortgage loans.  The
Company was required to purchase shares of capital stock in the FHLB as a
condition to obtaining the line of credit.
 
 We provide collateral of 105% of the
repurchase agreement balances by pledging U.S. Government Agency
securities.
 
 As of
September 30, 2010, the Bank had lines of credit of $13,650,000 in unsecured
overnight federal funds and $5,500,000 in secured overnight federal funds with
correspondent banks.
 
 Liquidity
and Capital Resources
 
 Liquidity describes our ability to meet
financial obligations that arise out of the ordinary course of
business.  Liquidity is needed primarily to fund loans, meet depositor
withdrawal requirements, and fund current and planned
expenditures.  The Company derives liquidity through increased
customer deposits, maturities in the investment portfolio, loan repayments and
income from earning assets.  To the extent that deposits are not
adequate to fund customer loan demand, liquidity needs can be met in the
short-term funds markets through lines of credit totaling $19,150,000 from
correspondent banks.  The Bank is also a member of the FHLB of
Atlanta, which provides another source of liquidity through a secured line of
credit in the amount of $39,511,320 of which $24,000,000 was advanced as of
September 30, 2010.  We also have the ability to borrow secured funds
through the Federal Reserve’s Discount window as necessary.
 
 Bank regulatory agencies have adopted
various capital standards, including risk-based capital standards, that apply to
financial institutions like the Company.  The primary objectives of
the risk-based capital framework are to provide a more consistent system for
comparing capital positions of financial institutions and to take into account
the different risks among financial institutions’ assets and off-balance sheet
items.
 
 Risk-based capital standards have been
supplemented with requirements for a minimum Tier 1 capital to assets ratio
(leverage ratio).  In addition, regulatory agencies consider the
published capital levels as minimum levels and may require a financial
institution to maintain capital at higher levels.  A comparison of the
Company’s capital ratios as of September 30, 2010 to the minimum ratios required
by federal banking regulators is presented below.
  -23-
  Actual
                      
                      
                      Minimum
                        Requirements
                      
                      
                      To Be Well
                        CapitalizedTotal
      risk-based capital
                      
                      
                      14.88
                      %
                      
                      
                      8.00
                      %
                      
                      
                      10.00
                      %Tier
      1 risk-based capital
                      
                      
                      13.63
                      %
                      
                      
                      4.00
                      %
                      
                      
                      6.00
                      %Tier
      1 leverage ratio
                      
                      
                      11.16
                      %
                      
                      
                      4.00
                      %
                      
                      
                      5.00
                      %
 
 Item 3.
              Quantitative
      and Qualitative Disclosures About Market
Risk.
 
 The Company is a “smaller reporting
company” and is not required to include the information required by this
item.
 
 Item 4.
              Controls
      and Procedures.
 
 We maintain disclosure controls and
procedures that are designed to ensure that information required to be disclosed
in the reports that Peoples Bancorp, Inc. files under the Securities and
Exchange Act of 1934 with the Securities and Exchange Commission, such as this
quarterly report, is recorded, processed, summarized and reported within the
time periods specified in those rules and forms, and that such information is
accumulated and communicated to management, including the President and Chief
Executive Officer (the “CEO”), who also serves as the Chief Financial Officer
(the “CFO”), to allow for timely decisions regarding required
disclosure.  A control system, no matter how well conceived and
operated, can provide only reasonable, not absolute, assurance that the
objectives of the control system are met.  Further, the design of a
control system must reflect the fact that there are resource constraints, and
the benefits of controls must be considered relative to their
costs.  These inherent limitations include the realities that
judgments in decision-making can be faulty, and that breakdowns can occur
because of simple error or mistake.  Additionally, controls can be
circumvented by the individual acts of some persons, by collusion of two or more
people, or by management override of the control.  The design of any
system of controls also is based in part upon certain assumptions about the
likelihood of future events, and there can be no assurance that any design will
succeed in achieving its stated goals under all potential future conditions;
over time, control may become inadequate because of changes in conditions, or
the degree of compliance with the policies or procedures may
deteriorate.
 
 An evaluation of the effectiveness of
these disclosure controls was carried out as of September 30, 2010 under the
supervision and with the participation of the Company’s management, including
the CEO.  Based on that evaluation, the Company’s management,
including the CEO, has concluded that our disclosure controls and procedures
are, in fact, effective at the reasonable assurance level.
 
 During the third quarter of 2010, there
was no change in our 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 Company’s financial condition and operations are subject are discussed in
detail in Item 1A of Part I of the Annual Report of Peoples Bancorp, Inc. on
Form 10-K for the year ended December 31, 2009 and in Part 1A of Part II of the
Quarterly Report of Peoples Bancorp, Inc. on Form 10-Q for the quarter ended
June 30, 2010.  Management does not believe that any material changes
in these risk factors have occurred since they were last
discussed.
  -24-
  Item
      2.
              Unregistered
      Sales of Equity Securities and Use of
Proceeds.
 
 None.
 
 Item
      3.
              Defaults
      Upon Senior Securities.
 
 Not applicable.
 
 Item
      4.
              (Removed
      and Reserved).
 
 
 Item
      5.
              Other
      Information.
 
 None.
 
 Item
      6.
              Exhibits.
 
 The exhibits filed or furnished with
this report are listed in the Exhibit Index that immediately follows the
signatures, which Index is incorporated herein by reference.
 
 SIGNATURES
 
 Pursuant to the requirements of the
Security Exchange Act of 1934, the registrant has causedthis report to be signed
on its behalf by the undersigned, thereunto duly authorized.
 
 PEOPLES
      BANCORP, INC.Date:  November
      10, 2010
                By:
                /s/ Thomas G. StevensonThomas
      G. StevensonPresident/Chief
      Executive Officer&
      Chief Financial Officer
  -25-
  EXHIBIT
INDEX
 
 Exhibit No.
                  
                  Description31.1
                  
                  Certifications
      of the CEO/CFO pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
      (filed herewith)32.1
                  
                  Certification
      of the CEO/CFO pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
      (furnished
herewith)
  -26-